Business Context and Reporting Period
Company: National Research Corporation (NRC Health)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
NRC Health is a leading provider of survey-based performance measurement, improvement services, and governance education to the healthcare industry in the United States and Canada. The company operates through six segments aggregated into one reporting segment, including NRC Picker, Ticker (market intelligence), Payer Solutions, The Governance Institute (TGI), and My InnerView (MIV), acquired in December 2008.
Key Financial Metrics (Year Ended Dec 31, 2009)
| Metric | 2009 | 2008 |
|---|---|---|
| Revenue | $57.7 million | $51.0 million |
| Operating Income | $13.7 million | $12.0 million |
| Net Income | $8.5 million | $7.4 million |
| Diluted EPS | $1.26 | $1.09 |
| Operating Margin | 23.7% | 23.5% |
| Effective Tax Rate | 35.3% | 37.9% |
| Operating Cash Flow | $13.7 million | $15.2 million |
| Total Debt | $7.7 million | $13.0 million |
| Working Capital | ($4.4 million) Deficit | ($10.7 million) Deficit |
| Cash & Equivalents | $2.5 million | $1.1 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 13.1% to $57.7 million, primarily driven by the full-year impact of the My InnerView (MIV) acquisition completed in December 2008.
- Expense Trends: Direct expenses rose 4.1% but decreased as a percentage of revenue (42.6% vs. 46.3%) due to MIV's lower cost structure. Selling, general, and administrative (SG&A) expenses increased 22.5% due to MIV integration and sales force expansion.
- Debt Reduction: Total debt decreased significantly from $13.0 million to $7.7 million. The company paid off a $3.9 million line of credit and made additional principal payments on the MIV acquisition term note.
- Working Capital: The working capital deficit improved from $10.7 million to $4.4 million, largely due to the repayment of the revolving credit facility. The deficit is primarily attributed to deferred revenue balances ($11.9 million) resulting from advance billings.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects growth through expanding client programs, cross-selling, and new client acquisition. Capital expenditures for 2010 are expected to be funded by operating cash flows.
- Acquisition Contingencies: The MIV acquisition includes contingent earn-out payments based on revenue and earnings growth. A $795,000 payment was accrued for 2009 and paid in February 2010. Future earn-outs for 2010 and 2011 are projected at $3.0 million and $1.0 million, respectively.
- Key Risks:
- Client Concentration: The ten largest clients accounted for 14% of 2009 revenue. Loss of key clients could materially impact results.
- Renewal Dependency: A substantial portion of revenue comes from annually renewable contracts that are cancelable on short notice without penalty.
- Industry Consolidation: Consolidation in the healthcare industry could lead to reduced budgets or termination of client relationships.
- Regulatory Changes: Healthcare reform and new reporting requirements (e.g., HCAHPS) could increase competition or pricing pressure.
- Unusual Items: No material unusual items were reported. The company recorded a $240,000 net increase to goodwill in 2009 related to MIV purchase price adjustments.
Investor Verification Checklist
- Renewal Rates: Verify the actual renewal rates for performance tracking contracts, as these are the primary revenue driver and are cancelable without penalty.
- MIV Integration: Assess whether MIV is meeting the revenue and earnings targets required to trigger the remaining $4.0 million in contingent earn-out payments.
- Deferred Revenue: Confirm the timing of revenue recognition for the $11.9 million deferred revenue balance to ensure it aligns with service delivery schedules.
- Debt Covenants: Review compliance with financial covenants on the $7.7 million term note, which is secured by company assets and restricts additional indebtedness.
- Client Concentration: Monitor the stability of the top 10 clients, which represented 14% of total revenue in 2009.