NRC Health (National Research Corporation) — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also provides unaudited fourth-quarter results. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise indicated.
Business context
NRC provides subscription-based analytics, surveys and performance-improvement services to healthcare providers, payers and other organizations. Its offerings address growth, retention, patient and consumer engagement, and healthcare governance. The company reports one aggregated reporting segment, with U.S., Canadian and Connect operations. Subscription revenue represented 82.3% of 2014 revenue.
Financial performance
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $98.8 | $92.6 | +6.7% |
| Operating income | $28.3 | $24.8 | +14.1% |
| Operating margin | 28.6% | 26.8% | +1.8 percentage points |
| Net income | $18.2 | $15.5 | +17.2% |
| Diluted EPS, Class A | $0.43 | $0.37 | — |
| Diluted EPS, Class B | $2.57 | $2.20 | — |
| Cash from operating activities | $26.2 | $19.3 | +$6.9 |
Revenue growth reflected market-share gains and expansion within existing clients. SG&A declined 0.8% to $25.0 million, partly because 2013 included recapitalization-related legal and accounting costs; direct expenses rose 7.4% to $41.7 million, slightly faster than revenue. The effective tax rate was 35.4%, down from 36.8%.
In the fourth quarter, revenue was $25.1 million versus $22.9 million a year earlier; operating income was $6.4 million versus $6.0 million, and net income was $4.1 million versus $3.8 million. Quarterly results are unaudited.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $40.0 million at year-end, up from $22.1 million. Working capital surplus was $25.3 million, compared with $12.8 million.
- Total debt and capital-lease obligations, including current portions, were $8.4 million, down from $10.5 million. The term note balance was $8.1 million at a fixed 3.12% rate; the $6.5 million revolving facility had no borrowings at year-end. The company reported covenant compliance.
- Cash used in investing activities was $5.7 million, including $2.5 million of capital expenditures, the Digital Assent acquisition and a partner-company option investment. Management expected 2015 capital expenditures to be similar to 2014 and funded from operating cash flow.
- The board suspended cash dividends through 2014; it declared $2.5 million in December 2014, paid in January 2015. Future dividends are discretionary.
Material changes, outlook and risks
- In October 2014, NRC acquired Digital Assent for $2.6 million, establishing an Atlanta technology-development center. Since acquisition, it contributed $95,000 of revenue and an operating loss of $548,000. Preliminary purchase accounting included $1.1 million of goodwill.
- NRC also invested $800,000 in a partner’s talent-matching technology, including a $657,000 option to acquire the company for $4.1 million on or before March 31, 2015. The filing does not state whether that option was exercised.
- NRC consolidates Connect, in which it owns 49%, as a variable interest entity. NRC had contributed $2.8 million and could contribute up to another $1.3 million. It may be required to buy the other members’ interests if specified recurring-contract-value and margin targets are met; the stated purchase price at year-end was zero.
- Management said existing liquidity should meet projected needs for the foreseeable future, but provided no specific revenue, earnings or margin guidance. NRC’s growth plans include cross-selling, new clients, new solutions and strategic acquisitions.
- Key risks include annual contract renewals that are generally cancellable on short or no notice, healthcare-sector dependence, competition and pricing pressure, reliance on key clients and personnel, data security and service interruptions, and protection of intellectual property. The ten largest clients generated 16% of revenue in 2014; no single client exceeded 5%.
- Foreign-currency translation reduced comprehensive income by $1.1 million in 2014. NRC held $9.9 million of cash in Canada and estimated $609,000 of additional tax would be due if undistributed foreign earnings were repatriated.
- Class B shares carried approximately 94% of total voting power as of February 20, 2015; CEO Michael Hays held approximately 55% of total voting power. This dual-class structure limits Class A holders’ influence.
- No material pending litigation or significant off-balance-sheet obligations were reported. The auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Renewal rates, cancellations and recurring-revenue trends, given the short-notice termination provisions.
- Whether NRC exercised the $4.1 million acquisition option and the performance and integration of Digital Assent.
- Connect’s progress toward its contract-value and EBITDA-margin thresholds, and the potential funding or buyout obligations.
- The use and availability of Canadian cash, potential repatriation taxes, and foreign-exchange exposure.
- Subsequent dividend decisions, debt-facility renewal terms and compliance with covenants.
- Current customer concentration, competitive pricing trends, and the effect of healthcare regulation and industry consolidation.