The following table sets forth selected financial information for each of the eight quarters in the two-year period ended December 31,
2017. 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.
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.
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.
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
, excluding subscription-based service agreements, 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). When the periods or patterns of revenue recognition differ, 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.
When a contract contains multiple elements, 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 the Company typically engages
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.
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. The following table provides the activity in the allowance for doubtful accounts for the years ended
December 31, 2017,
2016
and
2015:
|
|
Balance at
Beginning
of Year
|
|
|
Bad Debt
Expense
|
|
|
Write-offs
Net of
Recoveries
|
|
|
Balance
at End
of Year
|
|
|
|
(In thousands)
|
|
Year Ended December 31, 2015
|
|
$
|
206
|
|
|
$
|
111
|
|
|
$
|
144
|
|
|
$
|
173
|
|
Year Ended December 31, 2016
|
|
$
|
173
|
|
|
$
|
218
|
|
|
$
|
222
|
|
|
$
|
169
|
|
Year Ended December 31, 2017
|
|
$
|
169
|
|
|
$
|
249
|
|
|
$
|
218
|
|
|
$
|
200
|
|
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.
The Company capitalizes certain costs incurred in connection with obtaining or developing internal-use software, including payroll and payroll-related costs for employees who are directly associated with the internal-use software projects and external direct costs of materials and services. Capitalization of such costs ceases when the project is substantially complete and ready for its intended purpose. Costs incurred during the preliminary project and post-implementation stages, as well as software maintenance and training costs are expensed as incurred.
The Company capitalized approximately
$3.0
million and
$2.5
million of costs incurred for the development of internal-use software for the years ended
December 31, 2017
and
2016,
respectively.
T
he 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-L
ived 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, 2017,
2016,
or
2015.
Among others, m
anagement 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 or income 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
2017,
2016
or
2015.
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.
In
January 2017,
the FASB issued A
ccounting Standards Update (“ASU”)
2017
-
04,
Intangibles—Goodwill and Other
(Topic
350
),
Simplifying the Test for Goodwill Impairment
(“ASU
2017
-
04”
). In connection with the
October 1, 2017
annual impairment analysis, the Company early adopted ASU
2017
-
04,
which eliminates the need to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment (Step
2
). The new guidance
may
result in more or less impairment than could previously be recognized. The adoption of this guidance did
not
impact the Company's results of operations or financial position since only a qualitative analysis was performed as part of the
October 1, 2017
annual impairment analysis.
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 analysis will be performed, and 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, then goodwill is written down by this difference. The Company performed a qualitative analysis as of
October 1, 2017
and determined the fair value of each reporting unit likely significantly exceeded its carrying value.
No
impairments were recorded during the years ended
December 31, 2017,
2016
or
2015.
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 bas
is 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, 2017,
2016
and
2015,
the Company recorded income tax benefits relating to these tax credits of
$4,000,
$77,000,
and
$156,000,
respectively.
T
he 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. The Company prospectively elected ASU
2016
-
09,
Compensation – Stock Compensation (Topic
718
) Improvements to Employee Share-Based Payment Accounting
(“ASU
2016
-
09”
) in
2016.
As a result, the tax benefit from stock options exercised was recognized as a reduction to our provision for income taxes for the years ended
December 31, 2017
and
2016
rather than as an increase to additional paid-in capital for the year ended
December 31, 2015
prior to adoption.
Amounts recognized in the financial statements with respect to these plans:
|
|
20
17
|
|
|
20
16
|
|
|
20
15
|
|
|
|
(In thousands)
|
|
Amounts charged against income, before income tax benefit
|
|
$
|
1,845
|
|
|
$
|
1,929
|
|
|
$
|
1,383
|
|
Amount of related income tax benefit
|
|
|
(2,310
|
)
|
|
|
(1,164
|
)
|
|
|
(505
|
)
|
Net (benefit) expense
to net income
|
|
$
|
(465
|
)
|
|
$
|
765
|
|
|
$
|
878
|
|
Cash and Cash Equivalents
T
he Company considers all highly liquid investments with original maturities of
three
months or less to be cash equivalents. Cash equivalents were
$34.5
million and
$32.7
million as of
December 31, 2017,
and
2016,
respectively, consisting primarily of money market accounts, Eurodollar deposits and funds invested in commercial paper. At certain times, cash equivalent balances
may
exceed federally insured limits.
Reclassifications
Reclassifications
of
$191,000
have been made from noncurrent deferred income taxes to other noncurrent liabilities in the
2016
consolidated balance sheet to present the unrecognized tax benefits related to state taxes gross of federal tax benefits, consistent with the
2017
financial statement presentation. There was
no
impact on the previously reported net income and earnings per share.
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
and Eurodollar deposits are included in cash equivalents and are valued at amortized cost, which approximates fair value due to its short-term nature. Eurodollar deposits are United States dollars deposited in a foreign bank branch of a United States bank and have daily liquidity. Both of 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, 2017
and
2016:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(In thousands)
|
|
As of December 31, 201
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
13,971
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
13,971
|
|
Commercial Paper
|
|
|
--
|
|
|
|
10,490
|
|
|
|
--
|
|
|
|
10,490
|
|
Eurodollar Deposits
|
|
|
--
|
|
|
|
10,017
|
|
|
|
--
|
|
|
|
10,017
|
|
Total
Cash Equivalents
|
|
$
|
13,971
|
|
|
$
|
20,507
|
|
|
$
|
--
|
|
|
$
|
34,478
|
|
As of December 31, 201
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
11,200
|
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
11,200
|
|
Commercial Paper
|
|
|
--
|
|
|
|
21,450
|
|
|
|
--
|
|
|
|
21,450
|
|
Total
Cash Equivalents
|
|
$
|
11,200
|
|
|
$
|
21,450
|
|
|
$
|
--
|
|
|
$
|
32,650
|
|
There were
no
transfers between levels during the years ended
December 31,
201
7
and
2016.
The Company's long-term
debt described in Note
8
is recorded at historical cost. The fair value of long-term debt is classified in Level
2
of the fair value hierarchy and was estimated based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit.
The following are the carrying a
mount and estimated fair values of long-term debt:
|
|
December 31,
2017
|
|
|
December 31, 201
6
|
|
|
|
(In thousands)
|
|
Total carrying amount of long-term debt
|
|
$
|
1,067
|
|
|
$
|
3,540
|
|
Estimated fair value of long-term debt
|
|
$
|
1,066
|
|
|
$
|
3,533
|
|
The carrying amounts of accounts receivable, accounts payable, and accrued expenses approximate their fair value. All non-financial assets that are
not
recognized or disclosed at fair value in the financial statements on a recurring basis, which includes
property and equipment, goodwill, intangibles and cost method investments, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). As of
December 31, 2017
and
2016,
there was
no
indication of impairment related to these assets.
