10-K 1 nrci20161231_10k.htm FORM 10-K nrci20161231_10k.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2016

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                  

(State or other jurisdiction

of incorporation or organization)

     47-0634000     

(I.R.S. Employer

Identification No.)

   

1245 Q Street

                 Lincoln, Nebraska                 

(Address of principal executive offices)

 

   68508   

(Zip code)

 

Registrant’s telephone number, including area code: (402) 475-2525

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Class                                 Name of Each Exchange on Which Registered

Class A Common Stock, $.001 par value

Class B Common Stock, $.001 par value

The NASDAQ Stock Market

The NASDAQ Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐    No  ☒ 

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐    No  ☒ 

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

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 ☐

 

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

 

Aggregate market value of the class A common stock and the class B common stock held by non-affiliates of the registrant at June 30, 2016: $239,916,362.

 

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, $0.001 par value, outstanding as of February 17, 2017: 20,911,579 shares

Class B Common Stock, $0.001 par value, outstanding as of February 17, 2017: 3,541,026 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2017 Annual Meeting of Shareholders are incorporated by reference into Part III.

 

 

 

    

TABLE OF CONTENTS

     
   

Page

PART I

     

Item 1.

Business

1

Item 1A.

Risk Factors

9

Item 1B.

Unresolved Staff Comments

14

Item 2.

Properties

14

Item 3.

Legal Proceedings

14

Item 4.

Mine Safety Disclosures

14

     

PART II

     

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15

Item 6.

Selected Financial Data

17

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 7A.

Quantitative and Qualitative Disclosure About Market Risk

28

Item 8.

Financial Statements and Supplementary Data

29

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

58

Item 9A.

Controls and Procedures

58

Item 9B.

Other Information

58

     

PART III

     

Item 10.

Directors, Executive Officers and Corporate Governance

60

Item 11.

Executive Compensation

60

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

60

Item 13.

Certain Relationships and Related Transactions, and Director Independence

61

Item 14.

Principal Accountant Fees and Services

61

     

PART IV

     

Item 15.

Exhibits and Financial Statement Schedules

62

Signatures

 

65

 

i

 

 

PART I

 

Item 1.     Business

 

Special Note Regarding Forward-Looking Statements

 

Certain matters discussed in this Annual Report on Form 10-K 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, doing business as NRC Health (“NRC Health,” 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 and retention of key clients;

 

 

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 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; and

 

 

The factors set forth under the caption “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

 

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 Annual Report on Form 10-K and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

 

General

 

The Company is a leading provider of analytics and insights that facilitate measurement and improvement of the patient and employee experience while also increasing patient engagement and customer loyalty for healthcare providers, payers and other healthcare organizations. The Company’s solutions enable its clients to understand the voice of the customer with greater clarity, immediacy and depth. NRC Health’s heritage, proprietary methods, and holistic approach enable our partners to better understand the people they care for and design experiences that inspire loyalty and trust, while also facilitating regulatory compliance and the shift to population-based health management. The Company’s ability to measure what matters most and systematically capture, analyze and deliver insights based on self-reported information from patients, families and consumers is critical in today’s healthcare market. NRC Health believes that access to and analysis of its extensive consumer-driven information is becoming more valuable as healthcare providers increasingly need to more deeply understand and engage patients and consumers in an effort towards effective population-based health management.

 

1

 

 

NRC Health’s expertise includes the efficient capture, interpretation, transmittal and benchmarking of critical data elements from millions of healthcare consumers. Using its portfolio of solutions through internet-based business intelligence tools, the Company’s clients gain insights into what people think and feel about their organizations in real-time, allowing them to build on their strengths and resolve service issues with greater speed and personalization. The Company’s clients are also able to access networking groups, on-line education and an extensive library of performance improvement material that can be tailored to each of their unique needs.

 

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 Health partners with clients across the continuum of healthcare services. The Company’s clients range from integrated health systems 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 integrated service model.

 

NRC Health has achieved a market leadership position through its more than 35 years of industry innovation and experience, as well as its long-term, recurring revenue relationships (solutions that are used or required by a client each year) with many of the healthcare industry’s largest organizations. Since its founding in 1981, the Company has focused on meeting the evolving information needs of the healthcare industry through internal product development, as well as select acquisitions. The Company is a Wisconsin corporation headquartered in Lincoln, Nebraska.

 

Industry and Market Opportunity

 

According to the Centers for Medicare and Medicaid Services (“CMS”), health expenditures in the United States were approximately $3.2 trillion in 2015, or $9,990 per person. In total, health spending accounted for 17.8% of the nation’s Gross Domestic Product in 2015. Addressing this growing expenditure burden continues to be a major policy priority at both federal and state levels. In addition, continued unemployed and underemployed rates and lower incomes for many Americans coupled with increased co-pays and deductibles in healthcare plans have focused even more consumer attention on health spending and affordability. In the public sector, Medicare provides health coverage for individuals aged 65 and older, while Medicaid provides coverage for low income families and other individuals in need. Both programs are administered by the CMS. With the aging of the U.S. population, Medicare enrollment has increased significantly.  In addition, longer life spans and greater prevalence of chronic illnesses among both the Medicare and Medicaid populations have placed tremendous demands on the health care system.

 

Driven by escalating costs and a growing recognition of the challenges of chronic care and unnecessary hospitalizations, Medicare reimbursement for healthcare providers is shifting from a volume-based approach (fees paid for each element of service rendered, independent of outcome) to a more value-based model, where reimbursement is based on the value (or quality) of the healthcare service delivered. The establishment of standardized quality-focused datasets and the requirement that providers capture and transmit this data to CMS has enabled this shift.

 

2

 

 

An increasing percentage of Medicare reimbursement and reimbursement from commercial payers will be determined under value payment models, based on factors such as patient readmission rates and provider adherence to certain quality-related protocols. At the same time, many hospitals and other providers are creating new models of care delivery to improve patient experience, reduce cost and provide better clinical outcomes. These new models are based on sharing financial risk and managing the health and behaviors of large populations of patients and consumers. Certain of these new models are known as accountable care organizations, or ACOs, and medical homes, in which multiple provider organizations are coordinated in providing care and bearing shared financial risk in serving a defined patient population. This transformation towards value-based payment models and increased engagement of healthcare consumers is resulting in a greater need for providers to deliver more customer-centric healthcare.

 

NRC Health believes that its current portfolio of solutions is aligned to address this evolving market opportunity. The Company provides tools and solutions to capture, interpret and improve the data required by CMS as well as enhanced capabilities that capture insights about patient health risks, behaviors and perceptions. The information and analytics provided through these solutions enable payers and providers to better understand what matters most to people at key moments in their relationship with a health organization. NRC Health’s solutions enable its clients to design experiences to improve the wellbeing of the people and communities they care for. In addition, the Company’s portfolio of experience solutions helps providers address and impact the types of behaviors that could result in reduced hospital re-admission rates, and a direct and measurable impact on providers’ revenue.

 

Finally, the Company believes that its ability to offer these insights across the entire care continuum is particularly relevant as new reimbursement models reward collaboration amongst different types of providers. Bundled payments, medical home, ACOs and other models of reimbursement for population-based health management all require effective coordination of care both within and outside of the traditional acute care settings.

 

NRC Health’s Solutions

 

NRC Health’s portfolio of solutions are designed to help healthcare companies understand the totality of how their organizations are experienced by the people they serve. NRC Health’s solutions address specific needs around market insight, experience, transparency, and governance for healthcare providers, payers and other healthcare organizations. While each distinct solution provides discernible value on a stand-alone basis, the Company believes that in combination, its solutions provide value through a comprehensive view of healthcare consumers both within healthcare settings and outside of those settings—creating a differentiated solution set to address the emerging needs for population-based health management.

 

NRC Health’s Market Insights Solutions NRC Health’s Market Insights solutions are subscription-based services that allow for improved tracking of awareness, perception, and consistency of healthcare brands; real-time assessment of competitive differentiators; and enhanced segmentation tools to evaluate the needs, wants, and behaviors of communities through real-time competitive assessments and enhanced segmentation tools. NRC Health’s Market Insights is the largest U.S. healthcare consumer database of its kind, measuring the opinions and behaviors of 310,000 healthcare consumers in the top 300 markets across the country annually. NRC Health’s Market Insights is a syndicated survey that provides clients with an independent third-party source of information that is used to understand consumer perception and preferences and optimize marketing strategies. NRC Health’s Market Insights solutions provide clients with on-demand tools to measure brand value and build brand equity in their markets, evaluate and optimize advertising efficacy and consumer recall, and tailor research to obtain the real time voice of customer feedback to support branding and loyalty initiatives. The Company’s Market Insights solutions were historically marketed under the Healthcare Market Guide and Ticker brands.

 

3

 

 

NRC Health’s Experience Solutions – NRC Health’s Experience solutions provide hospitals and healthcare providers the ability to receive and take action on customer and employee feedback across all care settings in real-time. Experience solutions include patient and resident experience, workforce engagement, health risk assessments, transitions, and improvement tools. These solutions enable clients to comply with regulatory requirements and to improve their reimbursement under value-based purchasing models. More importantly, NRC Health’s Experience solutions provide quantitative and qualitative real-time feedback, improvement plans, and coaching tools to enable clients to improve the experiences of patients, residents, physicians and staff.   By illuminating the complete care journey in real time, the Company’s clients are able to ensure each individual receives the care, respect, and experience he or she deserves. Developing a longitudinal profile of what healthcare customers want and need allows for organizational improvement, increased clinician and staff engagement, loyal relationships and personal well-being.

 

NRC Health’s Experience solutions are provided on a subscription basis via a cross-continuum platform that collects and measures data and then delivers business intelligence that the Company’s clients utilize to improve patient experience, engagement and loyalty. Patient data can be collected on a longitudinal basis for improvement and regulatory compliance purposes as well as on a real time basis to support service recovery, rapid cycle improvement, and engagement activities. NRC Health provides these performance results and prescriptive analytics to its clients via web-based improvement planning and business intelligence portals. These solutions have previously been marketed under NRC Picker, My InnerView (“MIV”), Customer-Connect LLC (doing business as Connect), and NRC Canada.

 

NRC Health’s Transitions solutions are provided to healthcare organizations on a subscription basis to drive effective communication between healthcare providers and patients in the critical 24-72 hours post discharge using a discharge call program. Through preference-based communications and real-time alerts, these solutions enable organizations to identify and manage high-risk patients to reduce readmissions, increase patient satisfaction and support safe care transitions. Tracking, trending and benchmarking tools isolate the key areas for process improvement allowing organizations to implement changes and reduce future readmissions. NRC Health’s Transitions solutions were previously provided by Connect. Connect was formed in June 2013 to develop and provide patient outreach and discharge call solutions. NRC Health originally had a 49% ownership interest in Connect but by March 2016 had acquired all of the remaining interest and subsequently dissolved Customer-Connect LLC in June 2016.

 

NRC Health’s Health Risk Assessment solutions (formerly Payer Solutions) enable the Company’s clients to understand the health risks associated with populations of patients, analyze and address readmission risks, and efficiently reach out to patients to impact their behaviors outside of the healthcare provider settings. These health risk assessment solutions enable clients to effectively segment populations and manage care for those who are most at-risk, engage individuals, increase preventative care and manage wellness programs to improve patient experience and outcomes.

 

NRC Health’s Transparency Solutions – NRC Health’s Transparency solutions allow healthcare organizations to share a picture of their organization and ensure that timely and relevant content informs better consumer decision-making. NRC Health’s star ratings solution (formerly Reputation) enables clients to publish a five-star rating metric and verified patient feedback derived from actual patient survey data to complement their online physician information. Sharing this feedback not only results in better-informed consumer decision-making but also has the ability to drive new patient acquisition and grow online physician reputation. NRC Health’s reputation monitoring solution alerts clients to ratings and reviews on third-party websites and provides workflows for response and service recovery. These solutions raise physician awareness of survey results and provide access to improvement resources and educational development opportunities designed to improve the way care is delivered.

 

4

 

 

NRC Health’s Governance Solutions – NRC Health’s Governance solutions, branded as The Governance Institute (“TGI”), serves not-for-profit hospital and health system boards of directors, executives, and physician leadership. TGI’s subscription-based, value-driven membership services are provided through national conferences, publications, advisory services, and an on-line portal designed to improve the effectiveness of hospital and healthcare systems by continually strengthening their board governance, strategic planning, medical leadership, management performance, and transparency positioning. TGI also conducts research studies and tracks industry trends showcasing emerging healthcare trends and best practice solutions of healthcare boards across the country.

