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, 2015

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	(I.R.S. Employer
	incorporation or organization)	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  ☒  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  ☒  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 ☐        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  ☒ 

 

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

 

Class A Common Stock, $.001 par value, outstanding as April 30, 2015: 20,939,430 shares

Class B Common Stock, $.001 par value, outstanding as of April 30, 2015: 3,502,644 shares

 

 

NATIONAL RESEARCH CORPORATION

 

FORM 10-Q INDEX

 

For the Quarter Ended March 31, 2015

 

			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
		Notes to Condensed Consolidated Financial Statements	8-16
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16-21
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
	Item 4.	Controls and Procedures	21
	OTHER INFORMATION
	Item 1A.	Risk Factors	22
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
	Item 6.	Exhibits	22
	Signatures		23
	Exhibit Index		24

 

 

 

 

 

 

 

 

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 (“NRC,” the “Company,” “we,” “our,” “us,” or similar terms) “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 impact 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;

 

●

The possibility that the Company could be subject to security breaches or computer viruses:

 

●

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 year ended December 31, 2014, 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.

 

 

 

 

 

 

 

 

 

 

 

PART I – Financial Information

ITEM 1. Financial Statements

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts and par value, unaudited)

 

See accompanying notes to condensed consolidated financial statements

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except for per share amounts, unaudited)

 

 

 

 

See accompanying notes to condensed consolidated financial statements

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, unaudited)

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

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

 

Overview

 

The Company is a leading provider of analytics and insights that facilitate revenue growth, patient, employee and customer retention and patient engagement for healthcare providers, payers and other healthcare organizations. The Company’s solutions support the improvement of business and clinical outcomes, while facilitating regulatory compliance and the shift to population-based health management for its clients. The Company’s ability to systematically capture, analyze and deliver to its client’s self-reported information from patients, families and consumers is critical in today’s healthcare market. NRC believes that access to and analysis of its extensive consumer-driven information will become even more valuable in the future as healthcare providers increasingly need to more deeply understand and engage patients and consumers in an effort towards effective population-based health management.

 

The Company’s portfolio of subscription-based solutions provide actionable information and analysis to healthcare organizations and payers across a range of mission-critical, constituent-related elements, including patient experience and satisfaction, community population health risks, workforce engagement, community perceptions, and physician engagement. NRC partners with clients across the continuum of healthcare services. The Company’s clients range from acute care hospitals and post-acute providers, such as home health, long-term care and hospice, to numerous payer organizations. The Company believes this cross-continuum positioning is a unique and an increasingly important capability as evolving payment models drive healthcare providers and payers towards a more collaborative and interactive healthcare system.

 

 

 

Results of Operations

 

The following table sets forth for the periods indicated, select financial information derived from the Company’s condensed 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,
		2015				2014
Revenue:			100.0	%			100.0	%
Operating expenses:
Direct			44.9				39.7
Selling, general and administrative			29.0				24.4
Depreciation and amortization			3.9				3.6
Total operating expenses			77.8				67.7
Operating income			22.2	%			32.3	%

 

Three Months Ended March 31, 2015, Compared to Three Months Ended March 31, 2014

 

Revenue. Revenue for the three-month period ended March 31, 2015 increased 0.9% to $26.3 million, compared to $26.0 million in the three-month period ended March 31, 2014. The increase was due to new customer sales, as well as increases in sales to the existing client base.

 

Direct expenses. Direct expenses increased 14.2% to $11.8 million for the three-month period ended March 31, 2015, compared to $10.3 million in the same period during 2014. This was mainly due to increased variable costs of $812,000 from postage and printing, contracted survey related costs from larger volumes of survey processed, and higher conference expenses due to one additional conference held in the 2015 period compared to the same period last year. Fixed expenses increased by $658,000 primarily due to increased salary and benefit costs from the acquisition in October 2014. Direct expenses increased as a percentage of revenue to 44.9% in the three-month period ended March 31, 2015, compared to 39.7% during the same period of 2014 as a percentage of revenue.

 

Selling, general and administrative expenses. Selling, general and administrative expenses increased 19.8% to $7.6 million for the three-month period ended March 31, 2015, compared to $6.4 million for the same period in 2014 mainly due to the write-off of the purchase option for a potential acquisition of $657,000, increased salary and benefit costs of $357,000 mainly from the acquisition in 2014, higher share based compensation expense of $278,000 from additional grants and fewer forfeitures in 2015, and increased maintenance and repairs expense of $204,000 primarily due to repairs to the Company’s headquarters building. The option was written-off due to (1) an extension on the option to June 30, 2015 that decreased the probability of the exercise and (2) changes to the arrangement causing impairment in the value of the option. Selling, general, and administrative expenses increased as a percentage of revenue to 29.0% for the three-month period ended March 31, 2015, from 24.4% for the same period in 2014 due to increased selling, general, and administrative expenses coupled with minimal revenue growth.

