NRC Health (National Research Corporation) — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated results include the company’s wholly owned Canadian subsidiary and Customer-Connect LLC, a variable interest entity. NRC provides analytics and insights to healthcare organizations, including patient engagement, retention, and performance-tracking solutions. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $22.354 | $20.632 | $47.260 | $43.039 |
| Operating income | $5.534 | $5.216 | $12.750 | $11.298 |
| Operating margin | 24.8% | 25.3% | 27.0% | 26.3% |
| Net income | $3.434 | $3.939 | $7.904 | $7.789 |
| Effective tax rate | 37.1% | 22.9% | 37.2% | 29.5% |
| Operating cash flow | Not separately reported | Not separately reported | $5.969 | $7.801 |
- Q2 revenue increased 8.3%; operating income rose 6.1%, while net income declined 12.8%. Diluted EPS was $0.08 for Class A and $0.49 for Class B, versus $0.09 and $0.57, respectively, in Q2 2012.
- First-half revenue increased 9.8%; operating income rose 12.8% and net income increased 1.5%. First-half diluted EPS was $0.19 for Class A and $1.12 for Class B, broadly unchanged from the prior year.
- Subscription-based agreements were 79% of first-half revenue, up from 71% a year earlier, and represented 83% of contract value at June 30.
Financial position and liquidity
- At June 30, cash and cash equivalents were $10.802 million, total assets $104.899 million, and shareholders’ equity $63.235 million. Cash included $6.3 million held in Canada and intended to remain invested in foreign operations.
- Working capital was $4.9 million, compared with a $11.5 million deficit at December 31, 2012. The improvement was largely due to refinancing term debt and moving a significant portion out of current liabilities. Deferred revenue was $15.8 million at both dates.
- Term debt was $11.606 million; the revolving credit facility had no borrowings and $6.5 million of availability. Capital lease obligations totaled $0.276 million. The new term loan bears 3.12% interest; the revolver was extended to June 30, 2014. NRC reported compliance with debt covenants.
- First-half investing cash use was $0.966 million, primarily capital expenditures. Financing cash use was $2.131 million, including $2.142 million of dividends. Cash increased $2.516 million to $10.802 million.
Material changes, outlook, and risks
- Revenue growth reflected new customer wins and increased sales to existing clients. Management attributed higher direct costs to greater survey volumes and investments in technology, research, and service resources. SG&A rose in Q2 as a percentage of revenue, reflecting sales investment, recapitalization costs, and higher software-license fees.
- The higher tax rate reduced earnings growth. Management cited a $575,000 tax adjustment tied to state tax-rate changes, nondeductible May recapitalization expenses, and increased unrecognized tax benefits.
- In May 2013, NRC refinanced two term notes into an $11.8 million loan and recapitalized its stock into Class A and Class B shares. Share and per-share figures were restated for the recapitalization. Q2 dividends per share were zero for both classes; first-half dividends were $0.05 per Class A share and $0.31 per Class B share.
- Customer-Connect, formed in June, develops patient-engagement programs. NRC owns 49% but consolidates it as primary beneficiary; it committed an initial $100,000 contribution and may contribute up to $2.5 million more. If specified contract-value and margin targets are met, NRC must purchase the other members’ interests; the stated purchase price at June 30 was $0.
- Management said available cash, borrowing capacity, 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 2013 to be similar to the first half. No revenue or earnings guidance was provided.
- Risks highlighted include client nonrenewals and concentration, competition and pricing pressure, healthcare-sector consolidation and regulation, economic conditions, and retention of key personnel. NRC said there were no material changes to previously disclosed risk factors or market-risk disclosures.
- Disclosure controls were deemed effective, with no material change in internal control over financial reporting. The filing also disclosed purchases from entities connected to a board member and the CEO; amounts were limited as described in the filing.
Important facts for investors to verify
- Whether revenue growth and the higher subscription mix continue, and whether direct-cost increases constrain margins.
- How much of the Q2 earnings decline reflects the elevated tax rate and recapitalization-related costs, and whether the tax rate normalizes.
- Collection of receivables and unbilled revenue, which contributed to the first-half operating-cash-flow decline, and the timing of deferred-revenue recognition.
- Customer-Connect’s funding needs, progress toward its purchase-trigger conditions, and the potential cost of NRC’s future acquisition obligation.
- Debt amortization, covenant compliance, and liquidity, including the availability and terms of the revolving facility.