NRC HEALTH (National Research Corporation) - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2002, and the six-month period ended on the same date. National Research Corporation (NRC HEALTH) operates primarily in the healthcare survey business. The financial statements are unaudited but include all normal recurring adjustments.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2002 | Six Months Ended June 30, 2002 |
|---|---|---|
| Revenues | $4,799,653 | $8,848,280 |
| Net Income | $895,394 | $1,189,795 |
| Operating Income | $1,514,066 | $2,089,871 |
| Operating Margin | 31.5% | 23.6% |
| Net Cash from Operating Activities | N/A | $2,276,272 |
| Cash and Cash Equivalents | $1,869,979 (Ending Balance) | $1,869,979 (Ending Balance) |
| Working Capital | $9,189,253 | $9,189,253 |
| Total Debt (Notes Payable) | $5,246,996 | $5,246,996 |
| Earnings Per Share (Diluted) | $0.12 | $0.17 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 42.5% for the quarter and 18.6% for the six-month period compared to 2001. This was driven by new clients, including a major contract signed in January 2002, and expanded scope of work.
- Profitability Surge: Net income for the quarter jumped from $43,238 in 2001 to $895,394 in 2002. Operating income rose from $77,571 to $1,514,066.
- Expense Efficiency: Direct expenses as a percentage of revenue dropped significantly from 50.4% to 37.1% (quarterly) due to a mix of telephone versus mail methodology and volume pricing. SG&A expenses as a percentage of revenue also declined from 33.5% to 22.7%.
- Accounting Change: The adoption of SFAS No. 142 on January 1, 2002, ceased the amortization of goodwill and certain intangible assets, reducing depreciation and amortization expenses by approximately 10% for the quarter.
- Unusual Item: Other expenses included a $64,000 charge for prejudgment interest related to a lawsuit resolved in the first quarter of 2002.
Guidance, Outlook, and Risks
- Outlook: Management expects direct expenses as a percentage of revenue to increase slightly for the remainder of 2002, returning to levels similar to the first quarter (approx. 44%). SG&A expenses as a percentage of revenue are expected to decrease slightly.
- Liquidity: The company maintains strong liquidity with $1.9 million in cash and $9.2 million in working capital. Cash flow from operations remains sufficient to fund working capital and capital expenditures.
- Deferred Revenue: Deferred revenues increased to $3.5 million, primarily due to pre-sales of the NRC Healthcare Market Guide, which will be recognized in the third quarter.
- Market Risk: No material changes in market risk exposures were reported since December 31, 2001.
- Stock Repurchase: The company continues a stock repurchase program; 56,700 shares had been repurchased under the new authorization as of July 31, 2002.
Investor Verification Checklist
- Verify the sustainability of the 42.5% revenue growth rate and the impact of the "major new contract" signed in January 2002 on future quarters.
- Confirm the timing of revenue recognition for the $3.5 million in deferred revenues related to the NRC Healthcare Market Guide.
- Review the details of the resolved lawsuit and the $64,000 prejudgment interest charge to ensure no further contingencies exist.
- Monitor the trend of direct expenses as a percentage of revenue, as management anticipates an increase in the latter half of 2002.
- Assess the impact of the SFAS No. 142 accounting change on future comparability of earnings and depreciation expenses.