Business Context and Reporting Period
Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: NRC Health provides survey-based performance measurement, analysis, and educational services to the healthcare industry in the U.S. and Canada. The company helps healthcare organizations comply with regulatory standards and improve business practices through data collection and analytics.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 |
|---|---|---|
| Revenues | $13,313,356 | $33,453,175 |
| Net Income | $2,342,325 | $4,878,144 |
| Diluted EPS | $0.34 | $0.70 |
| Operating Cash Flow (9mo) | $5,702,014 | |
| Cash and Equivalents (Sep 30, 2006) | $1,387,119 | |
| Total Debt (Notes Payable) | $11,152,893 (Current: $3.0M; Long-term: $8.2M) | |
| Working Capital | Negative $2.76M |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 31.4% for the quarter and 40.1% for the nine-month period compared to 2005. This growth was driven by expanded scope with existing clients and new acquisitions.
- Acquisitions: The company acquired The Governance Institute (TGI) in May 2006 for approximately $19.8 million and Geriatric Health Systems (GHS) in late 2005. These acquisitions contributed significantly to revenue and increased goodwill from $11.5M to $30.1M.
- Expense Increases: Direct expenses rose 43.4% (quarter) and 50.8% (nine months) due to servicing higher revenue and acquisition-related costs. Selling, general, and administrative (SG&A) expenses increased 27.0% (quarter) and 36.4% (nine months), partly due to the adoption of SFAS No. 123R (share-based compensation).
- Profitability: Operating income increased to $3.99M for the quarter and $8.03M for the nine months. However, operating margins decreased slightly to 30.0% (quarter) and 24.0% (nine months) compared to 32.8% and 25.5% in the prior year, respectively.
- Liquidity: Working capital turned negative ($2.76M deficit) compared to a positive position in the prior year, primarily due to increased billings in excess of revenues earned (deferred revenue) and higher current debt obligations.
Guidance, Outlook, and Risks
- Outlook: Management expects direct expenses to remain at the upper end of their 43% to 45% revenue model for 2006 and 2007. SG&A expenses are expected to be 26% of revenue in 2006 due to sales expansion and accounting changes, potentially rising in 2007 due to TGI integration.
- Debt Financing: To fund the TGI acquisition, the company entered a credit facility in May 2006, borrowing $9.0M on a term note (7.21% interest) and $3.5M on a revolving credit line. The company is currently in compliance with all covenants.
- Accounting Changes: The adoption of SFAS No. 123R resulted in a share-based compensation expense of $799,000 for the nine months ended September 30, 2006. Management estimates this will impact earnings by approximately $0.08 to $0.10 per share for the full year 2006.
- Risks: No material changes to risk factors were reported since the 2005 10-K. Key risks include reliance on the healthcare industry, competition, and the ability to integrate acquisitions successfully.
Investor Verification Checklist
- Acquisition Integration: Verify the revenue contribution and cost synergies from the TGI and GHS acquisitions against management projections.
- Debt Covenants: Monitor compliance with the new credit facility covenants, specifically financial ratios and restrictions on additional indebtedness.
- Deferred Revenue: Analyze the $7.5M in "billings in excess of revenues earned" to ensure future revenue recognition aligns with project completion timelines.
- Share-Based Compensation: Track the impact of SFAS No. 123R on future earnings, noting the $1.3M in unrecognized compensation costs for stock options.
- Working Capital: Review the negative working capital position to ensure sufficient liquidity for operations and debt service.