NRC Health (National Research Corporation) — Q1 2013 Form 10-Q
Business and period: The company provides analytics and insights to healthcare organizations, including services supporting growth, retention, patient engagement, and regulatory compliance. This unaudited report covers the three months ended March 31, 2013, compared with Q1 2012. During the quarter, NRC reorganized eight operating segments into two geographic operating segments, aggregated as one reporting segment.
Financial performance
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $24.9 million | $22.4 million; up 11.2% |
| Operating income / margin | $7.2 million / 29.0% | $6.1 million / 27.1% |
| Net income | $4.5 million | $3.8 million; up 16.1% |
| Diluted EPS | $0.64 | $0.56 |
| Effective tax rate | 37.3% | 35.1% |
| Operating cash flow | $3.1 million | $2.1 million |
| Capital expenditures | $0.4 million | $0.6 million |
| Cash and cash equivalents | $9.2 million at March 31 | $8.3 million at December 31, 2012 |
| Notes payable | $12.1 million at March 31 | $12.4 million at December 31, 2012 |
Margins and revenue mix: Direct expenses rose 14.7% to $10.2 million and increased to 41.1% of revenue from 39.9%, reflecting higher survey volume and service costs. SG&A increased 5.6% to $6.5 million but declined to 26.1% of revenue from 27.5%; depreciation and amortization fell to $1.0 million from $1.2 million. Subscription-based agreements represented 74% of Q1 revenue, versus 68% a year earlier, and 80% of contract value at March 31.
Liquidity, debt, and cash flow
Working capital was negative $7.9 million at March 31, improved from negative $11.5 million at December 31. Management says deferred revenue and the current classification of term-note balances significantly affect working capital. Operating cash flow was reduced by $2.6 million of working-capital changes; cash increased by $0.9 million during the quarter. Financing activities included $2.1 million of dividends and $0.3 million of term-note repayments.
The two term notes, bearing 3.79% interest, totalled $12.1 million and mature July 31, 2013, including balloon payments. NRC said it expected to refinance them before maturity and had a commitment letter; it also expected a new revolving credit facility in Q2. The existing $6.5 million revolver was undrawn at quarter-end. The company reported compliance with its debt covenants. Cash included $6.2 million held in Canada, which management intends to reinvest indefinitely in foreign operations.
Changes, outlook, and risks
- Management attributed revenue growth to market-share gains and expansion within existing clients. Subscription agreements grew as a proportion of revenue and contract value.
- Management expected capital expenditures for the rest of 2013 to be similar to Q1, funded from operating cash flow, and said available liquidity and operating cash flows should meet projected needs and dividend policy for the foreseeable future.
- The effective tax rate increased primarily because of nondeductible fees associated with a recapitalization transaction and an increase in unrecognized tax benefits. The filing does not provide a clear description of the transaction itself.
- Unrecognized tax benefits were $252,000, plus $12,000 of interest. The company said these benefits could decrease within 12 months as certain tax statutes of limitation expire.
- Key disclosed business risks include contract non-renewal, dependence on a limited number of key clients, competitive and pricing pressures, healthcare industry consolidation, economic conditions, regulation and healthcare reform, and retaining personnel and protecting proprietary technology. NRC reported no material changes to its previously disclosed risk factors or market-risk exposures.
- Management reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Progress and final terms of refinancing the $12.1 million in term notes due July 31, 2013, and replacement of the existing revolving facility.
- Whether revenue growth and the increasing subscription mix continue, and how higher direct costs affect margins.
- Client retention, renewal rates, and customer concentration, which are important given the disclosed contract and key-client risks.
- Cash availability and potential tax consequences related to the $6.2 million held in Canada.
- The impact and any further costs or tax effects of the recapitalization transaction.