 

NRC Health’s Competitive Strengths

 

The Company believes that its competitive strengths include the following:

 

A leading provider of patient experience solutions for healthcare providers, payers and other healthcare organizations. The Company’s history is based on capturing the voice of the consumer in healthcare markets. The Company’s solutions build on the “Eight Dimensions of Patient-Centered Care,” a philosophy developed by noted patient advocate Harvey Picker, who believed patients’ experiences are integral to quality healthcare. NRC Health has extended this philosophy to include families, caregivers, employees and other stakeholders.

 

Premier client portfolio across the care continuum. NRC Health’s client portfolio encompasses leading healthcare organizations across the healthcare continuum, from acute care hospitals and post-acute providers to healthcare payers. The Company’s client base is diverse, with its top ten clients representing approximately 17% of total revenue for the year ended December 31, 2016 and no single client representing more than 5% of the Company’s revenue.

 

Highly scalable and visible revenue model. The Company’s solutions are offered to healthcare providers, payers and other healthcare organizations primarily through subscription-based service agreements. The solutions NRC Health provides are also recurring in nature, which enables an ongoing relationship with its clients. This combination of subscription-based revenue, a base of ongoing client renewals and automated platforms creates a highly visible and scalable revenue model for the Company.

 

Comprehensive portfolio of solutions. Since NRC Health offers solutions encompassing market insights, experience, transparency, and governance, its clients can engage with the Company at multiple levels and, over time, increase their commitment and the financial value of their business relationship.

 

Exclusive focus on healthcare. The Company focuses exclusively on healthcare and serving the unique needs of healthcare organizations across the continuum, which NRC Health believes gives it a distinct competitive advantage compared to other survey and analytics software providers. The Company’s platform includes features and capabilities built specifically for healthcare providers, including a library of performance improvement content which can be tailored to the provider based on their specific customer feedback profile.


Experienced senior management team led by NRC Health’s founder. NRC Health’s senior management team has extensive industry and leadership experience. Michael D. Hays, the Company’s Chief Executive Officer, founded NRC Health in 1981. Prior to launching the Company, Mr. Hays served as Vice President and as a Director of SRI Research Center, Inc. (now known as the Gallup Organization). The Chief Financial Officer, Kevin Karas, CPA, has extensive financial experience having served as CFO at two previous companies, along with healthcare experience at Rehab Designs of America, Inc. and NovaCare, Inc. Steven D. Jackson, the Company’s President, served as Chief Strategy Officer for Vocera Communications, and he also served as Chief Operating Officer for ExperiaHealth.

 

5

 

 

Competition

 

The healthcare information and market research services industry is highly competitive. The Company has traditionally competed with healthcare organizations’ internal marketing, market research, and/or quality improvement departments which create their own performance measurement tools, and with relatively small specialty research firms which provide survey-based healthcare market research and/or performance assessment. The Company’s primary competitors among such specialty firms include Press Ganey, which has significantly higher annual revenue than the Company, and three or four other organizations that NRC Health believes have less annual revenue than the Company. The Company, to a certain degree, currently competes with, and anticipates that in the future it may increasingly compete with, (1) traditional market research firms which are significant providers of survey-based, general market research and (2) firms which provide services or products that complement healthcare performance assessments such as healthcare software or information systems. Although only a few of these competitors have offered specific services that compete directly with the Company’s solutions, many of these competitors have substantially greater financial, information gathering, and marketing resources than the Company and could decide to increase their resource commitments to the Company’s market. There are relatively few barriers to entry into the Company’s market, and the Company expects increased competition in its market which could adversely affect the Company’s operating results through pricing pressure, increased marketing expenditures, and market share losses, among other factors. There can be no assurance that the Company will continue to compete successfully against existing or new competitors.

 

The Company believes the primary competitive factors within its market include quality of service, timeliness of delivery, unique service capabilities, credibility of provider, industry experience, and price. NRC Health believes that its industry leadership position, exclusive focus on the healthcare industry, cross-continuum presence, comprehensive portfolio of solutions and relationships with leading healthcare payers and providers position the Company to compete in this market.

 

Growth Strategy

 

NRC Health believes that the value proposition of its current solutions, combined with the favorable alignment of its solutions with emerging market demand, positions the Company to benefit from multiple growth opportunities. The Company believes that it can accelerate its growth through (1) increasing sales of its existing solutions to its existing clients (or cross-selling), (2) winning additional new clients through market share growth in existing market segments, (3) developing and introducing new solutions to new and existing clients, and (4) pursuing acquisitions of, or investments in, firms providing products, solutions or technologies which complement those of the Company.

 

Selling additional solutions to existing clients. Approximately 20% of the Company’s existing clients purchase more than one of its solutions. NRC Health’s sales organization actively identifies and pursues these cross-sell opportunities in order to accelerate the growth of the Company.

 

Adding new clients. NRC Health believes that there is an opportunity to add new clients in each of the acute care, post-acute care and health plan market segments. The Company’s sales organization is actively identifying and engaging new client prospects in each of the segments noted above, with a focus on featuring its comprehensive cross continuum portfolio of solutions.

 

Adding new solutions. The need for growth, engagement and informing solutions in the market segments that NRC Health serves is evolving to align with emerging healthcare regulatory and reimbursement trends. The evolving market creates an opportunity for the Company to introduce new solutions that leverage its existing core competencies. The Company believes that there is an opportunity to drive sales growth with both existing and new clients, across all of the market segments that it serves, through the introduction of new solutions.

 

6

 

 

Pursue Strategic Acquisitions. The Company has historically complemented its organic growth with strategic acquisitions, having completed seven such transactions over the past fifteen years. These transactions have added new capabilities and access to market segments that are adjacent and complementary to the Company’s existing solutions and market segments. NRC Health believes that additional strategic acquisition opportunities exist for the Company to complement its organic growth by further expanding its service capabilities, technology offerings and end markets.

 

Sales and Marketing

 

The Company generates the majority of its revenue from the renewal of subscription-based client service agreements, supplemented by sales of other solutions to existing clients and the addition of new clients. NRC Health sales activities are carried out by a direct sales organization staffed with professional, trained sales associates. As compared to the typical industry practice of compensating sales associates with relatively high base pay and a relatively small sales commission, NRC Health compensates its sales staff with relatively low base pay and a relatively high commission component. The Company believes this compensation structure provides incentives to its sales associates to surpass sales goals and increases the Company’s ability to attract top-quality sales associates.

 

NRC Health conducts various marketing programs to generate new opportunities for its sales organization. The Company also maintains an active public relations program which includes (1) an ongoing presence in leading industry trade press and in the mainstream press, (2) public speaking at strategic industry conferences, (3) fostering relationships with key industry constituencies, and (4) annual awards programs that recognize top-ranking healthcare organizations.

 

Clients

 

NRC Health’s clients include many of the nation’s largest healthcare systems. The Company provides solutions to over 61 payer health plans and 145 of the 200 largest health systems.

 

The Company’s ten largest clients accounted for 17%, 15%, and 16% of the Company’s total revenue in 2016, 2015 and 2014, respectively. Approximately 5% of the Company’s revenue was derived from foreign customers in 2016 and 2015 and 7% in 2014.

 

For financial information by geographic area, see Note 14 to the Company’s consolidated financial statements.

 

Intellectual Property and Other Proprietary Rights

 

The Company’s success depends in part upon its data collection processes, research methods, data analysis techniques and internal systems, and procedures that it has developed specifically to serve clients in the healthcare industry. The Company has no patents. Consequently, it relies on a combination of copyright and trade secret laws and associate nondisclosure agreements to protect its systems, survey instruments and procedures. There can be no assurance that the steps taken by the Company to protect its rights will be adequate to prevent misappropriation of such rights or that third parties will not independently develop functionally equivalent or superior systems or procedures. The Company believes that its systems and procedures and other proprietary rights do not infringe upon the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims against the Company in the future or that any such claims will not result in protracted and costly litigation, regardless of the merits of such claims or whether the Company is ultimately successful in defending against such claims.

 

7

 

 

Associates

 

As of December 31, 2016, the Company employed a total of 372 persons on a full-time basis. In addition, as of such date, the Company had 32 part-time associates primarily in its survey operations, representing approximately 16 full-time equivalent associates. None of the Company’s associates are represented by a collective bargaining unit. The Company considers its relationship with its associates to be good.

 

Executive Officers of the Company

 

The following table sets forth certain information as of February 1, 2017, regarding the executive officers of the Company:

 

Name

Age

Position

     

Michael D. Hays

62

Chief Executive Officer

     

Steven D. Jackson 

41

President

     

Kevin R. Karas

59

Senior Vice President Finance, Chief Financial Officer, Treasurer and Secretary

 

Michael D. Hays has served as Chief Executive Officer and a director since he founded the Company in 1981. He also served as President of the Company from 1981 to 2004 and from July 2008 to July 2011. Prior to founding the Company, Mr. Hays served for seven years as a Vice President and a director of SRI Research Center, Inc. (n/k/a the Gallup Organization).

 

Steven D. Jackson has served as President of the Company since October 2015. He served as Group President from October 2014 until September 2015, during which time he oversaw the Company’s Market Insights, Transparency, and Predictive Analytics business units. Prior to joining the Company, Mr. Jackson served as Chief Strategy Officer for Vocera Communications where he was employed from 2007 to 2014. He also served as Chief Operating Officer for ExperiaHealth, a subsidiary of Vocera. Earlier in his career, Mr. Jackson held positions of increasing responsibility at The Advisory Board Company, Neoforma, and Stockamp & Associates.

 

Kevin R. Karas has served as Chief Financial Officer, Treasurer and Secretary of the Company since September 2011, and as Senior Vice President Finance since he joined the Company in December 2010. From 2005 to 2010, he served as Vice President of Finance for Lifetouch Portrait Studios, Inc., a national retail photography company.  Mr. Karas also previously served as Chief Financial Officer at CARSTAR, Inc., an automobile collision repair franchise business, from 2000 to 2005, Chief Financial Officer at Rehab Designs of America, Inc., a provider of orthotic and prosthetic services, from 1993 to 2000, and as a regional Vice President of Finance and Vice President of Operations at Novacare, Inc., a provider of physical rehabilitation services, from 1988 to 1993.  He began his career as a Certified Public Accountant at Ernst & Young.

 

Executive officers of the Company are elected by and serve at the discretion of the Company’s Board of Directors. There are no family relationships between any directors or executive officers of NRC Health.

 

Available Information

 

More information regarding NRC Health is available on the Company's website at www.nrchealth.com. NRC Health is not including the information contained on or available through its website as part of, or incorporating such information by reference into, this Annual Report on Form 10-K. The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports are made available to the public at no charge through a link appearing on the Company's website. NRC Health provides access to such materials through its website as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the Securities and Exchange Commission. Reports and amendments posted on the Company’s website do not include access to exhibits and supplemental schedules electronically filed with the reports or amendments.

 

8

 

 

Item 1A.     Risk Factors

 

You should carefully consider each of the risks described below, together with all of the other information contained in this Annual Report on Form 10-K, before making an investment decision with respect to our securities. If any of the following risks develop into actual events, our business, financial condition or results of operations could be materially and adversely affected and you may lose all or part of your investment.

 

We depend on contract renewals, including retention of key clients, for a large share of our revenue and our operating results could be adversely affected.

 

We expect that a substantial portion of our revenue for the foreseeable future will continue to be derived from renewable service contracts. Substantially all contracts are renewable annually at the option of our clients, although a client generally has no minimum purchase commitment under a contract and the contracts are generally cancelable on short or no notice without penalty. To the extent that clients fail to renew or defer their renewals, we anticipate our results may be materially adversely affected. We rely on a limited number of key clients for a substantial portion of our revenue. The Company’s ten largest clients accounted for 17%, 15%, and 16% of the Company’s total revenue in 2016, 2015, and 2014, respectively. Our ability to secure renewals depends on, among other things, our ability to gather and analyze performance data in a consistent, high-quality, and timely fashion. In addition, the service needs of our clients are affected by accreditation requirements, enrollment in managed care plans, the level of use of satisfaction measures in healthcare organizations’ overall management and compensation programs, the size of operating budgets, clients’ operating performance, industry and economic conditions, and changes in management or ownership. As these factors are beyond our control, we cannot ensure that we will be able to maintain our renewal rates. Any material decline in renewal rates from existing levels would have an adverse effect on our revenue and a corresponding effect on our operating and net income.

 

Our operating results may fluctuate and this may cause our stock price to decline. 