C
ontingencies
From time to time, the Company is involved in certain claims and litigation arising in the normal course of business. Management assesses the probability of loss for such contingencies and recognizes a liability when a loss is probable and estimable.
Since the Septembe
r
2017
announcement of the original proposed recapitalization plan (see Note
13
),
three
purported class action and/or derivative complaints have been filed in state or federal courts by
three
individuals claiming to be shareholders of the Company. All of the complaints name as defendants the Company and the individual directors of the Company. Two of these lawsuits were filed in the United States District Court for the District of Nebraska— a putative class action lawsuit captioned
Gennaro v. National Research Corporation, et al.
, and a putative class and derivative action lawsuit captioned
Gerson v. Hays, et al.
,. These lawsuits were consolidated by order of the federal court. A
third
lawsuit was filed the Circuit Court for Milwaukee County, Wisconsin—a putative class action lawsuit captioned
Apfel
v.
Hays, et al
. The allegations in all of the lawsuits are very similar. The plaintiffs allege, among other things, that the defendants breached their fiduciary duties in connection with the allegedly unfair proposed transaction, at an allegedly unfair price, conducted in an allegedly unfair and conflicted process and in alleged violation of Wisconsin law and the Company’s Articles of Incorporation. One of the lawsuits also alleges the proposed transactions is a voidable “conflict of interest transaction” under Wisconsin statutes. The plaintiffs in these lawsuits seek, among other things, an injunction enjoining the defendants from consummating the original proposed recapitalization plan, damages, equitable relief and an award of attorneys’ fees and costs of litigation. The Company believes that the allegations of the complaints are without merit and intends to defend these lawsuits vigorously. Despite the changes to the original proposed recapitalization plan that culminated in the
December 13, 2017
announcement of a revised proposed recapitalization plan, the Company expects that these shareholders or other shareholders might assert similar claims regarding the proposed recapitalization plan. The Company will defend any such lawsuits vigorously.
As of
December 31, 2017,
no
losses have been accrued as the Company does
not
believe the losses are probable or estimable.
Earnings Per Share
Net income per share of class A common stock and class B common stock is computed using the
two
-class method. Basic net income per share is computed by allocating undistributed earnings to common shares and using the weighted-average number of common shares outstanding during the period.
Diluted net income per share is computed using the weighted-average number of common shares and, if dilutive, the potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and vesting of restricted stock. The dilutive effect of outstanding stock options is reflected in diluted earnings per share by application of the treasury stock method.
The liquidation rights and the rights upon the consummation of an extraordinary transaction are the same for the holders of class A common stock and class B common stock. Other than share distributions and liquidation rights, the amount of any dividend or other distribution payable on each share of class A common stock will be equal to
one
-
sixth
(
1/6
th
) of the amount of any such dividend or other distribution payable on each share of class B common stock. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the class A and class B common stock as if the earnings for the year had been distributed.
At
December 31,
20
16,
and
2015,
the Company had
156,610
and
487,639
options of class A shares and
49,262,
and
58,429
options of class B shares, respectively, which have been excluded from the diluted net income per share computation because the exercise price exceeds the fair market value. At
December 31, 2017,
2016,
and
2015
an additional
104,647,
390,300,
and
68,779
options of class A shares and
1,858,
34,178,
and
1,101
options of class B shares, respectively were excluded as their inclusion would be anti-dilutive.
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
|
|
(In thousands, except per share data)
|
|
Numerato
r for net income per share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,388
|
|
|
$
|
11,555
|
|
|
$
|
10,178
|
|
|
$
|
10,341
|
|
|
$
|
8,759
|
|
|
$
|
8,851
|
|
Allocation of distributed and undistributed income to unvested restricted stock shareholders
|
|
|
(88
|
)
|
|
|
(87
|
)
|
|
|
(88
|
)
|
|
|
(88
|
)
|
|
|
(76
|
)
|
|
|
(77
|
)
|
Net income attributable to common shareholders
|
|
$
|
11,300
|
|
|
$
|
11,468
|
|
|
$
|
10,090
|
|
|
$
|
10,253
|
|
|
$
|
8,683
|
|
|
$
|
8,774
|
|
Denominator for net income per
share - basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
20,770
|
|
|
|
3,514
|
|
|
|
20,713
|
|
|
|
3,505
|
|
|
|
20,741
|
|
|
|
3,478
|
|
Net income per share - basic
|
|
$
|
0.54
|
|
|
$
|
3.26
|
|
|
$
|
0.49
|
|
|
$
|
2.93
|
|
|
$
|
0.42
|
|
|
$
|
2.52
|
|
Numerator for net income per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders for
basic computation
|
|
$
|
11,300
|
|
|
$
|
11,468
|
|
|
$
|
10,090
|
|
|
$
|
10,253
|
|
|
$
|
8,683
|
|
|
$
|
8,774
|
|
Denominator for net income per share - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
s
hares outstanding - basic
|
|
|
20,770
|
|
|
|
3,514
|
|
|
|
20,713
|
|
|
|
3,505
|
|
|
|
20,741
|
|
|
|
3,478
|
|
Weighted average effect of dilutive securities
– stock options:
|
|
|
857
|
|
|
|
89
|
|
|
|
324
|
|
|
|
55
|
|
|
|
240
|
|
|
|
44
|
|
Denominator for diluted earnings per share
– adjusted weighted average shares
|
|
|
21,627
|
|
|
|
3,603
|
|
|
|
21,037
|
|
|
|
3,560
|
|
|
|
20,981
|
|
|
|
3,522
|
|
Net income per share - diluted
|
|
$
|
0.52
|
|
|
$
|
3.18
|
|
|
$
|
0.48
|
|
|
$
|
2.88
|
|
|
$
|
0.41
|
|
|
$
|
2.49
|
|
Recent Accounting Pronouncements
Not
Yet Adopted
In
May 2014,
the FASB issued ASU
2014
-
09,
Revenue from Contracts with Customers (Topic
606
)
(“ASU
2014
-
09”
). ASU
2014
-
09
requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU
2014
-
09
will replace most existing revenue recognition guidance in accounting principles generally accepted in the United States when it becomes effective. The standard is effective for annual and interim reporting periods in fiscal years beginning after
December 15, 2017.