 

Depreciation and amortization. Depreciation and amortization expenses increased 8.6% to $1.0 million for the three-month period ended March 31, 2015, compared to $935,000 for the same period in 2014 due to increased depreciation costs mainly from Connect computer software investments and increased customer relationship and technology intangible amortization from the acquisition in October 2014. Depreciation and amortization expenses as a percentage of revenue were 3.9% and 3.6% for the three-month periods ended March 31, 2015 and 2014, respectively.

 

Provision for income taxes. Provision for income taxes was $2.3 million (39.8% effective tax rate) for the three-month period ended March 31, 2015, compared to $2.9 million (34.6% effective tax rate) for the same period in 2014. The effective tax rate for the three-month period ended March 31, 2015 increased from the recording of a capital loss valuation allowance due to impairment on the option for a potential acquisition that was written-off, as noted above.

 

 

 

 

 

Liquidity and Capital Resources

 

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

 

The Company has made capital contributions of $2.8 million to Connect through March 31, 2015 and will make additional capital contributions for up to $1.3 million on an as-needed basis as determined by the Board of Directors of Connect. Additionally, the Company has a future obligation to purchase the other equity units in Connect when certain targeted events have been achieved. If, at any time, Connect has at least $12.5 million of annual recurring contract value, including the NRC contracts being serviced, and the members have approved a financial statement showing a pro forma minimum 35% EBITDA margin for revenue on a going-forward basis, then within 90 days thereafter NRC is required to purchase from the other members, and the other members shall be required to sell to NRC, all of their equity units not owned by NRC. As of March 31, 2015, the price at which the other members had the obligation to sell their equity units to NRC was $0.

 

The Company had cash and cash equivalents of $37.0 million at March 31, 2015, of which $8.5 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.

 

Working Capital

 

The Company had a working capital balance of $25.6 million as of March 31, 2015, compared to a working capital balance of $25.3 million as of December 31, 2014. The change was primarily due to an increase in trade accounts receivable of $3.7 million partially offset by a decrease of cash and cash equivalents of $3.0 million. Trade accounts receivable increased due to the high volume of initial billings and timing of collections on new and renewal contracts, and cash equivalents decreased due to the payment of dividends in the three-month period ended March 31, 2015. The Company’s working capital is significantly impacted by its large deferred revenue balances. The current deferred revenue balances as of March 31, 2015 and December 31, 2014 were $15.5 million and $15.1 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 services before they have been completed. Billed amounts are recorded as billings in excess of revenue earned, or deferred revenue, on the Company’s condensed 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 when the respective period ends.

 

 

 

 

 

Cash Flow Analysis

 

A summary of operating, investing, and financing activities is shown in the following table:

 

		Three Months Ended March 31,
		2015				2014
		(In thousands)
Provided by operating activities		$	1,578			$	5,163
Used in investing activities			(757	)			(605	)
Provided by (used in) financing activities			(3,135	)			40
Effect of exchange rate change on cash			(718	)			(237	)
Net increase (decrease) in cash and cash equivalents			(3,032	)			4,361
Cash and cash equivalents at end of period		$	37,010			$	26,453

  

Cash Flows from Operating Activities

 

Cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization, gain or loss on sale of property and equipment, deferred taxes, share-based compensation and related taxes, and the effect of working capital changes.

 

Net cash provided by operating activities was $1.6 million for the three months ended March 31, 2015, 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 $1.8 million. Changes in working capital decreased 2015 cash flows from operating activities by $3.7 million, primarily due to increases in trade accounts receivable due to the timing of billing and collections on new or renewal contracts.

 

Net cash provided by operating activities was $5.2 million for the three months ended March 31, 2014, which included net income of $5.5 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, and non-cash stock compensation totaling $991,000. Changes in working capital reduced 2014 cash flows from operating activities by $1.3 million, primarily due to timing of billings and collections on new or renewal contracts, annual prepaid commitments, and payments of annual bonuses. These changes were partially offset by increasing cash flows from increases in deferred revenue due to timing of billing and revenue recognition on new or renewal contracts.

 

Net cash provided by operating activities decreased $3.6 million for the three months ended March 31, 2015 compared to the three months ended March 31, 2014. The decrease was mainly due to a reduction in net income of $2.0 million, and a $2.8 million reduction due to increased trade accounts receivables.

 

Cash Flows from Investing Activities

 

Net cash of $757,000 and $605,000 was used for investing activities in the three months ended March 31, 2015 and 2014, respectively, for purchases of property and equipment.

 

Cash Flows from Financing Activities

 

Net cash used in financing activities was $3.1 million in the three months ended March 31, 2015. The excess tax benefit of share-based compensation provided cash of $94,000. Cash was used to pay payroll taxes on vested restricted shares of $92,000, capital lease obligations of $50,000, to repay borrowings under the term note totaling $576,000 and for the payment of dividends on common stock of $2.5 million.

