XNYS:ARB Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 June 30, 2012

Or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission file number: 1-1969

 

 

ARBITRON INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   52-0278528

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9705 Patuxent Woods Drive

Columbia, Maryland 21046

(Address of principal executive offices) (Zip Code)

(410) 312-8000

(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  x    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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    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   x    Accelerated Filer   ¨
Non-Accelerated Filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

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

The registrant had 26,128,753 shares of common stock, par value $0.50 per share, outstanding as of August 1, 2012.

 

 

 


Table of Contents

ARBITRON INC.

INDEX

 

     Page
No.

PART I – FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Consolidated Balance Sheets – June 30, 2012, and December 31, 2011

   4

Consolidated Statements of Income – Three Months Ended June 30, 2012, and 2011

   5

Consolidated Statements of Income – Six Months Ended June 30, 2012, and 2011

   6

Consolidated Statements of Comprehensive Income– Three and Six Months Ended June  30, 2012, and 2011

   7

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2012, and 2011

   8

Notes to Consolidated Financial Statements – June 30, 2012

   9

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

   21

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   34

Item 4. Controls and Procedures

   34

PART II – OTHER INFORMATION

  

Item 1. Legal Proceedings

   35

Item 1A. Risk Factors

   36

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

   36

Item 4. (Removed and Reserved)

  

Item 6. Exhibits

   37

Signature

   39


Table of Contents

 

Arbitron owns or has the rights to various trademarks, trade names or service marks used in its radio audience ratings business and subsidiaries, including the following: the Arbitron name and logo, ArbitrendsSM , RetailDirect®, RADAR®, TAPSCANTM, TAPSCAN WORLDWIDETM, LocalMotion®, Maximi$er®, Maximi$er® Plus, Arbitron PD Advantage®, SmartPlus®, Arbitron Mobile, Arbitron Mobile IndexTM, Arbitron Mobile Trends PanelsTM, Portable People MeterTM, PPMTM , Arbitron PPMTM , Arbitron PPM®, PPM 360TM, Marketing Resources Plus®, PrintPlus®, MapMAKER DirectSM, Media ProfessionalSM, Media Professional PlusSM, QUALITAPSM, Schedule-ItSM, and Zokem.

The trademarks Windows®, MscoreTM, Audience Reaction™, Media Monitors® and Media Rating Council® referred to in this Quarterly Report on Form 10-Q are the registered trademarks of others.

 

 

We routinely post important information on our website at www.arbitron.com. Information contained on our website is not part of this quarterly report.

 

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ARBITRON INC.

Consolidated Balance Sheets

(In thousands, except par value data)

 

     June 30,
2012
    December 31,
2011
 
     (Unaudited)     (Audited)  

Assets

    

Current assets

    

Cash and cash equivalents

   $ 11,073      $ 19,715   

Trade accounts receivable, net of allowance for doubtful accounts of $4,208 as of June 30, 2012, and $4,615 as of December 31, 2011

     61,304        62,886   

Prepaid expenses and other current assets

     7,883        7,141   

Short-term equity and other investments

     1,703        1,703   

Deferred tax assets

     5,047        6,398   
  

 

 

   

 

 

 

Total current assets

     87,010        97,843   

Long-term equity and other investments

     11,945        13,210   

Property and equipment, net

     65,808        70,651   

Goodwill, net

     45,242        45,430   

Other intangibles, net

     9,171        10,526   

Noncurrent deferred tax assets

     1,326        —     

Other noncurrent assets

     1,098        1,308   
  

 

 

   

 

 

 

Total assets

   $ 221,600      $ 238,968   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 8,667      $ 10,534   

Accrued expenses and other current liabilities

     22,695        32,276   

Deferred revenue

     52,307        37,080   
  

 

 

   

 

 

 

Total current liabilities

     83,669        79,890   

Noncurrent deferred tax liabilities

     —          1,302   

Other noncurrent liabilities

     30,243        30,960   
  

 

 

   

 

 

 

Total liabilities

     113,912        112,152   
  

 

 

   

 

 

 

Stockholders’ equity

    

Preferred stock, $100.00 par value, 750 shares authorized, no shares issued

     —          —     

Common stock, $0.50 par value, 500,000 shares authorized, 32,338 shares issued as of June 30, 2012, and December 31, 2011

     16,169        16,169   

Retained earnings

     109,864        128,772   

Common stock held in treasury, 6,226 shares as of June 30, 2012, and 5,048 shares as of December 31, 2011

     (3,113     (2,524

Accumulated other comprehensive loss

     (15,232     (15,601
  

 

 

   

 

 

 

Total stockholders’ equity

     107,688        126,816   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 221,600      $ 238,968   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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ARBITRON INC.

Consolidated Statements of Income

(In thousands, except per share data)

(unaudited)

 

     Three Months Ended  
     June 30,  
     2012      2011  

Revenue

   $ 104,407       $ 95,737   
  

 

 

    

 

 

 

Costs and expenses

     

Cost of revenue

     63,205         61,025   

Selling, general and administrative

     20,701         18,656   

Research and development

     9,896         9,017   
  

 

 

    

 

 

 

Total costs and expenses

     93,802         88,698   
  

 

 

    

 

 

 

Operating income

     10,605         7,039   

Equity in net income of affiliate

     5,391         5,453   
  

 

 

    

 

 

 

Income before interest and income tax expense

     15,996         12,492   

Interest income

     11         8   

Interest expense

     132         104   
  

 

 

    

 

 

 

Income before income tax expense

     15,875         12,396   

Income tax expense

     5,912         4,812   
  

 

 

    

 

 

 

Net income

   $ 9,963       $ 7,584   
  

 

 

    

 

 

 

Income per weighted-average common share

     

Basic

   $ 0.38       $ 0.28   

Diluted

   $ 0.37       $ 0.27   

Weighted-average common shares used in calculations

     

Basic

     26,318         27,159   

Potentially dilutive securities

     486         449   
  

 

 

    

 

 

 

Diluted

     26,804         27,608   
  

 

 

    

 

 

 

Dividends declared per common share outstanding

   $ 0.10       $ 0.10   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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ARBITRON INC.

Consolidated Statements of Income

(In thousands, except per share data)

(unaudited)

 

     Six Months Ended  
     June 30,  
     2012      2011  

Revenue

   $ 210,801       $ 196,606   
  

 

 

    

 

 

 

Costs and expenses

     

Cost of revenue

     110,653         106,704   

Selling, general and administrative

     38,704         35,765   

Research and development

     19,614         18,012   
  

 

 

    

 

 

 

Total costs and expenses

     168,971         160,481   
  

 

 

    

 

 

 

Operating income

     41,830         36,125   

Equity in net income of affiliate

     3,035         2,921   
  

 

 

    

 

 

 

Income before interest and income tax expense

     44,865         39,046   

Interest income

     31         14   

Interest expense

     261         268   
  

 

 

    

 

 

 

Income before income tax expense

     44,635         38,792   

Income tax expense

     16,865         14,961   
  

 

 

    

 

 

 

Net income

   $ 27,770       $ 23,831   
  

 

 

    

 

 

 

Income per weighted-average common share

     

Basic

   $ 1.04       $ 0.88   

Diluted

   $ 1.02       $ 0.86   

Weighted-average common shares used in calculations

     

Basic

     26,782         27,119   

Potentially dilutive securities

     491         483   
  

 

 

    

 

 

 

Diluted

     27,273         27,602   
  

 

 

    

 

 

 

Dividends declared per common share outstanding

   $ 0.20       $ 0.20   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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ARBITRON INC.

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Net income

   $ 9,963      $ 7,584      $ 27,770      $ 23,831   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Foreign currency translation adjustment

     (664     (23     (271     (9

Retirement liabilities:

        

Amortization of actuarial loss, net of tax expense of $205, and $151 for the three-month periods ended June 30, 2012, and 2011, respectively; and net of a tax expense of $410 and $303 for the six-month periods ended June 30, 2012, and 2011, respectively.

     318        236        640        472   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

     (346     213        369        463   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 9,617      $ 7,797      $ 28,139      $ 24,294   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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ARBITRON INC.

Consolidated Statements of Cash Flows

(In thousands and unaudited)

 

     Six Months Ended
June 30,
 
     2012     2011  

Cash flows from operating activities

    

Net income

   $ 27,770      $ 23,831   

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

    

Depreciation and amortization of property and equipment

     14,137        13,983   

Amortization of other intangible assets

     1,220        571   

Loss on asset disposals and impairments of property and equipment

     733        1,221   

Deferred income taxes

     (1,687     (706

Equity in net income of affiliate

     (3,035     (2,921

Distributions from affiliate

     4,300        4,050   

Bad debt expense

     860        930   

Non-cash share-based compensation

     4,377        3,831   

Changes in operating assets and liabilities

    

Trade accounts receivable

     722        327   

Prepaid expenses and other assets

     (548     2,705   

Accounts payable

     (1,319     250   

Accrued expenses and other current liabilities

     (10,770     (6,998

Deferred revenue

     15,227        11,267   

Other noncurrent liabilities

     1,667        2,010   
  

 

 

   

 

 

 

Net cash provided by operating activities

     53,654        54,351   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Additions to property and equipment

     (10,627     (14,182
  

 

 

   

 

 

 

Net cash used in investing activities

     (10,627     (14,182
  

 

 

   

 

 

 

Cash flows from financing activities

    

Proceeds from stock option exercises and stock purchase plan

     3,311        2,046   

Stock repurchases

     (50,025     —     

Dividends paid to stockholders

     (5,454     (5,408

Tax benefits realized from share-based awards

     554        484   

Debt borrowings

     —          5,000   

Debt repayments

     —          (53,000
  

 

 

   

 

 

 

Net cash used in financing activities

     (51,614     (50,878
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (55     (1
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (8,642     (10,710

Cash and cash equivalents at beginning of period

     19,715        18,925   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 11,073      $ 8,215   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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ARBITRON INC.

