Business Context and Reporting Period
Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
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 six segments aggregated into one reporting segment, including NRC Picker, Healthcare Market Guide, Payer Solutions, The Governance Institute, and My InnerView (MIV).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Revenue | $13,517 | $43,850 |
| Net Income | $1,994 | $6,253 |
| Operating Income | $3,298 | $10,373 |
| Operating Margin | 24.4% | 23.7% |
| Net Cash from Operating Activities | N/A | $10,273 |
| Cash and Cash Equivalents (End of Period) | $1,460 | $1,460 |
| Total Debt (Current + Long-term) | $8,559 | $8,559 |
| Working Capital | ($5,892) Deficiency | ($5,892) Deficiency |
Note: Working capital is calculated as Current Assets ($13,296) minus Current Liabilities ($19,188).
Material Changes vs. Prior Period
- Revenue Growth: For the nine months ended September 30, 2009, revenue increased 12.9% to $43.9 million compared to $38.8 million in the prior year period. This growth was primarily driven by the acquisition of My InnerView (MIV) in December 2008. For the three-month period, revenue remained virtually flat at $13.5 million.
- Expense Trends: Direct expenses decreased 17.5% in the quarter but increased 6.6% for the nine-month period due to MIV servicing costs. Selling, general, and administrative (SG&A) expenses increased 26.8% in the quarter and 15.9% for the nine months, largely due to MIV integration and sales force expansion.
- Profitability: Net income for the nine months increased 12.7% to $6.3 million. The effective tax rate decreased to 37.0% from 37.9% in the prior year due to lower Canadian statutory rates and increased R&D tax credits.
- Debt Reduction: The current portion of notes payable decreased significantly from $4.6 million to $0.8 million, reducing the overall working capital deficiency from $10.7 million to $5.9 million.
Guidance, Outlook, and Risks
Management Commentary: Management believes the company has adequate capital resources to meet projected needs. Future growth is expected to be driven by increased demand for performance measurement services resulting from public reporting programs. Capital expenditures for the remainder of 2009 are expected to focus on hardware, software, and production equipment.
Liquidity and Capital Resources:
- Term Note: $9.0 million borrowed in Dec 2008 for MIV acquisition; 5.2% interest; balloon payment due Dec 31, 2011.
- Revolving Credit: $6.5 million facility renewed in July 2009; no balance outstanding as of Sept 30, 2009; $5.5 million borrowing capacity available.
- Dividends: $3.2 million paid in dividends during the nine-month period.
Risk Factors:
- Reliance on a limited number of key clients and potential non-renewal of performance tracking contracts.
- Highly competitive market with potential price pressure.
- Impact of the economic downturn and healthcare industry consolidation.
- Ability to manage growth and integrate acquisitions effectively.
- Regulatory developments affecting the healthcare industry.
Investor Verification Checklist
- Client Concentration: Verify the stability of revenue from key clients given the risk of non-renewal.
- MIV Integration: Assess whether the MIV acquisition continues to drive revenue growth and if its higher SG&A ratio impacts long-term margins.
- Debt Covenants: Confirm continued compliance with financial ratios required by the term note and revolving credit facility.
- Working Capital: Monitor the working capital deficiency and the company's ability to fund operations without increasing debt.
- Stock Repurchases: Review the remaining authorized shares (289,275) under the repurchase program and recent activity.