NRC

Business Context and Reporting Period

Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 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 six segments aggregated into one reporting segment, including NRC Picker, Ticker, Payer Solutions, The Governance Institute, and My InnerView (MIV).

Key Financial Metrics

Note: Total Debt includes current portion ($819) and long-term portion ($6,149). Deferred Revenue includes current ($15,909) and long-term ($253) portions.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 4.0% for the quarter and 3.9% for the six-month period compared to the prior year, driven by new client additions and expanded sales from existing clients.
• Expense Trends:
  • Direct Expenses: Decreased 3.9% (quarter) and 6.9% (six months) due to a shift toward subscription-based products with lower variable costs and more efficient survey methodologies.
  • Selling, General & Administrative (SG&A): Increased 16.9% (quarter) and 12.5% (six months) primarily due to sales force expansion, new executive hires, and transaction costs related to the OCS acquisition.
  • Depreciation & Amortization: Increased 18.9% (quarter) and 7.8% (six months) due to a large software project placed into service in late 2009.
• Tax Rate: The effective tax rate increased to 38.8% for the six-month period (from 37.3% in 2009) due to projected taxable income moving the federal rate from 34% to 35%.
• Liquidity: Cash and cash equivalents increased significantly from $2.5 million at year-end 2009 to $7.2 million at June 30, 2010. Working capital deficiency improved from $4.4 million to $1.4 million.

Guidance, Outlook, and Risks

• Acquisition Activity: On August 3, 2010 (subsequent to period end), the company acquired Outcome Concept Systems, Inc. (OCS) for approximately $16.3 million (including working capital adjustment), funded by cash and new debt. This expands offerings into home care and hospice analytics.
• Debt Refinancing: In July 2010, the company refinanced its existing term loan with a new $6.9 million term loan at a lower interest rate (3.79% vs. 5.2%) and extended the maturity to 2013. The revolving credit facility was renewed with a $6.5 million capacity; $5.9 million was available as of June 30, 2010.
• Regulatory Impact: The company notes the passage of the Patient Protection and Affordable Care Act. While the impact is difficult to estimate, healthcare costs are expected to increase in 2011, and the company is assessing effects on future revenue.
• Risk Factors: Key risks include non-renewal of performance tracking contracts, intense market competition, price pressure, consolidation in the healthcare industry, and reliance on a limited number of key clients.
• Forward-Looking Statements: Management cautions that actual results may differ materially from expectations due to economic downturns, regulatory changes, and integration risks of acquisitions.

Investor Verification Checklist

• Deferred Revenue Recognition: Verify the timing of revenue recognition given the significant deferred revenue balance ($16.1 million) and the company's billing practices (often invoicing 50%+ upfront).
• Acquisition Integration: Monitor the financial impact and integration progress of the OCS acquisition announced in August 2010.
• Debt Covenants: Confirm continued compliance with financial ratios and covenants associated with the term note and revolving credit facility.
• Client Concentration: Assess the risk associated with the potential non-renewal of contracts with key healthcare clients.
• Regulatory Changes: Track the specific impact of the Affordable Care Act on the company's client base and service demand.