Notes to Consolidated Financial Statements

June 30, 2012

(unaudited)

 

1. Basis of Presentation and Consolidation

Presentation

The accompanying unaudited consolidated financial statements of Arbitron Inc. (the “Company” or “Arbitron”) have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and are of a normal recurring nature. The consolidated balance sheet as of December 31, 2011 was audited as of that date, but all of the information and notes as of December 31, 2011 required by GAAP have not been included in this Form 10-Q. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Consolidation

The consolidated financial statements of Arbitron for the six-month period ended June 30, 2012, reflect the consolidated financial position, results of operations and cash flows of the Company and its wholly-owned subsidiaries: Arbitron Holdings Inc., Arbitron Mobile Oy, Astro West LLC, Cardinal North LLC, Ceridian Infotech (India) Private Limited, Arbitron International, LLC, and Arbitron Technology Services India Private Limited. For the six-month period ended June 30, 2011, the consolidated financial statements did not reflect Arbitron Mobile Oy and Cardinal North LLC, which were established related to the acquisition of Zokem Oy in July 2011. All significant intercompany balances and transactions have been eliminated in consolidation. The Company has one segment which meets the quantitative thresholds for being a reportable segment.

 

2. New Accounting Pronouncements

Testing Goodwill for Impairment. In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-08, Intangibles — Goodwill and Other (Topic 350) — Testing Goodwill for Impairment (“ASU 2011-08”), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for the Company for interim and annual periods ended during 2012. The adoption of this guidance had no impact on the Company’s consolidated financial statements.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements. In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820) — Fair Value Measurement (“ASU 2011-04”), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. ASU 2011-04 is effective for the Company for interim and annual periods ended during 2012 and will be applied prospectively. The adoption of this guidance had no impact on the Company’s consolidated financial statements.

 

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3. Debt

On November 21, 2011, the Company entered into an agreement with a consortium of lenders to provide up to $150.0 million of financing to the Company through a five-year, unsecured revolving credit facility (the “Credit Facility”) expiring on November 21, 2016. The agreement contains an expansion feature to increase the total financing available under the Credit Facility by up to $75.0 million to an aggregate of $225.0 million. Such increased financing would be provided by one or more existing Credit Facility lending institutions, subject to the approval of the lending banks, and/or in combination with one or more new lending institutions, subject to the approval of the Credit Facility’s administrative agent.

As of June 30, 2012 and December 31, 2011, there were no outstanding borrowings under the Credit Facility. Interest paid during the six-month periods ended June 30, 2012, and 2011, was $0.1 million and $0.3 million, respectively.

 

4. Stockholders’ Equity

Changes in stockholders’ equity for the six-month period ended June 30, 2012, were as follows (in thousands):

 

     Shares
Outstanding
    Common
Stock
     Treasury
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Total
Stockholders’
Equity
 

Balance as of December 31, 2011

     27,290      $ 16,169       $ (2,524   $ 128,772      $ (15,601   $ 126,816   

Net income

     —          —           —          27,770        —          27,770   

Common stock issued from treasury stock

     195        —           97        3,067        —          3,164   

Common stock repurchased

     (1,373     —           (686     (49,339     —          (50,025

Excess tax benefits from share-based awards

     —          —           —          554        —          554   

Non-cash share-based compensation

     —          —           —          4,377        —          4,377   

Dividends declared

     —          —           —          (5,337     —          (5,337

Other comprehensive income

     —          —           —          —          369        369   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

     26,112      $ 16,169       $ (3,113   $ 109,864      $ (15,232   $ 107,688   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

A quarterly cash dividend of $0.10 per common share was paid to stockholders on July 2, 2012.

 

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5. Net Income per Weighted-Average Common Share

The computations of basic and diluted net income per weighted-average common share for the three and six-month periods ended June 30, 2012 and 2011, are based on the Company’s weighted-average shares of common stock and potentially dilutive securities outstanding. Potentially dilutive securities are calculated in accordance with the treasury stock method, which assumes the proceeds from the exercise of all stock options are used to repurchase the Company’s common stock at the average market price for the period.

As of June 30, 2012, and 2011, there were stock options to purchase 2,012,378 shares, and 2,038,787 shares of the Company’s common stock outstanding, respectively, of which stock options to purchase 1,295,172 shares, and 869,397 shares of the Company’s common stock, respectively, were excluded from the computation of the diluted net income per weighted-average common share for the three-month periods ended June 30, 2012, and 2011, respectively, either because the stock options’ exercise prices were greater than the average market price of the Company’s common shares or assumed repurchases from proceeds from the stock options’ exercise were antidilutive.

 

6. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss as of June 30, 2012 and December 31, 2011, were as follows (in thousands):

 

     June 30,
2012
    December 31,
2011
 

Foreign currency translation adjustment

   $ (2,419   $ (2,148

Retirement plan liabilities, net of tax

     (12,813     (13,453
  

 

 

   

 

 

 

Accumulated other comprehensive loss

   $ (15,232   $ (15,601
  

 

 

   

 

 

 

 

7. Prepaid Expenses and Other Current Assets

Prepaids and other current assets as of June 30, 2012, and December 31, 2011, consisted of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Prepaid income taxes

   $ 2,599       $ 1,984   

Survey participant incentives and prepaid postage

     2,179         1,770   

Insurance recovery receivables

     484         993   

Other

     2,621         2,394   
  

 

 

    

 

 

 

Prepaids and other current assets

   $ 7,883       $ 7,141   
  

 

 

    

 

 

 

Insurance recovery receivables. During 2008, the Company became involved in two securities-law civil actions and a governmental interaction primarily related to the commercialization of the Company’s PPM service. The management of the Company believes a portion of the legal fees and costs associated with this litigation are covered by the Company’s Directors and Officers insurance policy and therefore has recognized an insurance recovery receivable. On February 3, 2012, as a result of a mediation process overseen by an independent mediator, the Company and its insurers agreed to settle the class action for $7.0 million, which was funded by insurance. From 2008 until June 30, 2012, the Company had incurred approximately $12.6 million in legal fees and costs in defense of its

 

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positions related thereto, and as of June 30, 2012, the Company had received $9.2 million in insurance reimbursements related to these legal actions. From 2008 until December 31, 2011, the Company had incurred approximately $12.1 million in legal fees and costs in defense of its positions related thereto, and as of December 31, 2011, the Company had received $7.9 million in insurance reimbursements.

For the six-month periods ended June 30, 2012, and 2011, the Company incurred approximately $0.6 million, and $0.6 million, respectively, in related legal fees, which were recognized as increases to selling, general, and administrative expense. These legal fees were offset by $0.8 million, and $0.8 million in estimated insurance recoveries, which were recognized as reductions to selling, general and administrative expense during 2012 and 2011, respectively.

 

8. Equity and Other Investments, Total

The Company’s equity and other investments as of June 30, 2012, and December 31, 2011, consisted of the following (in thousands):

 

     June 30,
2012
     December 31,
2011
 

Long-term equity and other investment

   $ 11,945       $ 13,210   

Short-term equity and other investment

     1,703         1,703   
  

 

 

    

 

 

 

Equity and other investments, total

   $ 13,648       $ 14,913   
  

 

 

    

 

 

 

The Company’s 49.5% investment in Scarborough Research (“Scarborough”), a Delaware general partnership, is accounted for using the equity method of accounting. The Company’s preferred stock investment in TRA Global, Inc. (“TRA”), a Delaware corporation is accounted for using the cost method of accounting. See Note 16 for further information regarding the Company’s TRA investment as of June 30, 2012, and December 31, 2011.

The following table shows the investment activity and balances for each of the Company’s investments and in total for the three and six-month periods ended June 30, 2012, and 2011 (in thousands):

 

                                                                             
     Three-Month Period Ended
June 30, 2012
    Three-Month Period Ended
June 30, 2011
 
     Scarborough     TRA      Total     Scarborough     TRA      Total  

Beginning balance

   $ 7,905      $ 1,703       $ 9,608      $ 8,023      $ 5,180       $ 13,203   

Investment income

     5,391        —           5,391        5,453        —           5,453   

Distributions from investee

     (1,351     —           (1,351     (1,400     —           (1,400
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance at June 30

   $ 11,945      $ 1,703       $ 13,648      $ 12,076      $ 5,180       $ 17,256   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

                                                                             
     Six-Month Period Ended
June 30, 2012
    Six-Month Period Ended
June 30, 2011
 
     Scarborough     TRA      Total     Scarborough     TRA      Total  

Beginning balance

   $ 13,210      $ 1,703       $ 14,913      $ 13,205      $ 5,180       $ 18,385   

Investment income

     3,035        —           3,035        2,921        —           2,921   

Distributions from investee

     (4,300     —           (4,300     (4,050     —           (4,050
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance at June 30

   $ 11,945      $ 1,703       $ 13,648      $ 12,076      $ 5,180       $ 17,256   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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9. Retirement Plans

Certain of the Company’s United States employees participate in a defined-benefit pension plan that closed to new participants effective January 1, 1995. The Company has a nonqualified, unfunded supplemental retirement plan, as well as a postretirement healthcare plan for eligible retired employees who participate in the pension plan and were hired before January 1, 1992. The components of periodic benefit costs for the defined-benefit pension, postretirement healthcare and supplemental retirement plans were as follows for the three and six-month periods ended June 30, 2012, and 2011 (in thousands):

 

                                                                 
    

Defined-Benefit
Pension

Plan

Three-Month

Period Ended
June 30,

   

Postretirement
Healthcare
Plan

Three-Month

Period Ended
June 30,

    

Supplemental
Retirement
Plan

Three-Month

Period Ended
June 30,

 
     2012     2011     2012      2011      2012      2011  

Service cost

   $ 216      $ 193      $ 10       $ 9       $ 8       $ 5   

Interest cost

     477        455        18         21         40         40   

Expected return on plan assets

     (509     (513     —           —           —           —     

Amortization of net loss

     470        343        5         7         48         38   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $      654      $     478      $ 33       $ 37       $   96       $   83   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                 
    