 

Our overall operating results may fluctuate as a result of a variety of factors, including the size and timing of orders from clients, client demand for our services (which, in turn, is affected by factors such as accreditation requirements, enrollment in managed care plans, operating budgets and clients’ operating performance), the hiring and training of additional staff, expense increases, and industry and general economic conditions. Because a significant portion of our overhead is fixed in the short-term, particularly some costs associated with owning and occupying our building and full-time personnel expenses, our results of operations may be materially adversely affected in any particular period if revenue falls below our expectations. These factors, among others, make it possible that in some future period our operating results may be below the expectations of securities analysts and investors which would have a material adverse effect on the market price of our class A common stock and/or our class B common stock.

 

9

 

 

We operate in a highly competitive market and could experience increased price pressure and expenses as a result.

 

The healthcare information and market research services industry is highly competitive. We have traditionally competed with healthcare organizations’ internal marketing, market research and/or quality improvement departments that create their own performance measurement tools, and with relatively small specialty research firms that provide survey-based healthcare market research and/or performance assessment. The Company’s primary competitors among such specialty firms include Press Ganey, which we believe has significantly higher annual revenue than us, and three or four other firms that we believe have lower annual revenue than us. To a certain degree, we currently compete with, and anticipate that in the future we may increasingly compete with, (1) traditional market research firms which are significant providers of survey-based, general market research, and (2) firms which provide services or products that complement healthcare performance assessments, such as healthcare software or information systems. Although only a few of these competitors have offered specific services that compete directly with our services, many of these competitors have substantially greater financial, information gathering, and marketing resources than the Company and could decide to increase their resource commitments to our market. There are relatively few barriers to entry into the Company’s market, and we expect increased competition in our market which could adversely affect our operating results through pricing pressure, increased marketing expenditures, and market share losses, among other factors. There can be no assurance that the Company will continue to compete successfully against existing or new competitors.

 

Because our clients are concentrated in the healthcare industry, our revenue and operating results may be adversely affected by changes in regulations, a business downturn or consolidation with respect to the healthcare industry.

 

Substantially all of our revenue is derived from clients in the healthcare industry. As a result, our business, financial condition and results of operations are influenced by conditions affecting this industry, including changing political, economic, competitive and regulatory influences that may affect the procurement practices and operation of healthcare providers and payers. The 2010 Federal comprehensive healthcare reform plan, which includes provisions to control healthcare costs, improve healthcare quality and expand access to affordable health insurance, could result in lower reimbursement rates and otherwise change the environment in which providers and payers operate. In addition, large private purchasers of healthcare services are placing increasing cost pressure on providers. Healthcare providers may react to these cost pressures and other uncertainties by curtailing or deferring purchases, including purchases of our services. Moreover, there has been consolidation of companies in the healthcare industry, a trend which we believe will continue to grow. Consolidation in this industry, including the potential acquisition of certain of our clients, could adversely affect aggregate client budgets for our services or could result in the termination of a client’s relationship with us. The impact of these developments on the healthcare industry is difficult to predict and could have an adverse effect on our revenue and a corresponding effect on our operating and net income.

 

We rely on third parties whose actions could have a material adverse effect on our business.

 

We outsource certain operations and engage third parties to perform work needed to fulfill our client services. For example, we use vendors to perform certain printing, mailing, information transmittal and other services related to our survey operations. If any of these vendors cease to operate or fail to adequately perform the contracted services and alternative resources and processes are not utilized in a timely manner, our business could be adversely affected. The loss of any of our key vendors could impair our ability to perform our client services and result in lower revenues and income. It would also be time-consuming and expensive to replace, either directly or through other vendors, the services performed by these vendors, which could adversely impact revenues, expenses and net income. Furthermore, our ability to monitor and direct our vendors’ activities is limited. If their actions and business practices violate policies, regulations or procedures otherwise considered illegal, we could be subject to reputational damage or litigation which would adversely affect our business.

 

10

 

 

We face several risks relating to our ability to collect the data on which our business relies.

 

Our ability to provide timely and accurate performance measurement and improvement services to our clients depends on our ability to collect large quantities of high-quality data through surveys and interviews. If our mail survey operations are disrupted and we are unable to mail our surveys in a timely manner, then our revenue and net income could be negatively impacted. If receptivity to our survey and interview methods by respondents declines, or, for some other reason, their willingness to complete and return surveys declines, or if we, for any reason, cannot rely on the integrity of the data we receive, then our revenue could be adversely affected with a corresponding effect on our operating and net income. We also rely on third-party panels of pre-recruited consumer households to produce NRC Health’s Market Insights in a timely manner. If we are not able to continue to use these panels, or the time period in which we use these panels is altered and we cannot find alternative panels on a timely, cost-competitive basis, we could face an increase in our costs or an inability to effectively produce NRC Health’s Market Insights. In either case, our operating and net income could be negatively affected.

 

Our principal shareholder effectively controls the Company, and holders of class A common stock are not able to independently elect directors of NRC Health or control any of the Company's management policies or business decisions because the holders of class A common stock have substantially less voting power than the holders of the Company's class B common stock, a majority of which is beneficially owned by our principal shareholder.

 

The Company's outstanding stock is divided into two classes of common stock: class A common stock and class B common stock. The class B common stock has one vote per share on all matters and the class A common stock has one-one-hundredth (1/100th) of one vote per share. As of February 17, 2017, the class B common stock constituted approximately 94% of NRC Health's total voting power. As a result, holders of class B common stock are able to exercise a controlling influence over the Company's business, have the power to elect its directors and indirectly control decisions such as whether to issue additional shares, declare and pay dividends or enter into significant corporate transactions. A majority of the class B common stock is owned by Michael D. Hays, our Chief Executive Officer.

 

As of February 17, 2017, approximately 56% of the outstanding class B common stock and approximately 26% of the outstanding class A common stock was owned by Mr. Hays, and that collectively constituted approximately 54% of the Company's total voting power. As a result, Mr. Hays can control matters requiring shareholder approval, including the election of directors and the approval of significant corporate matters such as change of control transactions. The effects of such influence could be to delay or prevent a change of control of the Company unless the terms are approved by Mr. Hays.

 

The market prices of our two classes of common stock may be volatile and shareholders may be unable to resell shares at or above the price at which the shares were acquired.

 

The market price of stock can be highly volatile. As a result, the market prices and trading volumes of each of our two classes of common stock may also be highly volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases that are in response to factors beyond our control, including, but not limited to:

 

 

Variations in our financial performance and that of similar companies;

 

Regulatory and other developments that may impact the demand for our services;

 

Reaction to our press releases, public announcements and filings with the Securities and Exchange Commission;

 

Client, market and industry perception of our services and performance;

 

Actions of our competitors;

 

Changes in earnings estimates or recommendations by analysts who follow our stock;

 

Loss of key personnel;

 

Investor or management team sales of our stock;

 

Changes in accounting principles; and

 

Variations in general market, economic and political conditions or financial markets.

 

11

 

 

Any of these factors, among others, may result in changes in the trading volumes and/or market prices of each of our classes common stock. Following periods of volatility in the market price of a company’s securities, shareholders have often filed securities class-action lawsuits. Our involvement in a class-action lawsuit would result in substantial legal fees and divert our senior management’s attention from operating our business, which could harm our business and net income.

 

Our business and operating results could be adversely affected if we are unable to attract or retain key managers and other personnel.


Our future performance may depend, to a significant extent, upon the efforts and ability of our key personnel who have expertise in gathering, interpreting and marketing survey-based performance information for healthcare markets. Although client relationships are managed at many levels within our company, the loss of the services of Michael D. Hays, our Chief Executive Officer, or one or more of our other senior managers, could have a material adverse effect, at least in the short to medium term, on most significant aspects of our business, including strategic planning, product development, and sales and customer relations. Our success will also depend on our ability to hire, train and retain skilled personnel in all areas of our business. Currently, we do not have employment agreements with our officers or our other key personnel. Competition for qualified personnel in our industry is intense, and many of the companies that compete with us for qualified personnel have substantially greater financial and other resources than us. Furthermore, we expect competition for qualified personnel to become more intense as competition in our industry increases. We cannot assure you that we will be able to recruit, retain and motivate a sufficient number of qualified personnel to compete successfully.

 

If intellectual property and other proprietary information technology were copied or independently developed by our competitors, our operating results could be negatively affected.

 

Our success depends in part upon our data collection process, research methods, data analysis techniques, and internal systems and procedures that we have developed specifically to serve clients in the healthcare industry. We have no patents. Consequently, we rely on a combination of copyright, trade secret laws and associate nondisclosure agreements to protect our systems, survey instruments and procedures. We cannot assure you that the steps we have taken to protect our rights will be adequate to prevent misappropriation of such rights, or that third parties will not independently develop functionally equivalent or superior systems or procedures. We believe that our systems and procedures and other proprietary rights do not infringe upon the proprietary rights of third parties. We cannot assure you, however, that third parties will not assert infringement claims against us in the future, or that any such claims will not result in protracted and costly litigation, regardless of the merits of such claims, or whether we are ultimately successful in defending against such claims.

 

Our business and operating results could be adversely affected if we experience business interruptions or failure of our information technology and communication systems.

 

Our ability to provide timely and accurate performance measurement and improvement services to our clients depends on the efficient and uninterrupted operation of our information technology and communication systems, and those of our external service providers. Our systems and those of our external service providers, could be exposed to damage or interruption from fire, natural disasters, energy loss, telecommunication failure, security breach and computer viruses. An operational failure or outage in our information technology and communication systems or those of our external service providers, could result in loss of customers, damage to customer relationships, reduced revenue and profits, refunds of customer charges and damage our reputation and may result in additional expense to repair or replace damaged equipment and recover data loss resulting from the interruption. Although we have taken steps to prevent system failures and have back-up systems and procedures to prevent or reduce disruptions, such steps may not prevent an interruption of services and our disaster recovery planning may not account for all contingencies. Additionally, our insurance may not adequately compensate us for all losses or failures that may occur. Any one of the above situations could have a material adverse effect on our business, financial condition, results of operations and reputation.

 

12

 

 

Security breaches or computer viruses could harm our business.

 

In connection with our client services, we receive, process, store and transmit sensitive business information electronically over the Internet. Computer viruses could spread throughout our systems and disrupt operations and service delivery. Unauthorized access to our computer systems or databases could result in the theft or publication of confidential information or the deletion or modification of records or could otherwise cause interruption in our operations. We cannot be certain that the technology protecting our networks and information will successfully prevent computer viruses, data thefts, release of confidential information or security breaches. A compromise in our data security systems that results in inappropriate disclosure of our associates', customers' or vendors' confidential information, could harm our reputation and expose us to regulatory action and claims. Changes in privacy and information security laws and standards may require we incur significant expense to ensure compliance due to increased technology investment and operational procedures. An inability to prevent security breaches or computer viruses or failure to comply with privacy and information security laws could result in litigation and regulatory risk, loss of customers, damage to customer relationships, reduced revenue and profits, refunds of customer charges and damage our reputation, which could adversely affect our business, financial condition, results of operations and reputation.

 

Reputational harm could have a material adverse effect on our business, financial condition and results of operations.

 

Our ability to maintain a good reputation is critical to selling our services. Our reputation could be adversely impacted by any of the following (whether or not valid): the failure to maintain high ethical and social standards; the failure to perform our client services in a timely manner; violations of laws and regulations; and the failure to maintain an effective system of internal controls or to provide accurate and timely financial information. Damage to our reputation or loss of our clients’ confidence in our services for any of these, or any other reasons, could adversely impact our business, revenues, financial condition, and results of operations, as well as require additional resources to rebuild our reputation.


Our operations are subject to laws and regulations that impose significant compliance costs and create reputational and legal risk.

 

Due to the nature of the services we offer, we are subject to significant commercial, trade and privacy regulations. We cannot predict the nature, scope or effect of future regulatory requirements to which our operations might be subject or the manner in which existing laws might be administered or interpreted, which could have a material and negative impact on our business and our results of operation. For example, recent years have seen an increase in the development or enforcement of legislation related to healthcare reform, privacy, trade compliance and anti-corruption. Additionally, some of the services we provide include information our clients need to fulfill regulatory reporting requirements. If our services result in errors or omissions in our clients’ regulatory reporting, we may be subject to loss of clients, reputational harm or litigation, each potentially adversely impacting our business. Furthermore, although we maintain a variety of internal policies and controls designed to educate, discourage, prevent and detect violations of such laws, we cannot guarantee that such actions will be effective or sufficient or that individual employees will not engage in inappropriate behavior in breach of our policies. Such conduct, or even an allegation of misbehavior, could result in material adverse reputational harm, costly investigations, severe criminal or civil sanctions, or could disrupt our business, and could negatively affect our results of operations or financial condition.

 

13

 

 

Failure to comply with public company regulations could adversely impact our profitability.

