e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2007
Or
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o |
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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)
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Delaware
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52-0278528 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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142 West 57th Street
New York, New York 10019-3000
(Address of principal executive offices) (Zip Code)
(212) 887-1300
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The
registrant had 29,835,206 shares of common stock, par value $0.50 per share, outstanding as
of July 30, 2007.
ARBITRON INC.
INDEX
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Page No. |
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PART I FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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Consolidated Balance Sheets June 30, 2007 and
December 31, 2006 |
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4 |
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Consolidated Statements of Income Three Months
Ended June 30, 2007 and 2006 |
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5 |
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Consolidated Statements of Income Six Months
Ended June 30, 2007 and 2006 |
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6 |
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Consolidated Statements of Cash Flows Six Months
Ended June 30, 2007 and 2006 |
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7 |
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Notes to Consolidated Financial Statements June 30, 2007 |
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8 |
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Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations |
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19 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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32 |
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Item 4. Controls and Procedures |
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32 |
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PART II OTHER INFORMATION |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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33 |
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Item 4. Submission of Matters to a Vote of Security Holders |
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33 |
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Item 5. Other Information |
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34 |
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Item 6. Exhibits |
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34 |
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Signature |
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35 |
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2
Arbitron owns or has the rights to various trademarks, trade names or service marks used in its radio audience measurement business and subsidiaries, including the following: the Arbitron
name and logo, ArbitrendsSM, RetailDirect®, RADAR®, Tapscan®, Tapscan WorldWi
de®,
LocalMotion®, Maximi$er®, Maximi$er® Plus, Arbitron PD
Advantage®,
SmartPlus®,
Arbitron Portable People MeterTM,
Marketing Resources Plus®, MRPSM, PrintPlusTM, MapMAKER
DirectSM, Media Professional®, Media Professional PlusSM,
QualitapSM, MediaMasterSM,
ProspectorSM, and Schedule-ItSM.
The trademarks Windows®, Media Rating Council® and Homescan®
are the registered trademarks of others.
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARBITRON INC.
Consolidated Balance Sheets
(In thousands, except par value data)
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June 30, |
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December 31, |
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2007 |
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2006 |
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(unaudited) |
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(audited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
32,409 |
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$ |
33,640 |
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Short-term investments |
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38,850 |
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27,625 |
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Trade accounts receivable, net of allowance for doubtful accounts
of $1,784 at June 30, 2007 and $1,419 at December 31, 2006 |
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32,267 |
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33,296 |
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Inventory |
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2,265 |
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3,793 |
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Prepaid expenses and other current assets |
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5,270 |
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4,167 |
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Deferred tax assets |
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2,771 |
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3,024 |
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Total current assets |
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113,832 |
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105,545 |
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Investment in affiliates |
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13,908 |
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13,907 |
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Property and equipment, net of accumulated depreciation of $31,725 at
June 30, 2007 and $29,120 at December 31, 2006 |
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42,291 |
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41,470 |
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Goodwill, net |
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40,558 |
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40,558 |
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Other intangibles, net |
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1,570 |
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2,029 |
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Noncurrent deferred tax assets |
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5,934 |
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5,913 |
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Other noncurrent assets |
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766 |
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898 |
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Total assets |
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$ |
218,859 |
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$ |
210,320 |
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Liabilities and Stockholders Equity |
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Current liabilities |
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Accounts payable |
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$ |
9,590 |
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$ |
9,972 |
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Accrued expenses and other current liabilities |
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17,542 |
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33,258 |
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Deferred revenue |
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66,495 |
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66,875 |
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Total current liabilities |
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93,627 |
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110,105 |
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Noncurrent liabilities |
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11,485 |
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10,959 |
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Total liabilities |
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105,112 |
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121,064 |
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Stockholders equity |
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Preferred stock, $100.00 par value, 750 shares authorized,
no shares issued |
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Common stock, $0.50 par value, authorized 500,000 shares,
issued 32,338 shares at June 30, 2007 and December 31, 2006 |
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16,169 |
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16,169 |
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Additional paid-in capital |
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64,333 |
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53,598 |
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Accumulated earnings (net distributions to Ceridian in
excess of accumulated earnings) prior to spin-off |
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(239,042 |
) |
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(239,042 |
) |
Retained earnings subsequent to spin-off |
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280,153 |
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266,905 |
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Common stock held in treasury, 2,326 shares at June 30, 2007
and 2,646 shares on December 31, 2006 |
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(1,163 |
) |
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(1,323 |
) |
Accumulated other comprehensive loss |
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(6,703 |
) |
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(7,051 |
) |
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Total stockholders equity |
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113,747 |
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89,256 |
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Total liabilities and stockholders equity |
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$ |
218,859 |
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$ |
210,320 |
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See accompanying notes to consolidated financial statements.
4
ARBITRON INC.
Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
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Three Months Ended |
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June 30, |
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2007 |
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2006 |
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Revenue |
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$ |
79,047 |
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$ |
74,165 |
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Costs and expenses |
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Cost of revenue |
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46,468 |
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36,684 |
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Selling, general and administrative |
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20,461 |
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20,557 |
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Research and development |
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11,830 |
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10,031 |
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Total costs and expenses |
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78,759 |
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67,272 |
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Operating income |
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288 |
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6,893 |
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Equity in net income of affiliates |
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5,089 |
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5,053 |
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Income before interest and income tax expense |
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5,377 |
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11,946 |
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Interest income |
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670 |
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829 |
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Interest expense |
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96 |
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937 |
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Income before income tax expense |
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5,951 |
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11,838 |
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Income tax expense |
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2,163 |
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4,478 |
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Net income |
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$ |
3,788 |
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$ |
7,360 |
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Net income per weighted-average common share |
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Basic |
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$ |
0.13 |
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$ |
0.25 |
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Diluted |
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$ |
0.13 |
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$ |
0.24 |
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Dividends declared per common share |
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$ |
0.10 |
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$ |
0.10 |
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Weighted-average common shares used in calculations |
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Basic |
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29,955 |
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29,945 |
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Potentially dilutive securities |
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309 |
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125 |
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Diluted |
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30,264 |
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30,070 |
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See accompanying notes to consolidated financial statements.
5
ARBITRON INC.
Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
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Six Months Ended |
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June 30, |
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2007 |
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2006 |
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Revenue |
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$ |
170,824 |
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$ |
159,253 |
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Costs and expenses |
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Cost of revenue |
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78,718 |
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60,939 |
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Selling, general and administrative |
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40,818 |
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40,013 |
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Research and development |
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22,567 |
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20,012 |
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Total costs and expenses |
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142,103 |
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120,964 |
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Operating income |
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28,721 |
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38,289 |
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Equity in net income of affiliates |
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1,333 |
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2,678 |
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Income before interest and income tax expense |
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30,054 |
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40,967 |
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Interest income |
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1,251 |
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|
1,816 |
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Interest expense |
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|
191 |
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|
1,880 |
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Income before income tax expense |
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31,114 |
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40,903 |
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Income tax expense |
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11,831 |
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15,357 |
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Net income |
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$ |
19,283 |
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$ |
25,546 |
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Net income per weighted-average common share |
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Basic |
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$ |
0.65 |
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$ |
0.84 |
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Diluted |
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$ |
0.64 |
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$ |
0.83 |
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Dividends declared per common share |
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$ |
0.20 |
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$ |
0.20 |
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Weighted-average common shares used in calculations |
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Basic |
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|
29,852 |
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|
30,500 |
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Potentially dilutive securities |
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|
271 |
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152 |
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Diluted |
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|
30,123 |
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30,652 |
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See accompanying notes to consolidated financial statements.
6
ARBITRON INC.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
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Six Months Ended |
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June 30 |
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2007 |
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2006 |
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Cash flows from operating activities |
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Net income |
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$ |
19,283 |
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$ |
25,546 |
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Adjustments to reconcile net income to net cash
provided by operating activities |
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Depreciation and amortization of property and equipment |
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4,933 |
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|
3,455 |
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Amortization of intangible assets |
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|
459 |
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|
902 |
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Loss on asset disposals |
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|
191 |
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|
177 |
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Asset impairment charges |
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|
638 |
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Deferred income taxes |
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|
18 |
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|
663 |
|
Equity in net income of affiliates |
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(1,333 |
) |
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|
(2,678 |
) |
Distributions from affiliates |
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|
4,500 |
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|
3,950 |
|
Bad debt expense |
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|
505 |
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|
470 |
|
Non-cash share-based compensation |
|
|
3,473 |
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|
|
3,775 |
|
Changes in operating assets and liabilities |
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Trade accounts receivable |
|
|
448 |
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|
|
(965 |
) |
Prepaid expenses and other assets |
|
|
(863 |
) |
|
|
(131 |
) |
Inventory |
|
|
1,528 |
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|
|
(4,074 |
) |
Accounts payable |
|
|
372 |
|
|
|
(966 |
) |
Accrued expense and other current liabilities |
|
|
(15,285 |
) |
|
|
(7,269 |
) |
Deferred revenue |
|
|
542 |
|
|
|
1,884 |
|
Other noncurrent liabilities |
|
|
976 |
|
|
|
740 |
|
|
|
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|
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|
Net cash provided by operating activities |
|
|
19,747 |
|
|
|
26,117 |
|
|
|
|
|
|
|
|
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|
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|
|
|
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Cash flows from investing activities |
|
|
|
|
|
|
|
|
Additions to property and equipment |
|
|
(10,314 |
) |
|
|
(9,846 |
) |
Investment in affiliates |
|
|
(954 |
) |
|
|
|
|
Purchases of short-term investments |
|
|
(140,195 |
) |
|
|
(276,565 |
) |
Proceeds from sales of short-term investments |
|
|
128,970 |
|
|
|
309,175 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(22,493 |
) |
|
|
22,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
Proceeds from stock option exercises and stock purchase plan |
|
|
11,118 |
|
|
|
5,396 |
|
Stock repurchases |
|
|
(5,175 |
) |
|
|
(68,529 |
) |
Tax benefits realized from share-based awards |
|
|
1,483 |
|
|
|
722 |
|
Dividends paid to stockholders |
|
|
(5,994 |
) |
|
|
(6,208 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
1,432 |
|
|
|
(68,619 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
83 |
|
|
|
197 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(1,231 |
) |
|
|
(19,541 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
33,640 |
|
|
|
40,848 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
32,409 |
|
|
$ |
21,307 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
7
ARBITRON INC.