Defined-Benefit
Pension

Plan

Six-Month

Period Ended
June 30,

   

Postretirement
Healthcare
Plan

Six-Month

Period Ended
June 30,

    

Supplemental
Retirement
Plan

Six-Month

Period Ended
June 30,

 
     2012     2011     2012      2011      2012      2011  

Service cost

   $ 431      $ 387      $ 18       $ 19       $ 15       $ 10   

Interest cost

     953        910        36         41         80         80   

Expected return on plan assets

     (1,018     (1,026     —           —           —           —     

Amortization of net loss

     943        685        11         14         96         76   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 1,309      $ 956      $ 65       $ 74       $ 191       $ 166   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

10. Acquisitions

Zokem Oy. On July 28, 2011, a wholly-owned subsidiary of the Company acquired Zokem Oy. The purchase price was $10.6 million in cash plus a contingent consideration arrangement with an estimated fair value of approximately $0.9 million as of the acquisition date. The contingent consideration arrangement provides for possible additional cash payments to be made by the Company to the former Zokem shareholders through 2015 of up to $12.0 million, which are contingent upon Zokem reaching certain financial performance targets in the future. The approximate $0.9 million fair value estimate was determined by applying the income approach method. The key assumptions used in the fair value valuation include a probability-weighted range of performance targets for the four-year measurement period of 2012 through 2015 and an adjusted discount rate. The Company periodically reassesses the fair value of the contingent consideration. As of June 30, 2012, the Company’s estimate of the fair value of the contingent consideration was $1.1 million, which was comprised of less than $0.1 million recorded in accrued expenses and other current liabilities and approximately $1.1 million recorded in other noncurrent liabilities on the Company’s consolidated balance sheet.

 

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Table of Contents
11. Goodwill

The following table shows the changes in goodwill for the six-month periods ended June 30, 2012, and 2011, (in thousands):

 

     Six-Month
Period
Ended
June 30,
2012
    Six-Month
Period
Ended
June 30,
2011
 

Beginning balance,

   $ 45,430      $ 38,895   

Translation effect

     (188     —     
  

 

 

   

 

 

 

Ending balance

   $ 45,242      $ 38,895   
  

 

 

   

 

 

 

 

12. Taxes

The effective tax rate decreased to 37.8% for the six months ended June 30, 2012, from 38.6% for the six months ended June 30, 2011. The decrease results primarily from the favorable settlement of various audits during the six-month period ended June 30, 2012.

During the six-month period ended June 30, 2012, the Company’s unrecognized tax benefits for certain income tax contingencies decreased from $1.3 million as of December 31, 2011, to $1.2 million as of June 30, 2012. The decrease is attributable to the settlement of various audits. If recognized, the $1.2 million in unrecognized tax benefits would reduce the Company’s effective tax rate in future periods.

Income taxes paid for the six-months ended June 30, 2012 and 2011, were $19.0 million and $14.3 million, respectively.

 

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13. Share-Based Compensation

The following table sets forth information with regard to the income statement recognition of share-based compensation for the three and six-month periods ended June 30, 2012, and 2011 (in thousands):

 

     Three-
Month
Period
Ended
June 30,
2012
     Three-
Month
Period
Ended
June 30,
2011
     Six-Month
Period
Ended
June 30,
2012
     Six-Month
Period
Ended
June 30,
2011
 

Cost of revenue

   $ 97       $ 115       $ 243       $ 243   

Selling, general and administrative

     2,018         1,634         3,940         3,429   

Research and development

     94         77         194         159   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share-based compensation

   $ 2,209       $ 1,826       $ 4,377       $ 3,831   
  

 

 

    

 

 

    

 

 

    

 

 

 

No share-based compensation cost was capitalized during the six-month periods ended June 30, 2012, and 2011.

Stock Options

Stock options awarded to employees under the Company’s 2008 Equity Compensation Plan (“2008 Plan”) generally vest annually over a three-year period, have a 10-year term and have an exercise price equal to the fair market value of the Company’s common stock at the date of grant. Compensation expense for stock options is recognized on a straight-line basis over the vesting period using the fair value of each stock option estimated as of the grant date.

For the three-month period ended June 30, 2012, the number of stock options granted was 12,511 and the weighted-average exercise price for those stock options granted was $35.46. For the three month period ended June 30, 2011, no stock options were granted. For the six-month periods ended June 30, 2012 and 2011, the number of stock options granted was 106,466 and 73,225, respectively, and the weighted-average exercise price for those stock options granted was $34.06 and $44.06, respectively.

As of June 30, 2012, there was $2.5 million in total unrecognized compensation cost related to unvested stock options. This aggregate unrecognized cost is expected to be recognized over a weighted-average remaining period of 2.1 years. The weighted-average exercise price and weighted-average remaining contractual term for outstanding stock options as of June 30, 2012, were $34.95 and 5.4 years, respectively.

Service and Performance Award Units

Service award units. The Company’s unvested service award units (i) were issued at the fair market value of the Company’s common stock on the date of grant, (ii) vest in four equal annual installments beginning on the first anniversary date of the grant, and (iii) expire without vesting if the employee is no longer employed by the Company. Compensation expense for service award units is recognized on a straight-line basis over the vesting period using the fair market value of the Company’s common stock on the date of grant.

As of June 30, 2012, there was $1.4 million of total unrecognized compensation cost related to unvested service award units. This aggregate unrecognized cost for service award units is expected to be recognized over a weighted-average period of 1.8 years.

 

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Table of Contents

Additional information for the three and six-month periods ended June 30, 2012, and 2011, is noted in the following table (dollars in thousands, except per share amounts):

 

     Three-
Month
Period
Ended
June 30,
2012
     Three-
Month
Period
Ended
June 30,
2011
     Six-Month
Period
Ended
June 30,
2012
     Six-Month
Period
Ended
June 30,
2011
 

Number of service award shares granted during the period

     4,583         —           4,583         18,434   

Weighted average grant-date fair value per share granted during the period

   $ 35.46         —         $ 35.46       $ 42.72   

Fair value of service award shares vested during the period

   $ 1,292       $ 1,531       $ 1,740       $ 2,214   

Service award units to Board of Directors (“Board”). Beginning in 2012, the Board members have the right to elect to receive all or a portion of their annual 2012 compensation as Board service award units. These Board service award units (i) were issued at the fair market value of the Company’s common stock on the date of grant, and (ii) vest on the anniversary date of the grant. Compensation expense for Board service award units is recognized on a straight-line basis over the vesting period using the fair market value of the Company’s common stock on the date of grant.

During the three and six-month period ended June 30, 2012, the Company granted 5,640 Board service award units at a weighted average grant-date fair value per share of $35.46. As of June 30, 2012, there was $0.2 million of total unrecognized compensation cost related to unvested Board service award units. This aggregate unrecognized cost for service award units is expected to be recognized over a weighted-average period of 0.9 years.

Performance award units. During the six-month periods ended June 30, 2012 and 2011, the Company granted performance award units under the 2008 Plan. These performance award units (i) were issued at the fair market value of the Company’s common stock on the date of grant, (ii) will expire without vesting if the Company’s return on invested capital (“ROIC”) for the annual performance period does not exceed 12%, which is an approximation of the Company’s weighted average cost of capital, (iii) will, if the Company’s ROIC exceeds 12%, vest in four equal annual installments beginning with the first anniversary date of the grant, and (iv) for any unvested units, expire without vesting if the recipient is no longer employed by the Company.

Compensation expense for performance award units is recognized on an accelerated basis using the fair market value of the Company’s common stock on the date of grant. The Company recognizes expense for these performance award units under the assumption that the performance ROIC target will be achieved. If it appears such performance ROIC target will not be met, the Company will stop recognizing any further compensation cost and any previously recognized compensation cost would be reversed. As of June 30, 2012, there was $2.1 million of total unrecognized compensation cost related to unvested performance award units. This aggregate unrecognized cost is expected to be recognized over a weighted-average period of 2.9 years.

 

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Table of Contents

Additional information for the three and six-month periods ended June 30, 2012, and 2011, is noted in the following table (dollars in thousands, except per share amounts):

 

     Three-
Month
Period
Ended
June 30,
2012
     Three-
Month
Period
Ended
June 30,
2011
     Six-Month
Period
Ended
June 30,
2012
     Six-Month
Period
Ended
June 30,
2011
 

Number of performance award shares granted during the period

     —           —           34,229         22,511   

Weighted average grant-date fair value per share granted during the period

     —           —         $ 33.87       $ 44.44   

Fair value of performance award shares vested during the period

   $ 325       $ 415       $ 847       $ 804   

Deferred Stock Units

Service DSU grants to CEO. During the six-month periods ended June 30, 2012 and 2011, the Company granted service-based deferred stock unit awards (“Service DSUs”) under the 2008 Plan to its CEO. Service DSUs are issued at the fair market value of the Company’s stock on the date of grant, and generally vest annually over a four-year period on each anniversary date of the grant. Service DSUs also include dividend equivalent DSUs, which vest immediately upon the date of grant.

Compensation expense for Service DSUs is recognized on a straight-line basis over the vesting period using the fair market value of the Company’s common stock on the date of grant. The Service DSUs provide for accelerated vesting upon termination without cause or the CEO’s retirement as defined in his employment agreement. As of June 30, 2012, there was no unrecognized compensation cost related to Service DSUs.