 

 

 

Net cash provided by financing activities was $40,000 in the three months ended March 31, 2014. Proceeds from the exercise of stock options and the excess tax benefit of share-based compensation provided cash of $408,000 and $528,000, respectively. Cash was used to pay payroll taxes on vested restricted shares of $309,000, capital lease obligations of $29,000 and to repay borrowings under the term notes totaling $558,000.

 

The effect of changes in foreign exchange rates decreased cash and cash equivalents by $718,000 in the three months ended March 31, 2015 and decreased cash and cash equivalents by $237,000 for the three months ended March 31, 2014.

 

Capital Expenditures

 

Cash paid for capital expenditures was $757,000 for the three-month period ended March 31, 2015. These expenditures consisted mainly of computer software. The Company expects similar capital expenditure purchases for the remainder of 2015 consisting primarily of computer software and hardware and other equipment to be funded through cash generated from operations.

 

Debt and Equity

 

The Company’s term note is payable in 60 monthly installments of $212,468. Borrowings under the term note bears interest at an annual rate of 3.12%. The outstanding balance of the term note at March 31, 2015 was $7.5 million.

 

The Company also has a revolving credit note that was renewed in June 2014 to extend the term to June 30, 2015. This revolving credit note provides for the maximum aggregate borrowings of $6.5 million, subject to a borrowing base equal to 75.0% 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-, or three-month LIBOR rate, or (3) the bank’s one-, two-, three-, six- or twelve-month Money Market Loan Rate. As of March 31, 2015, 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, 2015. The Company expects to renew the revolving credit note prior to June 30, 2015. If, however, the revolving credit note cannot be renewed, the Company believes it has adequate cash from operations to meet its debt and capital needs.

 

The term note and revolving credit note are secured by certain of the Company’s assets, including the Company’s land, building, trade accounts receivable and intangible assets. The term note and revolving credit note 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, 2015, the Company was in compliance with these restrictions and covenants.

 

The Company has capital leases for computer equipment, office equipment, and inserting equipment. The balance of the capital leases as of March 31, 2015 was $268,000.

 

Shareholders’ equity increased $95,000 to $87.8 million at March 31, 2015, from $87.7 million at December 31, 2014. The increase was primarily due to net income of $3.5 million and $506,000 related to share-based compensation, including options exercised, partially offset by dividends paid of $2.5 million, share repurchases of $320,000 related to stock options exercised and a cumulative translation adjustment of $1.1 million.

 

 

 

 

 

Contractual Obligations

 

The Company had contractual obligations to make payments in the following amounts in the future as of March 31, 2015:

 

Contractual Obligations(1)		Total Payments				Remainder of 2015				One to Three Years				Three to Five Years				After Five Years
(In thousands)
Operating leases		$	2,119			$	628			$	1,095			$	396			$	--
Capital leases			292				119				140				33				--
Purchase obligations			--				--				--				--				--
Uncertain tax positions(2)			--				--				--				--				--
Long-term debt			7,874				1,912				5,099				863				--
Total		$	10,285			$	2,659			$	6,334			$	1,292			$	--

 

⁽¹⁾ Amounts are inclusive of interest payments, where applicable.

⁽²⁾ We have $380,000 in liabilities associated with uncertain tax positions. We are unable to reasonably estimate the expected cash settlement dates of these uncertain tax positions with certain taxing authorities.

 

 

Stock Repurchase Program

 

The Board of Directors of the Company authorized the repurchase of 2,250,000 class A and 375,000 class B shares of common stock in the open market or in privately negotiated transactions under a stock repurchase program that was originally approved in February 2006 and subsequently amended in May 2013. As of March 31, 2015, the remaining number of common stock shares that could be purchased under this authorization was 418,749 class A shares and 69,791 class B shares.

 

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, 2014.

 

ITEM 4.     Controls and Procedures

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief 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 quarter ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

 

 

PART II – Other Information

 

ITEM	1A.  Risk Factors

 

There have been no material changes to the risk factors relating to the Company set forth in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 31, 2014.

 

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

 

The Board of Directors of the Company authorized the repurchase of an additional 2,250,000 class A and 375,000 class B shares of common stock in the open market or in privately negotiated transactions under a stock repurchase program that was originally approved in February 2006 and subsequently amended in May 2013. 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, 2015, 1,831,251 shares of class A common stock and 305,209 shares of class B common stock have been repurchased under that authorization. No stock was repurchased under the program during the three-month period ended March 31, 2015.

 

ITEM	6.     Exhibits

 

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

 

 

 

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 8, 2015	By:	/s/ Michael D. Hays
		Michael D. Hays
		Chief Executive Officer (Principal Executive Officer)

 

 

Date: May 8, 2015	By:	/s/ Kevin R. Karas
		Kevin R. Karas
		Senior Vice President Finance, Treasurer, Secretary and
		Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

 

 

 

 

 

NATIONAL RESEARCH CORPORATION

 

EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period ended March 31, 2015

 

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, 2015, 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.

 

 

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