Notes to Consolidated Financial Statements
June 30, 2007
(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
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 footnotes required by
U.S. generally accepted accounting principles 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. Certain amounts in the financial statements for prior periods have
been reclassified to conform to the current periods presentation. The consolidated balance sheet
as of December 31, 2006 was audited at that date, but all of the information and footnotes as of
December 31, 2006 required by U.S. generally accepted accounting principles have not been included
in this Form 10-Q. For further information, refer to the consolidated financial statements and
footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December
31, 2006.
Consolidation
The consolidated financial statements of Arbitron reflect the consolidated financial position,
results of operations and cash flows of Arbitron Inc. and its subsidiaries: Arbitron Holdings
Inc., Audience Research Bureau S.A. de C.V., Ceridian Infotech (India) Private Limited, CSW
Research Limited, Euro Fieldwork Limited, and Arbitron International, LLC. All significant
intercompany balances have been eliminated in consolidation.
2. New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
(FIN) 48, Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in
income taxes by prescribing the recognition threshold a tax position is required to meet before
being recognized in the financial statements. The Company adopted FIN 48, effective January 1,
2007. The impact of applying FIN 48 to the Companys consolidated financial statements was
immaterial. For further disclosure, see Note 12-Taxes.
Effective December 31, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans
(SFAS No. 158). Arbitron currently measures plan assets and benefit obligations as of September
30 each year. In accordance with the provisions of SFAS No. 158, the measurement date will be
required to be as of the date of the Companys fiscal year-end statement of financial position
effective for fiscal years ending after December 15, 2008.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157),
which defines fair value, establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements
but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The management of the
Company is evaluating the impact of SFAS No. 157, but does not currently expect the adoption of
SFAS No. 157, effective January 1, 2008, to have a material impact on the Companys consolidated
financial statements.
8
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159), which permits companies to choose to measure many financial
instruments and certain other items at fair value that are not currently required to be measured at
fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The
management of the Company is evaluating the potential impact of SFAS No. 159 on the Companys
consolidated financial statements.
On October 18, 2006, the Company prepaid its outstanding senior-secured notes obligation using
$50.0 million of its available cash and short-term investments. Under the original terms of the
note agreement, the notes carried a fixed interest rate of 9.96% and a maturity date of January 31,
2008.
On December 20, 2006, 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 2006 Credit Facility). The agreement contains an expansion feature for the
Company to increase the financing available under the 2006 Credit Facility up to $200.0 million. As
of June 30, 2007, no borrowings had been made under the 2006 Credit Facility. As of June 30, 2007,
and December 31, 2006, the Company was in compliance with the terms of its 2006 Credit Facility.
Although the Company had no borrowings under the 2006 Credit Facility as of June 30, 2007, if
a default occurs on future borrowings, either because Arbitron is unable to generate sufficient
cash flow to service the debt or because Arbitron fails to comply with one or more of the
restrictive covenants, the lenders could elect to declare all of the then outstanding borrowings,
as well as accrued interest and fees, to be immediately due and payable. In addition, a default
could result in the application of higher rates of interest on any amounts due.
Interest paid during each of the six-month periods ended June 30, 2007, and 2006 was
approximately $0.1 million and $1.2 million, respectively. Noncash amortization of deferred
financing costs classified as interest expense during the three month periods ended June 30, 2007,
and 2006, were each less than $0.1 million. Noncash amortization of deferred financing costs
classified as interest expense during the six-month periods ended June 30, 2007 and 2006, was less
than $0.1 million and $0.1 million, respectively.
9
Changes in stockholders equity for the six months ended June 30, 2007, were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to Ceridian |
|
Retained |
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
in Excess of |
|
Earnings |
|
Accumulated |
|
Stock- |
|
|
Shares |
|
Common |
|
Treasury |
|
Paid-In |
|
Accumulated |
|
Subsequent |
|
Other Compre- |
|
holders |
|
|
Outstanding |
|
Stock |
|
Stock |
|
Capital |
|
Earnings |
|
to Spin-off |
|
hensive Loss |
|
Equity |
|
|
|
Balance as of
December 31, 2006 |
|
|
29,692 |
|
|
$ |
16,169 |
|
|
$ |
(1,323 |
) |
|
$ |
53,598 |
|
|
$ |
(239,042 |
) |
|
$ |
266,905 |
|
|
$ |
(7,051 |
) |
|
$ |
89,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,283 |
|
|
|
|
|
|
|
19,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued |
|
|
427 |
|
|
|
|
|
|
|
213 |
|
|
|
10,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock repurchased |
|
|
(107 |
) |
|
|
|
|
|
|
(53 |
) |
|
|
(5,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefit
from stock option
exercises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,035 |
) |
|
|
|
|
|
|
(6,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348 |
|
|
|
348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June
30, 2007 |
|
|
30,012 |
|
|
$ |
16,169 |
|
|
$ |
(1,163 |
) |
|
$ |
64,333 |
|
|
$ |
(239,042 |
) |
|
$ |
280,153 |
|
|
$ |
(6,703 |
) |
|
$ |
113,747 |
|
|
|
|
A quarterly cash dividend of $0.10 per common share was paid to stockholders on July 2,
2007.