The Service DSUs will be convertible into shares of the Company’s common stock following the holder’s termination of employment. No Service DSUs were converted into shares of the Company’s common stock during the six-month periods ended June 30, 2012, and 2011. Additional information for the three and six-month periods ended June 30, 2012, and 2011, is noted in the following table (dollars in thousands, except per share amounts):

 

Service DSU’s Granted to CEO

   Three-
Month
Period
Ended
June 30,
2012
     Three-
Month
Period
Ended
June 30,
2011
     Six-Month
Period
Ended
June 30,
2012
     Six-Month
Period
Ended
June 30,
2011
 

Number of shares granted during the period

     —           —           1,181         900   

Weighted-average grant date fair value per share granted during the period

     —           —         $ 33.87       $ 44.44   

Fair value of shares vested during the period

     —           —         $ 568       $ 704   

 

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Table of Contents

Performance DSU grants to CEO. During the six-month periods ended June 30, 2012 and 2011, the Company granted performance-based deferred stock unit awards (“Performance DSUs”) under the 2008 Plan to its CEO. These Performance DSUs (i) were issued at the fair market value of the Company’s common stock on the date of grant, (ii) will expire without vesting if the Company’s ROIC for the annual performance period does not exceed 12%, which is an approximation of the Company’s weighted average cost of capital, (iii) will, if the Company’s ROIC exceeds 12%, vest in four equal annual installments beginning on the first anniversary date of the grant, and (iv) provide for accelerated vesting upon termination without cause or the CEO’s retirement as defined in his employment agreement. These Performance DSUs, if vested, will be convertible into shares of the Company’s common stock, subsequent to termination of employment.

Compensation expense for Performance DSUs is recognized on an accelerated basis using the fair market value of the Company’s common stock on the date of grant. The Company recognizes expense for these Performance DSUs under the assumption that the performance target will be achieved. If it appears such performance target will not be met, the Company will stop recognizing any further compensation cost and any previously recognized compensation cost would be reversed. As of June 30, 2012, there was $1.4 million of total unrecognized compensation cost related to Performance DSUs. This aggregate unrecognized cost is expected to be recognized over the weighted-average period of 0.5 years.

Additional information for the three and six-month periods ended June 30, 2012, and 2011, is noted in the following table (dollars in thousands, except per share amounts):

 

Performance DSU’s Granted to CEO

   Three-
Month
Period
Ended
June 30,
2012
     Three-
Month
Period
Ended
June 30,
2011
     Six-Month
Period
Ended
June 30,
2012
     Six-Month
Period
Ended
June 30,
2011
 

Number of shares granted during the period

     —           —           59,049         24,122   

Weighted-average grant date fair value per share granted during the period

     —           —         $ 33.87       $ 44.44   

Fair value of shares vested during the period

     —           —         $ 396       $ 227   

Service DSU grants to Board. The Company issues deferred stock units to its Board of Directors (“Board DSUs”) under the 2008 Plan. These Board DSUs (i) were issued at the fair market value of the Company’s common stock on the date of grant and (ii) if vested, will be convertible to shares of the Company’s common stock subsequent to termination of service as a director. Beginning in 2012, the Board members have the right to elect to receive all or a portion of their annual 2012 compensation as Board DSUs that vest completely on the first anniversary date of the grant. For 2011 and 2010, annual grants were issued to the Board as Board DSUs that vest annually in three equal installments over a three-year period.

In addition, the Board members have the right to elect to receive all or a portion of their retainer and meeting attendance fees as Board DSUs, which vest immediately. Board DSUs are only granted to nonemployee Directors. Board DSUs also include dividend equivalent DSUs, which vest immediately upon the date of grant.

Compensation expense for Board DSUs is recognized on a straight-line basis over the vesting period using the fair market value of the Company’s common stock on the date of grant. As of June 30, 2012, there was $1.5 million of total unrecognized compensation cost related to Board DSUs granted to nonemployee directors. This aggregate unrecognized cost is expected to be recognized over the weighted-average period of 1.3 years.

 

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Table of Contents

Additional information for the three and six-month periods ended June 30, 2012, and 2011, is noted in the following table (dollars in thousands, except per share amounts):

 

Board DSUs and Dividend Equivalents Granted to Board

   Three-
Month
Period
Ended
June 30,
2012
     Three-
Month
Period
Ended
June 30,
2011
     Six-Month
Period
Ended
June 30,
2012
     Six-Month
Period
Ended
June 30,
2011
 

Number of shares granted during the period

     21,179         21,061         22,568         22,481   

Weighted-average grant date fair value per share granted during the period

   $ 35.41       $ 40.67       $ 35.49       $ 40.60   

Fair value of shares vested during the period

   $ 554       $ 57       $ 660       $ 173   

 

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Table of Contents
14. Concentration Risk

Arbitron is a leading media and marketing information services firm primarily serving radio, advertisers, advertising agencies, cable and broadcast television, retailers, out-of-home media, online media, mobile media, telecommunications providers, and print media.

The Company’s quantitative radio audience ratings service and related software licensing revenue accounted for the following percentages, in the aggregate, of total Company revenue:

 

     Three-
Month
Period
Ended
June 30,
2012
    Three-
Month
Period
Ended
June 30,
2011
    Six-Month
Period
Ended
June 30,
2012
    Six-Month
Period
Ended
June 30,
2011
 

Quantitative radio audience ratings service and related software licensing revenue

     82     81     89     89

The Company had one customer that individually represented approximately 19% of its annual revenue for the year ended December 31, 2011. The Company had two customers that individually represented approximately 18% and 10% of its total accounts receivable balance as of June 30, 2012, and two customers that individually represented approximately 23% and 11% of its total accounts receivable balance as of December 31, 2011. The Company has historically experienced a high level of contract renewals.

 

15. Stock Repurchases

On February 9, 2012, the Company’s Board of Directors authorized a program to repurchase up to $100.0 million in shares of the Company’s outstanding common stock through either periodic open-market or private transactions, in accordance with applicable insider trading and other securities laws and regulations, at then-prevailing market prices over a period of up to two years ending February 9, 2014. As of June 30, 2012, the Company had repurchased 1,372,853 shares of its outstanding common stock under this program for approximately $50.0 million.

 

16. Financial Instruments

The Company believes the fair market value of the TRA investment approximates its carrying value of $1.7 million as of June 30, 2012. The Company accounts for its $1.7 million investment in TRA’s preferred stock using the cost method of accounting. TRA is closely held and there is not an efficient market in which buyers and sellers determine the fair value of these shares. The Company periodically assesses the fair value of its investment in TRA through comparative analysis and analysis of TRA’s actual and projected financial results. In the event the fair value of the investment in TRA were to fall below its carrying value in the future, the Company would be required to recognize an impairment loss. During the month ended July 31, 2012, the Company sold its investment in TRA and the proceeds from the sale were approximately equal to the investment’s $1.7 million carrying value recorded on its balance sheet as of June 30, 2012.

 

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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto in this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements regarding Arbitron Inc. and its subsidiaries (“we,” “our,” “Arbitron,” or the “Company”) in this document that are not historical in nature, particularly those that utilize terminology such as “may,” “will,” “should,” “likely,” “expects,” “intends,” “anticipates,” “estimates,” “believes,” “plans,” or comparable terminology, are forward-looking statements based on current expectations about future events, which we have derived from information currently available to us. These forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results to differ materially from results implied by such forward-looking statements. These risks and uncertainties include, in no particular order, whether we will be able to:

 

   

successfully obtain and/or maintain Media Rating Council, Inc. (“MRC”) accreditation for our audience ratings services;

 

   

renew contracts with key customers;

 

   

collect, manage, and process the consumer information we utilize in our media marketing and information services in compliance with applicable data protection and privacy statutes, regulations, and other requirements;

 

   

successfully execute and maintain our cross platform and mobile measurement initiatives;

 

   

support our current and future services by designing, recruiting, and maintaining research samples that appropriately balance quality, size and operational cost;

 

   

successfully develop, implement, and fund initiatives designed to enhance sample quality;

 

   

successfully manage costs associated with cell phone household recruitment, targeted in-person recruitment, and address-based sampling;

 

   

successfully maintain and promote industry usage of our media and marketing information services, a critical mass of broadcaster encoding, and the proper understanding of our services and methodologies in light of governmental actions, including investigation, regulation, legislation or litigation, customer or industry group activism, or adverse community or public relations efforts;

 

   

successfully manage the impact on our business of the current economic environment generally, and in the advertising market, including, without limitation, the insolvency of any of our customers or the impact of the economic environment on our customers’ ability to fulfill their payment obligations to us;

 

   

successfully integrate acquired operations, including differing levels of management and internal control effectiveness at the acquired entity;

 

   

effectively respond to rapidly changing technologies by creating proprietary systems to support our research initiatives and by developing new services that meet marketplace demands in a timely manner;

 

   

successfully execute our business strategies, including evaluating and, where appropriate, entering into potential acquisition, joint-venture or other material third-party agreements;

 

   

successfully develop and implement technology solutions to identify and report consumer use of new and existing forms of media content and delivery, and advertising in an increasingly competitive environment; and

 

   

compete with companies that may have financial, marketing, sales, technical or other advantages over us.

There are a number of additional important factors that could cause actual events or our actual results to differ materially from those indicated by such forward-looking statements, including, without limitation, the factors set forth in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011, and elsewhere, and any subsequent periodic or current reports filed by us with the Securities and Exchange Commission (the “SEC”).

 

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Table of Contents

In addition, any forward-looking statements represent our expectations only as of the day we filed this Quarterly Report with the SEC and should not be relied upon as representing our expectations as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change.

Overview

We are a leading media and marketing information services firm primarily serving radio, advertisers, advertising agencies, cable and broadcast television, retailers, out-of-home media, online media, mobile media, telecommunications providers, and print media. We currently provide four main services:

 

   

estimating the size and composition of radio audiences in local markets and of audiences to network radio programming and commercials in the United States;

 

   

estimating the size and composition of audiences to media other than radio, including television viewed out-of-home, and content distributed on multiple platforms; we also analyze the behavior of smartphone and tablet users;

 

   

providing qualitative information about consumers, including their lifestyles, shopping patterns, and use of media; and

 

   

providing software to access and analyze media audience and marketing information data.

We have commercialized our Arbitron Portable People MeterTM (“PPM®”) ratings service in 48 of the largest United States radio markets. We may choose to commercialize our PPM ratings service in additional markets in the future. We refer to each of the 48 United States radio markets in which we have commercialized our PPM service as a “PPM Market” and collectively, as the “PPM Markets.”