An entity
may
choose to adopt ASU
2014
-
09
either retrospectively or through a cumulative effect adjustment as of the start of the
first
period for which it applies the standard. The Company has completed system changes and is analyzing the resulting impact that this new guidance will have on its consolidated financial statements. The Company will adopt this new guidance using the modified retrospective approach beginning
January 1, 2018
by recording a cumulative effect adjustment. The Company expects the most significant change to result from deferring direct and incremental costs of obtaining a contract, consisting of commissions and incentives, and recognizing the expense over the estimated life of the client contract, including renewal periods, rather than expensing as incurred, which is the Company’s current practice. The Company expects adjustments to retained earnings of
no
more than
$2.7
million, net of related tax effects, upon adoption of deferring and amortizing direct and incremental contract costs. The Company also expects to record other immaterial adjustments, related to performance obligation determinations and estimating variable contingent consideration for certain contracts which were previously only recognized once the contingency was resolved and the services were performed. These amounts are only estimates and involve significant judgements by management including estimating the lives of its contracts, the value of performance deliverables and the expected amount to be earned from the satisfaction of those deliverables. The Company will finalize its calculation of the financial impact of the adoption of ASU
2014
-
09
in the
first
quarter of
2018.
ASU
2014
-
09
also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
In
January 2016,
the FASB issued ASU
2016
-
01,
Financial Instruments
—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU
2016
-
01
changes certain recognition, measurement, presentation and disclosure aspects related to financial instruments. ASU
2016
-
01
is effective for financial statements issued for fiscal years beginning after
December 15, 2017,
and interim periods within those fiscal years. Early adoption is
not
permitted. The Company believes its adoption will
not
significantly impact the Company’s results of operations and financial position.
In
February 2016,
the FASB issued ASU
2016
-
02,
Leases (Topic
842
). This ASU requires lessees to recognize a lease liability and a right-to-use asset for all leases, including operating leases, with a term greater than
twelve
months on its balance sheet. This ASU is effective in fiscal years beginning after
December 15, 2018,
with early adoption permitted, and requires a modified retrospective transition method. As of
December 31, 2017,
the Company had approximately
$3.0
million of operating lease commitments which would be recorded on the balance sheet under the new guidance. However, the Company is currently in the process of further evaluating the impact that this new guidance will have on its consolidated financial statements and does
not
plan to elect early adoption.
In
June 2016,
the FASB issued ASU
2016
-
13,
Financial Instruments
– Credit Losses (Topic
326
): Measurement of Credit Losses on Financial Instruments. This ASU will require the measurement of all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The guidance is effective for annual reporting periods beginning after
December 15, 2019
and interim periods within those fiscal years. The Company believes its adoption will
not
significantly impact the Company’s results of operations and financial position.
In
August 2016,
the FASB issued ASU
2016
-
15,
Statement of Cash Flows (Topic
230
) Classification of Certain Cash Receipts and Cash Payments which eliminates the diversity in practice related to
eight
cash flow classification issues.
This ASU is effective for the Company on
January 1, 2018
with early adoption permitted. The Company will adopt this ASU on
January 1, 2018
and believes it will
not
impact the Company’s results of operations and financial position.
In
October 2016,
the FASB issued ASU
2016
-
16,
Intra-Entity Transfers of Asset Other Than Inventory (“ASU
2016
-
16”
), which requires entities to recognize the tax consequences of intercompany asset transfers other than inventory transfers in the period in which the transfer takes place. ASU
2016
-
16
is effective for fiscal years and interim periods within fiscal years beginning after
December 15, 2017.
ASU
2016
-
16
is to be adopted using a modified retrospective approach with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The cumulative effect adjustment will include recognition of the income tax consequences of intra-entity transfers of assets other than inventory that occur before the adoption date.
The Company believes the adoption of ASU
2016
-
16
will
not
impact the Company’s consolidated financial statements.
The Company
makes equity investments to promote business and strategic objectives. For investments that do
not
have a readily determinable fair value, the Company applies either cost or equity method of accounting depending on the nature of its investment and its ability to exercise significant influence. Investments are periodically analyzed to determine whether or
not
there are any indicators of impairment and written down to fair value if the investment has incurred an other than temporary impairment. During
2017,
the Company acquired a
$1.3
million investment in convertible preferred stock of Practicing Excellence.com, Inc., a privately-held Delaware Corporation (“PX”), which is carried at cost and included in other non-current assets. The Company has a seat on PX's board of directors and the Company's investment, which is
not
considered to be in-substance common stock, represents approximately
15.7%
of the issued and outstanding equity interests in PX.
On
December 21
,
2015,
the Company completed the sale of selected assets and liabilities related to the clinical workflow product of the 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, which is included in other income on the Statement of Income. In connection with the closing of the transaction,
$300,000
was placed in escrow to cover certain indemnification claims for
one
year following the transaction pursuant to the purchase agreement. Due to the uncertainty related to the settlement of the claims, escrowed amounts were recognized when the contingency was removed and the cash was released from escrow rather than at the time of sale. The Company received
$223,000
of the escrow funds in
December 2016
upon final resolution of the claims and recorded an additional gain on the sale from these funds. The lack of operating results from this business due to its divestiture did
not
have a major effect on our operations and financial results, and, accordingly, it was
not
classified as a discontinued operation for any of the periods presented.
Customer-Connect LLC was formed in
June 2013
to develop and commercialize the Connect programs. Connect programs provide healthcare organizations the technology to engage patients through real-time identification and management of individual patient needs, preferences, risks, and experiences.
The platform ensures that organizations have access to a longitudinal view of the patient to more effectively manage patient engagement across the continuum of care. At inception, NRC Health had a
49%
ownership interest in Connect. NG Customer-Connect, LLC held a
25%
interest, and the remaining
26%
was held by Illuminate Health, LLC. Profits and losses were allocated under the hypothetical liquidation at book value approach.
In
July 2015,
the
Company acquired all of NG Customer-Connect, LLC’s interest in Connect and a portion of Illuminate Health LLC’s interest in Connect for combined consideration of
$2.8
million. As a result, as of
December 31, 2015,
the Company owned approximately
89%
of Connect and Illuminate Health, LLC owned
11%.
Under the amended operating agreement, NRC Health had the option to acquire additional equity units from Illuminate Health when new annual recurring contract value reached targeted levels. On
March 7, 2016,
the Company elected to exercise its
first
option to acquire
one
-
third
of the outstanding non-controlling interest for
$1.0
million. Subsequently, on
March 28, 2016,
NRC Health and Illuminate Health reached an agreement whereby NRC Health acquired the remaining interest held by Illuminate Health for
$1.0
million. Following these transactions, Customer-Connect LLC was a wholly owned subsidiary of NRC Health. All of Connect’s previous net income (losses) had been attributable to NRC Health. Since the Company previously consolidated Connect, the transactions to acquire additional ownership interests in Connect were accounted for as equity transactions, resulting in a reduction to additional paid-in capital of
$252,000
and
$2.8
million in
2016
and
2015,
respectively.
The acquisition of the remaining interest resulted in differences between the book and tax basis of Connect’s assets. As a result, the Company recorded deferred tax assets of
$1.7
million, with a corresponding increase to additional paid-in capital during
2016.
