NRC Health (National Research Corporation) — Q1 2018 Form 10-Q
Business and period: The company provides healthcare analytics and insight services, including patient and employee experience measurement, primarily through renewable subscriptions. This unaudited report covers the three months ended March 31, 2018, compared with Q1 2017. The company reports one aggregated segment.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $31.0 million | $30.3 million | +2.4% |
| Operating income | $9.0 million | $10.0 million | −10.3% |
| Operating margin | 28.9% | 32.9% | −4.0 percentage points |
| Net income | $7.3 million | $6.5 million | +12.0% |
| Effective tax rate | 18.5% | 34.7% | −16.2 percentage points |
| Operating cash flow | $8.2 million | $8.1 million | +$0.1 million |
| Capital expenditures | $1.3 million | $1.4 million | −$0.1 million |
Direct expenses were $12.9 million, or 41.6% of revenue, versus $12.5 million, or 41.3%. Selling, general and administrative expense rose 17.7% to $7.9 million (25.4% of revenue, versus 22.1%). Depreciation and amortization was $1.3 million, up 16.0%. Net income benefited from the lower tax rate following U.S. tax reform, despite lower operating income.
Cash and cash equivalents were $35.5 million at quarter-end, versus $34.7 million at December 31, 2017. Working capital was $22.4 million. The term note was repaid in March; no revolving-credit borrowings were outstanding at March 31, and the company reported no notes payable at that date. Capital lease obligations were $0.13 million. The company paid $4.2 million in dividends during the quarter.
Changes, accounting, and notable events
- Revenue growth was attributed to new customer sales and increased sales to existing clients. Operating expenses grew faster than revenue, particularly SG&A, reflecting recapitalization costs, higher compensation, software and hosting costs, professional services, and bad debt expense.
- Effective January 1, 2018, NRC Health adopted ASC 606 using the modified retrospective method; prior-year results were not restated. The company recorded an approximately $2.7 million after-tax increase to opening retained earnings. Under ASC 606, Q1 2018 revenue was $31.0 million; the company’s “without adoption” comparison shows $30.9 million revenue and $7.1 million net income. Deferred contract costs were $3.6 million at quarter-end.
- After quarter-end, shareholders approved and the company completed a recapitalization: each former Class B share was exchanged for one Class A share plus $19.59 cash. The company reported paying $72.6 million and issuing 3,617,615 shares in the exchange and settlement of related awards. The former share classes were consolidated into Common Stock, trading under ticker NRC.
- On April 18, 2018, the company entered a new credit agreement: a $15 million revolving facility, a term loan facility of up to $40 million, and a $15 million delayed-draw term facility. The term loan bears 5% interest and matures in 2023; the revolving and delayed-draw facilities bear floating interest (4.15% at April 18, 2018) and have stated maturities in 2021 and 2023, respectively. The facilities are secured by substantially all company assets and include financial covenants. The filing does not clearly state the precise term-loan amount drawn at closing.
Outlook, risks, and contingencies
No specific revenue or earnings guidance is provided. Management said cash, operating cash flows, and borrowing availability were expected to be sufficient for projected capital and debt needs, the recapitalization, and the dividend policy for the foreseeable future. It expected capital spending for the remainder of 2018 to be similar to Q1, primarily for software, hardware, and equipment.
Management highlighted risks including client non-renewals and retention, competition and price pressure, economic downturns, healthcare-industry consolidation and regulation, recruiting and retaining personnel, and cybersecurity or intellectual-property threats. Subscription agreements are generally cancelable on short or no notice without penalty. Three shareholder lawsuits related to the proposed transactions remained; plaintiffs sought damages, and the company said it would defend the cases. No loss was accrued because management did not consider a loss probable or estimable. The company reported effective disclosure controls and no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Actual borrowing outstanding under the new credit facilities after the $72.6 million recapitalization payment, and resulting interest, leverage, and covenant headroom.
- Revenue growth, client retention and renewal trends, and the impact of ASC 606 on comparisons; Q1 2017 was not restated.
- Whether elevated SG&A and hosting costs persist and how they affect operating margins.
- Developments and potential financial exposure in the shareholder litigation, for which no liability was recorded.
- The cover page reports common shares outstanding as of April 27, 2017, an apparent date inconsistency in a 2018 quarterly filing; verify the correct share-count date and figure.