NATIONAL RESEARCH CORP - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - NATIONAL RESEARCH CORP	Financial_Report.xls
EX-32 - EXHIBIT 32 - NATIONAL RESEARCH CORP	ex32.htm
EX-31.1 - EXHIBIT 31.1 - NATIONAL RESEARCH CORP	ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - NATIONAL RESEARCH CORP	ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2011

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

For the transition period from ________ to ________

Commission File Number 0-29466

National Research Corporation

(Exact name of Registrant as specified in its charter)

Wisconsin		47-0634000
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1245 “Q” Street, Lincoln, Nebraska 68508

(Address of principal executive offices) (Zip Code)

(402) 475-2525

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £ Accelerated filer £ Non-accelerated filer T Smaller reporting company £

(Do not check if a smaller reporting company)

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

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

Common Stock, $.001 par value, outstanding as of November 1, 2011: 6,723,790 shares

NATIONAL RESEARCH CORPORATION

FORM 10-Q INDEX

For the Quarter Ended September 30, 2011

			Page No.

PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Condensed Consolidated Balance Sheets	4
		Condensed Consolidated Statements of Income	5
		Condensed Consolidated Statements of Cash Flows	6
		Condensed Notes to Consolidated Financial Statements	7-14

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14-19

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20

	Item 4.	Controls and Procedures	20

PART II.	OTHER INFORMATION

	Item 1A.	Risk Factors	21

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21

	Item 6.	Exhibits	21

	Signatures		22

	Exhibit Index		23

Special Note Regarding Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified as such because the context of the statement includes phrases such as National Research Corporation (the “Company”) “believes,” “expects,” or other words of similar import. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which could cause actual results or outcomes to differ materially from those currently anticipated. Factors that could affect actual results or outcomes include, without limitation, the following factors:

●

The possibility of non-renewal of the Company’s client service contracts;

●

The Company’s ability to compete in its markets, which are highly competitive, and the possibility of increased price pressure and expenses;

●

The effects of an economic downturn;

●

The possibility of consolidation in the healthcare industry;

●

The impact of federal healthcare reform legislation or other regulatory changes;

●

The Company’s ability to retain its limited number of key clients;

●

The Company’s ability to attract and retain key managers and other personnel;

●

The possibility that the Company’s intellectual property and other proprietary information technology could be copied or independently developed by its competitors;

●

Regulatory developments; and

●

The factors set forth under the caption “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as such section may be updated by Part II, Item 1A of the Company’s subsequently filed Quarterly Reports on Form 10-Q (including this Report).

Shareholders, potential investors and other readers are urged to consider these and other factors in evaluating the forward-looking statements, and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included are only made as of the date of this Quarterly Report on Form 10-Q and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

PART I – Financial Information

ITEM 1.

Financial Statements

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	September 30, 2011			December 31, 2010
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	6,223		$	3,519
Trade accounts receivable, less allowance for doubtful accounts of $315 and $337 in 2011 and 2010, respectively		12,281			9,172
Unbilled revenue		975			1,115
Prepaid expenses and other		1,050			1,347
Recoverable income taxes		369			1,277
Deferred income taxes		729			911
Total current assets		21,627			17,341

Property and equipment, net		13,888			14,482
Intangible assets, net		7,460			8,638
Goodwill		57,693			55,133
Other		284			176

Total assets	$	100,952		$	95,770

Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of notes payable	$	1,878		$	1,827
Accounts payable		1,316			956
Accrued wages, bonus and profit sharing		3,391			2,750
Accrued expenses		1,648			2,916
Deferred revenue		18,423			17,701
Total current liabilities		26,656			26,150

Notes payable, net of current portion		12,916			14,333
Deferred income taxes		7,358			6,193
Deferred revenue		207			184
Other long term liabilities		305			326
Total liabilities		47,442			47,186

Shareholders’ equity:
Common stock, $0.001 par value; authorized 20,000,000 shares, issued 8,112,412 in 2011 and 8,044,855 in 2010, outstanding 6,723,790 in 2011 and 6,668,574 in 2010		8			8
Additional paid-in capital		30,630			28,970
Retained earnings		45,340			41,343
Accumulated other comprehensive income		797			1,108
Treasury stock, at cost; 1,388,622 shares in 2011 and 1,376,281 shares in 2010		(23,265	)		(22,845	)
Total shareholders’ equity		53,510			48,584

Total liabilities and shareholders’ equity	$	100,952		$	95,770

See accompanying notes to condensed consolidated financial statements.

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except for share amounts, unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010

Revenue	$	18,549		$	16,006		$	56,655		$	47,515

Operating expenses:
Direct expenses		7,471			6,038			21,489			18,370
Selling, general and administrative		5,572			5,250			17,651			14,265
Depreciation and amortization		1,312			1,225			3,790			3,382
Total operating expenses		14,355			12,513			42,930			36,017

Operating income		4,194			3,493			13,725			11,498

Other income (expense):
Interest income		4			1			8			5
Interest expense		(155	)		(137	)		(480	)		(328	)
Other, net		74			(24	)		55			(18	)

Total other expense		(77	)		(160	)		(417	)		(341	)

Income before income taxes		4,117			3,333			13,308			11,157

Provision for income taxes		1,470			1,191			4,876			4,226

Net income	$	2,647		$	2,142		$	8,432		$	6,931

Net income per share – basic	$	.40		$	.32		$	1.26		$	1.04
Net income per share – diluted	$	.39		$	.32		$	1.23		$	1.03

Weighted average shares and share equivalents outstanding – basic		6,679			6,632			6,666			6,635

Weighted average shares and share equivalents outstanding – diluted		6,850			6,727			6,845			6,725

See accompanying notes to condensed consolidated financial statements.

