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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended March 31, 2012
 
or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the transition period from ________ to ________
 
Commission File Number 0-29466

        National Research Corporation         
(Exact name of Registrant as specified in its charter)
 
              Wisconsin                    47-0634000  
  (State or other jurisdiction of incorporation or organization)  
(I.R.S. Employer
Identification No.)
 
 
1245 Q Street, Lincoln, Nebraska          68508
(Address of principal executive offices)  (Zip Code)
 
                          (402) 475-2525                        
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   T   No  £
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   T   No  £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  £ Accelerated filer  £  Non-accelerated filer  T Smaller reporting company  £
                                                                   
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)
Yes  £    No  T

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common Stock, $.001 par value, outstanding as of April 30, 2012: 6,782,385 shares
 
 
 

 
 
NATIONAL RESEARCH CORPORATION

FORM 10-Q INDEX

For the Quarter Ended March 31, 2012

 
   
Page No.
 
     
PART I.
FINANCIAL INFORMATION
 
       
 
Item 1.
Financial Statements
 
       
   
Condensed Consolidated Balance Sheets
4
 
   
Condensed Consolidated Statements of Income
5
 
   
Condensed Consolidated Statements of Comprehensive Income
6
 
   
Condensed Consolidated Statements of Cash Flows
7
 
   
Condensed Notes to Consolidated Financial Statements
8-14
 
         
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14-18
 
         
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
18
 
         
  Item 4. Controls and Procedures 18  
       
PART II.
OTHER INFORMATION
 
         
 
Item 1A.
Risk Factors
19
 
         
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
19
 
         
 
Item 6.
Exhibits
19
 
       
 
Signatures
20
 
       
 
Exhibit Index
21
 

 
-2-

 

Special Note Regarding Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.  These forward-looking statements can generally be identified as such because the context of the statement includes phrases such as National Research Corporation (the “Company”) “believes,” “expects,” or other words of similar import.  Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements.  Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated.  Factors that could affect actual results or outcomes include, without limitation, the following factors:
 
 
·
The possibility of non-renewal of the Company’s client service contracts;
 
 
·
The Company’s ability to compete in its markets, which are highly competitive, and the possibility of increased price pressure and expenses;
 
 
·
The effects of an economic downturn;
 
 
·
The possibility of consolidation in the healthcare industry;
 
 
·
The impact of federal healthcare reform legislation or other regulatory changes;
 
 
·
The Company’s ability to retain its limited number of key clients;
 
 
·
The Company’s ability to attract and retain key managers and other personnel;
 
 
·
The possibility that the Company’s intellectual property and other proprietary information technology could be copied or independently developed by its competitors;
 
 
·
Regulatory developments; and
 
 
·
The factors set forth under the caption “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as such section may be updated by Part II, Item 1A of the Company’s subsequently filed Quarterly Reports on Form 10-Q (including this Report).
 
Shareholders, potential investors and other readers are urged to consider these and other factors in evaluating the forward-looking statements, and are cautioned not to place undue reliance on such forward-looking statements.  The forward-looking statements included are only made as of the date of this Quarterly Report on Form 10-Q and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
 
 
-3-

 
 
PART I – Financial Information
 
ITEM 1.   Financial Statements

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts, unaudited)
 
   
March 31,
2012
   
December 31,
2011
 
Assets            
Current assets:
           
Cash and cash equivalents
  $ 7,872     $ 8,082  
Trade accounts receivable, less allowance for doubtful accounts of $256 and $289 in 2012 and 2011, respectively
    13,577       11,187  
Unbilled revenue
    999       913  
Prepaid expenses and other
    2,167       1,166  
Deferred income taxes
    644       789  
Total current assets
    25,259       22,137  
                 
Property and equipment, net
    13,511       13,613  
Intangible assets, net
    6,685       7,073  
Goodwill
    57,798       57,730  
Other
    125       123  
                 
Total assets
  $ 103,378     $ 100,676  
                 
Liabilities and Shareholders’ Equity
               
Current liabilities:
               
Current portion of notes payable
  $ 2,072     $ 1,861  
Accounts payable
    1,075       783  
Accrued wages, bonus and profit sharing
    2,922       3,591  
Accrued expenses
    1,834       1,519  
Income taxes payable
    153       145  
Deferred revenue
    16,361       16,500  
Total current liabilities
    24,417       24,399  
                 
Notes payable, net of current portion
    11,948       12,625  
Deferred income taxes
    7,934       7,588  
Deferred revenue
    372       185  
Other long term liabilities
    300       325  
Total liabilities
    44,971       45,122  
                 
Shareholders’ equity:
               
Common stock, $0.001 par value; authorized 20,000,000 shares, issued 8,214,111 in 2012 and 8,117,849 in 2011, outstanding 6,778,288 in 2012 and 6,724,280 in 2011
    8       8  
Additional paid-in capital
    33,414       31,080  
Retained earnings
    49,082       46,995  
Accumulated other comprehensive income
    1,117       907  
Treasury stock, at cost; 1,435,823 shares in 2012 and 1,393,569 shares in 2011
    (25,214 )     (23,436 )
Total shareholders’ equity
    58,407       55,554  
                 
Total liabilities and shareholders’ equity
  $ 103,378     $ 100,676  

See accompanying notes to condensed consolidated financial statements.

