Business Context and Reporting Period
Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 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 assists healthcare organizations in complying with regulatory standards and improving business practices through data collection methodologies including direct mail, telephone surveys, and focus groups.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2006 |
Six Months Ended June 30, 2006 |
Six Months Ended June 30, 2005 |
|---|---|---|---|
| Revenues | $10,663,436 | $20,139,819 | $13,746,232 |
| Net Income | $1,318,897 | $2,535,819 | $1,672,843 |
| Diluted EPS | $0.19 | $0.37 | $0.23 |
| Operating Cash Flow | N/A | $2,199,672 | $4,509,660 |
| Cash & Equivalents | $574,737 (End of Period) | $574,737 (End of Period) | $3,125,306 (End of Period) |
| Total Debt (Notes Payable) | $12,700,000 | $12,700,000 | $1,471,283 (Current only) |
| Working Capital | ($3,918,444) | ($3,918,444) | $8,057,624 |
Note: Working Capital is calculated as Current Assets minus Current Liabilities. For the six months ended June 30, 2006, Current Assets were $12,814,398 and Current Liabilities were $16,732,842.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 49.1% for the quarter and 46.5% for the six-month period compared to the prior year. This growth was driven by increased scope of work from existing clients and new acquisitions.
- Acquisitions:
- Geriatric Health Systems (GHS): Acquired in Sept 2005; contributed $2.1 million in revenue for the quarter and $3.0 million for the six months.
- The Governance Institute (TGI): Acquired May 30, 2006 for $19.8 million cash plus liabilities. Contributed $417,000 in revenue for the quarter and six months.
- Expense Increases:
- Direct Expenses: Increased 62.1% (quarter) and 55.9% (six months) due to higher volume and specific health plan projects with higher cost structures.
- SG&A Expenses: Increased 45.6% (quarter) and 41.5% (six months) due to sales expansion and the adoption of SFAS No. 123R (share-based compensation).
- Debt Structure: On May 26, 2006, the company entered a credit facility borrowing $12.5 million ($9.0M term note, $3.5M revolving) to finance the TGI acquisition. Total notes payable increased from $1.47 million (current only) at year-end 2005 to $12.7 million at June 30, 2006.
- Cash Flow: Operating cash flow decreased to $2.2 million (six months 2006) from $4.5 million (six months 2005), primarily due to increases in receivables and unbilled revenues, and decreases in deferred taxes and accrued expenses.
Guidance, Outlook, and Risks
- Expense Outlook: Management expects direct expenses to remain within 43% to 45% of total revenues for the remainder of 2006. SG&A expenses are expected to be on the upper end of the 23% to 25% model due to sales expansion and SFAS 123R adoption.
- Depreciation & Amortization: Expected to increase in dollar terms but remain within 4.5% to 6.0% of total revenues for 2006.
- Accounting Changes: Adoption of SFAS No. 123R is estimated to impact earnings by approximately $0.08 to $0.10 per share for the full year 2006.
- Liquidity: The company maintains a revolving credit facility of up to $3.5 million secured by assets. As of June 30, 2006, the company was in compliance with all debt covenants.
- Stock Repurchase: A plan to repurchase 750,000 shares was authorized in February 2006. As of August 4, 2006, 23,034 shares had been repurchased.
- Risks: No material changes to risk factors were reported since the 2005 10-K. Key risks include reliance on the healthcare industry and the ability to integrate acquisitions.
Investor Verification Checklist
- Acquisition Integration: Verify the revenue contribution and cost synergies from the TGI and GHS acquisitions against pro forma projections.
- Working Capital Trends: Investigate the shift from positive working capital in 2005 to negative working capital in 2006, driven by a significant increase in "Billings in excess of revenues earned" (deferred revenue) and current debt.
- Debt Covenants: Confirm ongoing compliance with the new credit facility covenants, specifically financial ratio requirements and restrictions on additional indebtedness.
- Share-Based Compensation: Monitor the actual impact of SFAS 123R on future earnings, as the current estimate is $0.08-$0.10 per share for 2006.
- Cash Conversion: Analyze the reasons for the decline in operating cash flow despite a 51% increase in net income, focusing on the timing of billings and receivables collection.