NATIONAL RESEARCH CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

	Nine months ended
	September 30,
	2011			2010
Cash flows from operating activities:
Net income	$	8,432		$	6,931
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,790			3,382
Deferred income taxes		1,139			21
Loss on disposal of property and equipment		(1	)		1
Non-cash share-based compensation expense		538			566
Tax benefit from exercise of stock options		55			16
Net changes in assets and liabilities:
Trade accounts receivable		(3,208	)		(3,084	)
Unbilled revenue		129			484
Prepaid expenses and other		147			1,684
Accounts payable		518			(1,130	)
Accrued expenses, wages, bonuses and profit sharing		1,149			(149	)
Income taxes recoverable and payable		906			386
Deferred revenue		769			3,246
Net cash provided by operating activities		14,363			12,354
Cash flows from investing activities:
Purchases of property and equipment		(2,276	)		(1,097	)
Payments for business acquisitions, net of cash acquired and acquisition earn-out obligation		(4,114	)		(15,441	)
Net cash used in investing activities		(6,390	)		(16,538	)
Cash flows from financing activities:
Proceeds from notes payable		4,545			11,300
Payments on notes payable		(5,910	)		(2,355	)
Payments on capital lease obligations		(104	)		(27	)
Purchases of treasury stock		--			(399	)
Proceeds from exercise of stock options		567			126
Common stock withheld from share-based compensation for payroll tax withholdings		(146	)		(64	)
Excess tax benefit from share-based compensation		354			20
Payment of dividends on common stock		(4,435	)		(3,794	)
Net cash (used in) provided by financing activities		(5,129	)		4,807
Effect of exchange rate changes on cash		(140	)		60
Increase in cash and cash equivalents		2,704			683
Cash and cash equivalents at beginning of period		3,519			2,512

Cash and cash equivalents at end of period	$	6,223		$	3,195
Supplemental disclosure of cash paid for:
Interest expense	$	449		$	328
Income taxes	$	2,375		$	4,506

See accompanying notes to condensed consolidated financial statements.

NATIONAL RESEARCH CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	BASIS OF CONSOLIDATION AND PRESENTATION

National Research Corporation (the “Company”) is a provider of performance measurement and improvement services, healthcare analytics and governance education to the healthcare industry in the United States and Canada. The Company’s services, which are comprehensive, include data collection, healthcare analytics, best practice identification and effective delivery of value-added business intelligence that enables its clients to improve performance across key business metrics. Through its extensive array of service capabilities and industry relationships, the Company is positioned to provide healthcare information services to organizations across a wide continuum of service delivery segments.

The Company has seven operating segments that are aggregated into one reporting segment because they have similar economic characteristics and meet the other aggregation criteria from the Financial Accounting Standards Board (“FASB”) guidance on segment disclosure. The seven operating segments are: NRC Picker U.S. and NRC Picker Canada, which each offer renewable performance tracking and improvement services, custom research, subscription-based educational services and a renewable syndicated service; Ticker, which offers stand-alone market information, as well as a comparative performance database to allow the Company’s clients to assess their performance relative to the industry, to access best practice examples, and to utilize competitive information for marketing purposes; Payer Solutions, which offers functional disease-specific and health status measurement tools; The Governance Institute (“TGI”), which offers subscription-based governance information and educational conferences designed to improve the effectiveness of hospital and healthcare systems by continually strengthening their healthcare boards, medical leadership and management performance in the United States; My InnerView (“MIV”) and Outcome Concept Systems, Inc. (“OCS”), which provide quality and performance improvement solutions to the senior care industry and financial and operational benchmarks and analytics to home care and hospice providers; and Illuminate, a new patient outreach and discharge program designed to facilitate service and clinical recovery within the critical hours after a patient is discharged from a healthcare setting within the acute care, skilled nursing, physician and home health environments.

The condensed consolidated balance sheet of the Company at December 31, 2010, was derived from the Company’s audited consolidated balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) the Company considers necessary for a fair presentation of financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States. Certain reclassifications have been made to the 2010 financial statement information to conform to the 2011 financial statement presentation. There was no impact on the previously reported net income and earnings per share information.

Information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto that are included in the Company’s Form 10-K for the fiscal year ended December 31, 2010, filed with the Securities and Exchange Commission (the “SEC”) on March 25, 2011.

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

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, National Research Corporation Canada. All significant intercompany transactions and balances have been eliminated. Because there are no minority interests in the consolidated subsidiary, all of the Company’s net income, comprehensive income and shareholders’ equity are attributable to controlling interests.

