National Research (NRC) - 2021 Q4 - Annual Report

PART I Business National Research Corporation (NRC Health) provides analytics and insights to healthcare organizations, focusing on patient engagement and loyalty through subscription-based solutions - The company's business is centered on providing analytics and insights to healthcare organizations to enhance patient engagement and loyalty through a portfolio of subscription-based solutions[15][17] - NRC Health's solutions are divided into three main categories: Market Insights, Experience, and Transparency[20][21][22] - The company's growth strategy is four-pronged: increasing service scope with existing clients, winning new clients, introducing new solutions, and pursuing strategic acquisitions[27] - The healthcare information market is highly competitive, with key competitors including internal departments, small specialty firms, and larger firms like Press Ganey[34] - As of December 31, 2021, the company employed 511 associates, with most working remotely due to the COVID-19 pandemic[47] Risk Factors The company faces risks from the COVID-19 pandemic, contract renewals, intense competition, industry consolidation, third-party reliance, cybersecurity threats, and control by its CEO's family - The COVID-19 pandemic poses a risk as it has caused financial strain on healthcare clients, potentially leading them to reduce or eliminate services purchased from the company[52] - A substantial portion of revenue depends on renewable service contracts, with the ten largest clients accounting for 14% of total revenue in 2021[56] - The company faces significant cybersecurity risks, having been the target of an external cyber-attack in February 2020 which caused a temporary suspension of services[66] - The company's principal shareholders, primarily trusts and entities controlled by the family of CEO Michael D. Hays, held approximately 52.4% of outstanding common stock as of February 25, 2022, giving them effective control[74][75] Unresolved Staff Comments The company reports no unresolved staff comments - There are no unresolved staff comments to report[83] Properties The company's headquarters is an owned 62,000 square foot building in Lincoln, Nebraska, currently under renovation, with additional leased office spaces - The main property is an owned headquarters in Lincoln, Nebraska, which is undergoing renovations expected to be completed in early 2023[84] - The company leases several smaller office spaces, including one in Markham, Ontario, which will be terminated in late 2022 due to the closure of the Canadian office[85] Legal Proceedings The company is involved in claims and litigation in the normal course of business, with no expected material adverse effect on its financial position - The company is periodically involved in claims and litigation, but management does not expect the outcomes to have a material adverse effect on its financial position[86] Mine Safety Disclosures This item is not applicable to the company - Not applicable[87] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, with $12.2 million in cash dividends declared in 2021 and an active share repurchase program - Cash dividends declared were $12.2 million in 2021, compared to $5.3 million in 2020 and $19.4 million in 2019[91] Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | | :--- | :--- | :--- | :--- | | Nov 1 – Nov 30, 2021 | 24,298 | $41.48 | 256,193 | | Dec 1 – Dec 31, 2021 | 94,846 | $41.53 | 168,943 | Comparison of 5-Year Cumulative Total Return | | 12/16 | 12/17 | 12/18 | 12/19 | 12/20 | 12/21 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | National Research Corporation | 100.00 | 199.11 | 209.79 | 368.11 | 239.77 | 235.38 | | NASDAQ Composite | 100.00 | 129.64 | 125.96 | 172.17 | 249.51 | 304.85 | | Russell 2000 | 100.00 | 114.65 | 102.02 | 128.06 | 153.62 | 176.39 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, revenue increased by 11.0% to $148.0 million and operating income grew by 17.8% to $50.3 million, driven by new sales and COVID-19 recovery Key Financial Metrics (2021 vs. 2020, in thousands) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $147,954 | $133,277 | 11.0% | | Operating income | $50,270 | $42,677 | 17.8% | | Operating margin | 34.0% | 32.0% | 2.0 pts | | Recurring Contact Value | $150,937 | $145,079 | 4.0% | | Cash provided by operating activities | $46,344 | $40,636 | 14.0% | - Revenue growth in 2021 was primarily due to new customer sales and increased sales to existing clients, along with a recovery from COVID-19 related service reductions in 2020[110] - The company's principal sources of liquidity as of December 31, 2021, included $54.4 million in cash, an unused $30 million line of credit, and a $15 million delayed draw term note[121] - Significant future capital expenditures are planned for the headquarters building renovation, estimated at $15 million in 2022 and $7 million in 2023[128] - The