On
June 30, 2016,
Customer-Connect LLC was dissolved.
(
5
)
|
Property and Equipment
|
At
December 31,
2017,
and
2016,
property and equipment consisted of the following:
|
|
201
7
|
|
|
201
6
|
|
|
|
(In thousands)
|
|
Furniture and equipment
|
|
$
|
5,064
|
|
|
$
|
4,737
|
|
Computer equipment
|
|
|
2,721
|
|
|
|
2,750
|
|
Computer software
|
|
|
22,569
|
|
|
|
20,592
|
|
Building
|
|
|
9,386
|
|
|
|
9,386
|
|
Leaseholds
|
|
|
41
|
|
|
|
--
|
|
Land
|
|
|
425
|
|
|
|
425
|
|
Property and equipment at cost
|
|
|
40,206
|
|
|
|
37,890
|
|
Less accumulated depreciation and amortization
|
|
|
27,847
|
|
|
|
26,084
|
|
Net property and equipment
|
|
$
|
12,359
|
|
|
$
|
11,806
|
|
Depreciation and amortization expense related to property and equipment
, including assets under capital lease, for the years ended
December 31, 2017,
2016,
and
2015
was
$4.0
million,
$3.6
million, and
$3.1
million, respectively.
Property and equipment included the following amounts under capital lease:
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Furniture and equipment
|
|
$
|
843
|
|
|
$
|
769
|
|
Property and equipment under capital lease, gross
|
|
|
843
|
|
|
|
769
|
|
Less accumulated amortization
|
|
|
684
|
|
|
|
530
|
|
Net assets under capital lease
|
|
$
|
159
|
|
|
$
|
239
|
|
(
6
)
|
Goodwill and Intangible Assets
|
Goodwill and intangible assets consisted of the following at
December 31,
201
7:
|
|
Useful Life
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
|
(In years)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
$
|
58,021
|
|
|
|
|
|
|
$
|
58,021
|
|
Non-amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite trade name
|
|
|
|
|
|
|
|
1,191
|
|
|
|
|
|
|
|
1,191
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer related
|
|
5
|
-
|
15
|
|
|
|
9,347
|
|
|
|
8,611
|
|
|
|
736
|
|
Technology
|
|
|
7
|
|
|
|
|
1,360
|
|
|
|
523
|
|
|
|
837
|
|
Trade names
|
|
5
|
-
|
10
|
|
|
|
1,572
|
|
|
|
1,572
|
|
|
|
--
|
|
Total amortizing intangible assets
|
|
|
|
|
|
|
|
12,279
|
|
|
|
10,706
|
|
|
|
1,573
|
|
Total intangible assets other than goodwill
|
|
|
|
|
|
|
$
|
13,470
|
|
|
$
|
10,706
|
|
|
$
|
2,764
|
|
G
oodwill and intangible assets consisted of the following at
December 31, 2016:
|
|
Useful Life
|
|
|
Gross
|
|
|
Accumulated Amortization
|
|
|
Net
|
|
|
|
(In years)
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
$
|
57,861
|
|
|
|
|
|
|
$
|
57,861
|
|
Non-amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite trade name
|
|
|
|
|
|
|
|
1,191
|
|
|
|
|
|
|
|
1,191
|
|
Amortizing intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer related
|
|
5
|
-
|
15
|
|
|
|
9,331
|
|
|
|
8,164
|
|
|
|
1,167
|
|
Technology
|
|
|
7
|
|
|
|
|
1,110
|
|
|
|
344
|
|
|
|
766
|
|
Trade names
|
|
5
|
-
|
10
|
|
|
|
1,572
|
|
|
|
1,572
|
|
|
|
--
|
|
Total amortizing intangible assets
|
|
|
|
|
|
|
|
12,013
|
|
|
|
10,080
|
|
|
|
1,933
|
|
Total intangible assets other than goodwill
|
|
|
|
|
|
|
$
|
13,204
|
|
|
$
|
10,080
|
|
|
$
|
3,124
|
|
The following represents a summary of changes in the Company’s carrying amount of goodwill for the years ended
December 31, 2017,
and
2016
(in thousands):
Balance as of December 31, 201
5
|
|
$
|
57,792
|
|
Foreign currency translation
|
|
|
69
|
|
Balance as of December 31, 201
6
|
|
$
|
57,861
|
|
Foreign currency translation
|
|
|
160
|
|
Balance as of December 31, 201
7
|
|
$
|
58,021
|
|
Aggregate amortization expense for customer
related intangibles, trade names, technology and non-competes for the years ended
December 31, 2017,
2016
and
2015
was
$610,000,
$654,000,
and
$995,000,
respectively. Estimated amortization expense for the next
five
years is:
2018—
$662,000;
2019—
$374,000;
2020—
$318,000;
2021—
$180,000;
2022—
$39,000.
For
the years ended
December 31, 2017,
2016,
and
2015,
income before income taxes consists of the following:
|
|
201
7
|
|
|
20
16
|
|
|
201
5
|
|
|
|
(In thousands)
|
|
U.S. Operations
|
|
$
|
32,750
|
|
|
$
|
29,848
|
|
|
$
|
25,536
|
|
Foreign Operations
|
|
|
1,533
|
|
|
|
1,508
|
|
|
|
1,824
|
|
Income before income taxes
|
|
$
|
34,283
|
|
|
$
|
31,356
|
|
|
$
|
27,360
|
|
Income tax expense consisted of the following components
:
|
|
201
7
|
|
|
201
6
|
|
|
201
5
|
|
|
|
(In thousands)
|
|
Federal
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
10,947
|
|
|
$
|
8,930
|
|
|
$
|
9,955
|
|
Deferred
|
|
|
(1,596
|
)
|
|
|
847
|
|
|
|
(1,232
|
)
|
Total
|
|
$
|
9,351
|
|
|
$
|
9,777
|
|
|
$
|
8,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
387
|
|
|
$
|
409
|
|
|
$
|
455
|
|
Deferred
|
|
|
704
|
|
|
|
(18
|
)
|
|
|
(23
|
)
|
Total
|
|
$
|
1,091
|
|
|
$
|
391
|
|
|
$
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
837
|
|
|
$
|
634
|
|
|
$
|
680
|
|
Deferred
|
|
|
61
|
|
|
|
36
|
|
|
|
(85
|
)
|
Total
|
|
$
|
898
|
|
|
$
|
670
|
|
|
$
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,340
|
|
|
$
|
10,838
|
|
|
$
|
9,750
|
|
Federal Tax Reform
On
December 22, 2017,
the Tax Cut and Jobs Act (the “Tax Act”)
was enacted which, among other changes, reduces the U.S. federal corporate tax rate from
35%
to
21%
effective
January 1, 2018.