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

Fair Value Measurements

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

The following details the Company’s financial assets and liabilities within the fair value hierarchy at September 30, 2011, and December 31, 2010:

	Level 1		Level 2		Level 3		Total
	(In thousands)
As of September 30, 2011: Money Market Funds	$	3,994	$	--	$	--	$	3,994
As of December 31, 2010: Money Market Funds	$	2,790	$	--	$	--	$	2,790

The Company's long-term debt is recorded at historical cost. The following are the carrying amount and estimated fair values, based primarily on estimated current rates available for debt of the same remaining duration and adjusted for nonperformance and credit risk:

	September 30, 2011		December 31, 2010
	(In thousands)
Total carrying amounts of long-term debt	$	14,794	$	16,160
Estimated fair value of long-term debt	$	14,934	$	16,305

The Company believes that the carrying amounts of trade accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short maturity of those instruments. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which includes goodwill and non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). As of September 30, 2011, and December 31, 2010, there was no indication of impairment related to the non-financial assets.

2. ACQUISITION

On August 3, 2010, the Company acquired all of the issued and outstanding shares of stock and stock rights of OCS, a provider of clinical, financial and operational benchmarks and analytics to home care and hospice providers. The acquisition provides the Company with a runway in the home health and hospice markets through OCS’s customer relationships with home healthcare and hospice providers and expands the Company's service offerings across the continuum of care.

The consolidated financial statements as of December 31, 2010, and September 30, 2011, include amounts acquired from OCS, as well as the results of operations for August 3, 2010, forward.

3. COMPREHENSIVE INCOME

Comprehensive income, including components of other comprehensive income, was as follows:

	Three months ended September 30,					Nine months ended September 30,
	(In thousands)					(In thousands)
	2011			2010		2011			2010

Net income	$	2,647		$	2,142	$	8,432		$	6,931
Other comprehensive income (loss):

Foreign currency translation		(497	)		128		(311	)		125

Total other comprehensive income (loss)		(497	)		128		(311	)		125

Comprehensive income	$	2,150		$	2,270	$	8,121		$	7,056

4. INCOME TAXES

The Company’s effective tax rate decreased to 36.6% for the nine-month period ended September 30, 2011, compared to 37.9% for the same period in 2010. The effective tax rate for 2010 included a $152,000 (or 1.4%) adjustment to deferred tax balances with the offset to income tax expense for a federal tax rate increase due to projected higher taxable income.

The unrecognized tax benefit during the nine-month period ended September 30, 2011, decreased by $24,000 to $244,000, excluding interest of $47,000 and no penalties, due to the expiration of the U.S. Federal statute of limitations associated with certain tax positions. The full unrecognized tax benefits, if recognized, would favorably impact the effective income tax rate. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits could continue to decrease during the next 12 months due to the expiration of the U.S. federal statute of limitations associated with certain other tax positions. The Company accrues interest and penalties related to uncertain tax position in the statements of income as income tax expense.

5. NOTES PAYABLE

On December 19, 2008, the Company borrowed $9.0 million under a term note to partially finance the acquisition of MIV. In July 2010, the Company refinanced the existing term loan with a $6.9 million term loan. The new term loan is payable in 35 monthly installments of $80,104, with a balloon payment of $4.8 million for the remaining principal balance and interest due on July 31, 2013. Borrowings under the term note bear interest at an annual rate of 3.79%. The outstanding balance of the term note at September 30, 2011, was $6.1 million.

On July 31, 2010, the Company borrowed $10.0 million under a term note to partially finance the acquisition of OCS. The term loan is payable in 35 monthly installments of $121,190 with a balloon payment of $6.7 million for the remaining principal balance and interest due on July 31, 2013. Borrowings under the term note bear interest at an annual rate of 3.79%. The outstanding balance of the term note at September 30, 2011, was $8.7 million.

The term notes are secured by certain of the Company’s assets, including the Company’s land, building, trade accounts receivable and intangible assets. The term notes contain various restrictions and covenants applicable to the Company, including requirements that the Company maintain certain financial ratios at prescribed levels and restrictions on the ability of the Company to consolidate or merge, create liens, incur additional indebtedness or dispose of assets. As of September 30, 2011, the Company was in compliance with these restrictions and covenants.

The Company also has a revolving credit note that was renewed in June 2011 to extend the term to June 30, 2012. The maximum aggregate amount available under the revolving credit note is $6.5 million, subject to a borrowing base equal to 75% of the Company’s eligible accounts receivable. Borrowings under the revolving credit note bear interest at a variable annual rate, with three rate options at the discretion of management as follows: (1) 2.5% plus the daily reset one-month LIBOR rate or (2) 2.2% plus the one-, two-, three-, six- or twelve-month LIBOR rate, or (3) the bank’s Money Market Loan Rate. As of September 30, 2011, the revolving credit note did not have a balance.

6. SHARE-BASED COMPENSATION

The Company measures and recognizes compensation expense for all share-based payments. The compensation expense is recognized based on the grant-date fair value of those awards. All of the Company’s existing stock option awards and non-vested stock awards have been determined to be equity-classified awards.

