NRC

Business Context and Reporting Period

Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2007
Business Overview: NRC Health provides survey-based performance measurement, analysis, tracking, improvement services, and governance education to the healthcare industry in the United States and Canada. The company helps healthcare organizations comply with regulatory standards and improve business practices.

Key Financial Metrics

Note: Total Debt is the sum of current portion of note payable ($1,035,771) and note payable net of current portion ($3,779,302). The revolving credit facility balance was $0.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 4.8% for the quarter and 13.9% for the nine-month period compared to the prior year. Growth was driven by new clients, expanded scope of work for existing clients, and the full-year impact of the TGI acquisition.
• Profitability: Net income rose 6.5% for the quarter and 17.5% for the nine-month period. Operating margins improved to 29.5% (quarter) and 25.1% (nine months) due to a higher mix of high-margin products.
• Expense Trends: Direct expenses increased due to higher conference costs and postage. Selling, general, and administrative (SG&A) expenses rose due to increased salaries, benefits, and contract services.
• Debt Reduction: Total debt decreased significantly from approximately $11.1 million in the prior year to $4.8 million as the company paid down the revolving line of credit and made additional payments on the term note.
• Liquidity: Cash and cash equivalents more than doubled to $2.1 million. Working capital improved from a deficiency of $1.5 million to a deficiency of $322,000.

Outlook, Risks, and Management Commentary

• Capital Resources: Management believes capital resources and operating cash flow are adequate to meet projected needs. Capital expenditures for the nine months were $1.1 million, with a budget of approximately $1.5 million for the full year 2007.
• Debt Covenants: The company is in compliance with all financial covenants and restrictions associated with its credit facility. The revolving line of credit matures on July 31, 2008, and management expects no difficulty renewing it.
• Shareholder Returns: The company paid $2.5 million in cash dividends during the first nine months of 2007. A stock repurchase program remains active with 690,386 shares remaining available for purchase.
• Risks: No material changes to risk factors were reported since the previous annual report. Key risks remain tied to the healthcare industry's demand for performance measurement services.
• Contingencies: A contingent payment of up to $706,000 related to the Smaller World acquisition is recorded in long-term liabilities, dependent on meeting future revenue goals.

Investor Verification Checklist

• Revenue Recognition: Verify the timing of "billings in excess of revenue earned" ($10.5 million), which represents deferred revenue recognized as income when earned.
• Debt Maturity: Confirm the repayment schedule for the remaining term note balance and the renewal status of the revolving credit facility maturing in July 2008.
• Acquisition Impact: Assess the ongoing contribution of the TGI acquisition to revenue and the amortization impact on operating expenses.
• Working Capital: Monitor the working capital deficiency, which, while improved, remains negative due to high deferred revenue balances.
• Share-Based Compensation: Review the $1.3 million in unrecognized compensation cost related to non-vested stock options expected to be recognized over 2.69 years.