NRC Health — Q2 2017 Form 10-Q
Business and period. National Research Corporation, doing business as NRC Health, provides analytics and insights to healthcare organizations, including patient and employee experience, engagement, and market research solutions. This unaudited report covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $28.4 | $26.1 | $58.7 | $54.0 |
| Operating income | $8.5 | $7.0 | $18.4 | $15.0 |
| Operating margin | 29.7% | 26.9% | 31.4% | 27.8% |
| Net income | $5.8 | $4.6 | $12.3 | $10.1 |
| Operating cash flow | Not stated separately | $10.6 | $11.2 | |
| Capital expenditures | Not stated separately | $2.4 | $2.2 |
Margins and earnings. Q2 revenue rose 8.9% year over year; net income increased 26.2%. For the first half, revenue increased 8.8% and net income 21.9%. Direct expense grew faster than revenue in both periods: 11.2% in Q2 and 9.7% for the first half. SG&A declined 5.0% and 7.1%, respectively, supporting improved operating margins. Q2 effective tax rate was 32.1% versus 35.2%; first-half rate was 33.5% versus 33.1%. Q2 diluted EPS was $0.13 for Class A and $0.80 for Class B; first-half diluted EPS was $0.28 and $1.71, respectively. The filing’s two-class allocation reflects different contractual dividend participation rights.
Liquidity, cash flow and debt
- At June 30, cash and cash equivalents were $31.6 million, total current assets $51.0 million, current liabilities $30.9 million, and working capital $20.1 million. Cash included $12.6 million held in Canada and intended to remain invested there.
- First-half operating cash flow was $10.6 million, down from $11.2 million. Working-capital changes reduced 2017 operating cash flow by $5.1 million, chiefly due to receivables, prepaid expenses, and accrued liabilities. Cash declined $1.4 million from year-end to $31.6 million.
- First-half financing used $10.0 million, including $8.4 million of dividends and $1.4 million of term-note repayments. The prior-year period included $21.8 million of dividends and a $2.0 million payment for Customer-Connect non-controlling interests.
- Term-note debt was $2.1 million at 3.12%; capital lease obligations were $0.2 million. The $12.0 million revolving facility had no borrowings and was extended to mature June 30, 2018. The company reported covenant compliance. Debt is secured by certain assets.
- Deferred revenue was $16.7 million, versus $15.5 million at year-end; substantially all is expected to be earned within 12 months. Uncertain tax-position liabilities were $0.73 million, with settlement timing not reasonably estimable.
Changes, outlook and risks
- Management attributed revenue growth to new customer sales and higher sales to existing clients. Higher direct costs reflected technology, phone, and labor costs, including increased customer-service compensation; lower postage, printing, and paper costs partly offset increases.
- Management said existing cash, borrowing availability, and operating cash flows should fund projected capital and debt needs and the dividend policy for the foreseeable future. It expected capital expenditures for the remainder of 2017 to be similar to the first half, primarily software, hardware, and equipment, funded from operating cash flow. No specific revenue or earnings guidance was provided.
- The company plans to adopt the new revenue standard on January 1, 2018 using a cumulative-effect adjustment rather than retrospective application, changing its prior adoption plan. It expects notable effects from deferring commissions over estimated client-relationship lives and estimating variable consideration at contract inception; the overall impact was still under evaluation.
- Management reported no material changes to the annual-report risk factors or market-risk disclosures. Cited risks include client non-renewals and retention, competition and price pressure, healthcare-sector consolidation and regulation, personnel retention, and cybersecurity and intellectual-property threats. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Facts investors should verify
- Whether revenue growth continues and client renewals and new-customer sales support it.
- Whether higher direct costs, receivables, and working-capital needs affect margins and cash conversion.
- The realized accounting and earnings effects of the 2018 revenue-standard adoption.
- Cash availability and potential tax cost of repatriating Canadian funds, and resolution of uncertain tax positions.
- Dividend sustainability, debt-facility terms and covenant compliance, and the June 2018 revolving-credit maturity.