The Tax Act makes broad and complex changes to the U.S. tax code and it will take time to fully analyze the impact of the changes. Based on the information available, and the current interpretation of the Tax Act, the Company was able to make a reasonable estimate and recorded a provisional net tax benefit related to the remeasurement of the deferred tax assets and liabilities due to the reduction in the U.S. federal corporate tax rate, offset by the
one
-time mandatory deemed repatriation tax, payable over
eight
years. Pursuant to the Staff Accounting Bulletin published by the United States Securities and Exchange Commission on
December 22, 2017,
addressing the challenges in accounting for the effects of the Tax Act in the period of enactment, companies must report provisional amounts for those specific income tax effects of the Tax Act for which the accounting is incomplete but a reasonable estimate can be determined. Those provisional amounts will be subject to adjustment during a measurement period of up to
one
year from the enactment date. Pursuant to this guidance, the estimated impact of the Tax Act is based on a preliminary review of the new tax law and projected future financial results and is subject to revision based upon further analysis and interpretation of the Tax Act and to the extent that future results differ from currently available projections. The Company’s accounting for the following elements of the Tax Act is incomplete. However, the Company was able to make reasonable estimates and recorded a provisional net tax benefit of
$1.9
million related to the following elements of the Tax Act pursuant to the Staff Accounting Bulletin referred to above:
|
●
|
Reduction of U.S. Federal Corporate Tax Rate: The Tax Act reduces the corporate tax rate to
21%,
effective
January 1, 2018.
Consequently, we have recorded a decrease related to deferred tax assets and liabilities with a corresponding net adjustment to deferred income tax benefit for the year ended
December 31, 2017.
Since the Company has recorded provisional amounts related to certain portions of the Tax Act, any corresponding deferred tax remeasurement is also provisional.
For example, the Tax Act had several changes that were depreciation related. The primary change for the Company would be the availability of
100%
bonus depreciation on assets placed in service after
September 27, 2017.
The Company is still evaluating which assets meet the requirements of this and therefore,
no
adjustments have been recorded related to this portion of the Tax Act as of
December 31, 2017.
In addition, under the Tax Act, expense under certain stock compensation plans
may
now be subject to limitations as to deductibility and the Company is still reviewing and analyzing each plan to determine the impact.
|
|
●
|
One-Time Mandatory Deemed Repatriation Tax: Under the Tax Act, the Company will be subject to a
one
-time mandatory deemed repatriation tax on accumulated non-U.S. earnings. The estimated impact of the Tax Act is based on a preliminary review of the new law.
Several estimates were used in these calculations and the Company is still finalizing the material inputs, therefore all repatriation adjustments are considered provisional. For example, the Company’s expected use of foreign tax credits and credit carryforwards
may
be impacted once the analysis is completed. Currently, the Company estimates that it will be unable to use approximately
$535,000
of foreign tax credit carryforwards and has provided a full valuation allowance against such amount.
|
|
●
|
Global Intangible Low-Taxed Income (
“GILTI”) Policy Election: The GILTI provisions of the Tax Act do
not
apply to the Company until
2018
and we are still evaluating its impact. The FASB allows companies to adopt an accounting policy to either recognize deferred taxes for GILTI or treat such tax cost as a current-period expense when incurred. We have
not
yet determined our accounting policy because determining the impact of the GILTI provisions requires analysis of our existing legal entity structure, the reversal of our U.S. generally accepted accounting principles and U.S. tax basis differences in the assets and liabilities of our foreign subsidiary, and our ability to offset any tax with foreign tax credits. As such, we have
not
made a policy decision regarding whether to record deferred taxes on GILTI or treat such tax cost as a current-period expense.
|
In addition, as a result of the Tax Act, the Company determined that it would
no
longer indefinitely reinvest the earnings of its Canadian subsidiary and recorded the withholding tax of
$706,000
associated with this planned repatriation.
The difference between the Company
’s income tax expense as reported in the accompanying consolidated financial statements and the income tax expense that would be calculated applying the U.S. federal income tax rate of
35%
for
2017,
2016,
and
2015
on pretax income was as follows:
|
|
20
17
|
|
|
20
16
|
|
|
20
15
|
|
|
|
(
In thousands)
|
|
Expected federal income taxes
|
|
$
|
11,999
|
|
|
$
|
10,975
|
|
|
$
|
9,576
|
|
Foreign tax rate differential
|
|
|
(131
|
)
|
|
|
(129
|
)
|
|
|
(139
|
)
|
State income taxes, net of federal benefit and state tax credits
|
|
|
608
|
|
|
|
436
|
|
|
|
391
|
|
Federal tax
credits
|
|
|
(130
|
)
|
|
|
(165
|
)
|
|
|
(150
|
)
|
Uncertain tax positions
|
|
|
151
|
|
|
|
6
|
|
|
|
93
|
|
Nondeductible expenses related to
proposed recapitalization
|
|
|
504
|
|
|
|
--
|
|
|
|
--
|
|
Share based compensation
|
|
|
(1,564
|
)
|
|
|
(441
|
)
|
|
|
--
|
|
Compensation limit for covered employees
|
|
|
955
|
|
|
|
--
|
|
|
|
--
|
|
Impact of
2017 Tax Act
|
|
|
(2,415
|
)
|
|
|
--
|
|
|
|
--
|
|
Valuation allowance
|
|
|
535
|
|
|
|
--
|
|
|
|
--
|
|
Withholding tax on repatriation
of foreign earnings
|
|
|
706
|
|
|
|
--
|
|
|
|
--
|
|
Other
|
|
|
122
|
|
|
|
156
|
|
|
|
(21
|
)
|
Total
|
|
$
|
11,340
|
|
|
$
|
10,838
|
|
|
$
|
9,750
|
|
Deferred tax assets and liabilities at
December 31,
2017
and
2016,
were comprised of the following:
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
46
|
|
|
$
|
62
|
|
Accrued expenses
|
|
|
416
|
|
|
|
580
|
|
Share based compensation
|
|
|
1,457
|
|
|
|
2,357
|
|
Accrued bonuses
|
|
|
113
|
|
|
|
84
|
|
Foreign tax credit
from repatriation
|
|
|
535
|
|
|
|
--
|
|
Other
|
|
|
166
|
|
|
|
244
|
|
Gross deferred tax assets
|
|
|
2,733
|
|
|
|
3,327
|
|
Less Valuation Allowance
|
|
|
(535
|
)
|
|
|
--
|
|
Deferred Tax Assets
|
|
|
2,198
|
|
|
|
3,327
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
169
|
|
|
|
270
|
|
Property and equipment
|
|
|
856
|
|
|
|
1,206
|
|
Intangible assets
|
|
|
4,497
|
|
|
|
6,521
|
|
Repatriation withholding
|
|
|
706
|
|
|
|
--
|
|
Deferred tax liabilities
|
|
|
6,228
|
|
|
|
7,997
|
|
Net deferred tax liabilities
|
|
$
|
(4,030
|
)
|
|
$
|
(4,670
|
)
|
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than
not
that some portion
, or all, of the deferred tax assets will
not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers projected future taxable income, carry-back opportunities, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, the Company believes it is more likely than
not
that it will realize the benefits of these deductible differences excluding the foreign tax credit carryforward.