 

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act Wall Street Reform and Consumer Protection Act, the listing requirements of NASDAQ and other applicable securities rules and regulations. Additionally, laws, regulations and standards relating to corporate governance and public disclosure are subject to varying interpretations and continue to develop and change. If we misinterpret or fail to comply with these rules and regulations, our legal and financial compliance costs and net income may be adversely affected.

 

Our growth strategy includes future acquisitions which involve inherent risk.

 

In order to expand services or technologies to existing clients and increase our client base, we have historically, and may in the future, make strategic business acquisitions that we believe complement our business. Acquisitions have inherent risks which may have material adverse effects on our business, financial condition, or results of operations, including, among other things: (1) failure to successfully integrate the purchased operations, technologies, products or services and maintain uniform standard controls, policies and procedures; (2) substantial unanticipated integration costs; (3) loss of key associates including those of the acquired business; (4) diversion of management’s attention from other operations; (5) failure to retain the customers of the acquired business; (6) failure to achieve any projected synergies and performance targets; (7) additional debt and/or assumption of known or unknown liabilities; (8) dilutive issuances of equity securities; and (9) a write-off of goodwill, software development costs, client lists, other intangibles and amortization of expenses. If we fail to successfully complete acquisitions or integrate acquired businesses, we may not achieve projected results and there may be a material adverse effect on our business, financial condition and results of operations.


Item 1B.     Unresolved Staff Comments

 

The Company has no unresolved staff comments to report pursuant to this item.

 

Item 2.        Properties

 

The Company’s headquarters is located in an owned office building in Lincoln, Nebraska, of which 62,000 square feet are used for the Company’s operations. This facility houses all the capabilities necessary for NRC Health’s survey programming, printing and distribution, data processing, analysis and report generation, marketing, and corporate administration. The Company’s term note is secured by this property, among other things.

 

The Company is leasing 4,000 square feet of office space in Markham, Ontario, 3,900 square feet of office space in San Diego, California, 8,100 square feet of office space in Seattle, Washington and 1,500 square feet of office space in Atlanta, Georgia.

 

Item 3.        Legal Proceedings

 

The Company is not subject to any material pending litigation.

 

Item 4.        Mine Safety Disclosures

 

Not applicable.

 

14

 

 

PART II

 

Item 5.     Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

In May 2013, the Company consummated a recapitalization (the “May 2013 Recapitalization”) pursuant to which the Company established two classes of common stock (class A common stock and class B common stock), issued a dividend of three shares of class A common stock for each share of the Company’s then existing common stock and reclassified each then existing share of common stock as one-half of one share of class B common stock. Following the May 2013 Recapitalization, the Company’s class A common stock and the Company’s class B common stock are traded on the NASDAQ Global Market under the symbols “NRCIA” and “NRCIB,” respectively.

 

The following table sets forth the range of high and low sales prices for, and dividends declared on the class A common stock and class B common stock for the period from January 1, 2015, through December 31, 2016:

 

   

Class A

   

Class B

 
   

High

   

Low

   

Dividends

Declared Per

Common Share

   

High

   

Low

   

Dividends

Declared Per

Common Share

 

2015 Quarter Ended:

                                               

March 31

  $ 16.67     $ 13.00     $ 0.06     $ 36.20     $ 31.26     $ 0.36  

June 30

  $ 15.25     $ 13.29     $ 0.06     $ 35.50     $ 31.50     $ 0.36  

September 30

  $ 15.21     $ 10.72     $ 0.06     $ 35.50     $ 27.54     $ 0.36  

December 31

  $ 17.42     $ 11.32     $ 0.44     $ 38.22     $ 31.88     $ 2.64  
                                                 

2016 Quarter Ended

                                               

March 31

  $ 16.10     $ 13.70     $ 0.08     $ 36.87     $ 32.99     $ 0.48  

June 30

  $ 16.67     $ 12.53     $ 0.08     $ 44.60     $ 33.19     $ 0.48  

September 30

  $ 17.14     $ 13.26     $ 0.08     $ 38.50     $ 32.18     $ 0.48  

December 31

  $ 20.00     $ 14.35     $ 0.10     $ 46.37     $ 32.57     $ 0.60  


Cash dividends in the aggregate amount of $14.3 million were declared in 2016 with $10.1 million paid in 2016 and the remaining $4.2 million paid in January 2017. Cash dividends in the aggregate amount of $26.0 million were declared in 2015 with $7.6 million paid in 2015 and the remaining $18.4 million paid in January 2016. The payment and amount of future dividends, if any, is at the discretion of the Company’s Board of Directors and will depend on the Company’s future earnings, financial condition, general business conditions, alternative uses of the Company’s earnings and other factors.

 

On February 17, 2017, there were approximately 16 shareholders of record and approximately 1,224 beneficial owners of the class A common stock and approximately 14 shareholders of record and approximately 1,157 beneficial owners of the class B common stock.

 

In February 2006, the Board of Directors of the Company authorized the repurchase of 2,250,000 shares of class A common stock and 375,000 shares of class B common stock (on a post-May 2013 Recapitalization basis) 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 February 17, 2017, 1,969,509 shares of class A common stock and 305,509 shares of class B common stock have been repurchased under that authorization. No class A or class B common stock was repurchased during the three-month period ended December 31, 2016. The remaining shares that may be purchased under that authorization are 280,491 and 69,491 for class A and class B common stock, respectively.

 

15

 

 

The following graph compares the cumulative 5-year total return provided shareholders on the Company’s common stock relative to the cumulative total returns of the NASDAQ Composite Index and the Russell 2000 Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on December 31, 2011 (or on May 23, 2013 for our class A common stock which was the first day it was traded), and its relative performance is tracked through December 31, 2016. In accordance with Securities and Exchange Commission guidance, in calculating the cumulative 5-year total return on our class B common stock, we gave retroactive effect to the May 2013 Recapitalization (i.e., as if it had occurred on December 31, 2011).   

 

 

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

 

   

12/11

   

12/12

   

5/23/13

   

12/13

   

12/14

   

12/15

   

12/16

 
                                                         
                                                         

National Research Corporation - Class B

    100.00       146.97       ---       172.09       180.14       199.70       245.75  
                                                         

National Research Corporation - Class A

    ---       ---       100.00       94.10       70.25       83.85       101.51  
                                                         

NASDAQ Composite

    100.00       116.41       ---       165.47       188.69       200.32       216.54  
                                                         

Russell 2000

    100.00       116.35       ---       161.52       169.43       161.95       196.45  

 

16

 


Item 6.     Selected Financial Data

 

The selected statement of income data for the years ended December 31, 2016, 2015 and 2014, and the selected balance sheet data at December 31, 2016 and 2015, are derived from, and are qualified by reference to, the audited consolidated financial statements of the Company included elsewhere in this Annual Report on Form 10-K. The selected statement of income data for the year ended December 31, 2013 and 2012, and the balance sheet data at December 31, 2014, 2013 and 2012, are derived from audited consolidated financial statements not included herein. The Company acquired Digital Assent, LLC (“Digital Assent”) on October 28, 2014 and disposed of selected assets and liabilities related to the clinical workflow product of its Predictive Analytics operating segment on December 21, 2015. The acquisition and disposal did not have a significant impact on the Company’s financial results, therefore, the historical data in the table below have not been adjusted.

 

   

Year Ended December 31, (a)

 
   

2016

   

2015

   

2014

   

2013

   

2012

 
   

(In thousands, except per share data)

 

Statement of Income Data:

                                       

Revenue

  $ 109,384     $ 102,343     $ 98,837     $ 92,590     $ 86,421  

Operating expenses:

                                       

Direct

    45,577       44,610       41,719       38,844       35,461  

Selling, general and administrative

    28,385       27,177       25,018       25,208       23,542  

Depreciation and amortization

    4,225       4,109       3,804       3,732       4,699  

Total operating expenses

    78,187       75,896       70,541       67,784       63,702  

Operating income

    31,197       26,447       28,296       24,806       22,719  

Other income (expense)

    159       913       (204 )     (318 )     (512 )

Income before income taxes

    31,356       27,360       28,092       24,488       22,207  

Provision for income taxes

    10,838       9,750       9,936       9,004       7,139  

Net income

  $ 20,518     $ 17,610     $ 18,156     $ 15,484     $ 15,068  

Earnings per share common stock:

                                       
Basic Earnings per share:                                        

Class A

  $ 0.49     $ 0.42     $ 0.44     $ 0.37     $ 0.37  

Class B

  $ 2.93     $ 2.52     $ 2.62     $ 2.25     $ 2.22  

Diluted Earnings per share:

                                       

Class A

  $ 0.48     $ 0.41     $ 0.43     $ 0.37     $ 0.36  

Class B

  $ 2.88     $ 2.49     $ 2.57     $ 2.20     $ 2.17  
Weighted average share and share equivalents outstanding:                                        

Class A – basic

    20,713       20,741       20,764       20,677       20,325  

Class B – basic

    3,505       3,478       3,473       3,447       3,388  

Class A – diluted

    21,037       20,981       21,076       21,099       20,854  

Class B – diluted

    3,560       3,522       3,536       3,514       3,476  

 

   

2016

   

2015

   

2014

   

2013

   

2012

 
   

(In thousands)

 

Balance Sheet Data:

                                       

Working capital surplus (deficiency)

  $ 15,551     $ 10,890     $ 25,262     $ 12,784     $ (11,483 )

Total assets

    120,624       128,049       129,510       111,088       100,046  

Total debt and capital lease obligations, including current portion

    3,732       5,917       8,386       10,546       12,763  

Total shareholders’ equity

  $ 82,806     $ 74,222     $ 87,748     $ 71,755     $ 56,742  

 

 

(a)

All share and per share data have been retroactively adjusted to give effect to the May 2013 Recapitalization as further described in Item 5.

 

 

 

 

 

17

 

 

Item 7.      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 measurement and improvement of the patient and employee experience while also increasing patient engagement and customer loyalty for healthcare providers, payers and other healthcare organizations. The Company’s solutions enable its clients to understand the voice of the customer with greater clarity, immediacy and depth. NRC Health’s heritage, proprietary methods, and holistic approach enable our partners to better understand the people they care for and design experiences that inspire loyalty and trust, while also facilitating regulatory compliance and the shift to population-based health management. The Company’s ability to measure what matters most and systematically capture, analyze and deliver insights based on self-reported information from patients, families and consumers is critical in today’s healthcare market. NRC Health believes that access to and analysis of its extensive consumer-driven information is becoming more valuable 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 Health partners with clients across the continuum of healthcare services. The Company’s clients range from integrated health systems 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 integrated service model.

 

Acquisitions/ Investments

 

In October 2014, NRC Health acquired Digital Assent, a company with a healthcare technology platform. The acquisition created a Center of Excellence in Atlanta, Georgia, responsible for developing novel solutions to enhance consumer decision-making in the selection of healthcare providers. The all-cash consideration paid at closing was $2.6 million.

 

Divestitures

 

On December 21, 2015, the Company completed the sale of selected assets and liabilities related to the clinical workflow product of the former Predictive Analytics operating segment, for a net cash amount of approximately $1.6 million.  The Company recorded a gain of approximately $1.1 million from the sale in the fourth quarter of 2015, which is included in other income on the Consolidated Statement of Income. An additional gain was recorded in December 2016, when $223,000 was received from proceeds placed in escrow at the time of sale.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The most significant of these areas involving difficult or complex judgments made by management with respect to the preparation of the Company’s consolidated financial statements for 2016 include:

 

 

Revenue recognition;

 

Valuation of goodwill and identifiable intangible assets;

 

Income taxes; and

 

Business combinations.

 

18

 

 

Revenue Recognition

 

The Company derives a majority of its operating revenue from its annually renewable services, which include performance measurement and improvement services, healthcare analytics and governance education services. The Company provides these services to its clients under annual client service contracts, although such contracts are generally cancelable on short or no notice without penalty.

 

Services are provided under subscription-based service agreements. The Company recognizes subscription-based service revenue over the period of time the service is provided. Generally, the subscription periods are for twelve months and revenue is recognized equally over the subscription period.

 

Certain contracts are fixed-fee arrangements with a portion of the project fee billed in advance and the remainder billed periodically over the duration of the project. Revenue and direct expenses for services provided under these contracts are recognized under the proportional performance method. Under the proportional performance method, the Company recognizes revenue based on output measures or key milestones such as survey set-up, survey mailings, survey returns and reporting. The Company measures its progress based on the level of completion of these output measures and recognizes revenue accordingly. Management judgments and estimates must be made and used in connection with revenue recognized using the proportional performance method. If management made different judgments and estimates, then the amount and timing of revenue for any period could differ materially from the reported revenue.