 
 
-4-

 
 
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for share amounts, unaudited)

   
Three months ended
March 31,
 
   
2012
   
2011
 
             
Revenue
  $ 22,407     $ 19,791  
                 
Operating expenses:
               
Direct expenses
    8,931       6,758  
Selling, general and administrative
    6,151       6,090  
Depreciation and amortization
    1,243       1,243  
Total operating expenses
    16,325       14,091  
                 
Operating income
    6,082       5,700  
                 
Other income (expense):
               
Interest income
    5       2  
Interest expense
    (142 )     (169 )
Other, net
    (15 )     (29 )
                 
Total other expense
    (152 )     (196 )
                 
Income before income taxes
    5,930       5,504  
                 
Provision for income taxes
    2,081       2,048  
                 
Net income
  $ 3,849     $ 3,456  
                 
Net income per share – basic
  $ .57     $ .52  
Net income per share – diluted
  $ .56     $ .51  
                 
Weighted average shares and share equivalents outstanding – basic
    6,719       6,654  
                 
Weighted average shares and share equivalents outstanding – diluted
    6,907       6,809  
 
See accompanying notes to condensed consolidated financial statements.
 
 
-5-

 
 
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, unaudited)

   
Three months ended
March 31,
 
   
2012
   
2011
 
             
Net income
  $ 3,849     $ 3,456  
Other comprehensive income, net of tax:
               
Foreign currency translation
  $ 210     $ 225  
Other comprehensive income
  $ 210     $ 225  
Comprehensive income
  $ 4,059     $ 3,681  
 
See accompanying notes to condensed consolidated financial statements.
 
 
-6-

 
 
NATIONAL RESEARCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
 
   
Three months ended
 
   
March 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net income
  $ 3,849     $ 3,456  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,243       1,243  
Deferred income taxes
    275       678  
Non-cash share-based compensation expense
    52       220  
Tax benefit from exercise of stock options
    213       20  
Net changes in assets and liabilities:
               
Trade accounts receivable
    (2,340 )     (3,708 )
Unbilled revenue
    (75 )     (22 )
Prepaid expenses and other
    (933 )     (419 )
Accounts payable
    87       (171 )
Accrued expenses, wages, bonuses and profit sharing
    (335 )     484  
Income taxes recoverable and payable
    11       974  
Deferred revenue
    34       1,121  
Net cash provided by operating activities
    2,081       3,876  
Cash flows from investing activities:
               
Purchases of property and equipment
    (633 )     (760 )
Payments for business acquisitions, net of cash acquired and acquisition earn-out obligation
    ---       (1,564 )
Net cash used in investing activities
    (633 )     (2,324 )
Cash flows from financing activities:
               
Proceeds from notes payable
    ---       2,045  
Payments on notes payable
    (467 )     (2,497 )
Payments on other long term liabilities
    (31 )     (51 )
Proceeds from exercise of stock options
    372       132  
Common stock withheld from vested restricted shares for payroll tax withholdings
    (466 )     (74 )
Excess tax benefit from share-based compensation
    599       71  
Payment of dividends on common stock
    (1,762 )     (1,477 )
Net cash used in financing activities
    (1,755 )     (1,851 )
Effect of exchange rate changes on cash
    97       96  
Decrease in cash and cash equivalents
    (210 )     (203 )
Cash and cash equivalents at beginning of period
    8,082       3,519  
Cash and cash equivalents at end of period
  $ 7,872     $ 3,316  
                 
Supplemental disclosure of cash paid for:
               
Interest expense
  $ 135     $ 156  
Income taxes
  $ 708     $ 187  

See accompanying notes to condensed consolidated financial statements.
 
 
-7-

 
 
NATIONAL RESEARCH CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.            BASIS OF CONSOLIDATION AND PRESENTATION

National Research Corporation (the “Company”) is a provider of performance measurement and improvement services, healthcare analytics and governance education to the healthcare industry in the United States and Canada.  The Company’s services, which are comprehensive, include data collection, healthcare analytics, best practice identification and effective delivery of value-added business intelligence that enables its clients to improve performance across key business metrics.  Through its extensive array of service capabilities and industry relationships, the Company is positioned to provide healthcare information services to organizations across a wide continuum of service delivery segments.
 