company acquired PatientWisdom, Inc. on January 4, 2021, for $5.0 million in cash[127] Quantitative and Qualitative Disclosure About Market Risk The company's primary market risks relate to foreign currency exchange rates from its Canadian subsidiary and interest rates on its debt facilities - Foreign currency risk is primarily from the Canadian subsidiary, whose operations are expected to close by the end of 2022, which will eliminate this exposure[142] - The company is exposed to interest rate risk on its $26.6 million fixed-rate Term Loan and its variable-rate Line of Credit and Delayed Draw Term Loan, which are based on LIBOR[143][144] - The company is aware of the planned phase-out of LIBOR and notes that its credit agreement allows the lender to designate a substitute index[145] Financial Statements and Supplementary Data This section includes the independent auditor's report from KPMG LLP and the company's audited consolidated financial statements for the three years ended December 31, 2021 Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on the financial statements and internal controls, noting a Critical Audit Matter related to revenue recognition from subscription agreements - KPMG issued an unqualified (clean) opinion on the financial statements and internal controls[150] - A Critical Audit Matter was identified concerning the sufficiency of audit evidence over key terms within new and modified subscription-based service agreements, as these terms directly impact revenue recognition[158] Consolidated Financial Statements The consolidated financial statements show total assets of $157.5 million and total liabilities of $72.2 million as of December 31, 2021, with net income of $37.5 million for the year Consolidated Balance Sheet Data (in thousands) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total current assets | $73,707 | $54,112 | | Total assets | $157,540 | $133,423 | | Total current liabilities | $40,388 | $31,681 | | Total liabilities | $72,203 | $69,108 | | Total shareholders' equity | $85,337 | $64,315 | Consolidated Income Statement Data (in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenue | $147,954 | $133,277 | $127,982 | | Operating income | $50,270 | $42,677 | $43,035 | | Net income | $37,466 | $37,260 | $32,406 | | Diluted EPS | $1.46 | $1.45 | $1.26 | Notes to Consolidated Financial Statements The notes detail accounting policies, the PatientWisdom acquisition, goodwill, income taxes, debt, share-based compensation, leases, and the company's restructuring into a single operating segment - On January 4, 2021, the company acquired PatientWisdom, Inc. for $5.0 million, recognizing $4.3 million in goodwill[223][225] - Subscription services recognized ratably over time constituted the majority of revenue, totaling $137.0 million in 2021[227] - The company's credit agreement includes a $30 million revolving line of credit and a term loan with a balance of $26.6 million at year-end 2021[238][239] - In March 2021, the company changed its operating segments from six to one, reflecting a change in its corporate reporting structure[262] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable - Not applicable[265] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes - Management concluded that disclosure controls and procedures were effective as of December 31, 2021[266] - Management concluded that internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework[268] Other Information The company has no other information to report for this item - No other information to report[271] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Not applicable[272] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement[275] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement[277] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Security ownership information is incorporated by reference from the 2022 Proxy Statement, detailing outstanding options and available securities under equity compensation plans - Information on security ownership of beneficial owners and management is incorporated by reference from the 2022 Proxy Statement[278] Equity Compensation Plan Information as of December 31, 2021 | Plan Category | Number of Securities to be issued upon exercise | Weighted average exercise price | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 477,640 | $30.88 | 1,586,867 | Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement[282] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement[283] PART IV Exhibits, Financial Statement Schedules This section lists the consolidated financial statements and exhibits filed as part of the Annual Report on Form 10-K, with schedules omitted if not applicable - This section provides an index of all exhibits filed with the Form 10-K, including corporate governance documents, credit agreements, equity plans, and certifications[289][293] Form 10-K Summary No Form 10-K summary is provided - None[292]