NRC

Business Context and Reporting Period

Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: NRC Health provides performance measurement, healthcare analytics, and governance education services to the healthcare industry in the U.S. and Canada. The company operates seven segments aggregated into one reporting segment, including NRC Picker, Ticker, Payer Solutions, The Governance Institute, My InnerView, Outcome Concept Systems (OCS), and Illuminate.

Key Financial Metrics

Note: Working capital deficiency is primarily driven by significant deferred revenue balances ($18.8 million) resulting from billing clients in advance of service completion.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 13.9% year-over-year. Approximately $1.9 million of this increase is attributed to the acquisition of Outcome Concept Systems (OCS), with the remainder driven by new clients and expanded sales.
• Expense Increases: Selling, general, and administrative (SG&A) expenses rose 36.3% to $6.1 million. This was driven by sales force expansion, new executive hires, and a one-time $280,000 charge for terminating a lease in Wausau, Wisconsin.
• Direct Expenses: Increased 4.7% to $6.8 million but improved as a percentage of revenue (34.1% vs. 37.2%) due to a more cost-efficient product mix and operational centralization.
• Cash Flow: Operating cash flow decreased to $3.9 million from $6.3 million in the prior year, primarily due to timing differences in billings and collections (increased accounts receivable).
• Investing Activities: Net cash used in investing activities increased significantly to $2.3 million, largely due to a $1.6 million earn-out payment related to the MIV acquisition.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Tax Rate: The effective tax rate decreased to 37.2% (from 39.9% in 2010). The projected annualized effective tax rate for 2011 is 36.8%.
• Expense Trends: SG&A expenses as a percentage of revenue are expected to remain fairly constant through the rest of 2011. Direct expenses are projected to be lower than the prior year but higher than Q1 2011.
• Capital Needs: Management believes operating cash flow and existing borrowing arrangements are adequate to meet capital and debt maturity needs.

Risks and Contingencies:

• Contract Renewals: Risk of non-renewal of client service contracts.
• Regulatory Environment: Impact of federal healthcare reform legislation and industry consolidation.
• Debt Covenants: Term notes contain restrictions on indebtedness, liens, and asset disposal; the company was in compliance as of March 31, 2011.
• Subsequent Event: In April 2011, the company agreed to limit the final earn-out payment for the MIV acquisition to $2.6 million, with $2.4 million paid immediately.

Investor Verification Checklist

• Deferred Revenue Quality: Verify the sustainability of the $18.8 million deferred revenue balance, which masks a working capital deficiency.
• Acquisition Integration: Assess the ongoing contribution of the OCS acquisition ($1.9M revenue in Q1) and the finalization of MIV earn-out obligations.
• Debt Maturity: Review the repayment schedule for term notes with balloon payments due in July 2013 and the status of the revolving credit facility expiring June 30, 2011.
• One-Time Costs: Confirm that the $280,000 lease termination cost is a non-recurring item and does not signal broader operational contraction.
• Cash Conversion: Monitor the trend in accounts receivable, which increased by $3.8 million, impacting operating cash flow despite revenue growth.