NRC Health (National Research Corporation) — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited results; financial amounts below are in U.S. dollars and millions unless otherwise noted. The company provides healthcare performance measurement, analytics, improvement services, and governance education in the U.S. and Canada.
Financial performance
- Q2 revenue: $18.3 million, up 29.5% from $14.1 million. Management attributed growth to OCS, market-share gains, pricing, and cross-selling.
- Q2 operating income: $3.8 million versus $2.7 million; operating margin was 21.0%, compared with 18.8%. Net income: $2.3 million versus $1.7 million; diluted EPS was $0.34 versus $0.25.
- First-half revenue: $38.1 million, up 20.9%. Operating income was $9.5 million versus $8.0 million, while operating margin eased to 25.0% from 25.4%. Net income was $5.8 million versus $4.8 million; diluted EPS was $0.85 versus $0.71.
- Expenses and margins: Q2 direct expenses were 39.6% of revenue versus 41.6%; SG&A was 32.7% versus 32.1%. For the first half, direct expenses improved to 36.8% of revenue from 39.1%, while SG&A increased to 31.7% from 28.6%. D&A was 6.5% of first-half revenue versus 6.9%.
- Cash flow: First-half operating cash flow was $8.3 million, down from $9.2 million. Investing used $5.3 million, including $4.0 million of MIV earn-out payments and $1.3 million of capital expenditures. Financing used $2.1 million, including $3.0 million of dividends and $4.1 million of debt repayments, partly offset by borrowings and equity-related proceeds. Cash increased $0.9 million from year-end to $4.5 million.
- Liquidity and debt: Working capital was negative $6.3 million at June 30, versus negative $8.8 million at December 31, 2010. Management said the deficit primarily reflects $18.0 million of deferred revenue, largely advance billings expected to be recognized as services are provided. The balance sheet shows $3.3 million of current notes payable and short-term borrowings and $13.4 million of long-term notes payable. The company separately reports $15.3 million outstanding on term notes and $1.4 million on its revolving facility; the disclosed debt figures are not presented on a directly comparable basis. The revolver had $4.9 million of additional borrowing capacity and was renewed through June 30, 2012.
Changes, outlook, and notable items
- OCS, acquired in August 2010, contributed $3.8 million of first-half revenue and $1.1 million of operating income; it also increased expenses. The reported growth therefore includes an acquisition contribution.
- Subscription-based agreements represented 64.0% of contract value at June 30, 2011. Management cited subscription growth and more efficient survey methods as contributors to lower direct costs as a share of revenue.
- Management projected full-year direct expenses at an average 37.0% of revenue, SG&A at 31.0%, and D&A at about 7.0%; it expected capital expenditures similar to first-half spending. These are projections, not assurances. Management stated it believed operating cash flow and available capital were adequate for foreseeable working-capital, capital-expenditure, and debt needs.
- The MIV earn-out was revised to cap the final payment at approximately $2.6 million; $2.4 million was paid in April, with up to approximately $117,000 potentially payable by February 2012 if conditions are met. First-half investing cash flow also included approximately $4.0 million in total MIV earn-out payments.
- The company incurred $280,000 of first-quarter lease-termination costs, included in SG&A. It reported compliance with its debt covenants at June 30 and no indication of impairment of goodwill or other nonfinancial assets.
- First-half effective tax rate was 37.1% versus 38.8%; unrecognized tax benefits were $283,000, plus $41,000 of accrued interest. The company said these benefits could slightly decrease over the next 12 months as a statute of limitations expires.
Risks and contingencies
Disclosed risks include client contract non-renewals and dependence on a limited number of key clients, competition and price pressure, economic weakness, healthcare-industry consolidation, healthcare reform and other regulatory changes, personnel retention, and protection of intellectual property and technology. Term debt is secured by specified assets and includes financial-ratio covenants and restrictions on additional debt and certain corporate actions. The filing reported no material change to the risk factors in the 2010 Form 10-K.
Important facts for investors to verify
- How much of revenue and earnings growth reflects recurring organic growth versus the OCS acquisition, pricing, and cross-selling.
- Whether the improved direct-cost ratio and management’s full-year expense projections are sustained as staffing and sales investment increase.
- Cash conversion and working-capital trends, especially receivables, unbilled revenue, and advance-billed deferred revenue.
- Debt repayment and refinancing capacity, covenant headroom, the revolver’s borrowing-base availability, and the July 2013 term-loan balloon payments.
- The final MIV earn-out obligation and any effects of tax uncertainties or other contingent items.