NRC Health (National Research Corporation) — Q3 2013 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2013; financial statements are unaudited. NRC provides analytics and insights to healthcare organizations, including services supporting patient engagement, retention, and regulatory compliance. The company reports one aggregated segment. May 2013 recapitalization created Class A and Class B common stock; prior share and per-share data were restated.
Financial performance
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2012 period.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $22.4 | $21.4 | $69.7 | $64.4 |
| Operating income | $6.0 | $5.6 | $18.8 | $16.9 |
| Operating margin | 26.9% | 26.4% | 27.0% | 26.3% |
| Net income | $3.8 | $3.6 | $11.7 | $11.4 |
| Diluted EPS, Class A / Class B | $0.09 / $0.54 | $0.09 / $0.51 | $0.28 / $1.67 | $0.27 / $1.64 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $15.3 | $13.6 |
Q3 revenue rose 4.8%; nine-month revenue rose 8.1%. Net income increased 6.6% in Q3 and 3.1% year to date. Nine-month subscription-agreement revenue represented 80.8% of total revenue, up from 73.7%.
- Costs and margins: Q3 direct expenses rose 7.8%, faster than revenue, and increased to 42.2% of revenue from 41.0%. For nine months, direct expenses rose 10.9% and reached 41.9% of revenue versus 40.9%. Management cited survey volume and investment in technology, research, and service resources. Lower depreciation and amortization partly offset cost increases.
- Cash and liquidity: Cash was $18.9 million at September 30, 2013, versus $8.3 million at year-end 2012. Working capital was $8.8 million, compared with a $11.5 million deficiency at year-end, reflecting debt refinancing and higher cash. Nine-month operating cash flow was $15.3 million; capital expenditures were $1.6 million.
- Debt: Term-note balance was $10.9 million; the company had no revolving-credit borrowings and $6.5 million available under the facility. The new term loan carries 3.12% interest. Capital-lease obligations were $0.25 million. The company reported compliance with debt covenants.
Material changes and notable items
- In May 2013, NRC refinanced two term notes into an $11.8 million loan with 60 monthly installments and a lower stated rate than the prior notes (3.12% versus 3.79%). The revolving credit facility was renewed through June 30, 2014.
- The effective tax rate increased to 35.9% in Q3 from 34.9%, and to 36.8% for the nine months from 31.3%. The company attributed the year-to-date increase mainly to a $575,000 tax adjustment related to state tax-rate changes and nondeductible recapitalization fees.
- NRC formed Connect in June 2013, owns 49%, and consolidates it as the primary beneficiary of a variable interest entity. Connect recorded losses of $391,000 for Q3 and $471,000 for the nine months, all attributed to NRC. NRC may contribute up to $2.5 million as needed. It must purchase the other members’ interests if stated recurring-contract-value and EBITDA-margin thresholds are met; the stated purchase price as of September 30 was $0.
- Cash dividends paid were $2.1 million in the first nine months, compared with $5.3 million in 2012; no Q3 dividend was reported for 2013. The filing reports no stock repurchases during Q3.
Outlook, risks, and controls
Management said cash, borrowing availability, and operating cash flows should be sufficient for projected capital and debt needs and the dividend policy for the foreseeable future. It expected capital expenditures for the remainder of 2013 to be similar to year-to-date spending. No specific revenue or earnings guidance was provided.
Risks highlighted include client contract non-renewals and reliance on a limited number of key clients, competition and pricing pressure, economic conditions, healthcare-industry consolidation and regulatory changes, talent retention, and protection of intellectual property. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors or market-risk exposures were reported.
Important facts for investors to verify
- Whether revenue growth and the higher subscription mix continue, and whether direct-cost growth moderates.
- Connect’s funding needs, operating performance, path to the contract-value and margin thresholds, and potential acquisition obligation.
- The effect of the higher effective tax rate and recapitalization-related costs on future earnings.
- Debt amortization, covenant headroom, and continued availability of the $6.5 million revolver.
- Cash held in Canada was $7.8 million and is intended to remain invested abroad; repatriation could incur U.S. federal tax, which the company said it could not reasonably quantify.
- Class A and Class B EPS and dividend rights differ; assess per-share comparisons using the recapitalization-restated figures.