The Company has eight operating segments that are aggregated into one reporting segment because they have similar economic characteristics and meet the other aggregation criteria from the Financial Accounting Standards Board (“FASB”) guidance on segment disclosure.  The eight operating segments are: NRC Picker U.S. and NRC Picker Canada, which each offer renewable performance tracking and improvement services, custom research, subscription-based educational services and a renewable syndicated service; Ticker, which offers stand-alone market information, as well as a comparative performance database to allow the Company’s clients to assess their performance relative to the industry, to access best practice examples, and to utilize competitive information for marketing purposes; Payer Solutions, which offers functional disease-specific and health status measurement tools; The Governance Institute (“TGI”), which offers subscription-based governance information and educational conferences designed to improve the effectiveness of hospital and healthcare systems by continually strengthening their healthcare boards, medical leadership and management performance in the United States; My InnerView (“MIV”), which provides quality and performance improvement solutions to the senior care industry; Outcome Concept Systems, Inc. (“OCS”), which provides financial and operational benchmarks and analytics to home care and hospice providers; and Illuminate, a patient outreach and discharge program designed to facilitate service and clinical recovery within the critical hours after a patient is discharged from a healthcare setting within the acute care, skilled nursing, physician and home health environments.
 
The condensed consolidated balance sheet of the Company at December 31, 2011, was derived from the Company’s audited consolidated balance sheet as of that date.  All other financial statements contained herein are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) the Company considers necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.

Information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted.  These consolidated financial statements should be read in conjunction with the financial statements and notes thereto that are included in the Company’s Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2012.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, National Research Corporation Canada.  All significant intercompany transactions and balances have been eliminated.
 
 
-8-

 
 
The functional currency of the Company’s foreign subsidiary, National Research Corporation Canada, is the subsidiary’s local currency.  The Company translates the assets and liabilities of its foreign subsidiary at the period-end rate of exchange and its foreign subsidiary’s income statement balances at the average rate prevailing during the period.  The Company records the resulting translation adjustment in accumulated other comprehensive income, a component of shareholders’ equity.  Gains and losses related to transactions denominated in a currency other than the subsidiary’s local currency and short-term intercompany accounts are included in other income (expense) in the consolidated statements of income.

Fair Value Measurements
 
The Company’s valuation techniques are based on maximizing observable inputs and minimizing the use of unobservable inputs when measuring fair value.  Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions.  The inputs are then classified into the following hierarchy: (1) Level 1 Inputs—quoted prices in active markets for identical assets and liabilities; (2) Level 2 Inputs—observable market-based inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities in active markets, quoted prices for similar or identical assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; (3) Level 3 Inputs—unobservable inputs.

The following details the Company’s financial assets and liabilities within the fair value hierarchy at March 31, 2012, and December 31, 2011:

Fair Values Measured on a Recurring Basis

   
Level 1
   
Level 2
   
Level 3
   
Total
 
    (In thousands)  
As of March 31, 2012
                       
Money Market Funds   $ 3,519     $ --     $ --     $ 3,519  
Commercial Paper
    4,057       --       --       4,057  
Total
  $ 7,576     $ --     $ --     $ 7,576  
As of December 31, 2011
                               
Money Market Funds
  $ 3,243     $ --     $ --     $ 3,243  
Commercial Paper
    4,659       --       --       4,659  
Total
  $ 7,902     $ --     $ --     $ 7,902  
 
The Company's long-term debt is recorded at historical cost. The following are the carrying amount and estimated fair values, based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit risk:
 
   
March 31, 2012
   
December 31, 2011
 
   
(In thousands)
 
Total carrying amounts of long-term debt
  $ 14,020     $ 14,486  
Estimated fair value of long-term debt
  $ 14,494     $ 14,498  

The Company estimated the fair value of our long-term, fixed rate debt using a Level 3 discounted cash flow analysis based on current borrowing rates for debt with similar maturities.
 
The Company believes that the carrying amounts of trade accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of those instruments.  All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes goodwill and non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is evidence of impairment).  As of March 31, 2012, and December 31, 2011, there was no indication of impairment related to the non-financial assets.
 
 
-9-

 
 
2.           INCOME TAXES
 
The Company’s effective tax rate decreased to 35.1% for the three-month period ended March 31, 2012, compared to 37.2% for the same period in 2011.  The effective tax rate for the three-month period ended March 31, 2012, is lower than the rate in same period of 2011 primarily due to the recording of federal tax credits of $111,000 in the 2012 quarter, as well as a reduction in the Canadian statutory tax rates.

The unrecognized tax benefit as of March 31, 2012, was $303,000, excluding interest of $20,000 and no penalties.  The full unrecognized tax benefits, if recognized, would favorably impact the effective income tax rate.  The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could continue to decrease during the next 12 months due to the expiration of the U.S. federal statute of limitations associated with certain other tax positions.  The Company accrues interest and penalties related to uncertain tax position in the statements of income as income tax expense.

