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, 2001
Business Overview: The Company provides healthcare market research and survey services. A significant event during the period was the acquisition of the healthcare survey business of The Picker Institute on May 7, 2001.
Key Financial Metrics
| Metric | Q3 2001 | Q3 2000 | 9 Months 2001 | 9 Months 2000 |
|---|---|---|---|---|
| Revenues | $6,104,832 | $5,017,115 | $13,562,930 | $14,110,273 |
| Net Income | $931,917 | $831,180 | $1,478,289 | $1,975,324 |
| Operating Income | $1,523,100 | $1,013,831 | $2,345,435 | $2,324,861 |
| Operating Margin | 25.0% | 20.2% | 17.3% | 16.5% |
| EPS (Diluted) | $0.13 | $0.12 | $0.21 | $0.28 |
| Cash & Equivalents | $2,923,770 (as of Sep 30, 2001) | |||
| Working Capital | $6,333,727 (as of Sep 30, 2001) | |||
| Total Debt | $5,334,311 (Notes Payable) |
Material Changes vs. Prior Period
- Quarterly Revenue Growth: Revenues increased 21.7% in Q3 2001 compared to Q3 2000, driven by new clients and approximately $500,000 in revenue from the Picker acquisition.
- Year-to-Date Revenue Decline: Revenues for the nine months ended September 30, 2001, decreased 3.9% compared to the prior year. This was primarily due to the absence of $2.1 million in lower-margin contracts that occurred in 2000 but did not recur in 2001.
- Profitability Improvement: Despite the YTD revenue decline, operating income increased slightly (0.9%) due to improved cost management. Direct expenses as a percentage of revenue decreased from 51.7% to 46.6% YTD.
- Acquisition Impact: The acquisition of The Picker Institute resulted in $4.1 million of goodwill and increased depreciation and amortization expenses by 48.5% in Q3 and 44.5% YTD.
- Legal Costs: Selling, general, and administrative (SG&A) expenses increased significantly in Q3 due to $318,000 in legal and consulting fees related to a previously disclosed legal proceeding.
Guidance, Outlook, and Risks
- Outlook: Management expects direct expenses as a percentage of total revenues to remain at levels lower than in 2000 for the balance of 2001, citing improved systems implemented in the prior year.
- Accounting Changes: The Company is preparing to adopt FASB Statement No. 142, which will require goodwill to be tested for impairment annually rather than amortized. Management states it is not practicable to estimate the impact of this change or potential transitional impairment losses at this time.
- Liquidity: The Company maintains strong liquidity with $2.9 million in cash and $6.3 million in working capital. Cash flow from operations increased to $3.1 million YTD, primarily due to the timing of collections and billings.
- Capital Allocation: The Company continues to repurchase shares under an authorization approved in April 1999. As of October 31, 2001, 56,700 shares had been repurchased under this specific authorization.
Investor Verification Checklist
- Legal Proceedings: Verify the status and potential financial exposure of the "previously disclosed legal proceeding" which drove a $318,000 increase in Q3 legal fees.
- Goodwill Impairment: Monitor future filings for the impact of FASB Statement No. 142 adoption, specifically regarding the $4.1 million goodwill from the Picker acquisition and potential impairment charges.
- Revenue Recurrence: Assess the sustainability of revenue growth given the YTD decline was caused by the non-renewal of specific lower-margin contracts.
- Debt Obligations: Review the terms of the $5.3 million in notes payable to ensure compliance with covenants given the shift in cash flow dynamics.