NRC Health (National Research Corporation) — Q3 2016 Form 10-Q
Business and period: NRC provides analytics, insights and subscription solutions to healthcare organizations and payers, focused on patient and employee experience, engagement and loyalty. This unaudited filing covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless noted. Amounts below are in millions except per-share data.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $27.0 | $25.2 | $81.0 | $76.0 |
| Operating income | $7.3 | $6.5 | $22.4 | $18.7 |
| Operating margin | 27.2% | 26.0% | 27.6% | 24.7% |
| Net income | $4.7 | $4.1 | $14.8 | $11.7 |
| Net margin | 17.5% | 16.4% | 18.3% | 15.4% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $18.0 | $14.8 |
Per-share results: Q3 basic/diluted EPS was $0.11/$0.11 for Class A and $0.67/$0.66 for Class B, versus $0.10/$0.10 and $0.59/$0.59, respectively, in Q3 2015. Nine-month diluted EPS was $0.35 for Class A and $2.08 for Class B, versus $0.28 and $1.65.
Margins and expenses: Direct expenses were 42.4% of revenue in Q3 (43.6% prior year) and 41.6% for nine months (43.7%). SG&A was 26.4% in Q3 (26.2%) and 26.9% year to date (27.5%). Nine-month effective tax rate declined to 33.8% from 37.2%; Q3 rate was 35.3% versus 36.2%.
Liquidity, cash flow and debt
- Cash and cash equivalents were $28.9 million at September 30, down $13.3 million from December 31, 2015. Of the September balance, $10.7 million was held in Canada and intended to remain invested in foreign operations.
- Working capital was $14.8 million, versus $10.9 million at year-end 2015. Current deferred revenue was $17.4 million, primarily reflecting advance billings on client contracts; substantially all is expected to be earned within 12 months.
- For the first nine months, operating cash flow was $18.0 million, capital expenditures were $3.1 million, and financing used $28.7 million. Financing included $25.2 million of dividends, $1.8 million of term-debt repayment and $2.0 million to acquire the remaining Connect interest.
- Term-note balance was $3.9 million, bearing 3.12% interest. The $6.5 million revolving facility had no borrowings and was fully available at quarter-end; it was renewed through June 30, 2017. The company reported compliance with debt covenants. Capital lease balance was $0.2 million.
Changes and management commentary
- Q3 revenue rose 7.1%; management attributed growth to new customers and increased sales to existing clients. Nine-month revenue increased 6.6%.
- Operating income increased 12.1% in Q3 and 19.3% for nine months. Management cited revenue growth outpacing direct-cost growth; year-to-date SG&A also declined as a share of revenue.
- In March, NRC acquired the remaining noncontrolling interest in Customer-Connect LLC for $2.0 million in total, making it wholly owned; the entity was dissolved June 30, 2016. The transaction generated a $1.7 million deferred tax asset recorded through additional paid-in capital.
- Dividends paid in the first nine months were $25.2 million, including payment of $18.4 million declared in 2015. Cash reduction also reflects these distributions and the Connect interest purchase.
Outlook, risks and unusual items
Management stated that cash, available borrowing capacity and operating cash flows should be sufficient for projected capital and debt needs and the dividend policy for the foreseeable future. No specific revenue or earnings guidance was provided. NRC expected capital expenditures for the remainder of 2016 to be similar to the first nine months, primarily for software, hardware and other equipment.
The filing identifies risks including client contract non-renewals and retention, competition and pricing pressure, healthcare industry consolidation and regulation, economic conditions, personnel retention, intellectual-property protection, and cybersecurity threats. Management reported no material changes to the annual-report risk factors, no material market-risk changes, effective disclosure controls, and no material changes to internal control over financial reporting during the quarter.
Notable accounting items include early adoption of ASU 2016-09, which reduced nine-month tax expense by $447,000 through recognition of share-based compensation tax benefits. NRC was evaluating the future revenue standard, which it expected could materially change commission expense timing and require estimation of variable consideration. It was also evaluating the lease-accounting standard. The filing reported $414,000 of unrecognized tax benefits, plus interest and penalties, and said settlement timing could not be reasonably estimated.
Important facts for investors to verify
- Whether customer additions and expansion within existing accounts continue to support revenue growth and improved operating margins.
- Cash conversion and receivables collection: receivables rose $4.3 million from year-end, which management attributed to billing and collection timing.
- The sustainability of the dividend relative to operating cash flow, capital spending and remaining debt payments.
- The impact of future revenue-recognition changes, particularly commission deferral and variable consideration estimates.
- Foreign cash and potential repatriation tax exposure; management estimated an additional $534,000 tax liability at year-end 2015 if undistributed earnings were repatriated.