The Company’s 2001 Equity Incentive Plan provides for the granting of stock options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 600,000 shares of the Company’s common stock. Options granted may be either nonqualified or incentive stock options. Options vest over one to five years following the date of grant and option terms are generally five to ten years following the date of grant.

The Company’s 2004 Non-Employee Director Stock Plan (the “2004 Director Plan”) is a nonqualified plan that provides for the granting of options with respect to 550,000 shares of the Company’s common stock. The 2004 Director Plan provides for grants of nonqualified options to each director of the Company who is not employed by the Company. On the date of each annual meeting of shareholders of the Company, options to purchase 12,000 shares of the Company’s common stock are granted to directors that are re-elected or retained as a director at such meeting. Options vest one year following the date of grant and option terms are generally ten years following the date of grant, or three years in the case of termination of the outside director’s service.

The Company’s 2006 Equity Incentive Plan provides for the granting of options, stock appreciation rights, restricted stock, performance shares and other share-based awards and benefits up to an aggregate of 600,000 shares of the Company’s common stock. Options granted may be either incentive stock options or nonqualified stock options. Vesting terms vary with each grant and option terms are generally five to ten years. Options vest over five years following the date of grant and options terms are generally five to ten years following the date of grant.

The Company granted options to purchase 166,008 and 273,812 shares of the Company’s common stock during the nine-month periods ended September 30, 2011, and 2010, respectively. Options to purchase shares of common stock were granted with exercise prices equal to the fair value of the common stock on the date of grant. The fair value of stock options granted was estimated using a Black-Scholes valuation model with the following assumptions:

	2011	2010

Expected dividend yield at date of grant	2.00 to 2.55%	2.86 to 3.09%
Expected stock price volatility	26.70 to 32.00%	28.40 to 31.20%
Risk-free interest rate	1.70 to 2.14%	1.55 to 2.56%
Expected life of options (in years)	4 to 6	4 to 6

The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected volatility was based on historical monthly price changes of the Company’s stock based on the expected life of the options at the date of grant. The expected life of options is the average number of years the Company estimates that options will be outstanding. The Company considers groups of associates that have similar historical exercise behavior separately for valuation purposes.

The following table summarizes stock option activity under the Company’s 2001 and 2006 Equity Incentive Plans and the 2004 Director Plan for the nine months ended September 30, 2011:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms (Years)		Aggregate Intrinsic Value (In thousands)
Outstanding at December 31, 2010		834,061		$	23.49		--		--
Granted		166,008		$	35.88		--		--
Exercised		(49,210	)	$	15.63		--		--
Cancelled		(171,997	)	$	28.00		--		--
Outstanding at September 30, 2011		778,862		$	25.64		6.59	$	5,841
Exercisable at September 30, 2011		378,048		$	21.93		5.19	$	4,238

The following table summarizes information regarding non-vested stock granted to associates under the 2001 Equity Incentive Plan for the nine months ended September 30, 2011:

	Shares Outstanding			Weighted Average Grant Date Fair Value Per Share
Outstanding at December 31, 2010		22,636		$	21.03
Granted		39,501		$	32.31
Vested		(6,957	)	$	17.25
Forfeited		(21,154	)	$	27.65
Outstanding at September 30, 2011		34,026		$	30.78

As of September 30, 2011, the total unrecognized compensation cost related to non-vested stock awards was approximately $772,000 and is expected to be recognized over a weighted average period of 4.18 years.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

The following represents a summary of changes in the Company’s carrying amount of goodwill for the nine months ended September 30, 2011.

	(In thousands)
Balance as of December 31, 2010	$	55,133
OCS acquisition		106
MIV acquisition earnout		2,550
Foreign currency translation		(96	)
Balance as of September 30, 2011	$	57,693

The agreement under which the Company acquired MIV provided for contingent earn-out payments over three years based on growth in revenue and earnings. The 2010 earn-out payment was paid in February 2011 for $1.6 million and was recorded as an addition to goodwill in 2010. In April 2011, the Company reached an agreement which limits the final earn-out payment associated with the MIV acquisition at approximately $2.6 million. Of this amount, $2.4 million was paid during April 2011 and a final payment of $117,000 was paid in September 2011.

Intangible assets consisted of the following:

	September 30, 2011		December 31, 2010
	(In thousands)
Non-amortizing other intangible assets:
Trade name	$	1,191	$	1,191
Amortizing other intangible assets:
Customer related intangibles		10,509		10,520
Non-compete agreements		430		430
Trade name		1,902		1,902
Total other intangible assets		14,032		14,043
Less accumulated amortization		6,572		5,405
Other intangible assets, net	$	7,460	$	8,638

8. PROPERTY AND EQUIPMENT

	September 30, 2011			December 31, 2010
	(In thousands)
Property and equipment	$	30,393		$	28,678
Accumulated depreciation		(16,505	)		(14,196	)
Property and equipment, net	$	13,888		$	14,482

9. RESTRUCTURING AND SEVERANCE COSTS

The Company records restructuring liabilities that represent charges incurred in connection with consolidations, including operations from acquisitions. These charges consist primarily of lease termination and severance costs. Severance charges are based on various factors including the employee’s length of service, contract provisions and salary levels. Expense for one-time termination benefits are accrued over each individual’s service period. The Company records the expense based on its best estimate derived from its detailed analysis. Although significant changes are not expected, actual costs may differ from these estimates.