3.           NOTES PAYABLE
 
On December 19, 2008, the Company borrowed $9.0 million under a term note to partially finance the acquisition of MIV.  In July 2010, the Company refinanced the existing term loan with a $6.9 million term loan.  The new term loan is payable in 35 monthly installments of $80,104, with a balloon payment of $4.8 million for the remaining principal balance and interest due on July 31, 2013.  Borrowings under the term note bear interest at an annual rate of 3.79%.  The outstanding balance of the term note at March 31, 2012, was $5.8 million.
 
On July 31, 2010, the Company borrowed $10.0 million under a term note to partially finance the acquisition of OCS.  The term loan is payable in 35 monthly installments of $121,190 with a balloon payment of $6.7 million for the remaining principal balance and interest due on July 31, 2013.  Borrowings under the term note bear interest at an annual rate of 3.79%.  The outstanding balance of the term note at March 31, 2012, was $8.3 million.
 
The term notes are secured by certain of the Company’s assets, including the Company’s land, building, trade accounts receivable and intangible assets.  The term notes contain various restrictions and covenants applicable to the Company, including requirements that the Company maintain certain financial ratios at prescribed levels and restrictions on the ability of the Company to consolidate or merge, create liens, incur additional indebtedness or dispose of assets.  As of March 31, 2012, the Company was in compliance with these restrictions and covenants.
 
The Company also has a revolving credit note that was renewed in June 2011 to extend the term to June 30, 2012. The maximum aggregate amount available under the revolving credit note is $6.5 million, subject to a borrowing base equal to 75% of the Company’s eligible accounts receivable.  Borrowings under the revolving credit note bear interest at a variable annual rate, with three rate options at the discretion of management as follows:  (1) 2.5% plus the daily reset one-month London Interbank Offered Rate (“LIBOR”) or (2) 2.2% plus the one-, two-, three-, six- or twelve-month LIBOR rate, or (3) the bank’s Money Market Loan Rate.  As of March 31, 2012, the revolving credit note did not have a balance.  According to the borrowing base requirements, the Company had the capacity to borrow $6.5 million as of March 31, 2012.
 
 
-10-

 
 
4.           SHARE-BASED COMPENSATION
 
The Company measures and recognizes compensation expense for all share-based payments.  The compensation expense is recognized based on the grant-date fair value of those awards.  All of the Company’s existing stock option awards and non-vested stock awards have been determined to be equity-classified awards.
 
The Company’s 2001 Equity Incentive Plan provides for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 600,000 shares of the Company’s common stock.  Options granted may be either nonqualified or incentive stock options.  Options vest over one to five years following the date of grant and option terms are generally five to ten years following the date of grant.
 
The Company’s 2004 Non-Employee Director Stock Plan (the “2004 Director Plan”) is a nonqualified plan that provides for the granting of options with respect to 550,000 shares of the Company’s common stock.  The 2004 Director Plan provides for grants of nonqualified options to each director of the Company who is not employed by the Company.  On the date of each annual meeting of shareholders of the Company, options to purchase 12,000 shares of the Company’s common stock are granted to directors that are re-elected or retained as a director at such meeting.  Options vest one year following the date of grant and option terms are generally ten years following the date of grant, or three years in the case of termination of the outside director’s service.
 
The Company’s 2006 Equity Incentive Plan provides for the granting of options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 600,000 shares of the Company’s common stock.  Options granted may be either incentive stock options or nonqualified stock options.  Vesting terms vary with each grant and option terms are generally five to ten years.  Options vest over five years following the date of grant and options terms are generally five to ten years following the date of grant.
 
The Company granted options to purchase 31,630 and 68,008 shares of the Company’s common stock during the three-month periods ended March 31, 2012, and 2011, respectively.  Options to purchase shares of common stock were granted with exercise prices equal to the fair value of the common stock on the date of grant.  The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following assumptions:
 
   
2012
   
2011
 
             
Expected dividend yield at date of grant
    3.98%       2.35%  
Expected stock price volatility
    29.10%       28.70%  
Risk-free interest rate
    1.15%       2.14%  
Expected life of options (in years)
    6       6  
 
The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility was based on historical monthly price changes of the Company’s stock based on the expected life of the options at the date of grant. The expected life of options is the average number of years the Company estimates that options will be outstanding. The Company considers groups of associates that have similar historical exercise behavior separately for valuation purposes.
 
