NRC Health (National Research Corporation) — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. NRC Health provides subscription-based analytics and insights for healthcare organizations, including patient and employee experience, consumer engagement, reputation, and governance solutions.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $119.7 million | $117.6 million | +1.8% |
| Operating income | $35.3 million | $34.2 million | +3.1% |
| Operating margin | 29.5% | 29.1% | +0.4 percentage points |
| Net income | $30.0 million | $22.9 million | +31.0% |
| Operating cash flow | $39.8 million | $28.1 million | +$11.8 million |
- Revenue growth reflected new customer sales and increased sales to existing clients. VoC platform solutions rose to 49.6% of revenue from 33.9%; clients buying multiple solutions increased to 24% from 22%.
- Direct expenses fell 3.0% to $47.6 million (39.7% of revenue versus 41.7%). SG&A rose 5.7% to $31.4 million, and depreciation and amortization increased 19.1% to $5.5 million, mainly reflecting software and hosting investments.
- Net income growth substantially exceeded operating income growth. The effective tax rate fell to 13.4% from 33.1%, reflecting tax reform and tax benefits related to the recapitalization and share-based compensation. Interest expense rose to $1.5 million from $82,000 following the new term loan.
- Fourth-quarter revenue was $30.6 million versus $29.9 million a year earlier; operating income was $9.4 million versus $8.7 million, and net income was $7.8 million versus $6.5 million.
Cash, liquidity, debt, and capital allocation
- Year-end cash was $13.0 million, down $21.7 million from 2017. The company generated $39.8 million in operating cash flow, used $6.0 million in investing activities, and used $54.5 million in financing activities.
- Working capital shifted from a $19.9 million surplus to an $18.7 million deficit, primarily due to the recapitalization, lower cash, and dividends payable. Management said available cash, borrowing capacity, and operating cash flow should meet projected needs and debt maturities for the foreseeable future.
- Reported total debt and capital-lease obligations were $39.0 million at year-end. The new $40 million term loan bears fixed interest at 5%, with a balloon payment due in April 2023. A $15 million revolving facility and $15 million delayed-draw facility were available; neither had a balance at year-end. The company borrowed $8.5 million on the revolver in January 2019, partly to fund dividends.
- The company declared $29.7 million of dividends in 2018, including a special dividend; $17.1 million was payable in January 2019. It completed a recapitalization in April, paying $72.4 million and issuing 3.6 million shares to exchange the former Class B shares and settle related awards.
Outlook, notable items, and risks
- No quantified revenue or earnings guidance is provided. Management expects 2019 capital expenditures to be similar to 2018’s $6.0 million, primarily for computer equipment and software, funded from operating cash flow. Growth priorities include cross-selling, winning new clients, developing solutions, and selective acquisitions or investments.
- ASC 606 was adopted in 2018 using the modified retrospective method. The transition increased opening retained earnings by approximately $2.7 million net of tax, principally due to deferring and amortizing eligible contract acquisition costs. Reported 2018 revenue was $119.7 million; the filing estimates it would have been $119.5 million without the new standard.
- Key risks include annual contract renewal and client retention, healthcare-sector budget and regulatory changes, competition and pricing pressure, dependence on quality data and third-party vendors, cybersecurity and technology interruptions, and attracting and retaining key personnel. The ten largest clients generated 17% of revenue; no single client exceeded 4%.
- Two shareholder lawsuits related to the proposed recapitalization were dismissed in 2018, and no appeals were filed. The filing reports no material off-balance-sheet obligations beyond operating leases. The company was compliant with debt covenants at year-end.
- The Hays family trusts held approximately 50.06% of outstanding common stock as of February 25, 2019, giving them effective control over shareholder-vote matters. Foreign-currency translation reduced 2018 comprehensive income by $1.3 million; the company had no currency hedges.
Important facts for investors to verify
- How much of future earnings growth is expected to come from operating performance versus tax and share-based compensation benefits recorded in 2018.
- Whether revenue growth and VoC adoption can accelerate while annual renewals, cross-selling, and customer retention remain strong.
- The impact of the recapitalization, dividends, and January 2019 revolver borrowing on leverage, liquidity, and future capital returns.
- Debt amortization, the April 2023 balloon payment, covenant headroom, and the effect of the LIBOR transition on floating-rate facilities.
- Whether higher software, platform-hosting, and development spending produces improved growth and margins; and how the ASC 606 transition affects comparability.