5. |
|
Short-term Investments |
Short-term investments as of June 30, 2007, and December 31, 2006, consisted of $38.9 million
and $27.6 million, respectively, in municipal and other government-issued variable-rate demand
notes and auction-rate securities recorded by the Company at fair value. All of the Companys
short-term investment assets are classified as available-for-sale securities in accordance with
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
For the three months ended June 30, 2007 and 2006, gross purchases of available-for-sale
securities were $47.0 million and $54.1 million, respectively, and gross proceeds from sales of
available-for-sale securities were $47.5 million and $92.6 million for the three months ended June
30, 2007 and 2006, respectively.
For the six months ended June 30, 2007 and 2006, gross purchases of available-for-sale
securities were $140.2 million and $276.6 million, respectively, and gross proceeds from sales of
available-for-sale securities were $129.0 million and $309.2 million for the six months ended June
30, 2007 and 2006, respectively.
10
Inventory as of June 30, 2007, and December 31, 2006, consisted of $2.3 million and $3.8
million, respectively, of Portable People MeterTM equipment held for resale to
international licensees of the PPMTM service. The inventory is accounted for on a
first-in, first-out (FIFO) basis.
7. |
|
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 months ended June 30, 2007 and 2006, are based on Arbitrons 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 that the proceeds from the exercise of all stock options are used to repurchase the
Companys common stock at the average market price for the period. As of June 30, 2007, and 2006,
there were options to purchase 1,929,584 and 2,514,252 shares of the Companys common stock
outstanding, of which options to purchase 13,291 and 1,427,187 shares of the Companys common
stock, respectively, were excluded from the computation of diluted net income per weighted-average
common share, either because the options exercise prices were greater than the average market
price of the Companys common shares or assumed repurchases from proceeds from the options
exercise were potentially antidilutive. The Company elected to use the short-cut method of
determining its initial hypothetical tax benefit windfall pool and, in accordance with provisions
under SFAS No. 123R, Share Based Payment, (SFAS No. 123R) the assumed proceeds associated with
the entire amount of tax benefits for share-based awards granted prior to SFAS No. 123R adoption
were used in the diluted shares computation. For share-based awards granted subsequent to the
January 1, 2006 SFAS No. 123R adoption date, the assumed proceeds for the related excess tax
benefits were used in the diluted shares computation.
On November 16, 2006, Arbitron announced that its Board of Directors had authorized a program
to repurchase up to $100.0 million of its outstanding common stock through either periodic
open-market or private transactions at then-prevailing market prices over a period of two years
through December 31, 2008. As of June 30, 2007, 106,600 shares of the Companys common stock were
repurchased under this program for $5.2 million.
The Company is involved, from time to time, in litigation and proceedings arising in the
ordinary course of business. Legal costs for services rendered in the course of these proceedings
are charged to expense as they are incurred.
During 2005, the Pennsylvania Department of Revenue concluded a sales tax audit of the Company
and notified the Company of an assessment of $3.6 million, including outstanding sales tax and
accumulated interest since 2001. Since 2005, the assessment has increased due to additional
interest to $3.9 million as of June 30, 2007.
Currently, the Company continues to contest the assessment in its entirety. Consistent
with the findings of a previous Pennsylvania sales tax audit of the Company, the Company contends
that it continues to provide nontaxable services to its Pennsylvania customers and intends to
vigorously defend this position during the appeals process. The Commonwealth of Pennsylvania has
denied the Companys administrative appeals, and the dispute was submitted to the Commonwealth
Court of Pennsylvania for consideration. Currently, the Company is discussing settlement options
with the Office of Attorney General in an effort to avoid protracted litigation and the related
costs and has offered to settle the disputed matter. As of June 30, 2007, the Office of Attorney
General has not yet responded to the Companys offer.
Given the nature of this uncertainty, and the pending settlement offer, $0.5 million was
recognized during the quarter ended June 30, 2007, in accordance with FAS No. 5 Accounting for
Contingencies.