The following table summarizes stock option activity under the Company’s 2001 and 2006 Equity Incentive Plans and the 2004 Director Plan for the three months ended March 31, 2012:
 
   
Number of
Options
   
Weighted Average Exercise
Price
   
Weighted Average Remaining Contractual Terms (Years)
   
Aggregate Intrinsic
Value
(In thousands)
 
Outstanding at December 31, 2011
    769,401     $ 25.73       --       --  
Granted
    31,630     $ 38.35       --       --  
Exercised
    (88,439 )   $ 19.04       --       --  
Cancelled
    (66,043 )   $ 26.66       --       --  
Outstanding at March 31, 2012
    646,549     $ 27.16       6.52     $ 10,200  
Exercisable at March 31, 2012
    334,085     $ 22.95       5.01     $ 6,677  
 
 
-11-

 
 
The following table summarizes information regarding non-vested stock granted to associates under the 2001 Equity Incentive Plan for the three months ended March 31, 2012:
 
   
Shares Outstanding
   
Weighted Average Grant Date Fair Value Per Share
 
Outstanding at December 31, 2011
    30,002     $ 30.57  
Granted
    7,823     $ 38.35  
Vested
    (2,449 )   $ 22.87  
Forfeited
    --       --  
Outstanding at March 31, 2012
    35,376     $ 32.83  
 
As of March 31, 2012, the total unrecognized compensation cost related to non-vested stock awards was approximately $858,000 and is expected to be recognized over a weighted average period of 4.08 years.
 
5.           GOODWILL AND OTHER INTANGIBLE ASSETS
 
The following represents a summary of changes in the Company’s carrying amount of goodwill for the three months ended March 31, 2012.
 
   
(In thousands)
 
Balance as of December 31, 2011
  $ 57,730  
Foreign currency translation
    68  
Balance as of March 31, 2012
  $ 57,798  
 
Intangible assets consisted of the following:

   
March 31, 2012
   
December 31, 2011
 
   
(In thousands)
 
Non-amortizing other intangible assets:
           
Trade name
  $ 1,191     $ 1,191  
Amortizing other intangible assets:
               
Customer related intangibles
    10,520       10,513  
Non-compete agreements
    430       430  
Trade name
    1,902       1,902  
Total other intangible assets
    14,043       14,036  
Less accumulated amortization
    7,358       6,963  
Other intangible assets, net
  $ 6,685     $ 7,073  
 
6. PROPERTY AND EQUIPMENT
 
   
March 31, 2012
   
December 31, 2011
 
   
(In thousands)
 
Property and equipment
  $ 29,999     $ 29,229  
Accumulated depreciation
    (16,488 )     (15,616 )
Property and equipment, net
  $ 13,511     $ 13,613  
 
 
-12-

 
 
7.           EARNINGS PER SHARE
 
Net income per share has been calculated and presented for “basic” and “diluted” per share data.  “Basic” net income per share was computed by dividing net income by the weighted average number of common shares outstanding, whereas “diluted” net income per share was computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effects of options and restricted stock.  As of March 31, 2012, and 2011, the Company excluded 80,240 and 65,758 options and -0- and 37,745 restricted stock shares for each period, respectively, from the diluted net income per share computation because the exercise or grant price exceeded the fair market value of the common stock on such date.

The following table shows the amounts used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock:

   
Three months ended
March 31,
 
   
(In thousands)
 
   
2012
   
­ 2011
 
Weighted average shares and share equivalents – basic
    6,719       6,654  
Weighted average dilutive effect of options
    174       147  
Weighted average dilutive effect of restricted stock
    14       8  
Weighted average shares and share equivalents - dilutive
    6,907       6,809  
 
8.           ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
 
In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Presentation of Comprehensive Income, which amends ASC 220, Comprehensive Income, by requiring all non-owner changes in shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance was effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2011.  In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers certain portions of ASU No. 2011-05 indefinitely and will be further deliberated by the FASB at a future date.  The Company adopted the requirements of ASU 2011-05 and ASU 2011-12 by presenting a single Condensed Consolidated Statement of Comprehensive Income immediately following the Statement of Income.  There was no other impact on the Company’s condensed consolidated financial statements.
 
In September 2011, the FASB issued ASU No. 2011-08, Intangibles — Goodwill and Other. ASU No. 2011-08 allows entities to first assess qualitatively whether it is necessary to perform the two-step goodwill impairment test.  If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting period is less than its carrying amount, the quantitative two-step goodwill impairment test is required.  An entity has the unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test.  The Company adopted the requirements of ASU 2011-08.  The adoption of this standard did not have a material effect on the Company’s condensed consolidated financial statements.
 
 
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9.           RELATED PARTY TRANSACTIONS
 
A Board member of the Company also serves as an officer of Ameritas Life Insurance Corp. (Ameritas).  In connection with the Company’s regular assessment of its insurance-based associate benefits and the costs associated therewith, which is conducted by an independent insurance broker, in 2007 the Company began purchasing dental insurance for certain of its associates from Ameritas and in 2009, the Company also began purchasing vision insurance for certain of its associates from Ameritas.  The total value of these purchases was $42,000 for each of the three-month periods ended March 31, 2012 and 2011.
 
The Company leased office space for OCS from EPIC Property Management LLC from August 2010 through June 2011.  A former owner of OCS and an associate of the Company during the lease-term was a co-owner of EPIC Property Management LLC.  The total of the rental and utility payments under the lease was $50,000 in the three-month period ended March 31, 2011.

