NRC

Business Context and Reporting Period

Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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 $808k current portion and $6,357k long-term portion. Working Capital is negative due to significant deferred revenue.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 3.8% to $17.4 million, driven by new clients and expanded sales from existing clients. The Payer Solutions segment saw seasonal strength due to new health plan enrollees.
• Expense Management: Direct expenses decreased 11.3% to $6.5 million (37.2% of revenue vs. 43.5% prior year) due to growth in subscription-based products with lower variable costs. Conversely, Selling, General, and Administrative (SG&A) expenses increased 12.3% to $4.5 million (25.7% of revenue) due to sales force expansion.
• Profitability: Operating income rose 22.2% to $5.3 million. Net income increased 18.0% to $3.1 million.
• Liquidity: Cash and cash equivalents increased significantly from $2.5 million to $6.3 million, driven by strong operating cash flow of $6.3 million.
• Tax Rate: The effective tax rate increased to 39.9% from 38.0% due to projected taxable income moving the federal rate from 34% to 35%.

Guidance, Outlook, and Risks

• Outlook: Management expects direct expenses as a percentage of revenue to remain lower than the prior year for the remainder of 2010, though slightly higher than Q1. SG&A expenses are expected to remain elevated as a percentage of revenue due to continued sales force expansion. The effective tax rate for the remainder of 2010 is estimated at 37.5%.
• Capital Needs: The company expects to fund capital expenditures (primarily hardware and software) and debt obligations through cash flow from operations. A revolving credit facility of $6.5 million is available, with $5.7 million borrowing capacity as of March 31, 2010.
• Regulatory Impact: The passage of the Patient Protection and Affordable Care Act in March 2010 introduces uncertainty. While the impact on future revenues is difficult to estimate, healthcare costs for the company are expected to increase in 2011.
• Key Risks: 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.
• Unusual Items: The company paid a $172,000 earn-out obligation related to the MIV acquisition in February 2010. Future earn-outs for 2010 and 2011 are estimated at $2.0 million each.

Investor Verification Checklist

• Deferred Revenue: Verify the sustainability of the $14.1 million deferred revenue balance, which drives the working capital deficiency but indicates future revenue recognition.
• Sales Force ROI: Monitor whether the increased SG&A expenses from sales force expansion translate into sustained revenue growth in subsequent quarters.
• Debt Covenants: Confirm continued compliance with the term note covenants, which restrict additional indebtedness and require specific financial ratios.
• Regulatory Impact: Assess the long-term impact of the Affordable Care Act on client spending and the company's own healthcare costs.
• Acquisition Earn-outs: Track the performance of the MIV segment to ensure it meets the targets required for the estimated $4.0 million in future earn-out payments.