11
9. |
|
Comprehensive Income and Accumulated Other Comprehensive Loss |
The Companys comprehensive income is comprised of net income, changes
in foreign currency translation adjustments, and changes in defined benefit plan liabilities, net
of tax (expense) benefits. The components of comprehensive income were as follows (in
thousands) :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
3,788 |
|
|
$ |
7,360 |
|
|
$ |
19,283 |
|
|
$ |
25,546 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign
currency
translation
adjustment, net of
tax expense of $35
and $76 for the
three months ended
June 30, 2007 and
2006, respectively;
and $43 and $89 for
the six months
ended June 30, 2007
and 2006,
respectively |
|
|
56 |
|
|
|
123 |
|
|
|
68 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in defined
benefit plan
liabilities, net of
tax expense of $175
and $171 for the
three and six
months ended June
30, 2007,
respectively |
|
|
276 |
|
|
|
|
|
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
332 |
|
|
|
123 |
|
|
|
348 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
4,120 |
|
|
$ |
7,483 |
|
|
$ |
19,631 |
|
|
$ |
25,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive loss were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Foreign currency translation adjustment |
|
$ |
408 |
|
|
$ |
340 |
|
Defined benefit plan liabilities |
|
|
(7,111 |
) |
|
|
(7,391 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(6,703 |
) |
|
$ |
(7,051 |
) |
|
|
|
|
|
|
|
Effective December 31, 2006, the Company adopted Statement of Financial
Acounting Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and 132 (R) (SFAS
No. 158). The provisions of SFAS No. 158 require that the
funded status of the Companys pension plans and the benefit
obligations of the Companys post-retirement benefit plans be recognized in the Companys balance sheet.
Appropriate adjustments were made to various assets and liabilities
as of December 31, 2006, with an offsetting after-tax effect of $7.1
million recorded as a component of other comprehensive income rather
than as an adjustment to the ending balance of accumulated other
comprehensive income.
Excluding the impact of the adoption of SFAS No. 158, total other
comprehensive income for the year ended December 31, 2006 was $54.1
million after-tax, compared with the reported other comprehensive
income of $47.0 million after-tax. The presentation of other
comprehensive income for the year ended December 31, 2006 will be
revised to exclude the impact of the adoption of SFAS No. 158 in the Companys
Annual Report on Form 10-K for the year ending December 31, 2007.
12
10. |
|
Investment in Affiliates |
Investment in affiliates consists of the Companys 49.5% interest in Scarborough Research
(Scarborough), a syndicated, qualitative local market research partnership, and the Companys
50.0% interest in Project Apollo LLC ( Project Apollo), a national marketing panel service pilot
jointly owned by the Company and Nielsen Media Research. On February 1, 2007, the Company announced
the formation of Project Apollo. Project Apollos objective is to test a proposed service that
would provide multimedia exposure data combined with sales data from a single source to produce a
measure of advertising effectiveness. The following table shows the investment activity for each
of the Companys affiliates and in total for 2007: (Note: Scarborough was the only affiliate owned
by the Company during 2006.)
Summary of Investment Activity in Affiliates (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2007 |
|
Six
Months Ended June 30, 2007 |
|
|
|
|
|
|
Project |
|
|
|
|
|
|
|
|
|
Project |
|
|
|
|
Scarborough |
|
Apollo |
|
Total |
|
Scarborough |
|
Apollo |
|
Total |
|
|
|
|
|
Beginning Balance |
|
$ |
7,929 |
|
|
$ |
1,086 |
|
|
$ |
9,015 |
|
|
$ |
13,907 |
|
|
$ |
|
|
|
$ |
13,907 |
|
Proportionate share of income(loss) |
|
|
5,763 |
|
|
|
(674 |
) |
|
|
5,089 |
|
|
|
3,135 |
|
|
|
(1,802 |
) |
|
|
1,333 |
|
Distributions from affiliates |
|
|
(1,150 |
) |
|
|
|
|
|
|
(1,150 |
) |
|
|
(4,500 |
) |
|
|
|
|
|
|
(4,500 |
) |
Non-cash investments in affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,214 |
|
|
|
2,214 |
|
Cash investments in affiliates |
|
|
|
|
|
|
954 |
|
|
|
954 |
|
|
|
|
|
|
|
954 |
|
|
|
954 |
|
|
|
|
|
|
Ending Balance at June 30, 2007 |
|
$ |
12,542 |
|
|
$ |
1,366 |
|
|
$ |
13,908 |
|
|
$ |
12,542 |
|
|
$ |
1,366 |
|
|
$ |
13,908 |
|
|
|
|
|
|
13
Certain of Arbitrons United States employees participate in a defined-benefit pension plan
that closed to new participants effective January 1, 1995. Arbitron subsidizes healthcare benefits
for eligible retired employees who participate in the pension plan and were hired before January 1,
1992. Arbitron also sponsors two nonqualified, unfunded supplemental retirement plans.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, (SFAS No. 158) which required the Company to recognize
the underfunded status of its defined-benefit plans as a liability on the balance sheet as of
December 31, 2006, and to recognize any changes in that funded status through comprehensive income.
Arbitron currently measures plan assets and benefit obligations as of September 30 each year.
Effective for fiscal years ending after December 15, 2008, the measurement date, in accordance with
the provisions of SFAS No. 158, will be required to be as of the date of the Companys fiscal
year-end statement of financial position.