In the first quarter of 2011, the Company vacated its office in Wausau, Wisconsin, and reached agreements to terminate the operating lease for that office, as well as other leases for equipment. As a result, the Company made lump-sum payments totaling $280,000, which were included in selling, general and administrative expenses in the first quarter of 2011.

The following table reconciles the beginning and ending restructuring costs included in accrued wages, bonus and profit-sharing:

	2010 Restructuring Plan One-Time Termination Benefits			2010 Restructuring Contract Terminations			OCS One-Time Termination Benefits			Total
	(In thousands)
Balance, Restructuring Liability at December 31, 2010	$	37		$	--		$	14		$	51
Accrual for Contract Terminations		--			280			--			280
Payments		(37	)		(280	)		(14	)		(331	)
Balance, Restructuring Liability at September 30, 2011	$	--		$	--		$	--		$	--

10. EARNINGS PER SHARE

Net income per share has been calculated and presented for “basic” and “diluted” data. “Basic” net income per share was computed by dividing net income by the weighted average number of common shares outstanding, whereas “diluted” net income per share was computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effects of options and restricted stock. The Company excluded 178,965 and 544,581 options and 2,583 and 0 restricted stock shares for the three-month periods ended September 30, 2011, and 2010 respectively, and 107,048 and 457,060 options from the nine-month periods ended September 30, 2011, and 2010 respectively, from the diluted net income per share computation because the exercise or grant price exceeded the fair market value of the common stock on such date.

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

	Three months ended				Nine months ended
	September 30, (In thousands)				September 30, (In thousands)
	2011		2010		2011		2010
Weighted average shares and share equivalents – basic		6,679		6,632		6,666		6,635
Weighted average dilutive effect of options		160		82		165		77
Weighted average dilutive effect of restricted stock		11		13		14		13
Weighted average shares and share equivalents - dilutive		6,850		6,727		6,845		6,725

11. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

On January 1, 2011, the Company prospectively adopted Accounting Standard Update 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (ASU 2009-13). This guidance eliminates the residual method under the current guidance and replaces it with the “relative selling price” method when allocating revenue in a multiple deliverable arrangement. Additionally, it requires that revenue be allocated to each deliverable based on estimated selling price, even though such deliverables are not sold separately either by the Company or other vendors. The selling price for each deliverable is determined using vendor-specific objective evidence of selling price, if it exists, otherwise third-party evidence of selling price. If neither exists for a deliverable, the best estimate of the selling price is used for that deliverable. As a result, the new guidance allows some revenue to be recognized earlier and in different amounts than previous requirements. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements during the nine months ended September 30, 2011, and is not expected to materially impact subsequent periods based on the current business model.

12. RELATED PARTY TRANSACTIONS

A Board member of the Company also serves as an officer of Ameritas Life Insurance Corp. (Ameritas). In connection with the Company’s regular assessment of its insurance-based associate benefits and the costs associated therewith, which is conducted by an independent insurance broker, in 2007 the Company began purchasing dental insurance for certain of its associates from Ameritas and in 2009, the Company also began purchasing vision insurance for certain of its associates from Ameritas. The total value of these purchases was $41,000 and $34,000 in the three-month periods ended September 30, 2011, and 2010, respectively, and $124,000 and $108,000 in the nine-month periods ended September 30, 2011, and 2010, respectively.

The Company leased office space for OCS from EPIC Property Management LLC from August 2010 through June 2011. A former owner of OCS and an associate of the Company during the lease-term was a co-owner of EPIC Property Management LLC. The total of the rental and utility payments under the lease was $0 and $34,000 in the three-month periods ended September 30, 2011, and 2010, respectively, and $101,000 and $34,000 in the nine-month periods ended September 30, 2011, and 2010, respectively.

ITEM 2.

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

Overview

The Company believes it is a leading provider of performance measurement and improvement services, healthcare analytics and governance education to the healthcare industry in the United States and Canada. The Company believes it has achieved this leadership position based on 30 years of industry experience and its relationships with many of the industry’s largest organizations. The Company’s portfolio of services addresses the growing needs of healthcare organizations to measure and improve satisfaction, quality and cost outcomes relative to the services that they provide. Since its founding in 1981 in Lincoln, Nebraska, NRC has focused on meeting the information needs of the healthcare industry. The Company’s services, which are comprehensive, include data collection, healthcare analytics, best practice identification and effective delivery of value-added business intelligence that enables its clients to improve performance across key business metrics. Through its extensive array of service capabilities and industry relationships, NRC is positioned to provide healthcare information services to organizations across a wide continuum of service delivery segments.

Results of Operations

The following table sets forth for the periods indicated, select financial information derived from the Company’s consolidated financial statements expressed as a percentage of total revenue. The trends illustrated may not necessarily be indicative of future results. The discussion that follows the table should be read in conjunction with the condensed consolidated financial statements.