Historically, our quantitative radio ratings services and related software have accounted for a substantial majority of our revenue. For each of the six-month periods ended June 30, 2012, and 2011, our quantitative radio ratings services and related software accounted for approximately 89% of our revenue. Approximately 77% of our total revenue for the six-month period ended June 30, 2012, was derived from local radio ratings services, of which approximately 73% was from the PPM Markets and 27% was from our Diary markets.

We expect for the year ending December 31, 2012, our quantitative radio ratings services and related software licensing will account for approximately 89% of our revenue. We also expect approximately 78% of our total revenue for the year ending December 31, 2012 will be derived from local radio ratings services, of which we estimate approximately 74% will be from the PPM Markets and 26% will be from the Diary markets. Quarterly fluctuations in these percentages are reflective of the seasonal delivery schedule of our quantitative radio ratings service and our Scarborough reports. For further information regarding seasonality trends, see “Seasonality.”

While we expect our quantitative radio ratings services and related software licensing will account for the majority of our revenue for the foreseeable future, we continue to seek opportunities to diversify our revenue base by, among other things, leveraging the investment we have made in our PPM ratings service and technology.

With the commercialization of our PPM ratings service complete in 48 of the largest U.S. radio markets, our future performance will be impacted by our ability and the costs required to address a variety of challenges and opportunities in the markets and industries we serve. See “— Ratings Trends and Initiatives for our Syndicated Radio Ratings Services” below. Protecting and supporting our existing customer base, and ensuring our services are competitive from a price, quality, and service perspective are critical components to these overall goals, although there can be no guarantee we will be successful in our efforts.

 

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Table of Contents

Ratings Trends and Initiatives for our Syndicated Radio Ratings Services

Challenges

We face a number of challenges in our syndicated radio audience ratings services. Response rates are one measure of our effectiveness in obtaining consent from persons to participate in our surveys and panels. Overall response rates for survey research, in general, have declined over the past several decades, and it has become increasingly difficult and more costly for us to obtain consent from persons to participate in our surveys and panels. We have been adversely impacted by these industry trends. Another measure often employed by users of our data to assess quality in our ratings is sample proportionality, which refers to how well the distribution of the group participating in any individual survey compares to the distribution of the population in the local market. We strive to achieve a level of both response rates and sample proportionality in our surveys sufficient to maintain confidence in our ratings and acceptance by the industry, and to support accreditation by the MRC.

If response rates decline or we are unable to maintain sample proportionality in our surveys or the costs of recruitment initiatives significantly increase, our radio audience ratings business could be adversely affected.

Quality Improvement Initiatives

In an effort to address the above challenges, we established internal benchmarks we strive to achieve for response rates and sample proportionality and have instituted a number of methodological enhancements, including cell phone household recruiting, targeted in-person recruiting, and address-based sampling. It is more expensive for us to recruit cell phone households and to conduct targeted in-person recruiting and address-based sampling. Because we intend to continue to increase the number of cell phone households in our samples and the level of address-based and targeted in-person recruiting, we expect the expenditures required to support these methods will be material. We currently anticipate the aggregate cost of cell phone household recruitment for the PPM and Diary services, and address-based and targeted in-person recruiting for the PPM service will be approximately $18.5 million in 2012, as compared to $15.5 million in 2011.

Portable People Meter Service. In operating our PPM ratings service, we have experienced and expect to continue to experience challenges, including those related to response rates and sample proportionality as described above in “— Ratings Trends and Initiatives for our Syndicated Radio Ratings Services — Challenges.” We expect to continue to implement additional measures to address these challenges. Since launching our PPM ratings service, we have implemented a number of initiatives and announced additional initiatives. We believe these steps reflect our commitment to ongoing improvement and our responsiveness to feedback from customers and governmental entities. We believe these commitments and enhancements are consistent with our ongoing efforts to continuously improve our radio ratings services and to obtain and maintain MRC accreditation. We expect these initiatives will likely require expenditures that will be material in the aggregate.

Diary Service. We strive to achieve representative samples. We believe that additional expenditures will be required in the future to research and test new measures associated with improving response rates and sample proportionality as described above in “— Ratings Trends and Initiatives for our Syndicated Radio Ratings Services — Challenges.” We continue to research and test new measures aimed at continuously improving sample quality.

MRC Accreditation

On July 18, 2012, the MRC accredited the radio average-quarter-hour monthly ratings data produced by the PPM ratings service in five additional markets: Los Angeles, Tampa-St. Petersburg-Clearwater, Baltimore, Riverside-San Bernardino, and San Antonio. Three of the markets, including Los Angeles, Baltimore and San Antonio, are being granted MRC accreditation for the first time. Two of the markets, including Riverside-San Bernardino and Tampa-St. Petersburg-Clearwater, are regaining accreditation, which had been withdrawn by the MRC in January 2012. The MRC has also voted to continue accreditation in nine other markets: Atlanta, Cincinnati, Houston, Kansas City, Milwaukee-Racine, Minneapolis-St. Paul, Philadelphia, Phoenix, and St. Louis. The MRC voted to not grant accreditation at this time in the remaining 34 PPM markets, and therefore PPM data in those markets continue to be unaccredited.

 

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As of the date we filed this Quarterly Report on Form 10-Q with the SEC, the quarter-hour-based radio ratings data produced by the PPM ratings service is accredited by the MRC in 14 local markets: Atlanta; Cincinnati; Houston-Galveston; Kansas City; Milwaukee-Racine; Minneapolis-St. Paul; Philadelphia; Phoenix; St. Louis; Los Angeles; Tampa-St. Petersburg-Clearwater; Baltimore; Riverside-San Bernardino; and San Antonio. We have applied for accreditation in all PPM Markets. We continue to seek accreditation in all unaccredited PPM Markets. For additional information regarding the status of MRC accreditation of our ratings services, see “Item 1. Business — Media Rating Council Accreditation” in our Annual Report on Form 10-K for the year ended December 31, 2011.

Privacy and Data Security

We are currently subject to U.S. and international data protection and privacy statutes, rules, and regulations, and may in the future become subject to additional such statutes, rules, and regulations. Complying with these laws may require us to make certain investments, make modifications to existing services, or prohibit us from offering certain types of services, any of which may be material and adversely impact our financial results. Failing to comply could result in civil and criminal liability, negative publicity, data being blocked from use, and liability under contracts with our customers, vendors, and partners.

Sale of TRA Investment

During July 2012, we sold our investment in TRA and the proceeds from the sale were approximately equal to the investment’s $1.7 million carrying value recorded on our balance sheet as of June 30, 2012.

Stock Repurchases

On February 9, 2012, our Board of Directors authorized a program to repurchase up to $100.0 million in shares of our outstanding common stock through either periodic open-market or private transactions, in accordance with applicable insider trading and other securities laws and regulations, at then-prevailing market prices over a period of up to two years ending February 9, 2014. As of August 1, 2012, we have repurchased 1,372,853 shares of outstanding common stock under this program for approximately $50.0 million.

General Economic Conditions

Many of our customers derive most of their revenue from transactions involving the sale or purchase of advertising. During recent challenging economic times, advertisers reduced advertising expenditures, impacting advertising agencies and media. As a result, advertising agencies and media companies have been and may continue to be less likely to purchase our services, which has and could continue to adversely impact our business, financial position, and operating results. If the recovery from the recent economic downturn slows or if the economy experiences another downturn in the foreseeable future, it may also lead to an increase of incidences of customers’ inability to pay their accounts, an increase in our provision for doubtful accounts, and a further increase in collection cycles for accounts receivable or insolvency of our customers.

We depend on a limited number of key customers for our ratings services and related software. For example, in 2011, Clear Channel represented approximately 19% of our total revenue. Additionally, although the amount of revenue associated with customer contracts expiring in 2012 is lower, as compared to historical standards, if one or more key customers do not renew all or part of their contracts as they expire, we could experience a significant decrease in our operating results.

 

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Critical Accounting Policies and Estimates

Critical accounting policies and estimates are those that are both important to the presentation of our financial position or results of operations, and require our most difficult, complex or subjective judgments.

Software development costs. We capitalize software development costs with respect to significant internal use software initiatives or enhancements from the time the preliminary project stage is completed and management considers it probable the software will be used to perform the function intended, until the time the software is placed in service for its intended use. Once the software is placed in service, the capitalized costs are amortized over periods of three to five years. We perform an assessment quarterly to determine if it is probable all capitalized software will be used to perform its intended function. If an impairment exists, the software cost is written down to estimated fair value. As of June 30, 2012, and December 31, 2011, our capitalized software developed for internal use had carrying amounts of $28.5 million and $28.9 million, respectively, including $9.9 million and $10.4 million, respectively, of software related to the PPM service.

Deferred income taxes. We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for deferred tax assets and liabilities for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. We must make assumptions, judgments and estimates to determine the current provision for income taxes and also deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our assumptions, judgments, and estimates relative to the current provision for income taxes take into account current tax laws, interpretation of current tax laws and possible outcomes of current and future audits conducted by domestic and foreign tax authorities. Changes in tax law or interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in the consolidated financial statements. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account forecasts of the amount and nature of future taxable income. Actual operating results and the underlying amount and nature of income in future years could render current assumptions, judgments and estimates of recoverable net deferred tax assets inaccurate. We believe it is more likely than not that we will realize the benefits of these deferred tax assets. Any of the assumptions, judgments and estimates mentioned above could cause actual income tax obligations to differ from estimates, thus impacting our financial position and results of operations.

We include, in our tax calculation methodology, an assessment of the uncertainty in income taxes by establishing recognition thresholds for our tax positions. Inherent in our calculation are critical judgments by management related to the determination of the basis for our tax positions. For further information regarding our unrecognized tax benefits, see Note 12 in the Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

Insurance Receivables. During 2008, we became involved in two securities-law civil actions and a governmental interaction primarily related to the commercialization of our PPM service. Since 2008, we have incurred a total of $12.6 million in legal fees and expenses in connection with these matters. As of June 30, 2012, an aggregate of $9.2 million in insurance reimbursements related to these legal actions has been received. As of June 30, 2012, and December 31, 2011, our insurance claims receivable related to these legal actions was $0.5 million and $1.0 million, respectively, and these amounts are included in our prepaid expenses and other current assets on our balance sheet. See Note 7 in our Notes to Consolidated Financial Statements for additional information concerning our insurance recovery receivables.

