Business Context and Reporting Period
Company: National Research Corporation (NRC Health)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
NRC Health is a provider of performance measurement, healthcare analytics, and governance education services to the healthcare industry in the U.S. and Canada. The company operates through several brands including NRC Picker, My InnerView (MIV), Ticker, and The Governance Institute (TGI). In August 2010, the company acquired Outcome Concept Systems (OCS) to expand its presence in the home health and hospice markets.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Revenue | $63.4 million | $57.7 million |
| Operating Income | $13.9 million | $13.7 million |
| Net Income | $8.5 million | $8.5 million |
| Diluted EPS | $1.26 | $1.26 |
| Operating Margin | 21.9% | 23.7% |
| Operating Cash Flow | $14.6 million | $13.7 million |
| Total Debt | $16.6 million | $7.7 million |
| Working Capital | ($8.8 million) Deficiency | ($4.4 million) Deficiency |
| Cash and Equivalents | $3.5 million | $2.5 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 9.9% to $63.4 million. The acquisition of OCS contributed $3.0 million, with the remainder driven by new client additions and expanded sales to existing clients.
- Expense Increases: Selling, general, and administrative (SG&A) expenses rose 26.1% to $20.2 million, primarily due to OCS integration costs ($1.0 million), acquisition transition costs ($312,000), and sales force expansion. Direct expenses increased 2.0% to $24.6 million.
- Debt Expansion: Total debt increased significantly from $7.7 million to $16.6 million. This was driven by a $10.0 million term note to finance the OCS acquisition and the refinancing of a previous term note to $6.9 million.
- Working Capital: The working capital deficiency widened to $8.8 million from $4.4 million. This is largely attributed to a $5.8 million increase in deferred revenue, which is typical for the company's billing cycle where clients are invoiced before services are fully rendered.
Outlook, Risks, and Management Commentary
- Acquisition Integration: Management expects the OCS acquisition to provide entry into home health and hospice markets. The company recorded $13.5 million in goodwill related to this acquisition.
- Contingent Consideration: The company estimates a $2.6 million earn-out payment for the MIV acquisition in 2011, to be funded by operating cash flows.
- Key Risks:
- Client Concentration: The ten largest clients accounted for 19% of 2010 revenue. Contracts are generally renewable annually and cancelable on short notice.
- Regulatory Environment: Changes in healthcare regulations, specifically the Patient Protection and Affordable Care Act, could impact client budgets and reimbursement rates.
- Competition: The market is highly competitive with firms like Press Ganey having significantly higher revenues.
- Capital Resources: The company maintains a $6.5 million revolving credit facility with no outstanding balance as of year-end. Management believes operating cash flow is sufficient to meet debt maturities and dividend obligations.
Investor Verification Checklist
- Deferred Revenue Realization: Verify the timing of revenue recognition for the $17.7 million deferred revenue balance to ensure it aligns with service delivery schedules.
- Debt Covenants: Confirm continued compliance with financial ratios required by the new term notes and revolving credit facility.
- Client Retention Rates: Monitor renewal rates given the high concentration of revenue in the top 10 clients and the annual renewable nature of contracts.
- Acquisition Synergies: Assess the integration progress and revenue contribution of the OCS acquisition against initial projections.
- Goodwill Valuation: Review the annual goodwill impairment testing, particularly given the significant increase in goodwill to $55.1 million.