Business Context and Reporting Period
Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: NRC Health provides survey-based performance measurement, analysis, tracking, and governance education services to the healthcare industry in the U.S. and Canada. The company operates seven segments aggregated into one reporting segment, including NRC Picker, Ticker, Payer Solutions, The Governance Institute, MyInnerView (MIV), and the newly launched Illuminate program.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Revenue | $16.0 million | $47.5 million |
| Net Income | $2.1 million | $6.9 million |
| Operating Income | $3.5 million | $11.5 million |
| Operating Margin | 21.8% | 24.2% |
| Cash from Operations (9mo) | $12.4 million | |
| Cash and Equivalents (Sep 30, 2010) | $3.2 million | |
| Total Debt (Notes Payable) | $16.6 million ($1.8M current, $14.8M long-term) | |
| Working Capital | Deficiency of $8.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 18.4% year-over-year for the quarter and 8.4% for the nine-month period. The acquisition of Outcome Concept Systems (OCS) on August 3, 2010, contributed $1.2 million to revenue in both periods.
- Expense Increases: Selling, general, and administrative (SG&A) expenses rose 38.3% for the quarter and 20.8% for the nine-month period, primarily due to OCS acquisition costs, sales force expansion, and new executive hires.
- Profitability: Net income increased 7.4% for the quarter and 10.8% for the nine-month period compared to the prior year.
- Balance Sheet: Total assets grew from $72.5 million to $93.4 million, driven by a $13.2 million increase in goodwill and $2.6 million in intangible assets from the OCS acquisition.
- Working Capital: The working capital deficiency widened from $4.4 million to $8.9 million, largely due to a $6.8 million increase in deferred revenue resulting from upfront billing on new contracts.
Guidance, Outlook, and Risks
- Acquisition Integration: The company is integrating OCS into the MIV segment to expand into home health and hospice markets. OCS contributed $1.2 million in revenue and $102,000 in operating income since acquisition.
- Debt Financing: The company refinanced existing debt and borrowed $10.0 million to fund the OCS acquisition. Total term notes bear interest at 3.79% with balloon payments due in July 2013. A $6.5 million revolving credit facility is available but currently unutilized.
- Regulatory Impact: Management anticipates healthcare costs will increase approximately 20% in 2011 due to the Patient Protection and Affordable Care Act. The impact on future revenue remains difficult to estimate.
- Restructuring: The company announced a 2010 Restructuring Plan to centralize MIV/OCS functions, expecting aggregate costs of $144,000. Additionally, $347,000 in severance related to OCS employees is expected, with $333,000 already accrued.
- Risk Factors: Key risks include non-renewal of performance tracking contracts, intense market competition, price pressure, and the ability to retain key clients and personnel.
Investor Verification Checklist
- Deferred Revenue Recognition: Verify the timing of revenue recognition for the $18.7 million deferred revenue balance to ensure it aligns with contract terms.
- Acquisition Synergies: Monitor the integration progress of OCS and whether the projected revenue growth materializes in subsequent quarters.
- Debt Covenants: Confirm continued compliance with financial ratio covenants on the $16.6 million term notes, particularly given the working capital deficiency.
- Regulatory Exposure: Assess the specific impact of healthcare reform legislation on client spending and the company's projected 20% cost increase.
- Restructuring Costs: Track the actual execution of the 2010 Restructuring Plan and OCS severance payments against the estimated $491,000 total cost.