The Company had an unrecognized tax benefit at
December 31,
201
7
and
2016,
of
$843,000
and
$662,000,
respectively, excluding interest of
$5,000
and
$2,000
at
December 31, 2017
and
2016,
respectively. Of these amounts,
$620,000
and
$472,000
at
December 31, 2017
and
2016,
respectively, represents the net unrecognized tax benefits that, if recognized, would favorably impact the effective income tax rate. The change in the unrecognized tax benefits for
2017
and
2016
is as follows:
|
|
|
(In thousands)
|
|
Balance of unrecognized tax benefits at December 31, 2015
|
|
$
|
589
|
|
Reductions due to lapse of applicable statute of limitations
|
|
|
(148
|
)
|
Additions based on tax positions of prior years
|
|
|
5
|
|
Additions based on tax positions related to the current year
|
|
|
216
|
|
Balance of unrecognized tax benefits at December 31, 2016
|
|
$
|
662
|
|
Reductions due to lapse of applicable statute of limitations
|
|
|
--
|
|
Reductions due to tax positions of prior years
|
|
|
(7
|
)
|
Additions based on tax positions related to the current year
|
|
|
188
|
|
Balance of unrecognized tax benefits at December 31, 2017
|
|
$
|
843
|
|
The Company files a U.S. federal income tax return, various state jurisdictions
returns and a Canada federal and provincial income tax return. All years prior to
2014
are now closed for US federal income tax and for years prior to
2014
for state income tax returns, and
no
exposure items exist for these years. The Company completed a United States federal tax examination for the tax year ended
December 31, 2013
in the
first
quarter of
2016.
The
2013
to
2017
Canada federal and provincial income tax returns remain open to examination.
Note
s payable consisted of the following:
|
|
2
017
|
|
|
20
16
|
|
|
|
(In thousands)
|
|
Revolving credit note with U.S. Bank, maximum available $12.0 million, matures June 30, 2018
|
|
$
|
--
|
|
|
$
|
--
|
|
Note payable to U.S. Bank for $11.8 million, interest at a 3.12% fixed rate, monthly principal and interest payments of $212,468 through April 2018
|
|
|
1,067
|
|
|
|
3,540
|
|
Total notes payable
|
|
|
1,067
|
|
|
|
3,540
|
|
Less current portion
|
|
|
1,067
|
|
|
|
2,683
|
|
Note payable, net of current portion
|
|
$
|
--
|
|
|
$
|
857
|
|
The Company
’s revolving credit note was amended and extended effective
June 30, 2017
with a maturity date of
June 30, 2018.
The maximum aggregate amount available under the revolving credit note is
$12.0
million. 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
)
2.1%
plus the
one
-month London Interbank Offered Rate (“LIBOR”) or (
2
)
2.1%
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, 2017
the revolving credit note did
not
have a balance and the Company had the capacity to borrow
$12.0
million.
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, 2017,
the Company was in compliance with the financial covenants.
(
9
)
|
Share-Based Compensation
|
The Company measures and recognizes compensation expense for all share-based payments based on the grant-date fair value of those awards. All of the Company
’s existing stock option awards and non-vested stock awards have been determined to be equity-classified awards.
The
National Research Corporation
2001
Equity Incentive Plan (
“2001
Equity Incentive Plan”) provided for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of
1,800,000
shares of class A common stock and
300,000
shares of class B common stock. Stock options granted could have been either nonqualified or incentive stock options. Stock options vest over
one
to
five
years following the date of grant and option terms are generally
five
to
ten
years following the date of grant. Due to the expiration of the
2001
Equity Incentive Plan, at
December 31, 2015,
there were
no
shares of stock available for future grants. The Company has accounted for grants of
1,683,309
class A and
280,552
class B options and restricted stock under the
2001
Equity Incentive Plan using the date of grant as the measurement date for financial accounting purposes.
The Company
’s
2004
Non-Employee Director Stock Plan, as amended (the
“2004
Director Plan”), is a nonqualified plan that provides for the granting of options with respect to
3,000,000
shares of class A common stock and
500,000
shares of class B common stock. The
2004
Director Plan provides for grants of nonqualified stock options to each director of the Company who is
not
employed by the Company. On the date of each annual meeting of shareholders of the Company, options to purchase
36,000
shares of class A common stock and
6,000
shares of class B common stock are granted to directors that are elected or retained as a director at such meeting. Stock options vest
one
year following the date of grant and option terms are generally
ten
years following the date of grant, or
three
years in the case of termination of the outside director’s service. At
December 31, 2017,
there were
921,000
shares of class A common stock and
153,500
shares of class B common stock available for issuance pursuant to future grants under the
2004
Director Plan. The Company has accounted for grants of
2,079,000
class A and
346,500
class B options under the
2004
Director Plan using the date of grant as the measurement date for financial accounting purposes.
T
he National Research Corporation
2006
Equity Incentive Plan (the
“2006
Equity Incentive Plan”) provides for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of
1,800,000
shares of class A common stock and
300,000
shares of class B common stock. Stock options granted
may
be either incentive stock options or nonqualified stock options. Vesting terms vary with each grant and option terms are generally
five
to
ten
years following the date of grant. At
December 31, 2017,
there were
865,465
shares of class A common stock and
145,189
shares of class B common stock available for issuance pursuant to future grants under the
2006
Equity Incentive Plan. The Company has accounted for grants of
934,535
class A and
154,811
class B options and restricted stock under the
2006
Equity Incentive Plan using the date of grant as the measurement date for financial accounting purposes.
The
Company granted options to purchase
299,917
shares of class A common stock and
49,986
shares of class B common stock during
2017.