The components of periodic benefit costs for the defined-benefit pension plan and
postretirement plan were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined-Benefit |
|
|
Postretirement |
|
|
Supplemental |
|
|
|
Pension Plan |
|
|
Plan |
|
|
Retirement Plans |
|
|
|
Three Months |
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
218 |
|
|
$ |
242 |
|
|
$ |
9 |
|
|
$ |
8 |
|
|
$ |
32 |
|
|
$ |
7 |
|
Interest cost |
|
|
445 |
|
|
|
413 |
|
|
|
21 |
|
|
|
17 |
|
|
|
52 |
|
|
|
40 |
|
Expected return on plan assets |
|
|
(552 |
) |
|
|
(494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
(5 |
) |
Amortization of net loss |
|
|
166 |
|
|
|
180 |
|
|
|
11 |
|
|
|
5 |
|
|
|
48 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
282 |
|
|
$ |
346 |
|
|
$ |
41 |
|
|
$ |
30 |
|
|
$ |
127 |
|
|
$ |
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined-Benefit |
|
|
Postretirement |
|
|
Supplemental |
|
|
|
Pension Plan |
|
|
Plan |
|
|
Retirement Plans |
|
|
|
Six Months |
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
435 |
|
|
$ |
483 |
|
|
$ |
18 |
|
|
$ |
17 |
|
|
$ |
65 |
|
|
$ |
43 |
|
Interest cost |
|
|
890 |
|
|
|
826 |
|
|
|
42 |
|
|
|
33 |
|
|
|
105 |
|
|
|
81 |
|
Expected return on plan assets |
|
|
(1,103 |
) |
|
|
(988 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
|
|
(11 |
) |
Amortization of net loss |
|
|
331 |
|
|
|
359 |
|
|
|
23 |
|
|
|
10 |
|
|
|
96 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
564 |
|
|
$ |
691 |
|
|
$ |
83 |
|
|
$ |
60 |
|
|
$ |
255 |
|
|
$ |
177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arbitron estimates that it will contribute $2.4 million in 2007 to these defined-benefit
plans.
14
12. Taxes
On January 1, 2007, Arbitron adopted the provisions of FASB Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes. In applying FIN 48, the Company assessed all material
positions taken on income tax returns for years through December 31, 2006, that are still subject
to examination by relevant taxing authorities. As of the date of adoption, the Companys
unrecognized tax benefits totaled $0.7 million. If recognized, the $0.7 million would reduce the
Companys effective tax rate in future periods.
The Company files numerous income tax returns, primarily in the United States, including
federal, state, and local jurisdictions, and certain foreign jurisdictions. Tax years ended
December 31, 2003 through December 31, 2006, remain open for assessment by the Internal Revenue
Service. Generally, the Company is not subject to state, local, or foreign examination for years
prior to 2002. However, tax years 1989 through 2001 remain open for assessment for certain state
taxing jurisdictions where net operating loss (NOL) carryforwards were utilized on the income tax
returns since 2002. The Company accrues potential interest and penalties and recognizes income tax
expense where, under relevant tax law, interest and penalties would be assessed if the uncertain
tax position ultimately were not sustained.
Management determined it is reasonably possible that certain unrecognized tax benefits as of
the date of adoption will decrease during the subsequent 12 months due to the expiration of
statutes limitations and due to the settlement of certain state audit examinations. The estimated
decrease in these unrecognized federal tax benefits and the estimated decrease in unrecognized tax
benefits from various states are both immaterial.
Income taxes paid for the six months ended June 30, 2007 and 2006, were $12.7 million and
$15.0 million, respectively.
15
13. Share-Based Compensation
The following table sets forth information with regard to the income statement recognition of
share-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Cost of revenue |
|
$ |
182 |
|
|
$ |
182 |
|
|
$ |
316 |
|
|
$ |
313 |
|
Selling, general and administrative |
|
|
1,852 |
|
|
|
2,047 |
|
|
|
2,941 |
|
|
|
3,238 |
|
Research and development |
|
|
139 |
|
|
|
126 |
|
|
|
216 |
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
$ |
2,173 |
|
|
$ |
2,355 |
|
|
$ |
3,473 |
|
|
$ |
3,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was no capitalized share-based compensation cost incurred during the three and six-month
periods ended June 30, 2007, and 2006.
In some cases, the vesting of share-based awards is accelerated due to an employees
retirement. Prior to the adoption of SFAS No. 123R, the amount disclosed for the Companys pro
forma compensation expense did not include an acceleration of expense recognition for retirement
eligible employees. For share-based arrangements granted subsequent to the adoption of SFAS No.
123R, the Company accelerates expense recognition if retirement eligibility affects the vesting of
the award. If the accelerated pro forma expense recognition had occurred prior to January 1, 2006,
the share-based compensation expense for the three and six-month periods ended June 30, 2007, would
have been lower by $0.1 million and $0.3 million, respectively, and for the same periods of 2006,
would have been lower by $0.3 million and $0.6 million, respectively.
Stock Options
Stock options awarded to employees under the 1999 and 2001 Stock Incentive Plans (each
individual plan referred to herein as a SIP, and collectively as the SIPs) generally vest
annually over a three-year period, have five-year or 10-year terms and have an exercise price not
less than the fair market value of the underlying stock at the date of grant. Stock options granted
to directors under the 1999 SIP generally vest upon the date of grant, are generally exercisable in
six months after the date of grant, have 10-year terms and have an exercise price not less than the
fair market value of the underlying stock at the date of grant. Certain option and share awards
provide for accelerated vesting if there is a change in control of the Company (as defined in the
SIPs).
