NRC

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, 2005
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 performance tracking, custom research, and educational services.

Key Financial Metrics

Material Changes vs. Prior Period

• Quarterly Revenue Growth: Revenues for the three months ended June 30, 2005, increased 12.2% to $7.1 million compared to $6.4 million in the prior year quarter. This was driven by new client additions and expanded scope of work from existing clients.
• Semi-Annual Revenue Decline: Revenues for the six months ended June 30, 2005, decreased 1.3% to $13.7 million compared to $13.9 million in the prior year. Management attributed this to timing volatility and lower revenues from U.S. federal government contracts in Q1 2005, partially offset by new client revenue in Q2.
• Expense Increases: Selling, general, and administrative (SG&A) expenses increased 12.9% for the quarter and 13.9% for the six-month period, primarily due to sales and marketing expansion (salaries, benefits, and travel).
• Profitability: Net income for the six-month period decreased 12.6% to $1.67 million from $1.91 million in the prior year. Operating margins compressed from 23.1% to 20.1% year-over-year for the six-month period.
• Dividends: The company initiated a quarterly cash dividend in March 2005. Total dividends paid in the first six months of 2005 were $1.15 million, compared to $0 in the prior year.

Guidance, Outlook, and Risks

• Outlook: Management expects operating cash flows to remain sufficient for working capital and capital expenditures. Growth is anticipated to be driven by increased demand for performance measurement products due to public reporting programs.
• Capital Allocation: The company is actively repurchasing shares under a 2003 authorization for 500,000 shares. As of August 9, 2005, 328,211 shares had been repurchased. Additionally, $1.2 million in dividends were paid in the first half of 2005.
• Accounting Changes: The company is evaluating the impact of adopting SFAS No. 123(R) regarding share-based payments, effective January 1, 2006. This will require recognizing compensation cost based on grant-date fair value, which may reduce reported net income compared to the current intrinsic value method.
• Liquidity: The company maintains strong liquidity with $3.1 million in cash and $17.3 million in working capital. Deferred revenues (billings in excess of revenues earned) totaled $6.3 million, providing a backlog of future revenue recognition.

Investor Verification Checklist

• Revenue Volatility: Verify the sustainability of revenue growth given the 1.3% decline in the six-month period despite strong Q2 performance, specifically regarding federal government contract timing.
• Margin Compression: Analyze the trend of SG&A expenses rising faster than revenue (31.1% of revenue in 6M 2005 vs. 26.9% in 6M 2004) and its impact on long-term operating margins.
• Shareholder Returns: Assess the impact of the new dividend policy ($1.15M paid in 6 months) and aggressive stock buybacks ($3.26M in 6 months) on future cash flow availability.
• Deferred Revenue: Confirm the recognition timeline of the $6.3 million in deferred revenue to ensure it aligns with future earnings guidance.
• Accounting Impact: Monitor the upcoming adoption of SFAS No. 123(R) in 2006 and its potential effect on net income and EPS.