During
2016,
the Company granted options to purchase
315,620
shares of class A common stock and
52,603
shares of class B common stock, and during
2015
granted options to purchase
261,306
shares of class A common stock and
43,551
shares of class B common stock. Options to purchase shares of common stock are typically granted with exercise prices equal to the fair value of the common stock on the date of grant. The Company does, in certain limited situations, grant options with exercise prices that exceed the fair value of the common shares on the date of grant. The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following weighted average assumptions:
|
|
2
017
|
|
|
2016
|
|
|
2015
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
Expected dividend yield at date of grant
|
|
|
2.62
|
%
|
|
|
8.06
|
%
|
|
|
2.99
|
%
|
|
|
7.29
|
%
|
|
|
2.22
|
%
|
|
|
5.48
|
%
|
Expected stock price volatility
|
|
|
32.45
|
%
|
|
|
26.75
|
%
|
|
|
32.74
|
%
|
|
|
29.41
|
%
|
|
|
31.97
|
%
|
|
|
31.17
|
%
|
Risk-free interest rate
|
|
|
2.18
|
%
|
|
|
2.18
|
%
|
|
|
1.69
|
%
|
|
|
1.69
|
%
|
|
|
1.58
|
%
|
|
|
1.60
|
%
|
Expected life of options (in years)
|
|
|
6.80
|
|
|
|
6.80
|
|
|
|
6.86
|
|
|
|
6.86
|
|
|
|
5.49
|
|
|
|
5.62
|
|
The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility was based on historical monthly price changes of the Company
’s stock based on the expected life of the options at the date of grant. The expected life of options is the average number of years the Company estimates that options will be outstanding. The Company considers groups of associates that have similar historical exercise behavior separately for valuation purposes.
The following table summarizes stock option activity
under the
2001
and
2006
Equity Incentive Plans and the
2004
Director Plan for the year ended
December
31,
2017:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining Contractual
Terms (Years)
|
|
|
Aggregate
Intrinsic
Value
(In thousands)
|
|
Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 201
6
|
|
|
1,705,483
|
|
|
$
|
12.31
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
299,917
|
|
|
$
|
22.13
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(197,784
|
)
|
|
$
|
10.55
|
|
|
|
|
|
|
$
|
2,681
|
|
Forfeited
|
|
|
(60,982
|
)
|
|
$
|
21.35
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2017
|
|
|
1,746,634
|
|
|
$
|
13.88
|
|
|
|
5.39
|
|
|
$
|
40,901
|
|
Exercisable at
December 31, 2017
|
|
|
1,274,361
|
|
|
$
|
12.14
|
|
|
|
4.32
|
|
|
$
|
32,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 201
6
|
|
|
250,493
|
|
|
$
|
29.70
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
49,986
|
|
|
$
|
42.90
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(13,600
|
)
|
|
$
|
27.04
|
|
|
|
|
|
|
$
|
202
|
|
Forfeited
|
|
|
(10,163
|
)
|
|
$
|
41.53
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2017
|
|
|
276,716
|
|
|
$
|
31.78
|
|
|
|
5.52
|
|
|
$
|
6,719
|
|
Exercisable at
December 31, 2017
|
|
|
198,950
|
|
|
$
|
29.16
|
|
|
|
4.44
|
|
|
$
|
5,353
|
|
The following table summarizes information related to stock options for the years ended
December 31, 2017,
2016
and
2015:
|
|
2
017
|
|
|
2016
|
|
|
2015
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
|
Class A
|
|
|
Class B
|
|
Weighted average grant date fair value of stock options granted
|
|
$
|
5.83
|
|
|
$
|
3.66
|
|
|
$
|
3.62
|
|
|
$
|
3.90
|
|
|
$
|
3.49
|
|
|
$
|
5.45
|
|
Intrinsic value of stock options exercised (in thousands)
|
|
|
2,681
|
|
|
|
202
|
|
|
|
459
|
|
|
|
632
|
|
|
|
350
|
|
|
|
151
|
|
Intrinsic value of stock options vested (in thousands)
|
|
|
5,258
|
|
|
|
787
|
|
|
|
1,627
|
|
|
|
535
|
|
|
|
1,351
|
|
|
|
415
|
|
As of
December 31, 2017,
the total unrecognized compensation cost related to non-vested stock option awards was approximately
$1.2
million and
$152,000
for class A and class B common stock shares, respectively, which was expected to be recognized over a weighted average period of
2.53
years and
2.57
years for class A and class B common stock shares, respectively.
Cash received from stock options exercised for the
years ended
December
31,
2016
was
$548,000.
There was
no
cash received from stock options exercised for the year ended
December 31, 2017
or
2015.
The Company recognized
$1.2
million,
$964,000
and
$828,000
of non-cash compensation for the years ended
December 31, 2017,
2016,
and
2015,
respectively, related to options, which is included in selling, general and administrative expenses.
The actual tax benefit realized for the tax deduction from stock options exercised was
$1.1
million,
$398,000
and
$183,000
for the years ended
December 31, 2017,
2016
and
2015,
respectively. The Company prospectively elected ASU
2016
-
09,
Compensation – Stock Compensation (Topic
718
) Improvements to Employee Share-Based Payment Accounting
(“ASU
2016
-
09”
) in
2016.
As a result, the excess tax benefit from stock options exercised was recognized as a reduction to our provision for income taxes for the years ended
December 31, 2017
and
2016
rather than as an increase to additional paid-in capital for the years ended
December 31, 2015
prior to adoption.
During
2016
and
2015,
the Company granted
20,578
and
89,416
non-vested shares of class A and
3,430
and
14,902
non-vested shares of class B common stock, respectively, under the
2006
Equity Incentive Plan.
No
shares were granted during the year ended
December 31, 2017.
As of
December 31, 2017,
the Company had
81,677
and
13,611
non-vested shares of class A and class B common stock, respectively, outstanding under the
2006
Equity Incentive Plan. These shares vest over
five
years following the date of grant and holders thereof are entitled to receive dividends from the date of grant, whether or
not
vested. The fair value of the awards is calculated as the fair market value of the shares on the date of grant. The Company recognized
$629,000,
$966,000
and
$555,000
of non-cash compensation for the years ended
December 31, 2017,
2016,
and
2015,
respectively, related to this non-vested stock, which is included in selling, general and administrative expenses. The actual tax benefit realized for the tax deduction from vesting of restricted stock was
$1.3
million and
$161,000
for the years ended
December 31, 2017
and
2016,
respectively. There were
no
shares that vested in the year ended
December 31, 2015.
The following
table summarizes information regarding non-vested stock granted to associates under the
2006
Equity Incentive Plans for the year ended
December
31,
2017:
|
|
Class A
Shares Outstanding
|
|
|
Class A
Weighted
Average Grant
Date Fair Value
Per Share
|
|
|
Class B Shares Outstanding
|
|
|
Class B
Weighted
Average Grant
Date Fair
Value
Per Share
|
|
Outstanding at December 31, 201
6
|
|
|
174,487
|
|
|
$
|
13.93
|
|
|
|
29,081
|
|
|
$
|
37.21
|
|
Granted
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
$
|
--
|
|
Vested
|
|
|
(73,506
|
)
|
|
$
|
13.99
|
|
|
|
(12,251
|
)
|
|
$
|
38.50
|
|
Forfeited
|
|
|
(19,314
|
)
|
|
$
|
14.27
|
|
|
|
(3,219
|
)
|
|
$
|
34.69
|
|
Outstanding at December 31, 2017
|
|
|
81,677
|
|
|
$
|
13.80
|
|
|
|
13,611
|
|
|
$
|
36.65
|
|
As of
December 31, 2017,
the total unrecognized compensation cost related to non-vested stock awards was approximately
$806,000
and is expected to be recognized over a weighted average period of
2.54
years.
