NRC Health (National Research Corporation) — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report. Financial amounts below are in U.S. dollars; annual figures are for the year unless stated otherwise.
Business context
NRC provides performance measurement, healthcare analytics, benchmarking and governance education services to healthcare organizations in the United States and Canada. Its offerings span healthcare providers, payers, senior care, home health and hospice. Most revenue comes from annually renewable client contracts, which are generally cancellable on short or no notice. The ten largest clients contributed 20% of revenue in 2011; approximately 8% of revenue came from foreign customers.
Key financial results
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Revenue | $75.8 million | $63.4 million | +19.5% |
| Operating income | $18.7 million | $13.9 million | +35.2% |
| Operating margin | 24.7% | 21.9% | +2.8 percentage points |
| Net income | $11.6 million | $8.5 million | +36.1% |
| Diluted EPS | $1.69 | $1.26 | +34.1% |
| Operating cash flow | $18.5 million | $14.6 million | +26.6% |
Revenue growth reflected $4.5 million from OCS, acquired in 2010, along with market-share gains, enhanced-offering pricing and cross-selling to existing clients. Direct expenses were 37.8% of revenue versus 38.8% in 2010; SG&A was 30.8% versus 31.9%. The effective tax rate was 36.3%, compared with 36.2%.
Fourth quarter: Revenue was $19.1 million, operating income $5.0 million, net income $3.1 million and diluted EPS $0.46. In fourth-quarter 2010, these were $15.9 million, $2.4 million, $1.6 million and $0.23, respectively.
Liquidity, debt and capital allocation
- Year-end cash and cash equivalents were $8.1 million, up from $3.5 million. The company reported $18.5 million of operating cash flow, used $6.9 million in investing activities and used $6.9 million in financing activities.
- Working capital deficiency narrowed to $2.3 million from $8.8 million. Management attributed the deficiency mainly to deferred revenue from advance client billings ($16.5 million at year-end), which is generally earned within 12 months.
- Notes payable totaled $14.5 million at year-end; including capital lease obligations, debt and leases totaled approximately $14.9 million. Term debt bears fixed interest of 3.79%, with balloon payments due July 2013. The $6.5 million revolving facility was undrawn at year-end and matures June 30, 2012.
- Management said cash, available borrowing capacity and operating cash flow should cover projected capital and debt needs and the dividend policy for the foreseeable future. The company paid $5.9 million in dividends during 2011 ($0.88 per share).
Material changes, outlook and notable items
- Management expected 2012 revenue growth of 15% to 20%, SG&A as a percentage of revenue to decline, and capital expenditures to be comparable to 2011’s $2.8 million. It cautioned that direct expenses could rise as a percentage of revenue in the short term to support clients added late in 2011.
- OCS broadened NRC’s home health and hospice presence. In 2011, investing cash use included approximately $4.1 million of MIV acquisition earn-out payments; property and equipment purchases were $2.8 million.
- NRC recorded $280,000 of 2011 costs to terminate the Wausau office lease and related services. No goodwill or long-lived-asset impairment was recorded in 2011, 2010 or 2009.
- The 2011 adoption of updated multiple-deliverable revenue guidance had no material impact. Management expected newly issued accounting guidance to affect presentation, but not materially affect financial condition or results.
- The company reported no material pending litigation and no significant off-balance-sheet obligations apart from disclosed operating leases. Unrecognized tax benefits were $266,000, plus $43,000 of accrued interest.
Risks and governance
Key risks include annual contract nonrenewals and client cancellations; concentration in healthcare and a limited number of clients; healthcare industry consolidation, cost pressures and regulatory reform; competition and pricing pressure; reliance on timely, reliable survey data and IT systems; data-security and service-interruption risks; and dependence on key personnel. CEO Michael D. Hays beneficially owned approximately 62% of outstanding common stock, giving him effective control over matters requiring shareholder approval. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2011. KPMG issued an unqualified audit opinion.
Important facts for investors to verify
- Whether the 15%–20% 2012 revenue-growth outlook was achieved, and how much growth came from organic activity versus acquired businesses.
- Client renewal rates, top-client revenue exposure and the durability of cross-selling and pricing gains.
- Extension or replacement of the revolving credit facility before its June 30, 2012 maturity, and the company’s ability to manage the July 2013 term-debt balloon payments.
- Whether planned staffing and technology investment supported growth without reversing the 2011 margin improvement.
- Key-client concentration, healthcare policy changes, data-security exposure and the assumptions underpinning goodwill valuations.