 

The Company’s revenue arrangements with a client may include combinations of performance measurement and improvement services, healthcare analytics or governance education services which may be executed at the same time, or within close proximity of one another (referred to as a multiple-element arrangement). Each element of a multiple-element arrangement is accounted for as a separate unit of accounting provided each delivered element is sold separately by the Company or another vendor; and for an arrangement that includes a general right of return relative to the undelivered elements, delivery or performance of the undelivered services are considered probable and substantially in the control of the Company. The Company’s arrangements generally do not include a general right of return related to the delivered services. If these criteria are not met, the arrangement is accounted for as a single unit of accounting with revenue generally recognized equally over the subscription period or recognized under the proportional performance method.


Revenue is allocated to each separate unit of accounting based on relative selling price using a selling price hierarchy: vendor specific objective evidence (“VSOE”), if available, third-party evidence (“TPE”) if VSOE is not available, or estimated selling price if VSOE nor TPE is available. VSOE is established based on the services normal selling price and discounts for the specific services when sold separately. TPE is established by evaluating similar competitor services in standalone arrangements. If neither exists for a deliverable, the best estimate of the selling price (“ESP”) is used for that deliverable based on list price, representing a component of management’s market strategy, and an analysis of historical prices for bundled and standalone arrangements. Revenue allocated to an element is limited to revenue that is not subject to refund or otherwise represents contingent revenue. VSOE, TPE, and ESP are periodically adjusted to reflect current market conditions. These adjustments are not expected to differ significantly from historical results.

 

Valuation of Goodwill and Identifiable Intangible Assets

 

Intangible assets include customer relationships, trade names, technology, non-compete agreements and goodwill. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company reviews intangible assets with indefinite lives for impairment annually as of October 1 and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

 

19

 

 

When performing the impairment assessment, the Company first assesses qualitative factors to determine whether it is necessary to recalculate the fair value of our intangible assets with indefinite lives. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of the indefinite-lived intangibles is less than their carrying amount, the Company calculates the fair value using a market approach. If the carrying value of an intangible asset with an indefinite life exceeds its fair value, then the intangible asset is written-down to their fair values. The Company did not recognize any impairment related to our indefinite-lived intangible assets during 2016, 2015 or 2014.

 

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. All of the Company’s goodwill is allocated to its reporting units, which are the same as its operating segments. Goodwill is reviewed for impairment at least annually as of October 1 and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.

 

The Company reviews for goodwill impairment by first assessing qualitative factors to determine whether any impairment may exist. If we believe, as a result of the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative two-step test is required; otherwise, no further testing is required. Under the first step of the quantitative test, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, step two is not performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the Company performs step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the fair value of that goodwill. The fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the fair value of the reporting unit goodwill.

 

In instances when a step two is required, the fair value of the reporting unit is determined using an income approach and comparable market multiples. Under the income approach, there are a number of inputs used to calculate the fair value using a discounted cash flow model, including operating results, business plans, projected cash flows and a discount rate. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment. Discount rates are determined by using a weighted average cost of capital, which considers market and industry data. Management develops growth rates and cash flow projections for each reporting unit considering industry and Company-specific historical and projected information. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant weighted average cost of capital and low long-term growth rates. Under the market approach, the Company considers its market capitalization, comparisons to other public companies’ data, and recent transactions of similar businesses within the Company’s industry.

 

The Company performed a qualitative analysis as of October 1, 2016, which did not indicate that it was more likely than not that the carrying values of the reporting units exceeded fair value. No impairments were recorded during the years ended December 31, 2016, 2015 or 2014.

 

20

 

 

Income Taxes

 

The Company uses the asset and liability method of accounting for income taxes. Under that method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances, if any, are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Management judgment is required to determine the provision for income taxes and to determine whether deferred income taxes will be realized in full or in part. Such judgments include, but are not limited to, the likelihood we would realize the benefits of net operating loss carryforwards, the adequacy of valuation allowances, the election to capitalize or expense costs incurred, and the probability of outcomes of uncertain tax positions. It is possible that the various taxing authorities could challenge those judgments or positions and reach conclusions that would cause us to incur tax liabilities in excess of, or realize benefits less than, those currently recorded. In addition, changes in the geographical mix or estimated amount of annual pretax income could impact our overall effective tax rate.

 

Business Combinations

 

The Company uses the acquisition method of accounting for acquired businesses. Under the acquisition method, the financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is required in estimating the fair value of assets acquired, especially intangible assets. As a result, in the case of significant acquisitions we typically engage third-party valuation specialists in estimating fair values of tangible and intangible assets. The fair value estimates are based on available historical information and on expectations and assumptions about the future, considering the perspective of marketplace participants. While management believes those expectations and assumptions are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could impact the accuracy or validity of the estimates and assumptions.

 

Results of Operations

 

The following table and graphs set forth, for the periods indicated, selected financial information derived from the Company’s consolidated financial statements, including amounts expressed as a percentage of total revenue and the percentage change in such items versus the prior comparable period (please note that all columns may not add up to 100% due to rounding). The trends illustrated in the following table and graphs may not necessarily be indicative of future results. The discussion that follows the information should be read in conjunction with the Company’s consolidated financial statements.

 

   

Percentage of Total Revenue
Year Ended December 31,

   

Percentage

Increase (Decrease)

 
   

2016

   

2015

   

2014

   

2016 over

2015

   

2015 over

2014

 
                                         

Revenue

    100.0 %     100.0 %     100.0 %     6.9 %     3.5 %

Operating expenses:

                                       

Direct

    41.7       43.6       42.2       2.2       6.9  

Selling, general and administrative

    25.9       26.6       25.3       4.4       8.6  

Depreciation and amortization

    3.9       4.0       3.8       2.8       8.0  

Total operating expenses

    71.5       74.2       71.4       3.0       7.6  
                                         

Operating income

    28.5 %     25.8 %     28.6 %     18.0 %     (6.5% )

 

21

 

 

 

Year Ended December 31, 2016, Compared to Year Ended December 31, 2015

 

Revenue. Revenue in 2016 increased 6.9% to $109.4 million, compared to $102.3 million in 2015, which was driven primarily by a combination of continued gains in market share and vertical growth in our existing client base. Revenue from subscription-based agreements comprised 88.0% of the total revenue in 2016, compared to 86.6% of total revenue in 2015.

 

Direct expenses. Direct expenses increased 2.2% to $45.6 million in 2016, compared to $44.6 million in 2015. Variable expenses increased by $327,000 due to higher survey volumes and increased contracted survey costs, partially offset by decreased survey operations expenses due to a reduction in postage fees and changes in survey methodologies. Fixed expenses increased $641,000 as a result of higher salary and benefit costs in the client service area, increased travel expenses and increased software license amortization. Direct expenses decreased as a percentage of revenue to 41.7% in 2016 from 43.6% in 2015 as expenses increased by 2.2% while revenue for the same period increased by 6.9%.

 

Selling, general and administrative expenses. Selling, general and administrative expenses increased 4.4% to $28.4 million in 2016 compared to $27.2 million in 2015, primarily due to increased salary and benefits of $991,000 (mainly from increased incentives and share based compensation expense), increased marketing expenses of $510,000, higher annual incentive trip expenses of $348,000, Securities and Exchange Commission registration fees expensed in 2016 of $177,000, and increased professional development costs for associates of $172,000. These were partially offset by a reduction of $238,000 in repairs and maintenance on the Company’s headquarters building and the $657,000 write off of a purchase option in 2015 when the Company chose not to exercise the option and it expired. Selling, general, and administrative expenses decreased as a percentage of revenue to 25.9% in 2016, from 26.6% for the same period in 2015 as expenses increased by 4.4% while revenue increased by 6.9% during the same period.

 

Depreciation and amortization. Depreciation and amortization expenses increased 2.8% to $4.2 million in 2016 compared to $4.1 million in 2015 primarily due to increased depreciation and amortization from increased computer software investments and computer software license expense being included in depreciation and amortization in 2016, resulting from the adoption of Accounting Standards Update (“ASU”) 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. These increases were offset by decreased amortization as a result of the sale of the clinical workflow product of the former Predictive Analytics operating segment in 2015 and other intangibles becoming fully amortized. Depreciation and amortization expenses as a percentage of revenue decreased to 3.9% in 2016 from 4.0% during in 2015.

 

22

 

 

Other income (expense). Other income (expense) decreased to $159,000 in 2016 compared to $913,000 in 2015. This was primarily due to the $1.1 million gain on the sale of selected assets and liabilities related to the clinical workflow product of the former Predictive Analytics operating segment in 2015. In December 2016, an additional $223,000 was recorded as a gain on the sale due to receipt of funds placed in escrow at the time of the sale.

 

Provision for income taxes. Provision for income taxes was $10.8 million (34.6% effective tax rate) in 2016, compared to $9.8 million (35.6% effective tax rate) in 2015. The decrease in the effective tax rate was mainly due to the prospective adoption of ASU 2016-09, Compensation – Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which reduced tax expense by $460,000 in 2016. ASU 2016-09 requires excess tax benefits and tax deficiencies to be recorded in the income statement when share based compensation awards vest or are settled rather than to additional paid-in capital.


Year Ended December 31, 2015, Compared to Year Ended December 31, 2014

 

Revenue. Revenue in 2015 increased 3.5% to $102.3 million, compared to $98.8 million in 2014, which was driven primarily by a combination of continued gains in market share and vertical growth in our existing client base. Revenue from subscription-based agreements comprised 86.6% of the total revenue in 2015, compared to 82.3% of total revenue in 2014.

 

Direct expenses. Direct expenses increased 6.9% to $44.6 million in 2015, compared to $41.7 million in 2014. Variable expenses increased $1.1 million primarily from increased postage and printing of $989,000, and contracted survey-related costs of $ 416,000, partially offset by a reduction in labor costs of $334,000. Fixed expenses increased $1.8 million primarily due to increased salary and benefit costs from the Digital Assent acquisition in 2014 and staffing additions in the customer service area, and increased equipment lease costs from the acquisition. Direct expenses increased as a percentage of revenue to 43.6% in 2015 from 42.2% in 2014 primarily due to the staffing additions from the acquisition and growth in customer service support.

 

Selling, general and administrative expenses. Selling, general and administrative expenses increased 8.6% to $27.2 million in 2015, compared to $25.0 million in 2014, primarily due to increased salary and benefit costs of $1.1 million (which includes $581,000 of increased share-based compensation expense), the $657,000 write-off of the purchase option for a potential acquisition in 2015, increased contracted service costs of $328,000, increased maintenance and repairs expense of $278,000 (primarily due to repairs to the Company’s headquarters building), and higher software license and computer supplies fees of $247,000. These were partially offset by decreased recruiting and bad debt expenses. Selling, general, and administrative expenses increased as a percentage of revenue to 26.6% in 2015, from 25.3% in 2014, due to expense growth of 8.6% while revenue grew at 3.5%.

 

Depreciation and amortization. Depreciation and amortization expenses increased 8.0% to $4.1 million in 2015 compared to $3.8 million in 2014 due to increased customer relationship and technology intangible amortization from the acquisition in October 2014 and increased depreciation costs from computer software investments. Depreciation and amortization expenses as a percentage of revenue increased to 4.0% in 2015 from 3.8% during in 2014.

 

Other income (expense). Other income (expense) increased to $913,000 of other income in 2015 compared to ($204,000) of other expense in 2014. This was primarily due to the $1.1 million gain on the sale of selected assets and liabilities related to the clinical workflow product of the former Predictive Analytics operating segment.

 

Provision for income taxes. Provision for income taxes was $9.8 million (35.6% effective tax rate) in 2015, compared to $9.9 million (35.4% effective tax rate) in 2014. The effective tax rate for the twelve-month period ended December 31, 2015, is higher than the rate in the same period of 2014 primarily due to slightly higher projected state tax rates and less benefit from the foreign tax rate differential.

 

23

 

 

Inflation and Changing Prices

 

Inflation and changing prices have not had a material impact on revenue or net income in the last three years.

 

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.

 

As of December 31, 2016, our principal sources of liquidity included $33.0 million of cash and cash equivalents and up to $6.5 million of unused borrowings under our revolving credit note. The amount of unused borrowings actually available under the revolving credit note varies in accordance with the terms of the agreement. Of this cash, $11.7 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. The Company estimated at December 31, 2016, that an additional tax liability of $536,000 would become due if repatriation of undistributed earnings would occur.

 

Working Capital

 

The Company had a working capital surplus of $15.6 million and $10.9 million on December 31, 2016 and 2015, respectively.

