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, 2009
Business Overview: NRC Health provides survey-based performance measurement, analysis, tracking, and governance education services to the healthcare industry in the U.S. and Canada. The company operates through six segments aggregated into one reporting segment, including NRC Picker, Health Care Market Guide, Payer Solutions, The Governance Institute, and My InnerView (MIV).
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 |
Six Months Ended June 30, 2009 |
|---|---|---|
| Revenue | $13,593,950 | $30,333,691 |
| Operating Income | $2,701,616 | $7,075,480 |
| Net Income | $1,609,300 | $4,259,347 |
| Diluted EPS | $0.24 | $0.63 |
| Operating Cash Flow | N/A | $7,643,614 |
| Cash and Equivalents | $403,613 | $403,613 |
| Total Debt (Notes Payable) | $8,808,506 | $8,808,506 |
| Working Capital | ($8,020,577) | ($8,020,577) |
Note: Total Debt includes current portion ($820,319) and long-term portion ($7,988,187). Working Capital is calculated as Current Assets ($11,018,973) minus Current Liabilities ($19,039,550).
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 14.2% for the quarter and 19.6% for the six-month period compared to the same periods in 2008. This growth was primarily driven by the December 2008 acquisition of My InnerView (MIV), which contributed $2.2 million in revenue for the quarter.
- Expense Increases: Direct expenses rose 18.5% (quarter) and 20.8% (six months), largely due to servicing the new MIV business. Selling, general, and administrative (SG&A) expenses increased 10.4% and 11.1%, respectively, also attributed to MIV integration.
- Depreciation and Amortization: Increased significantly by 31.8% (quarter) and 49.1% (six months) due to the amortization of intangible assets from the MIV acquisition.
- Profitability: Despite higher expenses, Net Income increased 1.8% for the quarter and 18.8% for the six-month period. Operating margins improved slightly for the six-month period (23.3% vs. 23.1% in 2008) but declined slightly for the quarter (19.9% vs. 21.5% in 2008).
- Liquidity: Cash and cash equivalents decreased by $705,240 during the six-month period. The company maintained a working capital deficiency of $8.0 million, an improvement from the $10.7 million deficiency at year-end 2008, primarily due to debt reduction.
Guidance, Outlook, and Risks
Management Commentary: Management believes the company has adequate capital resources and operating cash flow to meet projected needs. Capital expenditures for the first half of 2009 were $2.1 million, with future spending expected for hardware, software, and equipment funded by operations.
Debt and Liquidity:
- Term Note: $9.0 million borrowed in Dec 2008 for the MIV acquisition; 5.2% interest; balloon payment due Dec 31, 2011.
- Revolving Credit: $6.5 million facility renewed in July 2009. As of June 30, 2009, the balance was $66,000, with $5.1 million remaining capacity.
Risks and Contingencies:
- Client Concentration: Risk of non-renewal of performance tracking contracts and reliance on a limited number of key clients.
- Competition: Highly competitive markets with potential for increased price pressure.
- Acquisition Integration: Risks associated with managing growth and integrating acquired companies like MIV.
- Regulatory and Industry Downturn: Potential impact of healthcare industry consolidation or regulatory changes.
Forward-Looking Statements: The filing includes standard disclaimers that actual results may differ materially from anticipated outcomes due to various risks.
Investor Verification Checklist
- MIV Integration: Verify the ongoing financial performance and integration costs of the My InnerView (MIV) acquisition, which drove significant revenue and expense growth.
- Working Capital Deficiency: Review the sustainability of the $8.0 million working capital deficiency and the company's reliance on debt facilities to fund operations.
- Debt Covenants: Confirm continued compliance with financial ratio covenants on the $9.0 million term note and the $6.5 million revolving credit facility.
- Revenue Recurrence: Assess the renewal rates of performance tracking contracts, given the risk of non-renewal cited in the filing.
- Capital Expenditures: Monitor future capital spending plans against cash flow generation to ensure funding for hardware and software upgrades.