Business Context and Reporting Period
Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended September 30, 2002
Business Overview: The Company provides healthcare survey and market research services. Revenue is seasonal, with increases typically occurring in the third quarter due to the annual release of the Healthcare Market Guide.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2002 |
Nine Months Ended Sep 30, 2002 |
Nine Months Ended Sep 30, 2001 |
|---|---|---|---|
| Revenues | $7,317,037 | $16,165,316 | $13,562,930 |
| Net Income | $1,426,542 | $2,616,336 | $1,478,289 |
| Diluted EPS | $0.20 | $0.37 | $0.21 |
| Operating Margin | 31.8% | 27.3% | 17.3% |
| Cash & Equivalents | $1,658,296 | Balance Sheet Data | |
| Working Capital | $10,920,548 | Calculated (Current Assets - Current Liab) | |
| Total Debt | $5,206,652 | Current + Non-current Notes Payable | |
| Operating Cash Flow | N/A | $3,722,887 | $3,112,006 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 19.9% in the quarter and 19.2% for the nine-month period compared to 2001. Growth was driven by new clients, including a major contract signed in January 2002, and seasonal factors.
- Profitability Expansion: Operating income margin improved significantly to 31.8% for the quarter (from 25.0% in 2001) and 27.3% for the nine-month period (from 17.3% in 2001).
- Expense Management:
- Direct Expenses: Increased 26.0% in the quarter due to higher printing, postage, and fieldwork costs associated with revenue growth, though labor costs decreased.
- SG&A: Decreased 13.3% in the quarter, primarily due to a $279,000 reduction in legal and consulting fees related to a previously disclosed legal proceeding.
- Depreciation & Amortization: Decreased 21.3% in the quarter and 11.2% for the nine months, largely due to the adoption of SFAS No. 142, which eliminated goodwill amortization.
- Cash Flow: Net cash provided by operating activities increased to $3.7 million for the nine months ended September 30, 2002, compared to $3.1 million in the prior year.
Guidance, Outlook, and Risks
- Accounting Changes: The Company adopted SFAS No. 142 (Goodwill and Other Intangible Assets) effective January 1, 2002, ceasing the amortization of goodwill. No impairment loss was recognized during the transitional evaluation.
- Future Standards: The Company noted the issuance of SFAS No. 146 (Exit or Disposal Activities) effective for activities initiated after December 31, 2002, and a tentative EITF conclusion on revenue recognition for multiple deliverables expected to be adopted in the first quarter of 2003.
- Liquidity: The Company maintains strong liquidity with $1.7 million in cash and $10.9 million in working capital. Capital expenditures of $1.3 million were made in the first nine months to support business expansion.
- Stock Repurchase: As of October 31, 2002, the Company had repurchased 68,100 shares under an authorization for 150,000 shares approved in April 1999.
- Risks: The filing notes that trends illustrated in the financial tables may not be indicative of future results. The Company relies on cash flow from operations for working capital.
Investor Verification Checklist
- Revenue Sustainability: Verify the duration and renewal terms of the "major contract signed in January 2002" cited as a primary driver of growth.
- Legal Exposure: Confirm the status of the "previously disclosed legal proceeding" that resulted in significant savings in legal fees during the period.
- Deferred Revenue: Review the $3.0 million in "billings in excess of revenues earned" to understand the timing of future revenue recognition.
- Capital Allocation: Assess the return on the $1.3 million invested in furniture, computer equipment, and software during the nine-month period.
- Debt Servicing: Monitor the $5.2 million total debt obligation and the Company's ability to service it with current operating cash flows.