	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010

Revenue		100.0	%		100.0	%		100.0	%		100.0	%

Operating expenses:
Direct expenses		40.3			37.7			37.9			38.7
Selling, general and administrative		30.0			32.8			31.2			30.0
Depreciation and amortization		7.1			7.7			6.7			7.1
Total operating expenses		77.4			78.2			75.8			75.8

Operating income		22.6	%		21.8	%		24.2	%		24.2	%

Three Months Ended September 30, 2011, Compared to Three Months Ended September 30, 2010

Revenue. Revenue for three-month period ended September 30, 2011, increased 15.9% to $18.5 million, compared to $16.0 million in the three-month period ended September 30, 2010. The increase was due to market share growth, increased pricing from enhanced offerings, and vertical growth in the existing client base from successful cross-selling activities. Subscription-based agreements, which grew to represent 70.0% of the contract value as of September 30, 2011, are recurring annual service agreements where revenue is spread evenly over the period of service provided.

Direct expenses. Direct expenses increased 23.7% to $7.5 million for the three-month period ended September 30, 2011, compared to $6.0 million in the same period during 2010. This was due to increases in variable expenses of $918,000, including postage and contracted survey related costs to service the higher volume of business, and an increase in fixed expenses of $518,000 from additional staffing and related expenses in information technology development and client service functions. Direct expenses increased as a percentage of revenue to 40.3% in the three-month period ended September 30, 2011, from 37.7% during the same period of 2010. This percentage is projected to be at an average of 37.0% for the full year.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 6.1% to $5.6 million for the three-month period ended September 30, 2011, compared to $5.3 million for the same period in 2010. Expenses increased by $322,000 primarily due to higher sales commissions and related incentives as a result of an increase in sales, as well as growth in marketing programs and client conference or networking events. Selling, general, and administrative expenses decreased as a percentage of revenue to 30.0% for the three-month period ended September 30, 2011, from 32.8% for the same period in 2010 primarily due to the realization and leveraging of revenue from sales force investments in prior periods. This percentage is projected to be at an average of 31.0% for the full year in 2011.

Depreciation and amortization. Depreciation and amortization expenses increased 7.1% to $1.3 million for the three-month period ended September 30, 2011, compared to $1.2 million in the same period in 2010, mainly due to the addition of OCS. Depreciation and amortization expenses as a percentage of revenue decreased to 7.1% for the three-month period ended September 30, 2011, from 7.7% during the same period of 2010. Depreciation and amortization is projected to remain fairly constant in dollar amounts through 2011 and at an average of 7% of revenue for the full year.

Provision for income taxes. The provision for income taxes totaled $1.5 million (35.7% effective tax rate) for the three-month period ended September 30, 2011, compared to $1.2 million (35.7% effective tax rate) for the same period in 2010.

Nine Months Ended September 30, 2011, Compared to Nine Months Ended September 30, 2010

Revenue. Revenue for the nine-month period ended September 30, 2011, increased 19.2% to $56.7 million compared to $47.5 million in the nine-month period ended September 30, 2010. This increase was due to the addition of OCS (increasing revenue by $4.4 million), market share growth, increased pricing from enhanced offerings, and vertical growth in the existing client base from successful cross-selling activities.

Direct expenses. Direct expenses increased 17.0% to $21.5 million in the nine-month period ended September 30, 2011, compared to $18.4 million in the same period during 2010 due to an increase in variable expenses of $1.4 million, including postage and contracted survey related costs to service the higher volume of business, and an increase in fixed expenses of $632,000 from additional staffing and related expenses in information technology development and client service functions. The addition of OCS also increased variable expenses by $304,000 and fixed expenses by $829,000. Direct expenses decreased as a percentage of revenue to 37.9% in the nine-month period ended September 30, 2011, from 38.7% during the same period of 2010.

Selling, general and administrative expenses. Selling, general and administrative expenses increased 23.7% to $17.7 million for the nine-month period ended September 30, 2011, compared to $14.3 million for the same period in 2010. Expenses increased by $2.2 million primarily due to the expansion of the sales force, increased sales commissions, and the addition of several executives in various leadership roles. The addition of OCS also increased expenses by $1.2 million. Selling, general, and administrative expenses increased as a percentage of revenue to 31.2% for the nine-month period ended September 30, 2011, from 30.0% for the same period in 2010.

Depreciation and amortization. Depreciation and amortization expenses for the nine-month period ended September 30, 2011, increased 12.1% to $3.8 million, compared to $3.4 million for the same period in 2010, primarily due to the addition of OCS in 2010. Depreciation and amortization expenses as a percentage of revenue decreased to 6.7% in the nine-month period ended September 30, 2011, from 7.1% in the same period of 2010.

Provision for income taxes. The provision for income taxes totaled $4.9 million (36.6% effective tax rate) for the nine-month period ended September 30, 2011, compared to $4.2 million (37.9% effective tax rate) for the same period in 2010. The effective tax rate for 2010 included a $152,000 adjustment to deferred tax balances with the offset to income tax expense for a federal tax rate increase due to projected higher taxable income. In addition, 2011 reflects an estimate for U.S. Federal research and development tax credits which were not in effect in the same period in 2010, and a $24,000 decrease in unrecognized tax benefits due to the expiration of the U.S. Federal statute of limitations associated with certain tax positions.