ITEM 2.           Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Overview

The Company believes it is a leading provider of performance measurement and improvement services, healthcare analytics and governance education to the healthcare industry in the United States and Canada.  The Company believes it has achieved this leadership position based on 31 years of industry experience and its relationships with many of the industry’s largest organizations.  The Company’s portfolio of services addresses the growing needs of healthcare organizations to measure and improve satisfaction, quality and cost outcomes relative to the services that they provide.  Since its founding in 1981 in Lincoln, Nebraska, NRC has focused on meeting the information needs of the healthcare industry.  The Company’s services, which are comprehensive, include data collection, healthcare analytics, best practice identification and effective delivery of value-added business intelligence that enables its clients to improve performance across key business metrics.  Through its extensive array of service capabilities and industry relationships, NRC is positioned to provide healthcare information services to organizations across a wide continuum of service delivery segments.
 
Results of Operations

The following table sets forth for the periods indicated, select financial information derived from the Company’s consolidated financial statements expressed as a percentage of total revenue.  The trends illustrated may not necessarily be indicative of future results.  The discussion that follows the table should be read in conjunction with the condensed consolidated financial statements.
 
   
Three months ended
 
   
March 31,
 
   
2012
   
2011
 
             
Revenue
    100.0 %     100.0 %
                 
Operating expenses:
               
Direct expenses
    39.9       34.1  
Selling, general and administrative
    27.5       30.8  
Depreciation and amortization
    5.5       6.3  
Total operating expenses
    72.9       71.2  
                 
Operating income
    27.1 %     28.8 %
 
 
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Three Months Ended March 31, 2012, Compared to Three Months Ended March 31, 2011

Revenue.  Revenue for three-month period ended March 31, 2012, increased 13.2% to $22.4 million, compared to $19.8 million in the three-month period ended March 31, 2011.  The increase was due to market share growth and vertical growth in the existing client base.  Revenue from subscription-based agreements comprised 68% of the total revenue for the three-month period ended March 31, 2012, compared to 49% of total revenue for the three-month period ended March 31, 2011.  Subscription-based agreements, which grew to represent 75.0% of the contract value as of March 31, 2012, are recurring annual service agreements where revenue is spread evenly over the period of service provided.
 
Direct expenses.  Direct expenses increased 32.2% to $8.9 million for the three-month period ended March 31, 2012, compared to $6.8 million in the same period during 2011.  This was due to increases in variable expenses of $1.2 million, including postage, labor costs, contracted survey-related costs to service the higher volume of business, and an increase in fixed expenses of $973,000 from additional investments in technology, research and service resources that support our strategy of empowering customer-centric healthcare across the continuum.  Direct expenses increased as a percentage of revenue to 39.9% in the three-month period ended March 31, 2012, from 34.1% during the same period of 2011 due to higher survey volumes for the subscription-based products in the first quarter of 2012 and investments in technology, research and service resources.  This percentage is projected to be at an average of 39-40% for the full year in 2012.

Selling, general and administrative expenses.  Selling, general and administrative expenses increased 1% to $6.2 million for the three-month period ended March 31, 2012, compared to $6.1 million for the same period in 2011.  Selling, general, and administrative expenses decreased as a percentage of revenue to 27.5% for the three-month period ended March 31, 2012, from 30.8% for the same period in 2011 due to the Wasau location closing costs of $280,000 incurred in 2011 as well as the leveraging of selling, general and administrative expenses against increased revenue in the three-month period ended March 31, 2012.  This percentage is projected to be at an average of 28-29% for the full year in 2012.

Depreciation and amortization.  Depreciation and amortization expenses were $1.2 million for the three-month periods ended March 31, 2012, and 2011.  Depreciation and amortization expenses as a percentage of revenue decreased to 5.5% for the three-month period ended March 31, 2012, from 6.3% during the same period of 2011.  Depreciation and amortization is projected to remain fairly constant in dollar amounts through 2012 and at an average of 6% of revenue for the full year.

Provision for income taxes. The provision for income taxes totaled $2.1 million (35.1% effective tax rate) for the three-month period ended March 31, 2012, compared to $2.0 million (37.2% effective tax rate) for the same period in 2011.  The effective rate for the three months ended March 31, 2012, is lower than the same period in 2011, primarily due to the recording of federal tax credits of $111,000 in the 2012 quarter, as well as a reduction in Canadian statutory tax rates.

Liquidity and Capital Resources

The Company believes that its existing sources of liquidity, including cash and cash equivalents, borrowing availability, and operating cash flow will be sufficient to meet its projected capital and debt maturity needs and dividend policy for the foreseeable future.

The Company had cash and cash equivalents of $7.9 million at March 31, 2012, of which $3.7 million was held in Canada.  All of the amounts held in Canada are intended to be indefinitely reinvested in foreign operations.  The amounts held outside of the U. S. are eligible for repatriation, but under current law, would be subject to U.S. federal income taxes, less applicable foreign tax credits.  It is impractical to determine the additional income tax liability, if any, associated with such repatriation.
 
