Business Context and Reporting Period
Company: National Research Corporation (NRC Health)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2005
NRC Health is a leading provider of survey-based performance measurement, analysis, tracking, and educational services to the healthcare industry in the United States and Canada. The company's primary offerings include renewable performance tracking services, custom research, educational services, and the syndicated NRC Healthcare Market Guide. In September 2005, the company acquired substantially all assets of Geriatric Health Systems, LLC for $4.0 million in cash plus assumed liabilities to expand its capabilities in measuring health status and member satisfaction for health plans.
Key Financial Metrics
| Metric | 2005 | 2004 | Change |
|---|---|---|---|
| Revenues | $32.44 million | $29.68 million | +9.3% |
| Operating Income | $8.42 million | $7.40 million | +13.7% |
| Net Income | $5.24 million | $4.55 million | +15.1% |
| Diluted EPS | $0.74 | $0.63 | +17.5% |
| Operating Margin | 25.9% | 24.9% | +100 bps |
| Cash from Operations | $8.19 million | $7.82 million | +4.7% |
| Working Capital | $8.06 million | $19.43 million | -58.5% |
| Total Debt | $1.47 million | $4.90 million | -70.0% |
| Cash & Equivalents | $0.84 million | $3.65 million | -77.0% |
Note: All figures in millions unless otherwise noted. Debt consists of a note payable to US Bank, classified as current as of year-end.
Material Changes vs. Prior Period
- Revenue Growth: Driven by increased scope of work from existing clients, new client additions, and $575,000 in revenue from the Geriatric Health Systems acquisition.
- Expense Management: Direct expenses decreased as a percentage of revenue (42.1% vs. 43.4%) due to a shift to web-based delivery for the Market Guide and reduced printing/postage costs. However, Selling, General, and Administrative (SG&A) expenses rose to 26.6% of revenue (from 24.9%) due to sales and marketing expansion initiatives.
- Liquidity Shift: Working capital declined significantly from $19.4 million to $8.1 million. This was primarily due to a reduction in cash and marketable securities used to fund the Geriatric Health Systems acquisition ($4.1 million net cash outflow), stock repurchases ($5.9 million), and the initiation of quarterly cash dividends ($2.3 million).
- Debt Reduction: The company paid down $3.4 million in principal on its long-term debt, reclassifying the remaining balance as a current liability with an intent to pay off within 12 months.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- The company expects direct expenses to remain within its 43-45% revenue model in 2006.
- SG&A expenses are expected to be slightly higher than the historical 23-25% model in 2006 due to continued sales and marketing expansion.
- Depreciation and amortization are expected to be at the lower end of the 4.5-6.0% model in 2006.
- Capital expenditures for 2006 are budgeted at approximately $1.3 million, funded by operating cash flow.
Key Risks & Contingencies:
- Client Concentration: The ten largest clients accounted for 40% of 2005 revenues. The U.S. Department of Veterans Affairs alone represented 11% of total revenues.
- Contract Renewals: A substantial portion of revenue is derived from annually renewable contracts that are generally cancelable on short notice without penalty.
- Seasonality: Operating results fluctuate quarterly, particularly due to the timing of the Market Guide delivery (typically Q3), which impacts revenue recognition and margins.
- Regulatory Changes: The introduction of the HCAHPS survey program in 2006 may increase competition and pricing pressure.
- Accounting Changes: Adoption of SFAS No. 123(R) in 2006 is expected to decrease net income by approximately $0.04 to $0.06 per share due to the recognition of share-based compensation expense.
Investor Verification Checklist
- Client Retention Rates: Verify renewal rates for the top 10 clients, particularly the U.S. Department of Veterans Affairs, given the high concentration risk.
- Debt Maturity: Confirm the company's ability to refinance or repay the $1.47 million note payable classified as current within the next 12 months.
- Acquisition Integration: Assess the performance of the Geriatric Health Systems acquisition and its contribution to the commercial health plan market.
- Dividend Sustainability: Evaluate the impact of the new quarterly dividend policy ($0.32/share in 2005) on future cash flows and capital allocation.
- Market Guide Timing: Monitor the delivery schedule of the 2006 Market Guide to anticipate potential quarterly revenue fluctuations.