Contingent consideration. The agreement governing the 2011 acquisition of Zokem Oy, now Arbitron Mobile Oy (“Arbitron Mobile”), provides for possible additional cash payments to be made by us to the former Zokem shareholders through 2015 of up to $12.0 million, contingent upon Arbitron Mobile reaching certain financial performance targets in the future. We estimated the fair value of this contingent consideration to be approximately $0.9 million as of the July 28, 2011 acquisition date. We periodically estimate the fair value of the contingent consideration and any change in fair value will be recognized in our consolidated financial results of operations. An increase in the contingent consideration expected to be paid will result in a charge to operations in the quarter the anticipated fair value of contingent consideration increases, while a decrease in the contingent consideration expected to be paid will result in a credit to operations in the quarter the anticipated fair value of contingent consideration decreases. The estimate of the fair value of contingent consideration requires subjective assumptions to be made of

 

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future operating results. We estimated that the fair value of the contingent consideration as of June 30, 2012 to be $1.1 million. Future revisions to our assumptions could materially change our estimate of the fair value of contingent consideration and therefore materially affect our future financial results and financial condition.

 

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Results of Operations

Comparison of the Three Months Ended June 30, 2012 to the Three Months Ended June 30, 2011

The following table sets forth information with respect to our consolidated statements of income:

Consolidated Statements of Income

(Dollars in thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended     Increase     Percentage of  
     June 30,     (Decrease)     Revenue  
     2012     2011     Dollars     Percent     2012     2011  

Revenue

   $ 104,407      $ 95,737      $ 8,670        9.1     100.0     100.0
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Costs and expenses

            

Cost of revenue

     63,205        61,025        2,180        3.6     60.5     63.7

Selling, general and administrative

     20,701        18,656        2,045        11.0     19.8     19.5

Research and development

     9,896        9,017        879        9.7     9.5     9.4
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Total costs and expenses

     93,802        88,698        5,104        5.8     89.8     92.6
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

     10,605        7,039        3,566        50.7     10.2     7.4

Equity in net income of affiliate

     5,391        5,453        (62     (1.1 %)      5.2     5.7
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Income before interest and tax expense

     15,996        12,492        3,504        28.0     15.3     13.0

Interest income

     11        8        3        37.5     0.0     0.0

Interest expense

     132        104        28        26.9     0.1     0.1
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Income before income tax expense

     15,875        12,396        3,479        28.1     15.2     12.9

Income tax expense

     5,912        4,812        1,100        22.9     5.7     5.0
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Net income

   $ 9,963      $ 7,584      $ 2,379        31.4     9.5     7.9
  

 

 

   

 

 

   

 

 

       

Income per weighted average common share

            

Basic

   $ 0.38      $ 0.28      $ 0.10        35.7    
  

 

 

   

 

 

   

 

 

       

Diluted

   $ 0.37      $ 0.27      $ 0.10        37.0    
  

 

 

   

 

 

   

 

 

       

Cash dividends declared per common share

   $ 0.10      $ 0.10      $ —          —         
  

 

 

   

 

 

   

 

 

       

Other data:

            

EBIT (1)

   $ 15,996      $ 12,492      $ 3,504        28.0    

EBITDA (1)

   $ 23,610      $ 19,731      $ 3,879        19.7    

EBIT Margin (1)

     15.3     13.0        

EBITDA Margin (1)

     22.6     20.6        

EBIT and EBITDA Reconciliation (1)

            

Net income

   $ 9,963      $ 7,584      $ 2,379        31.4    

Income tax expense

     5,912        4,812        1,100        22.9    

Interest (income)

     (11     (8     3        37.5    

Interest expense

     132        104        28        26.9    
  

 

 

   

 

 

   

 

 

       

EBIT (1)

     15,996        12,492        3,504        28.0    

Depreciation and amortization

     7,614        7,239        375        5.2    
  

 

 

   

 

 

   

 

 

       

EBITDA (1)

   $ 23,610      $ 19,731      $ 3,879        19.7    
  

 

 

   

 

 

   

 

 

       

Certain percentage amounts may not total due to rounding.

 

(1) EBIT (earnings before interest and income taxes), EBIT Margin (EBIT divided by revenue), EBITDA (earnings before interest, income taxes, depreciation and amortization), and EBITDA Margin (EBITDA divided by revenue) are non-GAAP financial measures we believe are useful to investors in evaluating our results. See “—EBIT and EBITDA” below for further discussion of these non-GAAP financial measures.

 

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Revenue. Revenue increased by 9.1% or $8.7 million for the three-month period ended June 30, 2012, as compared to the same period in 2011, due primarily to a $6.9 million increase in PPM-based ratings service revenue, in particular the continued phase-in of contracted price increases, a $1.4 million increase in Scarborough qualitative service revenue, and a $1.0 million increase in Diary rating service revenue. These revenue increases for our PPM and Diary services also included an aggregate $1.2 million benefit from the timing of items associated with data from prior surveys.

Cost of Revenue. Cost of revenue increased by 3.6% or $2.2 million for the three-month period ended June 30, 2012, as compared to the same period in 2011. Cost of revenue increased primarily due to a $1.1 million increase in Scarborough royalties, and a $0.6 million increase associated with our Arbitron Mobile service acquired during the third quarter of 2011.

Selling, General, and Administrative. Selling, general, and administrative increased by 11.0% or $2.0 million for the three-month period ended June 30, 2012, as compared to the same period in 2011. Selling, general, and administrative increased primarily due to $1.3 million in Arbitron Mobile-related costs incurred during the three-month period ended June 30, 2012, and $0.8 million of executive separation costs incurred during the second quarter of 2012.

EBIT and EBITDA. We believe presenting EBIT and EBITDA, both non-GAAP financial measures, as supplemental information helps investors, analysts and others, if they so choose, understand and evaluate our operating performance in some of the same ways we do because EBIT and EBITDA exclude certain items not directly related to our core operating performance. We reference these non-GAAP financial measures in assessing current performance and making decisions about internal budgets, resource allocation and financial goals. EBIT is calculated by deducting interest income from net income and adding back interest expense and income tax expense to net income. EBITDA is calculated by deducting interest income from net income and adding back interest expense, income tax expense, and depreciation and amortization to net income. EBIT and EBITDA margins are calculated as percentages of revenue. EBIT and EBITDA should not be considered substitutes either for net income, as indicators of our operating performance, or for cash flow, as measures of our liquidity. In addition, because EBIT and EBITDA may not be calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies.

EBIT and EBITDA increased by $3.5 million and $3.9 million, respectively, for the three-month period ended June 30, 2012, as compared to the same period in 2011, primarily due to an increase in PPM service revenue.

 

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Comparison of the Six Months Ended June 30, 2012 to the Six Months Ended June 30, 2011

The following table sets forth information with respect to our consolidated statements of income:

Consolidated Statements of Income

(Dollars in thousands, except per share amounts)

(Unaudited)

 

     Six Months Ended     Increase     Percentage of  
     June 30,     (Decrease)     Revenue  
     2012     2011     Dollars     Percent     2012     2011  

Revenue

   $ 210,801      $ 196,606      $ 14,195        7.2     100.0     100.0
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Costs and expenses

            

Cost of revenue

     110,653        106,704        3,949        3.7     52.5     54.3

Selling, general and administrative

     38,704        35,765        2,939        8.2     18.4     18.2

Research and development

     19,614        18,012        1,602        8.9     9.3     9.2
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Total costs and expenses

     168,971        160,481        8,490        5.3     80.2     81.6
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Operating income

     41,830        36,125        5,705        15.8     19.8     18.4

Equity in net income of affiliate

     3,035        2,921        114        3.9     1.4     1.5
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Income before interest and tax expense

     44,865        39,046        5,819        14.9     21.3     19.9

Interest income

     31        14        17        121.4     0.0     0.0

Interest expense

     261        268        (7     (2.6 %)      0.1     0.1
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Income before income tax expense

     44,635        38,792        5,843        15.1     21.2     19.7

Income tax expense

     16,865        14,961        1,904        12.7     8.0     7.6
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Net income

   $ 27,770      $ 23,831      $ 3,939        16.5     13.2     12.1
  

 

 

   

 

 

   

 

 

       

Income per weighted average common share

            

Basic

   $ 1.04      $ 0.88      $ 0.16        18.2    
  

 

 

   

 

 

   

 

 

       

Diluted

   $ 1.02      $ 0.86      $ 0.16        18.6    
  

 

 

   

 

 

   

 

 

       

Cash dividends declared per common share

   $ 0.20      $ 0.20      $ —          —         
  

 

 

   

 

 

   

 

 

       

Other data:

            

EBIT (1)

   $ 44,865      $ 39,046      $ 5,819        14.9    

EBITDA (1)

   $ 60,222      $ 53,600      $ 6,622        12.4    

EBIT Margin (1)

     21.3     19.9        

EBITDA Margin (1)

     28.6     27.3        

EBIT and EBITDA Reconciliation (1)

            

Net income

   $ 27,770      $ 23,831      $ 3,939        16.5    

Income tax expense

     16,865        14,961        1,904        12.7    

Interest (income)

     (31     (14     17        121.4    

Interest expense

     261        268        (7     (2.6 %)     
  

 

 

   

 

 

   

 

 

       

EBIT (1)

     44,865        39,046        5,819        14.9    

Depreciation and amortization

     15,357        14,554        803        5.5    
  

 

 

   

 

 

   

 

 

       

EBITDA (1)

   $ 60,222      $ 53,600      $ 6,622        12.4    
  

 

 

   

 

 

   

 

 

       

Certain percentage amounts may not total due to rounding.