Liquidity and Capital Resources

The Company believes it has adequate capital resources and operating cash flow to meet its projected capital and debt maturity needs for the foreseeable future. Requirements for working capital, capital expenditures and debt maturities are funded by operations and the Company’s borrowing arrangements.

The Company had cash and cash equivalents of $6.2 million at September 30, 2011, of which $2.3 million was held in Canada. All of the amounts held in Canada are intended to be indefinitely reinvested in foreign operations. The amounts held outside of the U. S. are eligible for repatriation, but under current law, would be subject to U.S. federal income taxes, less applicable foreign tax credits. It is impractical to determine the additional income tax liability, if any, associated with such repatriation.

Working Capital

The Company had a working capital deficiency of $5.0 million as of September 30, 2011, compared to a working capital deficiency of $8.8 million as of December 31, 2010. The working capital deficiency balance was primarily due to a deferred revenue balance of $18.4 million as of September 30, 2011, and $17.7 million as of December 31, 2010.

The deferred revenue balance is primarily due to timing of initial billings on new and renewal contracts. The Company typically invoices clients for performance tracking services and custom research projects before they have been completed. Billed amounts are recorded as billings in excess of revenue earned, or deferred revenue, on the Company’s consolidated financial statements, and are recognized as income when earned. In addition, when work is performed in advance of billing, the Company records this work as revenue earned in excess of billings, or unbilled revenue. Substantially all deferred revenue and all unbilled revenue will be earned and billed respectively, within 12 months of the respective period ends.

Cash Flow Analysis

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

	For the Nine Months Ended September 30,
	2011			2010
	(In thousands)
Provided by operating activities	$	14,363		$	12,354
Used in investing activities		(6,390	)		(16,538	)
(Used in) provided by financing activities		(5,129	)		4,807
Effect of exchange rate change on cash		(140	)		60
Net increase in cash and cash equivalents		2,704			683
Cash and cash equivalents at end of period	$	6,223		$	3,195

Cash Flows from Operating Activities

Cash flows from operating activities consist of net income adjusted for non-cash items including depreciation and amortization, deferred taxes, and the effect of working capital changes.

Net cash provided by operating activities was $14.4 million for the nine months ended September 30, 2011, which included net income of $8.4 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, and non-cash stock compensation totaling $5.5 million. Changes in working capital benefitted 2011 cash flows from operating activities by $411,000, primarily due to timing of initial billings on new or renewal contracts decreasing cash flows provided from trade accounts receivable, partially offset by timing of payments on accrued expenses and income taxes.

Net cash provided by operating activities was $12.4 million for the nine months ended September 30, 2010, which included net income of $6.9 million, plus non-cash charges (benefits) for deferred tax expense, depreciation and amortization, and non-cash stock compensation totaling $4.0 million. Changes in working capital benefitted 2010 cash flows from operating activities by $1.4 million.

Cash Flows from Investing Activities

Net cash of $6.4 million was used for investing activities in the nine months ended September 30, 2011. Earn-out payments related to the MIV acquisition approximated $4.1 million, and purchases of property and equipment totaled $2.3 million.

Net cash of $16.5 million was used for investing activities in the nine months ended September 30, 2010. Payments for the OCS acquisition approximated $15.3 million, earn-out payments related to the MIV acquisition approximated $172,000 and purchases of property and equipment totaled $1.1 million.

Cash Flows from Financing Activities

Net cash used by financing activities was $5.1 million in the nine months ended September 30, 2011. Cash was generated from borrowings under the term note and revolving credit note totaling $4.5 million. Proceeds from the exercise of and the excess tax benefit of share-based compensation provided cash of $495,000 and $354,000, respectively. Cash was used to pay dividends of $4.4 million, repay capital lease obligations of $104,000, repay borrowings under the term and revolving credit notes totaling $5.9 million, and repurchase of Company common stock for $74,000.

Net cash provided by financing activities was $4.8 million in the nine months ended September 30, 2010. Cash was generated from borrowings under the term note and revolving credit note totaling $11.3 million. Proceeds from the exercise of and excess tax benefit of share-based compensation provided cash of $146,000. Cash was used to pay dividends of $3.8 million, repay borrowings under the term and revolving credit notes totaling $2.4 million, and repurchase of Company common stock for $399,000.

The effect of changes in foreign exchange rates increased (decreased) cash and cash equivalents by ($140,000) and $60,000 in the nine-month periods ended September 30, 2011, and 2010, respectively.

Capital Expenditures

Cash paid for capital expenditures was $2.3 million for the nine-month period ended September 30, 2011. These expenditures consisted mainly of computer software, computer hardware, furniture and other equipment. The Company expects similar capital expenditure purchases for the remainder of 2011 consisting primarily of computer software and hardware and other equipment to be funded through cash generated from operations.

Debt and Equity

On December 19, 2008, the Company borrowed $9.0 million under a term note to partially finance the acquisition of MIV. In July 2010, the Company refinanced the existing term loan with a $6.9 million term loan. The new term loan is payable in 35 monthly installments of $80,104, with a balloon payment of the remaining principal balance and interest due on July 31, 2013. Borrowings under the term note bear interest at an annual rate of 3.79%. The outstanding balance of the term note at September 30, 2011, was $6.1 million.

