Business Context and Reporting Period
Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2001
Business Overview: The Company provides healthcare survey and market research services. During the period, the Company acquired the healthcare survey business of The Picker Institute on May 7, 2001.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2001 |
Six Months Ended June 30, 2001 |
Six Months Ended June 30, 2000 |
|---|---|---|---|
| Revenues | $3,367,555 | $7,458,098 | $9,093,159 |
| Net Income | $43,238 | $546,372 | $1,144,145 |
| Operating Income | $77,571 | $822,335 | $1,311,031 |
| Net Cash from Operating Activities | N/A | $1,925,187 | $536,478 |
| Cash and Cash Equivalents (End of Period) | $1,136,955 | $1,136,955 | $3,723,782 |
| Working Capital | $5,331,429 | $5,331,429 | $8,341,718 |
| Total Debt (Notes Payable) | $5,365,751 | $5,365,751 | $5,430,332 |
| Operating Margin | 2.3% | 11.0% | 14.4% |
Note: Working Capital calculated as Total Current Assets ($11,135,795) minus Total Current Liabilities ($5,804,366). Total Debt includes current and non-current notes payable.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 27.4% for the quarter and 18% for the six-month period compared to the prior year. This was primarily due to the non-recurrence of $1.1 million (quarter) and $2.1 million (six months) in revenue from specific customer contracts that occurred in 2000 but not in 2001.
- Profitability Compression: Net income dropped significantly, from $650,383 to $43,238 for the quarter, and from $1,144,145 to $546,372 for the six-month period. Operating margins contracted from 15.9% to 2.3% (quarter) and 14.4% to 11.0% (six months).
- Expense Structure: While direct expenses decreased proportionally with revenue, Selling, General, and Administrative (SG&A) expenses increased as a percentage of revenue (from 26.4% to 33.5% for the quarter) due to lower revenue bases and increased legal/consulting fees of $269,000 related to a disclosed legal proceeding.
- Depreciation and Amortization: Increased 34% for the quarter and 42% for the six-month period, driven by the amortization of goodwill from the Picker Institute acquisition and new capital assets.
- Cash Flow: Net cash provided by operating activities improved significantly to $1.9 million for the six months ended June 30, 2001, compared to $536,000 in the prior year, largely due to timing differences in collections and billings.
Guidance, Outlook, and Risks
- Acquisition Impact: The Company acquired The Picker Institute's healthcare survey business for $3.2 million plus $0.6 million in costs. Goodwill of $4.1 million was recognized and is being amortized over 10 years. Results are included from May 7, 2001.
- Deferred Revenue: Deferred revenues increased to $3.1 million (from $1.8 million at year-end 2000), primarily due to pre-sales of the annual NRC Market Guide product. These revenues are expected to be recognized in the third quarter.
- Expense Outlook: Management expects SG&A expenses as a percentage of revenue to decrease for the remainder of 2001 to levels lower than 2000. Direct expenses are expected to remain at levels lower than 2000.
- Accounting Changes: The Company noted the issuance of FASB Statements No. 141 and 142 regarding business combinations and goodwill. Goodwill amortization is expected to cease upon adoption on January 1, 2002, replaced by impairment testing.
- Liquidity: The Company maintains $1.1 million in cash and $5.3 million in working capital. Historically, operations have been the principal source of funds.
Investor Verification Checklist
- Revenue Recurrence: Verify the likelihood of securing new contracts to replace the $2.1 million in non-recurring revenue lost from 2000.
- Legal Proceedings: Investigate the status and potential financial impact of the "previously disclosed legal proceeding" driving increased legal fees.
- Acquisition Integration: Assess the performance of the newly acquired Picker Institute business and the impact of the $4.1 million goodwill amortization on future earnings.
- Deferred Revenue Recognition: Confirm the timing and magnitude of revenue recognition from the $3.1 million in deferred billings, specifically regarding the NRC Market Guide.
- Cash Position: Monitor the decline in cash and cash equivalents from $3.2 million to $1.1 million over the six-month period and its sufficiency for ongoing operations and capital expenditures.