 

(1) EBIT (earnings before interest and income taxes), EBIT Margin (EBIT divided by revenue), EBITDA (earnings before interest, income taxes, depreciation and amortization), and EBITDA Margin (EBITDA divided by revenue) are non-GAAP financial measures we believe are useful to investors in evaluating our results. See “—EBIT and EBITDA” below for further discussion of these non-GAAP financial measures.

 

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Revenue. Revenue increased by 7.2% or $14.2 million for the six-month period ended June 30, 2012, as compared to the same period in 2011, due primarily to a $12.4 million increase in PPM-based ratings service revenue, in particular the continued phase-in of contracted price increases, a $1.4 million increase in our Scarborough qualitative service revenue, and a $0.8 million increase associated with our Arbitron Mobile service, which was acquired during the third quarter of 2011.

Cost of Revenue. Cost of revenue increased by 3.7% or $3.9 million for the six-month period ended June 30, 2012, as compared to the same period in 2011. Cost of revenue increased primarily due to a $1.3 million increase in costs associated with our cross platform initiatives, as well as costs incurred related to Arbitron Mobile, which was acquired in July 2011, a $1.1 million increase in Scarborough royalty costs, a $0.6 million increase in aggregate costs associated with address based sampling, in-person recruiting and cell-phone household recruiting, and a $0.6 million increase in PPM variable costs, including higher survey participant incentives and panel management costs, for the six-month period ended June 30, 2012, as compared to the same period in 2011.

Selling, General, and Administrative. Selling, general, and administrative increased by 8.2% or $2.9 million for the six-month period ended June 30, 2012, as compared to the same period in 2011. Selling, general, and administrative increased primarily due to $2.4 million in higher Arbitron Mobile costs incurred during the six-month period ended June 30, 2012, as compared to the same period of 2011, and $0.8 million of executive separation costs incurred during the first half of 2012.

Research and Development. Research and development increased by 8.9% or $1.6 million for the six-month period ended June 30, 2012, as compared to the same period in 2011. Research and development increased primarily due to a $0.7 million increase in costs associated with Arbitron Mobile, which was acquired during the third quarter of 2011, as well as a $0.5 million increase in engineering development expense related to our PPM service for the six-month period ended June 30, 2012, as compared to the same period in 2011.

EBIT and EBITDA. We believe presenting EBIT and EBITDA, both non-GAAP financial measures, as supplemental information helps investors, analysts and others, if they so choose, understand and evaluate our operating performance in some of the same ways we do because EBIT and EBITDA exclude certain items not directly related to our core operating performance. We reference these non-GAAP financial measures in assessing current performance and making decisions about internal budgets, resource allocation and financial goals. EBIT is calculated by deducting interest income from net income and adding back interest expense and income tax expense to net income. EBITDA is calculated by deducting interest income from net income and adding back interest expense, income tax expense, and depreciation and amortization to net income. EBIT and EBITDA margins are calculated as percentages of revenue. EBIT and EBITDA should not be considered substitutes either for net income, as indicators of our operating performance, or for cash flow, as measures of our liquidity. In addition, because EBIT and EBITDA may not be calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies.

EBIT and EBITDA increased by $5.8 million and $6.6 million, respectively, for the six-month period ended June 30, 2012, as compared to the same period in 2011, primarily due to an increase in PPM service revenue.

 

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Liquidity and Capital Resources

 

     As of
June 30,

2012
     As of
December 31,

2011
     Change  

Cash and cash equivalents

   $ 11,073       $ 19,715       $ (8,642

Working capital

   $ 3,341       $ 17,953       $ (14,612

Working capital, excluding deferred revenue which does not require a significant additional cash outlay

   $ 55,648       $ 55,033       $ 615   

Total debt

   $ —         $ —         $ —     

We have historically relied upon our cash flow from operations, supplemented by borrowings under our available revolving credit facility as needed, to fund our dividends, common stock repurchases, capital expenditures, and contractual obligations. We expect, based on current and anticipated levels of operating performance, our cash flow from operations, cash and cash equivalents, and availability under our Credit Facility will be sufficient to support our operations for the next 12 to 24 months. See “— Credit Facility” below for further discussion of the relevant terms and covenants.

Cash flow from operating activities. For the six-month period ended June 30, 2012, the net cash provided by operating activities was $53.7 million, which was primarily due to $60.2 million of EBITDA, increased by $4.4 million of non-cash share-based compensation, partially offset by $19.0 million in income taxes paid for the six-month period ended June 30, 2012. EBITDA is discussed and reconciled to net income in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.”

Net cash provided by operating activities for the six-month period ended June 30, 2012, was also positively impacted by a $15.2 million increase in deferred revenue primarily due to price escalators associated with our PPM ratings service, partially offset by a $8.9 million decrease in payroll, bonus, and benefit accruals for the six-month period ended June 30, 2012.

Cash flow from investing activities. Net cash used in investing activities for the six-month periods ended June 30, 2012, and 2011, was $10.6 million and $14.2 million, respectively. This $3.6 million decrease in cash used in investing activities was due primarily to a $3.2 million decrease in metering equipment and other PPM-related capital expenditures for the six-month period ended June 30, 2012, as compared to the same period in 2011.

Cash flow from financing activities. Net cash used in financing activities for the six-month periods ended June 30, 2012, and 2011, was $51.6 million and $50.9 million, respectively. This $0.7 million increase in net cash used in financing activities was due primarily to $50.0 million of repurchases of our common stock during the six-month period ended June 30, 2012, partially offset by a $1.3 million increase in proceeds from stock option exercises and stock purchase plans for the six-month period ended June 30, 2012, when a large number of stock options were nearing their expiration, as compared to the same period of 2011. During the six-month period ended June 30, 2012, we had no outstanding borrowings or repayments under our current Credit Facility. During the six-month period ended June 30, 2011, we made no repurchases of our common stock and we repaid $48.0 million of net repayments of our then outstanding obligations under our prior credit facility,

Repatriation of Foreign Earnings

We have provided for U.S. taxes on all of our foreign earnings, consistent with the U.S. Internal Revenue Code’s taxation of world-wide income. We do not have material amounts of unrepatriated earnings in foreign jurisdictions and do not expect to permanently reinvest these current or future foreign earnings outside of the U.S.

 

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Credit Facility

On November 21, 2011, we entered into the Credit Facility, a new agreement with a consortium of lenders to provide up to $150.0 million of financing through a five-year, unsecured revolving credit facility expiring on November 21, 2016. The agreement contains an expansion feature to increase the total financing available under the Credit Facility by up to $75.0 million to an aggregate of $225.0 million. Such increased financing would be provided by one or more existing Credit Facility lending institutions, subject to the approval of the lending banks, and/or in combination with one or more new lending institutions, subject to the approval of the Credit Facility’s administrative agent. Interest on borrowings under the Credit Facility is calculated based on a floating rate for a duration of up to six months (or, with the consent of each lender, nine or 12 months), at which time the interest rate is reset based upon the LIBOR.

Our Credit Facility contains financial terms, covenants and operating restrictions that potentially restrict our financial flexibility. The material debt covenants under our Credit Facility include both a maximum leverage ratio and a minimum interest coverage ratio. The leverage ratio is a non-GAAP financial measure equal to the amount of our consolidated total indebtedness, as defined in our Credit Facility, divided by a contractually defined adjusted Earnings Before Interest, Taxes, Depreciation and Amortization and non- cash compensation (“Consolidated EBITDA”) for the trailing four-quarter period. The interest coverage ratio is a non-GAAP financial measure equal to Consolidated EBITDA divided by total interest expense. Both ratios are designed as measures of our ability to meet current and future debt obligations. The following table presents the actual ratios and their threshold limits as defined by the Credit Facility as of June 30, 2012:

 

Covenant

   Threshold      Actual  

Maximum leverage ratio

     3.25         0.00   

Minimum interest coverage ratio

     3.00         241.0   

As of June 30, 2012, based upon these financial covenants, there was no default or limit on our ability to borrow the unused portion of our Credit Facility.

Our Credit Facility contains customary events of default, including nonpayment and breach covenants. In the event of default, repayment of borrowings under the Credit Facility could be accelerated. Our Credit Facility also contains cross default provisions whereby a default on any material indebtedness, as defined in the Credit Facility, could result in the acceleration of our outstanding debt and the termination of any unused commitment under the Credit Facility. The agreement potentially limits, among other things, our ability to sell assets, incur additional indebtedness, and grant or incur liens on our assets. Under the terms of the Credit Facility, all of our material domestic subsidiaries, if any, must guarantee the commitment. Currently, we do not have any material domestic subsidiaries as defined under the terms of the Credit Facility. Although we do not believe the terms of our Credit Facility limit the operation of our business in any material respect, the terms of the Credit Facility may restrict or prohibit our ability to raise additional debt when needed or could prevent us from investing in other growth initiatives. We have been in compliance with the terms of the Credit Facility since the inception of the agreement. As of August 1, 2012, we had no outstanding borrowings under the Credit Facility.

 

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Seasonality

Revenue

We recognize revenue for services over the term of license agreements as services are delivered while expenses are recognized as incurred. As of Spring 2012, we gather radio-listening data in 277 U.S. local markets, including 229 Diary markets and 48 PPM Markets.

In PPM Markets, we deliver ratings 13 times per year, with four PPM ratings reports delivered in the fourth quarter of a given year. As a result, we expect to recognize more revenue in PPM Markets in the fourth quarter than in each of the first three quarters of the year.

All 229 Diary markets are measured at least twice per year (April-May-June for the “Spring Survey” and October-November-December for the “Fall Survey”). In addition, we measure 48 larger Diary markets an additional two times per year (January-February-March for the “Winter Survey” and July-August-September for the “Summer Survey”). We generally deliver our Diary ratings reports and recognize the related revenue in the quarter after the survey is measured. Consequently, our Diary revenue is generally higher in the first and third quarters as a result of the delivery of the Fall Survey and Spring Survey to all Diary markets compared to revenue in the second and fourth quarters, when delivery of the Winter Survey and Summer Survey, respectively, is made only to 48 larger Diary markets.