On July 31, 2010, the Company borrowed $10.0 million under a term note to partially finance the acquisition of OCS. The term loan is payable in 35 monthly installments of $121,190, with a balloon payment of the remaining principal balance and interest due on July 31, 2013. Borrowings under the term note bear interest at an annual rate of 3.79%. The outstanding balance of the term note at September 30, 2011, was $8.7 million.

The Company also has a revolving credit note that was renewed in June 2011 to extend the term to June 30, 2012. The maximum aggregate amount available under the revolving credit note is $6.5 million, subject to a borrowing base equal to 75% of the Company’s eligible accounts receivable. Borrowings under the revolving credit note bear interest at a variable annual rate, with three rate options at the discretion of management as follows: (1) 2.5% plus the daily reset one-month LIBOR rate, or (2) 2.2% plus the one-, two-, three-, six- or twelve-month LIBOR rate, or (3) the bank’s Money Market Loan Rate. As of September 30, 2011, the revolving credit note did not have a balance.

The agreement under which the Company acquired MIV provides for contingent earn-out payments over three years based on growth in revenue and earnings. The 2010 and 2009 earn-out payments paid in February 2011 and 2010, were $1.6 million and $172,000 respectively, net of closing valuation adjustments, and were recorded as additions to goodwill. In April 2011, the Company reached an agreement which limits the final earn-out payment associated with the MIV acquisition at $2.6 million. Of this amount, $2.4 million was paid during April 2011 and a final payment of $117,000 was paid in September 2011. The payments have been recorded as additions to goodwill.

The Company assumed capital leases of $42,000 in connection with its acquisition of OCS for computer equipment through 2012. The capital leases meet capitalization requirements because the lease terms exceed more than 75% of the related assets’ estimated useful lives. The equipment is depreciated over the lease terms. The Company also purchased operational inserting equipment for $389,000 through a capital lease arrangement. The lease began November 1, 2010, for a five-year term with a bargain purchase option. The equipment is being depreciated over seven years, the estimated useful life of the asset. The Company entered into a new a capital lease agreement for office equipment, which meets capitalization requirements for the present value of the minimum lease payments exceeding 90% of the fair market value of the equipment. The value of the lease is $58,000 and the equipment is being depreciated over the five-year lease term.

Shareholders’ equity increased $4.9 million to $53.5 million at September 30, 2011, from $48.6 million at December 31, 2010. The increase was due to net income of $8.4 million, non-cash stock compensation expense of $538,000, the exercise of stock options of $769,000, tax benefits of share-based compensation of $354,000, offset by dividends paid of $4.4 million, a decrease in the cumulative translation adjustment of $311,000 and share repurchases of $420,000, including $74,000 of restricted shares for payroll tax withholdings and $346,000 previously-owned common shares tendered by optionees to pay for the option strike price to exercise options.

Stock Repurchase Program

In February 2006, the Board of Directors of the Company authorized the repurchase of 750,000 shares of common stock in the open market or in privately negotiated transactions. As of September 30, 2011, the remaining number of shares that could be purchased under this authorization was 256,376.

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

There are no material changes to the disclosures regarding the Company’s market risk exposures made in its Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 4.

Controls and Procedures

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – Other Information

ITEM 1A.

Risk Factors

Risk factors relating to the Company are contained in Part I, Item 1A of its Annual Report on Form 10-K for the fiscal year ended December 31, 2010. No material change to such risk factors has occurred during the three-month period ended September 30, 2011.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

In February 2006, the Board of Directors of the Company authorized the repurchase of an additional 750,000 shares of Common Stock in the open market or in privately negotiated transactions. Unless terminated earlier by resolution of the Company’s Board of Directors, the repurchase program will expire when the Company has repurchased all shares authorized for repurchase thereunder. As of November 1, 2011, 493,624 shares have been repurchased under that authorization.

The table below summarizes stock repurchases for the three-month period ended September 30, 2011.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

July 1 – July 31, 2011		--		--		--		264,420
August 1 – August 31, 2011		--		--		--		264,420
September 1 – September 30, 2011		8,044	$	34.25		8,044		256,376

ITEM 6.

Exhibits

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NATIONAL RESEARCH CORPORATION

Date: November 8, 2011	By:	/s/ Michael D. Hays
		Michael D. Hays Chief Executive Officer (Principal Executive Officer)



Date: November 8, 2011	By:	/s/ Kevin R. Karas
		Kevin R. Karas Senior Vice President Finance, Treasurer, Secretary and Chief Financial Officer (Principal Financial and Accounting Officer)

NATIONAL RESEARCH CORPORATION

EXHIBIT INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period ended September 30, 2011

Exhibit

(31.1)

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

(31.2)

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

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

(101)*

Financial statements from the Quarterly Report on Form 10-Q of National Research Corporation for the quarter ended September 30, 2011, formatted in eXtensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, (iv) the Notes to Condensed Consolidated Financial Statements, and (v) document and entity information

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

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