 
-15-

 

Working Capital
 
The Company had a working capital balance of $842,000 as of March 31, 2012, compared to a working capital deficiency of $2.3 million as of December 31, 2011.  The change in the working capital balance was primarily due to an increase in accounts receivable of $2.4 million.  The Company’s working capital is significantly impacted by its large deferred revenue balances.  The deferred revenue balances as of March 31, 2012, and 2011 were $16.3 million and $16.5 million, respectively.
 
The deferred revenue balance is primarily due to timing of initial billings on new and renewal contracts.  The Company typically invoices clients for performance tracking services and custom research projects before they have been completed.  Billed amounts are recorded as billings in excess of revenue earned, or deferred revenue, on the Company’s consolidated financial statements, and are recognized as income when earned.  In addition, when work is performed in advance of billing, the Company records this work as revenue earned in excess of billings, or unbilled revenue.  Substantially all deferred revenue and all unbilled revenue will be earned and billed respectively, within 12 months of the respective period ends.
 
Cash Flow Analysis
 
A summary of operating, investing, and financing activities are shown in the following table:
 
   
For the Three Months Ended March 31,
 
   
2012
   
2011
 
   
(In thousands)
 
Provided by operating activities
  $ 2,081     $ 3,876  
Used in investing activities
    (633 )     (2,324 )
Used in financing activities
    (1,755 )     (1,851 )
Effect of exchange rate change on cash
    97       96  
Net decrease in cash and cash equivalents
    (210 )     (203 )
Cash and cash equivalents at end of period
  $ 7,872     $ 3,316  
 
Cash Flows from Operating Activities
 
Cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization, deferred taxes, and the effect of working capital changes.
 
Net cash provided by operating activities was $2.1 million for the quarter ended March 31, 2012, which included net income of $3.8 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, and non-cash stock compensation totaling $1.8 million.  Changes in working capital reduced 2012 cash flows from operating activities by $3.6 million, primarily due to the timing of initial billings on new or renewal contracts decreasing cash flows provided from trade accounts receivable and an increase in prepaid expenses.
 
Net cash provided by operating activities was $3.9 million for the quarter ended March 31, 2011, which included net income of $3.5 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization and non-cash stock compensation totaling $2.2 million.  Changes in working capital reduced 2011 cash flows from operating activities by $1.7 million, primarily due to the timing of initial billings on new or renewal contracts decreasing cash flows provided from trade accounts receivable and deferred revenue.
 
 
-16-

 
 
Cash Flows from Investing Activities
 
Net cash of $633,000 was used for investing activities in the quarter ended March 31, 2012, for purchases of property and equipment.
 
Net cash of $2.3 million was used for investing activities in the quarter ended March 31, 2011.  Earn-out payments related to the MIV acquisition approximated $1.6 million, and purchases of property and equipment totaled $760,000.
 
Cash Flows from Financing Activities
 
Net cash used by financing activities was $1.8 million in the quarter ended March 31, 2012.  Proceeds from the exercise of and the excess tax benefit of share-based compensation provided cash of $372,000 and $599,000, respectively.  Cash was used to pay dividends of $1.8 million, payroll taxes on vested restricted shares of $466,000, and repay borrowings under the term notes totaling $467,000.
 
Net cash used by financing activities was $1.9 million in the quarter ended March 31, 2011.  Cash was generated from borrowings under the term note and revolving credit note totaling $2.0 million.  Proceeds from the exercise of stock options provided cash of $132,000.  Cash was used to pay dividends of $1.5 million, repay borrowings under the term note and revolving credit note totaling $2.5 million, and repurchases of the Company’s common stock for $74,000.
 
The effect of changes in foreign exchange rates increased cash and cash equivalents by $97,000 and $96,000 in the quarters ended March 31, 2012, and 2011, respectively.
 
Capital Expenditures
 
Cash paid for capital expenditures was $633,000 for the three-month period ended March 31, 2012.  These expenditures consisted mainly of computer software, computer hardware, furniture and other equipment.  The Company expects similar capital expenditure purchases for the remainder of 2012 consisting primarily of computer software and hardware and other equipment to be funded through cash generated from operations.
 
Debt and Equity
 
On December 19, 2008, the Company borrowed $9.0 million under a term note to partially finance the acquisition of MIV.  In July 2010, the Company refinanced the existing term loan with a $6.9 million term loan.  The new term loan is payable in 35 monthly installments of $80,104, with a balloon payment of $4.8 million for the remaining principal balance and interest due on July 31, 2013.  Borrowings under the term note bear interest at an annual rate of 3.79%.  The outstanding balance of the term note at March 31, 2012, was $5.8 million.
 