The Company uses historical data to estimate option exercises and employee terminations in
order to determine the expected term of the option; identified groups of optionholders that have
similar historical exercise behavior are considered separately for valuation purposes. The expected
term of options granted represents the period of time that such options are expected to be
outstanding. The expected term can vary for certain groups of optionholders exhibiting different
behavior. The risk-free rate for periods within the contractual life of the option is based on the
U.S. Treasury strip bond yield curve in effect at the time of grant. Expected volatilities are
based on the historical volatility of the Companys common stock.
16
The fair value of each option granted to employees and nonemployee directors during the six
months ended June 30, 2007, was estimated on the date of grant using a Black-Scholes option
valuation model. Those assumptions along with other data regarding the Companys stock options for
the three and six months ended June 30, 2007, and 2006, are noted in the following table:
|
|
|
|
|
|
|
|
|
Assumptions for options |
|
Three Months |
|
Three Months |
|
Six Months |
|
Six Months |
granted to employees and |
|
Ended June 30, |
|
Ended June 30, |
|
Ended June 30, |
|
Ended June 30, |
nonemployee directors |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Expected volatility |
|
24.95 - 26.24% |
|
27.22 - 27.35% |
|
24.95 - 26.52% |
|
27.22 - 27.35% |
Expected dividends |
|
1.00% |
|
1.00% |
|
1.00% |
|
1.00% |
Expected term (in years) |
|
5.75 - 6.25 |
|
5.25 - 6.00 |
|
5.75 - 6.25 |
|
5.25 - 6.00 |
Risk-free rate |
|
4.62 - 4.91% |
|
4.96 - 5.07% |
|
4.56 - 4.91% |
|
4.37 - 5.07% |
|
|
|
|
|
|
|
|
|
Weighted-average
volatility |
|
25.39% |
|
27.34% |
|
25.45% |
|
27.33% |
Weighted-average term
(in years) |
|
5.92 |
|
5.52 |
|
5.91 |
|
5.74 |
Weighted-average
risk-free rate |
|
4.62% |
|
4.99% |
|
4.62% |
|
4.70% |
Weighted-average grant
date fair value |
|
$14.82 |
|
$12.73 |
|
$14.79 |
|
$12.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Three Months |
|
Six Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
Ended June 30, |
|
Ended June 30, |
Other data |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
Options granted |
|
|
151,291 |
|
|
|
158,522 |
|
|
|
158,610 |
|
|
|
299,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
exercise price for
options granted |
|
$ |
48.26 |
|
|
$ |
40.09 |
|
|
$ |
48.15 |
|
|
$ |
39.51 |
|
As of June 30, 2007, there was $2.5 million of total unrecognized compensation cost related to
options granted under the SIPs. This aggregate unrecognized cost is expected to be recognized over
a weighted-average period of 1.9 years. The weighted-average exercise price and weighted-average
remaining contractual term for outstanding stock options as of June 30, 2007, was $38.04 and 6.57
years, respectively. The total intrinsic value of options exercised during the three months ended
June 30, 2007, and 2006, was $2.7 million and $0.7 million, respectively. The total intrinsic value
of options exercised during the six months ended June 30, 2007, and 2006, was $4.1 million and $1.9
million, respectively.
Nonvested Share Awards
The Companys nonvested share awards generally vest over four or five years on either a
monthly or annual basis. Compensation expense is recognized on a straight-line basis using the
market price on the date of grant as the awards vest. For the six months ended June 30, 2007, and
2006, the number of nonvested share awards granted was 113,233 and 79,482 shares, respectively, and
the weighted-average grant date fair value was $46.33 and $38.88, respectively. The total fair
value of share awards vested during the six months ended June 30, 2007, and 2006, was $0.6 million
and $0.1 million, respectively. For the three months ended June 30, 2007, the number of nonvested
share awards granted was 10,933 shares and the weighted average grant date fair value was $48.25.
There were no nonvested share awards granted during the three months ended June 30, 2006. The total
fair value of share awards vested during the three months ended June 30, 2007, and 2006, was $0.1
million and less than $0.1 million, respectively. As of June 30, 2007, there was $7.3 million of
total unrecognized compensation cost related to nonvested share awards granted under the SIPs. This
aggregate unrecognized cost for nonvested share awards is expected to be recognized over a
weighted-average period of 3.1 years.
17
Deferred Stock Units
Deferred stock units granted to employees vest annually over a three-year period and are
convertible to shares of common stock, subsequent to their termination of employment. Deferred
stock units granted to nonemployee directors vest immediately upon grant and are convertible into
shares of common stock subsequent to the directors termination of service. For the six months
ended June 30, 2007, the number of deferred stock units granted to employee and nonemployee
directors was 21,667 and 2,384 shares, respectively. For the six months ended June 30, 2006, the
number of deferred stock units granted to employee and nonemployee directors was 18,186 and 3,915
shares, respectively. The total fair value of deferred stock units that vested during the six
months ended June 30, 2007, and 2006, was $0.1 million and $0.1 million, respectively. As of June
30, 2007, the total unrecognized compensation cost related to deferred stock units granted under
the SIPs was $1.5 million. The aggregate unrecognized cost as of June 30, 2007, is expected to be
recognized over a weighted-average period of 2.5 years.