Revenue related to the sale of Scarborough services by Arbitron is recognized predominantly in the second and fourth quarters when the substantial majority of services are delivered.

As a result of the various seasonal impacts mentioned above, consolidated revenue is typically highest in the fourth quarter and lowest in the second quarter of each year.

Costs and expenses

Now that all our planned PPM Markets are commercialized, and because we conduct our PPM services continuously throughout the year, we do not expect significant seasonality in PPM costs and expenses. In our Diary service, our expenses are generally higher in the second and fourth quarters as we conduct the Spring and Fall Surveys for all 229 of our Diary Markets.

Equity earnings/losses in Scarborough Research

Our affiliate, Scarborough, typically experiences losses during the first and third quarters of each year because revenue is recognized predominantly in the second and fourth quarters when the substantial majority of services are delivered. Scarborough royalty costs, which are recognized in cost of revenue, are also higher during the second and fourth quarters.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our interest income and expense are sensitive to fluctuations in the general level of interest rates. As such, changes in interest rates affect the interest earned on the Company’s cash and cash equivalents and other highly liquid investments, as well as the value of those investments.

In November 2011, we entered into our Credit Facility with a consortium of lenders to provide us up to $150.0 million of financing. Interest on borrowings under the Credit Facility is calculated based on a floating rate for a duration of up to six months, at which time the interest rate is reset based upon the LIBOR. As of June 30, 2012, we had no outstanding borrowings under the Credit Facility. Therefore, a hypothetical market interest rate change of 1% would have zero impact on our results of operations over a 12-month period. A hypothetical market interest rate change of 1% would have no impact on either the carrying amount or the fair value of the Credit Facility. We do not use derivatives for speculative or trading purposes.

Foreign Currency Risk

We are exposed to the translation of foreign currency earnings to the U.S. dollar. Our principal exposures are to the euro via our Finnish subsidiary and the Indian rupee via our Indian subsidiary. If we expand our foreign operations in both Finland and India, our exposure to foreign currency exchange rate trends could increase, resulting in higher or lower translation impacts to our financial results and position.

As of June 30, 2012, we had $6.3 million in recorded intercompany balances on our Finnish and Indian subsidiary balance sheets, which are impacted by fluctuations in currency exchange rates. As the exchange rates increase or decrease, our intercompany balances will be exposed to translation adjustment charges and/or credits, which will be recognized in our financial results.

Financial statements of foreign subsidiaries are translated into U.S. dollars at current rates at the end of the period except that revenue and expenses are translated at average current exchange rates during each reporting period. The translation adjustments are recorded in accumulated other comprehensive income (loss) on our consolidated balance sheet until the net investment in such foreign subsidiaries is liquidated. As of June 30, 2012, the cumulative net currency translation adjustment recorded on our balance sheet reduced our shareholders’ equity by $2.4 million.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the most recently completed fiscal quarter. Based upon that evaluation, the Company’s President and Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Report.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We are involved, from time to time, in litigation and proceedings, including with governmental authorities, arising out of the ordinary course of business. Legal costs for services rendered in the course of these proceedings are charged to expense as they are incurred.

On April 30, 2008, Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund filed a securities class action lawsuit in the United States District Court for the Southern District of New York on behalf of a purported Class of all purchasers of Arbitron common stock between July 19, 2007, and November 26, 2007. The plaintiff asserts that Arbitron, Stephen B. Morris (our former Chairman, President and Chief Executive Officer), and Sean R. Creamer (currently our Executive Vice President, Chief Operating Officer and Chief Financial Officer) violated federal securities laws. The plaintiff alleges misrepresentations and omissions relating, among other things, to the delay in commercialization of our PPM ratings service in November 2007, as well as stock sales during the period by company insiders who were not named as defendants and Messrs. Morris and Creamer. The plaintiff sought class certification, compensatory damages plus interest and attorneys’ fees, among other remedies. On September 22, 2008 the plaintiff filed an Amended Class Action Complaint. On November 25, 2008, Arbitron, Mr. Morris, and Mr. Creamer each filed Motions to Dismiss the Amended Class Action Complaint. In September 2009, the plaintiff sought leave to file a Second Amended Class Action Complaint in lieu of oral argument on the pending Motions to Dismiss. The court granted leave to file a Second Amended Class Action Complaint and denied the pending Motions to Dismiss without prejudice. On or about October 19, 2009, the plaintiff filed a Second Amended Class Action Complaint. Arbitron and each of Mr. Morris and Mr. Creamer again moved to dismiss the Second Amended Class Action Complaint. Briefing on motions to dismiss the Second Amended Class Action Complaint was completed in March 2010. On September 24, 2010, the Court granted Mr. Creamer’s motion to dismiss the plaintiff’s claims against him, and all claims against Mr. Creamer were dismissed with prejudice. The motions to dismiss the Second Amended Class Action Complaint by Arbitron and Mr. Morris were denied. Arbitron and Mr. Morris each then filed answers denying the claims. On September 6, 2011, the Court entered an order granting the plaintiff’s motion to certify the action as a class action, to appoint the lead plaintiff as class representative, and to appoint its counsel as lead counsel. The court defined the class as all purchasers of common stock of the Company who were damaged through purchasing stock during the period July 19, 2007 through November 26, 2007. On February 3, 2012, as a result of a mediation process overseen by an independent mediator, the Company and its insurers agreed to settle the case for $7 million, which will be funded by insurance. Because this is a class action, settlements of this type are subject to preliminary and final review by the Court with an opportunity for class members to respond to the proposed settlement and object if they so desire. The Court has issued an order preliminarily approving the settlement and Notice of the settlement has been sent to the class members. The Court has scheduled a hearing on the final approval of the settlement to be held on October 19, 2012.

On or about June 13, 2008, a purported stockholder derivative lawsuit, Pace v. Morris, et al., was filed against Arbitron, as a nominal defendant, each of our directors, and certain of our current and former executive officers in the Supreme Court of the State of New York for New York County. The derivative lawsuit is based on essentially the same substantive allegations as the securities class action lawsuit. The derivative lawsuit asserts claims against the defendants for misappropriation of information, breach of fiduciary duty, abuse of control, and unjust enrichment. On July 28, 2011 the derivative plaintiff filed an amended complaint that reiterates, in large part, the claims of the original complaint filed in 2008. The amended complaint also adds claims for breach of fiduciary duty related to the retirement of Mr. Morris in 2009 and the resignation of Mr. Skarzynski in 2010. The derivative plaintiff seeks equitable and/or injunctive relief, restitution and disgorgement of profits, plus attorneys’ fees and costs, among other remedies.

The Company intends to defend itself and its interests vigorously against these allegations.

We are involved from time to time in a number of judicial and administrative proceedings considered ordinary with respect to the nature of our current and past operations, including employment-related disputes, contract disputes, government proceedings, customer disputes, and tort claims. In some proceedings, the claimant seeks damages as well as other relief, which, if granted, would require substantial expenditures on our part. Some of these matters raise difficult and complex factual and legal issues, and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular action, and the jurisdiction, forum and law under which each action is

 

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pending. Because of this complexity, final disposition of some of these proceedings may not occur for several years. As such, we are not always able to estimate the amount of our possible future liabilities. There can be no certainty that we will not ultimately incur charges in excess of present or future established accruals or insurance coverage. Although occasional adverse decisions (or settlements) may occur, we believe that the likelihood that final disposition of these proceedings will, considering the merits of the claims, have a material adverse impact on our financial position or results of operations is remote.

Item 1A. Risk Factors

See “Item 1A. — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 for a detailed discussion of risk factors affecting Arbitron.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On February 9, 2012, our Board of Directors authorized a program to repurchase up to $100.0 million in shares of our outstanding common stock through either periodic open-market or private transactions, in accordance with applicable insider trading and other securities laws and regulations, at then-prevailing market prices over a period of up to two years ending February 9, 2014. The following table outlines the stock repurchase activity during the three months ended June 30, 2012:

 

Period

   Total
Number
of Shares
Purchased
     Average
Price
Paid
Per
Share
     Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Program
     Total Amount
of Dollars
Purchased
     Maximum
Dollar Value
of Shares
That May Yet
Be Purchased
Under the
Program
 

April 1-30

     346,347       $ 37.64         346,347       $ 13,036,197       $ 67,182,645   

May 1-31

     473,562         36.34         473,562         17,207,490         49,975,155   

June 1-30

     —           —           —           —           49,975,155   
  

 

 

       

 

 

    

 

 

    

Total

     819,909       $ 36.89         819,909       $ 30,243,687       $ 49,975,155   
  

 

 

       

 

 

    

 

 

    

 

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ITEM 6. EXHIBITS

 

               Incorporated by
Reference
    

Exhibit
No.

  

Exhibit Description

  

Form

  

SEC
File
No.

  

Exhibit

  

Filing
Date

  

Filed
Herewith

  31.1    Certification of Chief Executive Officer pursuant to Securities Exchange Act of 1934 Rule 13a – 14(a)                *
  31.2    Certification of Chief Financial Officer pursuant to Securities Exchange Act of 1934 Rule 13a – 14(a)                *
  32.1    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002                *
101+   

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language):

 

(i) Condensed Consolidated Balance Sheets at June 30, 2012 and December 31, 2011;

 

(ii) Condensed Consolidated Statement of Income for the Six Months Ended June 30, 2012 and 2011;

 

(iii) Condensed Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2012 and 2011;

               *
  

(iv) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011; and

 

(v) Notes to Condensed Consolidated Financial Statements.*

              

 

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* Filed or furnished herewith
+ Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURE

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.

 

ARBITRON INC.
By:  

/s/ Sean R. Creamer

  Sean R. Creamer
  Executive Vice President, Chief Operating Officer and Chief Financial Officer (on behalf of the registrant and as the registrant’s principal financial and principal accounting officer)
Date: August 7, 2012

 

39

XNYS:ARB Quarterly Report 10-Q Filling

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XNYS:ARB Quarterly Report 10-Q Filing - 6/30/2012
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