NRC

Business Context and Reporting Period

Company: National Research Corporation (NRC Health)

Filing Type: Form 10-K (Annual Report)

Period Ended: December 31, 2003

NRC Health is a leading provider of survey-based performance measurement, analysis, tracking, and improvement services to the healthcare industry. The company serves hospitals, health plans, and other healthcare organizations with tools to measure patient experience and health status. Key services include Performance Tracking Services, custom research, educational services, and the syndicated NRC Healthcare Market Guide. In March 2003, the company expanded its operations into Canada by acquiring Smaller World Communications Inc.

Key Financial Metrics (Year Ended Dec 31, 2003)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 20.3% to $26.9 million, driven by new client acquisitions, expansion into Canada, and increased scope of work from existing clients.
• Expense Increases: Direct expenses rose 25.9% to $12.0 million due to incremental costs of servicing additional clients (labor, printing, fieldwork). Selling, general, and administrative (SG&A) expenses increased 26.4% to $6.0 million, primarily due to higher salaries, marketing, and bad debt expenses.
• Profitability: Operating income increased 8.5% to $6.97 million. Net income rose 13.9% to $4.38 million. The effective tax rate decreased slightly to 36.6% from 37.5% in 2002.
• Liquidity: Cash and cash equivalents grew significantly to $3.44 million from $0.99 million, supported by strong operating cash flow of $8.27 million.
• Acquisitions: The company acquired Smaller World Communications Inc. for approximately $1.0 million in cash, with additional contingent payments possible based on revenue goals.

Guidance, Outlook, and Risks

• Outlook: Management expects direct and SG&A expenses as a percentage of revenue to remain similar to 2003 levels in 2004. Depreciation and amortization as a percentage of revenue are expected to decrease slightly. The company has budgeted approximately $1.0 million for capital expenditures in 2004.
• Key Risks:
  • Client Concentration: The ten largest clients accounted for 45% of total revenues in 2003. The U.S. Department of Veterans Affairs alone accounted for 14.6% of revenues.
  • Competition: The market is highly competitive with low barriers to entry, posing risks of pricing pressure and market share loss.
  • Contract Renewals: A significant portion of revenue relies on the renewal of annual performance tracking contracts.
  • Goodwill Impairment: The company holds $8.0 million in goodwill. While no impairment was recorded in 2003, future declines in fair value could trigger charges.
• Legal Proceedings: The company is not subject to any material pending litigation. A prior lawsuit with Cap Gemini America, Inc. was resolved in 2002.

Investor Verification Checklist

• Client Concentration: Verify the stability of the top 10 clients, particularly the U.S. Department of Veterans Affairs (14.6% of revenue), given the reliance on contract renewals.
• Revenue Recognition: Review the percentage-of-completion methodology used for Performance Tracking Services and the completed-contract basis for the Market Guide to ensure consistency.
• Goodwill Valuation: Monitor the annual impairment testing of the $8.0 million goodwill balance, especially given the competitive landscape.
• Contingent Acquisition Costs: Track the performance of Smaller World Communications Inc. to determine if additional purchase price payments (up to $1.17 million total) will be triggered.
• Stock Repurchases: Note the active stock repurchase program; 89,000 shares were repurchased under the 1999 authorization, and a new 500,000 share authorization was approved in July 2003.