NRC Health (National Research Corporation) — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited results; dollar amounts below are in millions unless noted. The company provides performance measurement, healthcare analytics, and governance education services in the U.S. and Canada.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $18.55 | $16.01 | $56.66 | $47.52 |
| Operating income | $4.19 | $3.49 | $13.73 | $11.50 |
| Net income | $2.65 | $2.14 | $8.43 | $6.93 |
| Diluted EPS | $0.39 | $0.32 | $1.23 | $1.03 |
| Operating margin | 22.6% | 21.8% | 24.2% | 24.2% |
Q3 revenue grew 15.9%, operating income 20.1%, and net income 23.6% year over year. Nine-month revenue rose 19.2%, operating income 19.4%, and net income 21.7%. Q3 direct expenses were 40.3% of revenue versus 37.7% a year earlier; for the nine-month period they were 37.9% versus 38.7%. SG&A was 30.0% of Q3 revenue and 31.2% for nine months. Nine-month effective tax rate was 36.6%, down from 37.9%.
Cash, debt, and liquidity
- Nine-month operating cash flow was $14.36 million, compared with $12.35 million in 2010. Investing used $6.39 million and financing used $5.13 million. Cash increased $2.70 million to $6.22 million.
- Cash at quarter-end included $2.3 million held in Canada and intended to remain invested there. The company says repatriation could incur U.S. federal taxes.
- Total notes payable were $14.79 million, down from $16.16 million at year-end 2010. The two term loans bear 3.79% interest and mature with balloon payments in July 2013. No amount was drawn on the $6.5 million revolving credit facility, renewed through June 30, 2012.
- Working capital was negative $5.0 million, improving from negative $8.8 million at December 31, 2010. Management attributes the deficit mainly to $18.4 million of deferred revenue, largely advance billings expected to be recognized within 12 months. The company stated it had adequate capital and operating cash flow for foreseeable needs and was in compliance with debt covenants.
- Nine-month dividends paid were $4.44 million. Capital expenditures were $2.28 million.
Drivers, changes, and unusual items
- Management attributed revenue growth to market-share gains, pricing on enhanced offerings, and cross-selling to existing clients. Subscription-based agreements represented 70% of contract value at September 30 and generally generate recurring revenue over the service period.
- Nine-month revenue included $4.4 million from OCS, acquired in August 2010. The comparison also reflects OCS being included for a longer period in 2011.
- Direct expenses rose with business volume, postage and contracted survey costs, and added staffing in technology and client service. Nine-month SG&A growth reflected sales-force expansion, commissions, leadership hires, and OCS.
- The company paid approximately $4.1 million in MIV earn-out amounts during the first nine months; the payments were recorded as additions to goodwill. It also incurred $280,000 of lease-termination costs in Q1; the related restructuring liability was fully paid by September 30.
- Management’s expense expectations for full-year 2011 were direct expenses averaging about 37% of revenue, SG&A about 31%, and depreciation and amortization about 7%. It expected capital expenditures for the remainder of 2011 to be similar to the first nine months. These are expense and spending expectations, not revenue or earnings guidance.
Risks and other disclosures
Risks highlighted include client contract non-renewals and dependence on a limited number of key clients, intense competition and pricing pressure, economic weakness, healthcare-industry consolidation and regulation, healthcare reform, retaining key personnel, and protection of intellectual property and technology. The filing reported no material change to previously disclosed risk factors, no material change in market-risk disclosures, and effective disclosure controls. The company noted uncertainty in estimates and that actual restructuring costs may differ from estimates, though significant changes were not expected. It also reported $244,000 of unrecognized tax benefits, excluding $47,000 of accrued interest, and said the balance could decrease over the next 12 months as statutes of limitation expire.
Key facts for investors to verify
- Whether revenue growth and cross-selling persist, and how much growth is organic versus attributable to OCS.
- Whether direct costs normalize toward management’s full-year estimate after the Q3 increase.
- Cash generation and working-capital trends, especially receivables, advance billings, and deferred revenue.
- Debt repayment capacity and the July 2013 balloon payments, alongside the $6.5 million facility’s borrowing-base limitations.
- Performance and remaining payment exposure associated with MIV earn-outs, and any tax, regulatory, client-retention, or competitive developments.