Business Context and Reporting Period
Company: National Research Corporation (NRC Health)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 1999
Business Overview: The Company provides performance tracking services, custom research, and syndicated services. Recent growth has been driven by the acquisition of HRS (June 1998) and the addition of new clients.
Key Financial Metrics
| Metric | Q1 1999 | Q1 1998 |
|---|---|---|
| Revenues | $3,662,923 | $3,406,100 |
| Operating Income | $12,017 | $656,558 |
| Net Income | $100,922 | $561,758 |
| Diluted EPS | $0.01 | $0.08 |
| Operating Cash Flow | $1,318,696 | $1,922,980 |
| Cash & Equivalents (End of Period) | $2,164,954 | $3,893,360 |
| Working Capital | $6,928,073 | N/A |
| Total Debt (Notes Payable) | $97,990 | N/A |
Note: Working Capital calculated as Current Assets ($15,035,342) minus Current Liabilities ($8,107,269). Total Debt includes current and long-term notes payable.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 7.5% year-over-year, driven by performance tracking services and the HRS acquisition. This was partially offset by a decrease in recognized revenue from syndicated services due to timing of billings.
- Profitability Decline: Operating income plummeted 98.2% to $12,017. Net income dropped 82% to $100,922.
- Expense Surge: Direct expenses rose 70.8% to $2.6 million (70.4% of revenue vs. 44.3% prior year). Increases were attributed to labor costs (new call center), software conversion costs ($113,000), and postage/printing.
- SG&A Reduction: Selling, general, and administrative expenses decreased 23.9% to $904,494 due to lower legal, accounting, and R&D costs.
- Depreciation: Depreciation and amortization increased 225.3% to $169,111 due to HRS intangible assets and new equipment purchases.
- Cash Position: Cash and cash equivalents decreased by $2.7 million, primarily due to the purchase of a new headquarters building ($1.475 million) and investments in equipment.
Guidance, Outlook, and Risks
- Software Conversion: Management expects direct expenses as a percentage of revenue to remain elevated until the internal software conversion is completed.
- Capital Expenditures: The Company plans to spend an additional $3.0 million in 1999 to renovate the new building, with a planned move in December 1999. Long-term financing of approximately $3.8 million is expected for the building.
- Stock Repurchase: The Company completed the repurchase of 245,000 shares in Q1 1999. In April 1999, the Board authorized an additional repurchase of 150,000 shares.
- Year 2000 (Y2K) Risk: Total estimated compliance costs are $126,000 ($44,000 incurred). While internal systems are being upgraded, the Company faces risk if clients fail to transmit data due to their own Y2K non-compliance. Contingency plans are being developed.
- Liquidity: The Company maintains $6.9 million in working capital and relies on operating cash flows to fund operations and capital expenditures.
Investor Verification Checklist
- Software Conversion Status: Verify the timeline and cost impact of the internal software conversion, which is currently inflating direct expenses.
- Deferred Revenue Recognition: Confirm the timing of revenue recognition for the $4.1 million in billings in excess of revenues earned (deferred revenue).
- Y2K Client Dependency: Assess the risk exposure regarding clients' ability to transmit data post-1999.
- Building Financing: Monitor the execution of the planned $3.8 million long-term financing for the new headquarters.
- Expense Margins: Track whether direct expense margins normalize after the software conversion is completed.