On July 31, 2010, the Company borrowed $10.0 million under a term note to partially finance the acquisition of OCS.  The term loan is payable in 35 monthly installments of $121,190, with a balloon payment of $6.7 million for the remaining principal balance and interest due on July 31, 2013.  Borrowings under the term note bear interest at an annual rate of 3.79%.  The outstanding balance of the term note at March 31, 2012, was $8.3 million.
 
 
-17-

 
 
The term notes are secured by certain of the Company’s assets, including the Company’s land, building, trade accounts receivable and intangible assets.  The term notes contain various restrictions and covenants applicable to the Company, including requirements that the Company maintain certain financial ratios at prescribed levels and restrictions on the ability of the Company to consolidate or merge, create liens, incur additional indebtedness or dispose of assets.  As of March 31, 2012, the Company was in compliance with these restrictions and covenants.
 
The Company also has a revolving credit note that was renewed in June 2011 to extend the term to June 30, 2012.  The Company expects to extend the term of the revolving credit note for at least one year beyond the maturity date.  If, however, the note cannot be extended, the Company believes it has adequate cash flows from operations to meet its debt and capital needs.  The maximum aggregate amount available under the revolving credit note is $6.5 million, subject to a borrowing base equal to 75% of the Company’s eligible accounts receivable.  Borrowings under the revolving credit note bear interest at a variable annual rate, with three rate options at the discretion of management as follows:  (1) 2.5% plus the daily reset one-month LIBOR rate, or (2) 2.2% plus the one-, two-, three-, six- or twelve-month LIBOR rate, or (3) the bank’s Money Market Loan Rate.  As of March 31, 2012, the revolving credit note did not have a balance.  According to the borrowing base requirements, the Company had the capacity to borrow $6.5 million as of March 31, 2012.
 
The Company has capital leases for computer equipment, office equipment, and inserting equipment.  The balance of the capital leases as of March 31, 2012, was $394,000.

Shareholders’ equity increased $2.8 million to $58.4 million at March 31, 2012, from $55.6 million at December 31, 2011.  The increase was primarily due to net income of $3.8 million and $2.3 million related to share-based compensation, partially offset by dividends paid of $1.8 million and share repurchases of $1.8 million.
 
Stock Repurchase Program

In February 2006, the Board of Directors of the Company authorized the repurchase of 750,000 shares of common stock in the open market or in privately negotiated transactions.  As of March 31, 2012, the remaining number of shares that could be purchased under this authorization was 209,175.
 
ITEM 3.           Quantitative and Qualitative Disclosures about Market Risk

There are no material changes to the disclosures regarding the Company’s market risk exposures made in its Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 4.           Controls and Procedures

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective. There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
-18-

 

PART II – Other Information

ITEM 1A.        Risk Factors

Risk factors relating to the Company are contained in Part I, Item 1A of its Annual Report on Form 10-K for the fiscal year ended December 31, 2011.  No material change to such risk factors has occurred during the three-month period ended March 31, 2012.

ITEM 2.           Unregistered Sales of Equity Securities and Use of Proceeds

In February 2006, the Board of Directors of the Company authorized the repurchase of an additional 750,000 shares of Common Stock in the open market or in privately negotiated transactions.  Unless terminated earlier by resolution of the Company’s Board of Directors, the repurchase program will expire when the Company has repurchased all shares authorized for repurchase thereunder.  As of April 30, 2012, 207,853 shares have been repurchased under that authorization.

The table below summarizes stock repurchases for the three-month period ended March 31, 2012.

Period
 
Total Number of Shares Purchased
   
Average Price
Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced
Plans or Programs
   
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
 
                         
January 1 – January 31, 2012
    6,557     $ 38.71       6,557       244,872  
February 1 – February 29, 2012
    35,697     $ 42.69       35,697       209,175  
March 1 – March 31, 2012
    --       --       --       209,175  
 
ITEM 6.           Exhibits

The exhibits listed in the accompanying index of exhibits are filed as part of this Quarterly Report on Form 10-Q.
 
 
-19-

 

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
    NATIONAL RESEARCH CORPORATION  
       
       
Date: May 11, 2012 By: /s/ Michael D. Hays  
    Michael D. Hays  
    Chief Executive Officer (Principal Executive Officer)  
       
       
       
       
       
Date: May 11, 2012   By:  /s/ Kevin R. Karas  
    Kevin R. Karas  
    Senior Vice President Finance, Treasurer, Secretary and  
    Chief Financial Officer (Principal  
    Financial and Accounting Officer)  
 
 
-20-

 

NATIONAL RESEARCH CORPORATION

EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period ended March 31, 2012

Exhibit

 

(31.1)
Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.

(31.2)
Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934.

(32)
Written Statement of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

(101)*
Financial statements from the Quarterly Report on Form 10-Q of National Research Corporation for the quarter ended March 31, 2012, formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, (v)  the Notes to Condensed Consolidated Financial Statements, and (vi) document and entity information

 
* In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
 
 
-21-