The Company leases
printing equipment in the United States, and office space in Canada, California, Georgia, and Washington. The Company also leased additional office space in Nebraska through
June 2016.
The Company recorded rent expense in connection with its operating leases of
$869,000,
$920,000
and
$1.0
million in
2017,
2016,
and
2015,
respectively. The Company also has capital leases for production, mailing and computer equipment.
P
ayments under non-cancelable operating leases and capital leases at
December 31, 2017
for the next
five
years are:
Year Ending
December 31,
|
|
Capital
Leases
|
|
|
Operating Leases
|
|
|
|
(In thousands)
|
|
201
8
|
|
$
|
80
|
|
|
$
|
708
|
|
201
9
|
|
|
51
|
|
|
|
679
|
|
20
20
|
|
|
34
|
|
|
|
485
|
|
20
21
|
|
|
6
|
|
|
|
377
|
|
20
22
|
|
|
1
|
|
|
|
190
|
|
Total minimum lease payments
|
|
|
172
|
|
|
|
|
|
Less: Amount representing interest
|
|
|
14
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
158
|
|
|
|
|
|
Less: Current maturities
|
|
|
71
|
|
|
|
|
|
Capital lease obligations, net of current portion
|
|
$
|
87
|
|
|
|
|
|
A
director of the Company also serves as an officer of Ameritas Life Insurance Corp. (“Ameritas”). In connection with the Company’s regular assessment of its insurance-based associate benefits, which is conducted by an independent insurance broker, and the costs associated therewith, the Company purchases dental and vision insurance for certain of its associates from Ameritas. The total value of these purchases was
$248,000,
$232,000
and
$227,000
in
2017,
2016
and
2015
respectively.
Mr. Hays, the Chief Executive Officer and director of the Company, is an owner of
14%
of the equity interest of Nebraska Global Investment Company LLC (“Nebraska Global”).
The Company, directly or indirectly through its former subsidiary Customer-Connect LLC, purchased certain services from Nebraska Global, primarily consisting of software development services. The total value of these purchases were
$12,500,
$488,000
and
$440,000
in
2017,
2016
and
2015,
respectively.
Mr. Hays
personally incurred approximately
$538,000
of fees and expenses in connection with exploring strategic alternatives for the Company, including the proposed recapitalization (see Note
13
), for which the Company has reimbursed Mr. Hays in
2017.
These fees and expenses were attributable to the evaluation of alternatives and the sourcing and negotiating of financing for the alternatives, all of which would have been borne directly by the Company if they had been advanced by Mr. Hays. Mr. Hays advanced these funds personally in order to maintain the confidentiality of the evaluation of such alternatives and allow the management team to maintain its focus on the Company’s business and operations.
During
2017,
the Company acquired a cost method investment in convertible preferred stock of PX
(see Note
2
). Also in
2017,
the Company paid
$250,000
to acquire certain perpetual content licenses from PX for content the Company includes in certain of its subscription services. The Company also has an agreement with PX which commenced in
2016
under which the Company acts as a reseller of PX services and receives a portion of the revenues. The total revenue earned from the PX reseller agreement in the years ended
December 31, 2017
and
2016
was
$633,000
and
$28,000,
respectively.
(
12
)
|
Associate Benefits
|
The Company sponsors a qualified
401
(k) plan covering substantially all associates with
no
eligibility service requirement. Under the
401
(k) plan, the Company matches
25.0%
of the
first
6.0%
of compensation contributed by each associate. Employer contributions, which are discretionary, vest to participants at a rate of
20%
per year. The Company contributed
$350,000,
$291,000
and
$330,000
in
2017,
2016
and
2015,
respectively, as a matching percentage of associate
401
(k) contributions.
(
1
3
)
|
Proposed Recapitalization
|
In
December 2017,
the Company
’s Board of Directors approved a recapitalization plan that will exchange each share of class B common stock for
one
share of class A common stock plus
$19.59
in cash, for total value of
$53.44
per class B share. This proposed recapitalization plan replaces the proposed plan announced in
September 2017.
In
December 2017,
the Company entered into a commitment letter with First National Bank of Omaha, which expires on
April 30, 2018,
to provide a senior secured term loan of
$40
million, a delayed draw term loan facility of
$15
million and a senior secured revolving line of credit facility of
$15
million.
The proposed recapitalization is subject to closing of financing and approval by the holders of the Company
’s class A common stock, class B common stock and both classes of stock voting together as a group. The Company incurred expenses related to the proposed recapitalization of approximately
$1.4
million in the year ended
December 31, 2017,
which are included in selling and administrative expenses. These expenses include certain amounts reimbursed to Mr. Hays (see Note
11
).
(
1
4
)
|
Segment Information
|
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 FASB guidance on segment disclosure. The
six
operating segments are Experience, The Governance Institute, Market Insights, Transparency, National Research Corporation Canada and Transitions, 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.
On
December 21, 2015,
selected assets and liabilities were sold from a
seventh
operating segment, Predictive Analytics, reducing the number of operating segments from
seven
to
six
as of
December 31, 2015.
The table below presents entity-wide information regarding the Company’s revenue and assets by geographic area:
|
|
201
7
|
|
|
201
6
|
|
|
20
15
|
|
|
|
(In thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
112,885
|
|
|
$
|
104,445
|
|
|
$
|
97,097
|
|
Canada
|
|
|
4,674
|
|
|
|
4,939
|
|
|
|
5,246
|
|
Total
|
|
$
|
117,559
|
|
|
$
|
109,384
|
|
|
$
|
102,343
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
72,562
|
|
|
$
|
71,192
|
|
|
$
|
70,624
|
|
Canada
|
|
|
2,495
|
|
|
|
2,367
|
|
|
|
2,364
|
|
Total
|
|
$
|
75,057
|
|
|
$
|
73,559
|
|
|
$
|
72,988
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
110,785
|
|
|
$
|
106,288
|
|
|
$
|
115,480
|
|
Canada
|
|
|
16,531
|
|
|
|
14,336
|
|
|
|
12,569
|
|
Total
|
|
$
|
127,316
|
|
|
$
|
120,624
|
|
|
$
|
128,049
|
|