 

The change was primarily due to decreases in dividends payable of $14.2 million and increases in trade accounts receivable of $1.1 million. This was partially offset by decreases in cash and cash equivalents of $9.1 million, increases in deferred revenue of $654,000 and increases in accrued expense of $363,000. Dividends payable and cash and cash equivalents changed mainly due to the payment of $18.4 million in dividends in 2016 that were declared in 2015. The payment and amount of future dividends are at the discretion of the Company’s Board of Directors. Trade accounts receivable increased due to the timing of billings and collections on new and renewal contracts. Accrued expenses changed due to the timing of vendor payments. The Company’s working capital is significantly impacted by its large deferred revenue balances which will vary based on the timing and frequency of billings on annual agreements. The deferred revenue balances as of December 31, 2016 and December 31, 2015, were $15.5 million and $14.8 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.

 

24

 

 

Cash Flow Analysis

 

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

 

   

For the Year Ended December 31,

 
   

2016

   

2015

   

2014

 
   

(In thousands)

 

Provided by operating activities

  $ 26,843     $ 21,886     $ 26,197  

Used in investing activities

    (3,750 )     (1,326 )     (5,723 )

Used in financing activities

    (32,502 )     (16,869 )     (1,730 )

Effect of exchange rate changes on cash

    285       (1,588 )     (794 )

Net (decrease) increase in cash and cash equivalents

    (9,124 )     2,103       17,950  

Cash and cash equivalents at end of period

  $ 33,021     $ 42,145     $ 40,042  

 

 

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, share-based compensation and related taxes, gain on sale from operating segment and the effect of working capital changes.

 

Net cash provided by operating activities was $26.8 million for the year ended December 31, 2016, which included net income of $20.5 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, reserve for uncertain tax positions, gain on sale from operating segment, loss on disposal of property and equipment and non-cash stock compensation totaling $6.8 million. Changes in working capital decreased cash flows from operating activities by $499,000, primarily due to the timing of payments on accounts payable and increases in prepaid expenses, accounts receivables, and unbilled revenue, which fluctuate due to the timing and frequency of billings on new and renewal contracts. These decreases to cash flows were partially offset by decreases income taxes recoverable, and timing of payments related to accrued expenses, wages, bonus and profit sharing and deferred revenue.


Net cash provided by operating activities was $21.9 million for the year ended December 31, 2015, which included net income of $17.6 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, reserve for uncertain tax positions, gain on sale from operating segment, write off of purchase option, tax benefit from exercise of stock options, and non-cash stock compensation totaling $3.8 million. Changes in working capital increased cash flows from operating activities by $472,000, primarily due to decreases in income taxes recoverable, and timing of payments related to accrued expenses, wages, bonus and profit sharing and deferred revenue. These increases were offset in part by decreases in accounts payable, and increases in accounts receivables and unbilled revenues which fluctuate due to the timing and frequency of billings on new and renewal contracts and increases in prepaid expenses.

 

Net cash provided by operating activities was $26.2 million for the year ended December 31, 2014, which included net income of $18.2 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, reserve for uncertain tax positions, loss on disposal of property and equipment, tax benefit from exercise of stock options, and non-cash stock compensation totaling $4.9 million. Changes in working capital increased 2014 cash flows from operating activities by $3.1 million, primarily due to decreases in trade accounts receivable and timing of billings on new or renewal contracts increasing cash flows provided from deferred revenue and unbilled revenue. The increase was partially offset by timing of payments on accrued expenses, wages, bonus and profit sharing and income taxes.

 

25

 

 

Cash Flows from Investing Activities

 

Net cash of $3.8 million was used for investing activities in the year ended December 31, 2016. Purchases of property and equipment totaled $4.0 million. The Company received $223,000 in cash from funds put in escrow at the time of the December 21, 2015 sale of selected assets and liabilities related to the clinical workflow product of the former Predictive Analytics operating segment.

 

Net cash of $1.3 million was used for investing activities in the year ended December 31, 2015. Purchases of property and equipment totaled $2.9 million. The Company received $1.6 million in cash for the December 21, 2015 sale of selected assets and liabilities related to the clinical workflow product of the former Predictive Analytics operating segment.

 

Net cash of $5.7 million was used for investing activities in the year ended December 31, 2014. Purchases of property and equipment totaled $2.5 million. The Company paid $2.6 million in cash for the October 2014 acquisition of Digital Assent and $657,000 for the option to purchase a partner company.

 

Cash Flows from Financing Activities

 

Net cash used in financing activities was $32.5 million in the year ended December 31, 2016. Cash was used to repay borrowings under the term note totaling $2.2 million and for capital lease obligations of $95,000. Cash was used to pay $28.6 million of dividends, purchase non-controlling interests in Connect totaling $2.0 million, and repurchase shares for payroll tax withholdings related to share-based compensation of $204,000. These were partially offset by the cash provided from the proceeds from the exercise of stock options of $548,000.

 

Net cash used in financing activities was $16.9 million in the year ended December 31, 2015. Cash was used to repay borrowings under the term note totaling $2.3 million and for capital lease obligations of $173,000. Cash was used to pay $10.1 million of dividends, purchase non-controlling interests in Connect totaling $2.8 million, purchase treasury stock totaling $1.7 million and repurchase shares for payroll tax withholdings related to share-based compensation of $92,000. These were partially offset by the cash provided from the excess tax benefit from share-based compensation of $240,000.

 

Net cash used in financing activities was $1.7 million in the year ended December 31, 2014. Proceeds from the exercise of stock options and the excess tax benefit of share-based compensation provided cash of $408,000 and $622,000, respectively, partially offset by repurchases of shares for payroll tax withholdings related to share-based compensation of $348,000. Cash was used to repay borrowings under the term note totaling $2.3 million and capital lease obligations of $156,000.

 

The effect of changes in foreign exchange rates increased (decreased) cash and cash equivalents by $285,000, ($1.6 million), and ($794,000) in the years ended December 31, 2016, 2015, and 2014, respectively.

 

Capital Expenditures

 

Capital expenditures for the year ended December 31, 2016 were $4.0 million. These expenditures consisted mainly of computer equipment and software. The Company expects similar capital expenditure purchases in 2017 consisting primarily of computer equipment and software and other equipment, to be funded through cash generated from operations.

 

Debt and Equity

 

The Company’s term note is payable in monthly installments of $212,468. Borrowings under the term note bear interest at an annual rate of 3.12%. The outstanding balance of the term note at December 31, 2016 was $3.5 million.

 

26

 

 

The Company also has a revolving credit note that was renewed in June 2016 to extend the term to June 30, 2017. The maximum aggregate amount available under the revolving credit note is $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 London Interbank Offered Rate (“LIBOR”) 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 December 31, 2016 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 December 31, 2016.

 

The term note and revolving credit note are secured by certain of the Company’s assets, including the Company’s land, building, accounts receivable and intangible assets. The term note and the 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 December 31, 2016, the Company was in compliance with the financial covenants.

 

The Company has capital leases for computer equipment, office equipment, printing and inserting equipment. The balance of the capital leases as of December 31, 2016 was $192,000.

 

 

Contractual Obligations

 

The Company had contractual obligations to make payments in the following amounts in the future as of December 31, 2016:

 

Contractual Obligations(1)

 

Total

Payments

   

Less than

One Year

   

One to

Three Years

   

Three to

Five Years

   

After

Five Years

 

(In thousands)

                                       

Operating leases

  $ 1,505     $ 603     $ 796     $ 106     $ --  

Capital leases

    209       96       81       32       --  

Uncertain tax positions(2)

    --       --       --       --       --  

Long-term debt

    3,625       2,762       863       --       --  

Total

  $ 5,339     $ 3,461     $ 1,740     $ 138     $ --  

 

  (1)

Amounts are inclusive of interest payments, where applicable.

  (2)    We have $467,000 in liabilities associated with uncertain tax positions. We are unable to reasonably estimate the expected cash settlement dates of these uncertain tax positions with the taxing authorities.

 

The Company generally does not make unconditional, non-cancelable purchase commitments. The Company enters into purchase orders in the normal course of business, but these purchase obligations do not exceed one year.

 

Shareholders’ equity increased by $8.6 million to $82.8 million in 2016, from $74.2 million in 2015. The increase was mainly due to net income of $20.5 million, changes in the cumulative translation adjustment of $369,000, share-based compensation of $1.9 million and $945,000 from the exercise of stock options. This was partially offset by dividends declared of $14.3 million, the acquisition of Customer-Connect LLC non-controlling interests of a net $252,000, and share repurchases of $601,000. The Customer-Connect LLC non-controlling interests net amounts consists of $2.0 million paid for the controlling interest, offset by the addition of a $1.7 million deferred tax asset from the purchase of these remaining interests, which resulted in an increase to additional paid-in capital.

 

Stock Repurchase Program

 

In February 2006, the Board of Directors of the Company authorized the repurchase of 2,250,000 shares of class A common stock and 375,000 shares of class B common stock (on a post-May 2013 Recapitalization basis) in the open market or in privately negotiated transactions. As of December 31, 2016, the remaining number of shares that could be purchased under this authorization was 280,491 shares of class A common stock and 69,491 shares of class B common stock.

 

27

 

 

Off-Balance Sheet Obligations

 

The Company has no significant off-balance sheet obligations other than the operating lease commitments disclosed in “Liquidity and Capital Resources.”

 

Recent Accounting Pronouncements

 

See Note 13 to the Company’s consolidated financial statements for a description of recently issued accounting pronouncements.


Item 7A.     Quantitative and Qualitative Disclosure About Market Risk

 

The Company’s primary market risk exposure is changes in foreign currency exchange rates and interest rates.

 

The Company’s Canadian subsidiary uses as its functional currency the local currency of the country in which it operates. It translates its assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. It translates its revenue and expenses at the average exchange rate during the period. The Company includes translation gains and losses in accumulated other comprehensive income (loss), a component of shareholders’ equity. Foreign currency translation gains (losses) were $369,000, ($2.2 million), and ($1.1 million) in 2016, 2015 and 2014, respectively. Gains and losses related to transactions denominated in a currency other than the functional currency of the countries in which the Company operates and short-term intercompany accounts are included in other income (expense) in the consolidated statements of income. A portion of our cash in our Canadian subsidiary is denominated in foreign currencies, where fluctuations in exchange rates will impact our cash balances in U.S. dollar terms. A sensitivity analysis assuming a hypothetical 10% change in the value of the U.S. dollar would impact our reported cash balance by approximately $1.6 million. We have not entered into any foreign currency hedging transactions. We do not purchase or hold any derivative financial instruments for the purpose of speculation or arbitrage.

 

We are exposed to interest rate risk with both our fixed-rate term debt and variable rate revolving line of credit facility. Interest rate changes for borrowings under our fixed-rate term debt would impact the fair value of such debt, but do not impact earnings or cash flow. At December 31, 2016, our fixed-rate term debt totaled $3.5 million. Based on a sensitivity analysis, a one percent change in market interest rates as of December 31, 2015, would not have a material effect on the estimated fair value of our fixed-rate debt outstanding at December 31, 2016.

 

Borrowings under our revolving credit note bear interest at a variable annual rate, with three rate options at the discretion of management. Borrowings under the revolving credit note may not exceed the lesser of a calculated borrowing base or $6.5 million. There were no borrowings outstanding under our revolving credit note at December 31, 2016, or at any time during 2016. A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to the average daily borrowings and the maximum borrowings available under the revolving credit note indicated that such a movement would not have a material impact on our consolidated financial position, results of operations or cash flows.

 

 
28

 

 

Item 8.     Financial Statements and Supplementary Data

 

Quarterly Financial Data (Unaudited)

 

The following table sets forth selected financial information for each of the eight quarters in the two-year period ended December 31, 2016. This unaudited information has been prepared by the Company on the same basis as the consolidated financial statements and includes all normal recurring adjustments necessary to present fairly this information when read in conjunction with the Company’s audited consolidated financial statements and the notes thereto.

