Business Context and Reporting Period
Company: National Research Corporation (NRC Health)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2002
Business Overview: NRC is a leading provider of survey-based performance measurement, analysis, and tracking services to the healthcare industry. Its primary offerings include the "Listening System" (renewable performance tracking), custom research, and the "Healthcare Market Guide" (syndicated service). The company serves hospitals, health plans, and other healthcare organizations.
Key Financial Metrics (Year Ended Dec 31, 2002)
| Metric | 2002 | 2001 | 2000 |
|---|---|---|---|
| Revenues | $22,387,401 | $17,673,988 | $18,316,116 |
| Operating Income | $6,418,988 | $2,712,523 | $3,324,608 |
| Net Income | $3,850,103 | $1,670,321 | $2,716,727 |
| Diluted EPS | $0.54 | $0.24 | $0.39 |
| Operating Margin | 28.7% | 15.4% | 18.2% |
| Net Cash from Operations | $4,284,083 | $3,079,652 | $2,035,140 |
| Total Debt | $5,175,997 | $5,302,069 | $5,430,000 (approx) |
| Working Capital | $12,918,836 | $7,260,105 | $8,342,000 (approx) |
| Cash & Equivalents | $991,217 | $1,080,053 | $3,218,805 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 26.7% to $22.4 million, driven primarily by a major new contract with the U.S. Department of Veterans Affairs (accounting for 18.2% of 2002 revenue) and the addition of other new clients.
- Profitability Surge: Operating income more than doubled (136.6% increase) to $6.4 million. This was significantly aided by the adoption of SFAS No. 142, which eliminated goodwill amortization expenses that had previously reduced net income.
- Expense Management: Selling, general, and administrative (SG&A) expenses decreased 5.0% to $4.7 million, largely due to a $627,000 reduction in legal and consulting fees compared to 2001. Direct expenses increased 18.6% but decreased as a percentage of revenue (42.7% vs 45.6%) due to improved software efficiency.
- Accounting Change: The company ceased amortizing goodwill effective January 1, 2002. Without this change, 2001 net income would have been approximately $2.0 million rather than the reported $1.67 million.
Outlook, Risks, and Management Commentary
- Acquisition Activity: On March 17, 2003 (subsequent to year-end), NRC acquired Smaller World Communications Inc. for $950,000 cash plus contingent consideration (min $407k, max $1.17M) based on revenue goals.
- Client Concentration Risk: The ten largest clients accounted for 51% of total revenues in 2002. The U.S. Department of Veterans Affairs alone represented 18.2% of revenue. HealthSouth Corporation (8.1% of revenue) was under federal investigation at the time of filing.
- Competition: The market is highly competitive with low barriers to entry. Competitors include internal healthcare departments and larger market research firms with greater resources.
- Liquidity: The company maintains strong liquidity with $12.9 million in working capital. Capital expenditures for 2003 are budgeted at approximately $1 million, funded by operating cash flow.
- Forward-Looking Statements: Management cautions that future results depend on contract renewals, the ability to integrate acquisitions, and the stability of the healthcare industry.
Investor Verification Checklist
- Client Concentration: Verify the stability of the U.S. Department of Veterans Affairs contract and the status of HealthSouth Corporation given its ongoing federal investigations.
- Goodwill Valuation: Review the annual impairment testing of the $7.9 million goodwill balance under SFAS No. 142, as future write-downs could materially impact earnings.
- Revenue Recognition: Confirm the accuracy of percentage-of-completion estimates for custom research and performance tracking services, which rely on management judgment regarding costs to complete.
- Acquisition Integration: Monitor the financial performance and integration of the Smaller World Communications Inc. acquisition completed in March 2003.
- Legal Contingencies: Track the resolution of the Cap Gemini lawsuit (settled in 2002) and any potential future litigation regarding proprietary rights or software infringement.