 

   

(In thousands, except per share data)

 
   

Quarter Ended

 
   

Dec. 31,

2016

   

Sept 30,

2016

   

June 30,

2016

   

Mar. 31,

2016

   

Dec. 31,

2015

   

Sept 30,

2015

   

June 30,

2015

   

Mar. 31,

2015

 
                                                                 

Revenue

  $ 28,368     $ 27,032     $ 26,114     $ 27,870     $ 26,365     $ 25,244     $ 24,464     $ 26,270  

Direct expenses

    11,836       11,468       10,734       11,539       11,365       11,006       10,440       11,799  

Selling, general and administrative expenses

    6,619       7,139       7,270       7,357       6,294       6,620       6,636       7,627  

Depreciation and amortization

    1,079       1,086       1,092       968       1,000       1,070       1,024       1,015  

Operating income

    8,834       7,339       7,018       8,006       7,706       6,548       6,364       5,829  

Other income (expense)

    171       (30 )     18       --       1,062       (63 )     (39 )     (47 )

Provision for income taxes

    3,280       2,580       2,478       2,500       2,841       2,346       2,261       2,302  

Net income

  $ 5,725     $ 4,729     $ 4,558     $ 5,506     $ 5,927     $ 4,139     $ 4,064     $ 3,480  

Earnings per share of common stock:

                                                               

Basic earnings per share

                                                               

Class A

  $ 0.14     $ 0.11     $ 0.11     $ 0.13     $ 0.14     $ 0.10     $ 0.10     $ 0.08  

Class B

  $ 0.82     $ 0.67     $ 0.65     $ 0.79     $ 0.85     $ 0.59     $ 0.58     $ 0.50  

Dilutive earnings per share

                                                               

Class A

  $ 0.13     $ 0.11     $ 0.11     $ 0.13     $ 0.14     $ 0.10     $ 0.10     $ 0.08  

Class B

  $ 0.80     $ 0.66     $ 0.64     $ 0.77     $ 0.84     $ 0.59     $ 0.57     $ 0.49  

Weighted average shares outstanding – basic

                                                               

Class A

    20,717       20,716       20,711       20,710       20,656       20,726       20,790       20,792  

Class B

    3,511       3,511       3,508       3,489       3,478       3,478       3,478       3,478  

Weighted average shares outstanding - diluted

                                                               

Class A

    21,118       21,068       20,992       21,012       20,936       20,937       21,029       21,033  

Class B

    3,569       3,556       3,565       3,549       3,523       3,521       3,522       3,524  

 

 
29

 

 

Report of Independent Registered Public Accounting Firm

 

 

The Board of Directors and Shareholders
National Research Corporation:

 

We have audited the accompanying consolidated balance sheets of National Research Corporation and subsidiary as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule listed in Item 15(2) of this Form 10-K. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Research Corporation and subsidiary as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), National Research Corporation and subsidiary’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 3, 2017 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

 

 

 

/s/ KPMG LLP

 

Lincoln, Nebraska
March 3, 2017

 

 
30

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets
(In thousands, except share amounts)

 

   

2016

   

2015

 
Assets                

Current assets:

               

Cash and cash equivalents

  $ 33,021     $ 42,145  

Trade accounts receivable, less allowance for doubtful accounts of $169 and $173, respectively

    10,864       9,808  

Unbilled revenue

    1,546       1,435  

Prepaid expenses

    1,585       1,482  

Income taxes receivable

    14       157  

Other current assets

    35       34  

Total current assets

    47,065       55,061  
                 

Net property and equipment

    11,806       11,125  

Intangible assets, net

    3,124       3,778  

Goodwill

    57,861       57,792  

Other

    768       293  
                 

Total assets

  $ 120,624     $ 128,049  
                 

Liabilities and Shareholders’ Equity

               

Current liabilities:

               

Current portion of notes payable

  $ 2,683     $ 2,402  

Accounts payable

    765       614  

Accrued wages, bonus and profit sharing

    4,543       4,391  

Accrued expenses

    3,069       2,706  

Current portion of capital lease obligations

    82       74  

Income taxes payable

    662       701  

Dividends payable

    4,213       18,440  

Deferred revenue

    15,497       14,843  

Total current liabilities

    31,514       44,171  
                 

Notes payable, net of current portion

    857       3,337  

Deferred income taxes

    4,861       5,744  

Other long term liabilities

    586       575  

Total liabilities

    37,818       53,827  
                 

Shareholders’ equity:

               

Preferred stock, $0.01 par value, authorized 2,000,000 shares, none issued

    --       --  

Class A Common stock, $0.001 par value; authorized 60,000,000 shares, issued 25,656,760 in 2016 and 25,592,812 in 2015, outstanding 20,891,069 in 2016 and 20,848,168 in 2015

    26       26  

Class B Common stock, $0.001 par value; authorized 80,000,000 shares, issued 4,308,875 in 2016 and 4,271,413 in 2015, outstanding 3,539,931 in 2016 and 3,510,150 in 2015

    4       4  

Additional paid-in capital

    46,725       44,103  

Retained earnings

    71,507       65,313  

Accumulated other comprehensive (loss) income, foreign currency translation adjustment

    (2,626 )     (2,995 )

Treasury stock, at cost; 4,765,691 Class A shares, 768,944 Class B shares in 2016 and 4,744,644 Class A shares, 761,263 Class B shares in 2015

    (32,830 )     (32,229 )

Total shareholders’ equity

    82,806       74,222  
                 

Total liabilities and shareholders’ equity

  $ 120,624     $ 128,049  

 

See accompanying notes to consolidated financial statements.

 

 
31

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

Consolidated Statements of Income
(In thousands, except for per share amounts)

 

 

   

2016

   

2015

   

2014

 
                         

Revenue

  $ 109,384     $ 102,343     $ 98,837  
                         

Operating expenses:

                       

Direct

    45,577       44,610       41,719  

Selling, general and administrative

    28,385       27,177       25,018  

Depreciation and amortization

    4,225       4,109       3,804  

Total operating expenses

    78,187       75,896       70,541  
                         

Operating income

    31,197       26,447       28,296  
                         

Other income (expense):

                       

Interest income

    47       60       83  

Interest expense

    (190 )     (220 )     (305 )

Other, net

    302       1,073       18  
                         

Total other expense

    159       913       (204 )
                         

Income before income taxes

    31,356       27,360       28,092  
                         

Provision for income taxes

    10,838       9,750       9,936  
                         

Net income

  $ 20,518     $ 17,610     $ 18,156  
                         
Earnings per share of common stock:                        

Basic earnings per share:

                       

Class A

  $ 0.49     $ 0.42     $ 0.44  

Class B

  $ 2.93     $ 2.52     $ 2.62  
Diluted earnings per share:                        

Class A

  $ 0.48     $ 0.41     $ 0.43  

Class B

  $ 2.88     $ 2.49     $ 2.57  
                         

Weighted average shares and share equivalents outstanding

                       

Class A - basic

    20,713       20,741       20,764  

Class B - basic

    3,505       3,478       3,473  

Class A - diluted

    21,037       20,981       21,076  

Class B - diluted

    3,560       3,522       3,536  

 

See accompanying notes to consolidated financial statements.

 

32

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

Consolidated Statements of comprehensive income
(In thousands)

 

 

   

2016

   

2015

   

2014

 
                         

Net Income

  $ 20,518     $ 17,610     $ 18,156  
                         

Other comprehensive income (loss):

                       

Cumulative translation adjustment

  $ 369     $ (2,222 )   $ (1,075 )

Other comprehensive income (loss)

  $ 369     $ (2,222 )   $ (1,075 )
                         

Comprehensive Income

  $ 20,887     $ 15,388     $ 17,081  

 

See accompanying notes to consolidated financial statements.

 

 
33

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

Consolidated Statements of Shareholders’ Equity

(In thousands except share and per share amounts)

 

 

   

Common
Stock
A

   

Common
Stock
B

   

Additional
Paid-in
Capital

   

Retained
Earnings

   

Accumulated

Other
Comprehensive
Income
(Loss)

   

Treasury

Stock

   

Total

 

Balances at December 31, 2013

  $ 25     $ 4     $ 42,192     $ 58,042     $ 302     $ (28,810 )   $ 71,755  

Purchase of 65,131 shares of class A and 4,317 shares of class B treasury stock

    --       --       --       --       --       (1,248 )     (1,248 )

Issuance of 140,595 class A common shares and 23,432 class B shares for the exercise of stock options

    --       --       1,308       --       --       --       1,308  

Tax benefit from the exercise of options and restricted stock

    --       --       622       --       --       --       622  

Issuance of restricted common shares, net of forfeitures (50,038 class A and 8,340 class B)

    --       --       --       --       --       --       --  

Non-cash stock compensation expense

    --       --       742       --       --       --       742  

Dividends declared of $0.06 and $0.36 per A and B common share, respectively

    --       --       --       (2,512 )     --       --       (2,512 )

Other comprehensive loss, foreign currency translation adjustment

    --       --       --       --       (1,075 )     --       (1,075 )

Net income

    --       --       --       18,156       --       --       18,156  

Balances at December 31, 2014

  $ 25     $ 4     $ 44,864     $ 73,686     $ (773 )   $ (30,058 )   $ 87,748  

Purchase of 163,268 shares of class A and 4,239 shares of class B treasury stock

    --       --       --       --       --       (2,171 )     (2,171 )

Issuance of 43,983 class A common shares and 7,330 class B shares for the exercise of stock options

    --       --       406       --       --       --       406  

Tax benefit from the exercise of options and restricted stock

    --       --       240       --       --       --       240  

Issuance of restricted common shares, net of forfeitures (73,168 class A and 12,194 class B)

    1       --       (1 )     --       --       --       --  

Non-cash stock compensation expense

    --       --       1,383       --       --       --       1,383  

Dividends declared of $0.62 and $3.72 per A and B common share, respectively

    --       --       --       (25,983 )     --       --       (25,983 )

Acquisition of non-controlling interest

    --       --       (2,789 )     --       --       --       (2,789 )

Other comprehensive loss, foreign currency translation adjustment

    --       --       --       --       (2,222 )     --       (2,222 )

Net income

    --       --       --       17,610       --       --       17,610  

Balances at December 31, 2015

  $ 26     $ 4     $ 44,103     $ 65,313     $ (2,995 )   $ (32,229 )   $ 74,222  

Purchase of 21,047 shares of class A and 7,681 shares of class B treasury stock

    --       --       --       --       --       (601 )     (601 )

Issuance of 52,383 class A common shares and 35,534 class B shares for the exercise of stock options

    --       --       945       --       --       --       945  

Issuance of restricted common shares, net of forfeitures (11,565 class A and 1,928 class B)

    --       --       --       --       --       --       --  

Non-cash stock compensation expense

    --       --       1,929       --       --       --       1,929  

Dividends declared of $0.34 and $2.04 per A and B common share, respectively

    --       --       --       (14,324 )     --       --       (14,324 )

Acquisition of non-controlling interest

    --       --       (252 )     --       --       --       (252 )

Other comprehensive income, foreign currency translation adjustment

    --       --       --       --       369       --       369  

Net income

    --       --       --       20,518       --       --       20,518  

Balances at December 31, 2016

  $ 26     $ 4     $ 46,725     $ 71,507     $ (2,626 )   $ (32,830 )   $ 82,806  

 

See accompanying notes to consolidated financial statements.

 

34

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows
(In thousands)

 

   

2016

   

2015

   

2014

 

Cash flows from operating activities:

                       

Net income

  $ 20,518     $ 17,610     $ 18,156  

Adjustments to reconcile net income to net cash provided by operating activities:

                       

Depreciation and amortization

    4,225       4,109       3,804  

Deferred income taxes

    865       (1,361 )     107  

Reserve for uncertain tax positions

    6       93       182  

Loss on disposal of property and equipment

    22       -       2  

Gain on sale from operating segment

    (223 )     (1,102 )     -  

Write-off of purchase option

    --       657       -  

Tax benefit from exercise of stock options

    --       25       93  

Non-cash share-based compensation expense

    1,929       1,383       742  

Change in assets and liabilities, net of effect of acquisition and disposal:

                       

Trade accounts receivable

    (1,044 )     (1,777 )     2,914  

Unbilled revenue

    (93 )     (390 )     66  

Prepaid expenses and other current assets

    (535 )     207       (2 )

Accounts payable

    (15 )     (224 )     163  

Accrued expenses, wages, bonus and profit sharing

    440       755       (367 )

Income taxes receivable and payable

    105       1,504       (715 )

Deferred revenue

    643       397       1,052  

Net cash provided by operating activities

    26,843       21,886       26,197  
                         

Cash flows from investing activities:

                       

Purchases of property and equipment

    (3,973 )     (2,939 )     (2,492 )

Option purchase

    --       --       (657 )

Acquisition, net of cash acquired

    --       --       (2,574 )

Net proceeds from sale of operating segment

    223       1,613       --  

Net cash used in investing activities

    (3,750 )     (1,326 )     (5,723 )
                         

Cash flows from financing activities:

                       

Payments on notes payable

    (2,199 )     (2,328 )     (2,256 )

Payments on capital lease obligations

    (95 )     (173 )     (156 )

Cash paid for non-controlling interest

    (2,000 )     (2,789 )     --  

Proceeds from exercise of stock options

    548       -       408  

Excess tax benefit from share-based compensation

    -       240       622  

Repurchase of shares for payroll tax withholdings related to share-based compensation

    (204 )     (92 )     (348 )

Purchase of Treasury Stock

    --       (1,673 )     --  

Payment of dividends on common stock

    (28,552 )     (10,054 )     --  

Net cash used in financing activities

    (32,502 )     (16,869 )     (1,730 )
                         

Effect of exchange rate changes on cash

    285       (1,588 )     (794 )

Net (decrease) increase in cash and cash equivalents

    (9,124 )     2,103       17,950  
                         

Cash and cash equivalents at beginning of period

    42,145       40,042       22,092  
                         

Cash and cash equivalents at end of period

  $ 33,021     $ 42,145     $ 40,042  
                         

Supplemental disclosure of cash paid for:

                       

Interest expense, net of $10, $14, and $10 capitalized, respectively

  $ 192     $ 207     $ 284  

Income taxes

  $ 9,963     $ 9,377     $ 9,874  

 

Supplemental disclosures of non-cash investing and financing activities:

Capital lease obligations for property and equipment originating during the years ended December 31, 2016, 2015 and 2014 was $109, $32, and $248, respectively.

 

In connection with the Company’s equity incentive plans, certain optionees tendered to the Company previously owned shares to pay for the option strike price. The total non-cash stock options exercised was $397, $406 and $900 for the years ended December 31, 2016, 2015, and 2014, respectively.

 

See accompanying notes to consolidated financial statements.

 

35

 

 

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements

 

 

 

(1)       Summary of Significant Accounting Policies

 

Description of Business and Basis of Presentation

 

National Research Corporation, doing business as NRC Health (“NRC Health,” the “Company,” “we,” “our,” “us” or similar terms), is a leading provider of analytics and insights that facilitate measurement and improvement of the patient and employee experience while also increasing patient engagement and customer loyalty for healthcare providers, payers and other healthcare organizations in the United States and Canada. The Company’s solutions enable its clients to understand the voice of the customer with greater clarity, immediacy and depth. The Company’s ten largest clients accounted for 17%, 15%, and 16% of the Company’s total revenue in 2016, 2015, and 2014, respectively.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, National Research Corporation Canada. Prior to becoming a wholly-owned subsidiary in March 2016, the accounts of Customer-Connect LLC (“Connect”), then a variable interest entity for which NRC Health was deemed the primary beneficiary, were included in the consolidated financial statements of the Company. On June 30, 2016, Customer-Connect LLC was dissolved. All significant intercompany transactions and balances have been eliminated.


Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

 

Translation of Foreign Currencies

 

The Company’s Canadian subsidiary uses as its functional currency the local currency of the country in which it operates. It translates its assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. It translates its revenue and expenses at the average exchange rate during the period. The Company includes translation gains and losses in accumulated other comprehensive income (loss), a component of shareholders’ equity. Gains and losses related to transactions denominated in a currency other than the functional currency of the country in which the Company operates and short-term intercompany accounts are included in other income (expense) in the consolidated statements of income. Since the undistributed earnings of the Company’s foreign subsidiary are considered to be indefinitely reinvested, the components of accumulated other comprehensive income (loss) have not been tax effected.

 

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Revenue Recognition

 

The Company derives a majority of its operating revenue from its annually renewable services, which include performance measurement and improvement services, healthcare analytics and governance education services. The Company provides these services to its clients under annual client service contracts, although such contracts are generally cancelable on short or no notice without penalty. Services are provided under subscription-based service agreements. The Company recognizes subscription-based service revenue over the period of time the service is provided. Generally, the subscription periods are for twelve months and revenue is recognized equally over the subscription period.

 

Certain contracts are fixed-fee arrangements with a portion of the project fee billed in advance and the remainder billed periodically over the duration of the project. Revenue for services provided under these contracts are recognized under the proportional performance method. Under the proportional performance method, the Company recognizes revenue based on output measures or key milestones such as survey set-up, survey mailings, survey returns and reporting. The Company measures its progress based on the level of completion of these output measures and recognizes revenue accordingly. Management judgments and estimates must be made and used in connection with revenue recognized using the proportional performance method. If management made different judgments and estimates, then the amount and timing of revenue for any period could differ materially from the reported revenue.

 

The Company’s revenue arrangements with a client may include combinations of NRC Health’s Experience, Transparency, Governance, and Market Insights solutions which may be executed at the same time, or within close proximity of one another (referred to as a multiple-element arrangement). Each element of a multiple-element arrangement is accounted for as a separate unit of accounting provided each delivered element is sold separately by the Company or another vendor; and for an arrangement that includes a general right of return relative to the undelivered elements, delivery or performance of the undelivered services are considered probable and substantially in the control of the Company. The Company’s arrangements generally do not include a general right of return related to the delivered services. If these criteria are not met, the arrangement is accounted for as a single unit of accounting with revenue generally recognized equally over the subscription period or recognized under the proportional performance method.


Revenue is allocated to each separate unit of accounting based on relative selling price using a selling price hierarchy: vendor-specific objective evidence (“VSOE”), if available, third-party evidence (“TPE”) if VSOE is not available, or estimated selling price if VSOE nor TPE is available. VSOE is established based on the services normal selling price and discounts for the specific services when sold separately. TPE is established by evaluating similar competitor services in standalone arrangements. If neither exists for a deliverable, the best estimate of the selling price (“ESP”) is used for that deliverable based on list price, representing a component of management’s market strategy, and an analysis of historical prices for bundled and standalone arrangements. Revenue allocated to an element is limited to revenue that is not subject to refund or otherwise represents contingent revenue. VSOE, TPE and ESP are periodically adjusted to reflect current market conditions. These adjustments are not expected to differ significantly from historical results.

 

Business Combinations

 

The Company uses the acquisition method of accounting for acquired businesses. Under the acquisition method, the financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is required in estimating the fair value of assets acquired, especially intangible assets. As a result, in the case of significant acquisitions we typically engage third-party valuation specialists in estimating fair values of tangible and intangible assets. The fair value estimates are based on available historical information and on expectations and assumptions about the future, considering the perspective of marketplace participants.

 

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Segment Information

 

In 2016, the Company had six operating segments comprised of Experience, The Governance Institute, Market Insights, Transparency, National Research Corporation Canada and Connect, which offer a portfolio of solutions that address specific needs around market insight, experience, transparency and governance for healthcare providers, payers and other healthcare organizations. The Company’s six operating segments 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.  As discussed in Note 3, on December 21, 2015, selected assets and liabilities were sold from the former Predictive Analytics operating segment, reducing the number of operating segments from seven to six in December 2015.

 

Trade Accounts Receivable

 

Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on the Company’s historical write-off experience and current economic conditions. The Company reviews the allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

Property and Equipment

 

Property and equipment is stated at cost. Major expenditures to purchase property or to substantially increase useful lives of property are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or otherwise disposed of, their costs and related accumulated depreciation are removed from the accounts and resulting gains or losses are included in income.

 

For costs of software developed for internal use, the Company expenses computer software costs as incurred in the preliminary project stage, which involves the conceptual formulation, evaluation and selection of technology alternatives. Costs incurred related to the design, coding, installation and testing of software during the application project stage are capitalized. Costs for training and application maintenance are expensed as incurred. The Company has capitalized approximately $2.5 million and $2.0 million of internal and external costs incurred for the development of internal-use software for the years ended December 31, 2016 and 2015, respectively, with such costs classified as property and equipment.

 

The Company provides for depreciation and amortization of property and equipment using annual rates which are sufficient to amortize the cost of depreciable assets over their estimated useful lives. The Company uses the straight-line method of depreciation and amortization over estimated useful lives of three to ten years for furniture and equipment, three to five years for computer equipment, one to five years for capitalized software, and seven to forty years for the Company’s office building and related improvements.

 

Leases are categorized as operating or capital at the inception of the lease. Assets under capital lease obligations are reported at the lower of fair value or the present value of the aggregate future minimum lease payments at the beginning of the lease term. The Company depreciates capital lease assets without transfer-of-ownership or bargain-purchase-options using the straight-line method over the lease terms, excluding any lease renewals, unless the lease renewals are reasonably assured. Capital lease assets with transfer-of-ownership or bargain-purchase-options are depreciated using the straight-line method over the assets’ estimated useful lives.

 

Impairment of Long-Lived Assets and Amortizing Intangible Assets

 

Long-lived assets, such as property and equipment and purchased intangible assets subject to depreciation or amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. No impairments were recorded during the years ended December 31, 2016, 2015, or 2014.

 

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Among others, management believes the following circumstances are important indicators of potential impairment of such assets and as a result may trigger an impairment review:

 

 

Significant underperformance in comparison to historical or projected operating results;

 

 

Significant changes in the manner or use of acquired assets or the Company’s overall strategy;

 

 

Significant negative trends in the Company’s industry or the overall economy;

 

 

A significant decline in the market price for the Company’s common stock for a sustained period; and

 

 

The Company’s market capitalization falling below the book value of the Company’s net assets.

 

Goodwill and Intangible Assets

 

Intangible assets include customer relationships, trade names, technology, non-compete agreements and goodwill. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company reviews intangible assets with indefinite lives for impairment annually as of October 1 and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

 

When performing the impairment assessment, the Company will first assess qualitative factors to determine whether it is necessary to recalculate the fair value of the intangible assets with indefinite lives. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of the indefinite-lived intangibles is less than their carrying amount, the Company calculates the fair value using a market approach. If the carrying value of intangible assets with indefinite lives exceeds their fair value, then the intangible assets are written-down to their fair values. The Company did not recognize any impairments related to indefinite-lived intangibles during 2016, 2015 or 2014.

 

Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. All of the Company’s goodwill is allocated to its reporting units, which are the same as its operating segments. Goodwill is reviewed for impairment at least annually, as of October 1, and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable.

 

The Company reviews for goodwill impairment by first assessing qualitative factors to determine whether any impairment may exist. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, a quantitative two-step test is required; otherwise, no further testing is required. Under the first step of the quantitative test, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value, step two is not performed. If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the Company performs step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the fair value of that goodwill. The fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and the residual fair value after this allocation is the fair value of the reporting unit goodwill.

 

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In instances when a step two is required, the fair value of the reporting unit is determined using an income approach and comparable market multiples. Under the income approach, there are a number of inputs used to calculate the fair value using a discounted cash flow model, including operating results, business plans, projected cash flows and a discount rate. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment. Discount rates are determined by using a weighted average cost of capital, which considers market and industry data. Management develops growth rates and cash flow projections for each reporting unit considering industry and Company-specific historical and projected information. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant weighted average cost of capital and low long-term growth rates. Under the market approach, the Company considers its market capitalization, comparisons to other public companies’ data, and recent transactions of similar businesses within the Company’s industry.

 

The Company performed a qualitative analysis as of October 1, 2016 which did not indicate that it was more likely than not that the carrying values of the reporting units exceeded fair value. No impairments were recorded during the years ended December 31, 2016, 2015 or 2014.

 

Income Taxes

 

The Company uses the asset and liability method of accounting for income taxes. Under that method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis using enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances, if any, are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company uses the deferral method of accounting for its investment tax credits related to state tax incentives. During the years ended December 31, 2016, 2015 and 2014, the Company recorded income tax benefits relating to these tax credits of $77,000, $156,000, and $224,000, respectively.

 

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

 

Share-Based Compensation

 

The compensation expense on share-based payments 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.

 

Amounts recognized in the financial statements with respect to these plans:

 

   

2016

   

2015

   

2014

 
   

(In thousands)

 

Amounts charged against income, before income tax benefit

  $ 1,929     $ 1,383     $ 742  

Amount of related income tax benefit

    (704 )     (505 )     (269 )

Total impact to net income

  $ 1,225     $ 878     $ 473  

 


Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents were $32.7 million and $39.8 million as of December 31, 2016, and 2015, respectively, consisting primarily of money market accounts and funds invested in commercial paper. At certain times, cash equivalent balances may exceed federally insured limits.

 

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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.

 

Commercial paper included in cash equivalents is valued at amortized cost, which approximates fair value due to its short-term nature. These are included as a Level 2 measurement in the table below.


The following details the Company’s financial assets within the fair value hierarchy at December 31, 2015 and 2014:

 

    Level 1     Level 2     Level 3     Total  
    (In thousands)  
As of December 31, 2016                                

Money Market Funds

  $ 11,200     $ --     $ --     $ 11,200  
Commercial Paper     --       21,450       --       21,450  
Total Cash Equivalents   $ 11,200     $ 21,450     $ --     $ 32,650  
As of December 31, 2015                                

Money Market Funds

  $ 8,954     $ --     $ --     $ 8,954  
Commercial Paper     --       30,872       --       30,872  
Total Cash Equivalents   $ 8,954     $