Employee Stock Purchase Plan
The Companys compensatory Employee Stock Purchase Plan (ESPP) provides for the issuance of
up to 600,000 shares of newly issued or treasury common stock of Arbitron. The purchase price of
the stock to ESPP participants is 85% of the lesser of the fair market value on either the first
day or the last day of the applicable three-month offering period. The total amount of compensation
expense recognized for ESPP share-based arrangements was $0.1 million for each of the three-month
periods ended June 30, 2007, and 2006, respectively. The number of ESPP shares issued during the
three months ended June 30, 2007, and 2006, was 9,095 and 10,268 shares, respectively. The total
amount of compensation expense recognized for ESPP share-based arrangements was $0.2 million and
$0.1 million for the six-month periods ended June 30, 2007, and 2006, respectively. The number of
ESPP shares issued during the six months ended June 30, 2007, and 2006, was 17,377 and 19,746
shares, respectively.
14. Concentration of Credit Risk
Arbitrons quantitative radio audience measurement service and related software sales, which
are primarily provided to radio broadcasters, accounted for approximately 76% and 78% of the
Companys revenue for the three months ended June 30, 2007, and 2006, and 86% and 87% for the six
months ended June 30, 2007 and 2006, respectively. Arbitron had one customer that individually
represented 19% of its revenue for the year ended December 31, 2006. Arbitron routinely assesses
the financial strength of its customers and has experienced only nominal losses on its trade
accounts receivable.
18
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Arbitrons consolidated
financial
statements and the notes thereto in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
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, anticipates, estimates, believes, or plans or comparable terminology,
are forward-looking statements based on current expectations about future events, which Arbitron
has derived from information currently available to it. These forward-looking statements involve
known and unknown risks and uncertainties that may cause our results to be materially different
from results implied in such forward-looking statements. These risks and uncertainties include, in
no particular order, whether we will be able to:
|
|
|
successfully implement the rollout of our Portable People MeterTM service; |
|
|
|
|
renew contracts with large customers as they expire; |
|
|
|
|
successfully execute our business strategies, including
entering into potential acquisition, joint-venture or other material
third-party agreements; |
|
|
|
|
effectively manage the impact of any further ownership shifts in the radio and advertising agency industries; |
|
|
|
|
respond to rapidly changing technological needs of our customer base, including creating new proprietary software
systems and new customer products and services that meet these needs in a timely manner; |
|
|
|
|
successfully manage the impact on our business of any economic downturn generally and in the advertising market in
particular; |
|
|
|
|
successfully manage the impact on costs of data collection due to lower respondent cooperation in surveys, privacy
concerns, consumer trends, technology changes and/or government regulations; |
|
|
|
|
successfully develop and implement technology solutions to measure multi-media and advertising in an increasingly
competitive environment; and |
|
|
|
|
successfully obtain and/or maintain Media Rating Council® accreditation for our
audience measurement services. |
Additional important factors known to Arbitron that could cause actual results to differ
materially from our forward-looking statements are identified and discussed from time to time in
Arbitrons filings with the Securities and Exchange Commission, including in particular the risk
factors discussed under the caption ITEM 1A. RISK FACTORS in Arbitrons Annual Report on Form
10-K for the year ended December 31, 2006.
The forward-looking statements contained in this document speak only as of the date hereof,
and Arbitron undertakes no obligation to correct or update any forward-looking statements, whether
as a result of new information, future events or otherwise.
Overview
Arbitron is an international media and marketing information services firm primarily serving
radio, cable television, advertising agencies, advertisers, out-of-home media, online media and,
through its Scarborough Research joint venture with The Nielsen Company, broadcast television and
print media.
19
Arbitron currently provides four main services:
|
|
|
measuring radio audiences in local markets in the United States; |
|
|
|
|
measuring national radio audiences and the audience size and composition of network
radio programs and commercials; |
|
|
|
|
providing application software used for accessing and analyzing media audience and
marketing information data; and |
|
|
|
|
providing consumer, shopping and media usage information services to radio, cable
television, advertising agencies, advertisers, retailers, out-of-home media, online
industries and, through its Scarborough Research joint venture with The Nielsen
Company, broadcast television and print media. |
Known Trends That Management Considers Material
Significant Concentrations. Historically, the Companys quantitative radio measurement
services and related software have accounted for a substantial majority of its total revenues.
Consolidation in the radio broadcasting industry has led to a concentration of ownership of radio
stations and, consequently, Arbitrons dependence on a limited number of key customers for such
services and related software has increased. For the year ended December 31, 2006, Clear Channel
Communications, Inc. (Clear Channel) and CBS Radio Inc. (CBS Radio) represented approximately
19 percent and nine percent, respectively, of Arbitrons total revenue. The Companys agreements
with these customers are not exclusive and do not contain automatic renewal obligations.
On June
26, 2007 Arbitron entered into a new multi-year agreement with Clear
Channel to provide PPM radio ratings and other related services to
Clear Channels 268 radio stations located in the 46 markets in
which Clear Channel operates out of the 50 markets identified in the
Companys previously announced PPM roll-out plan (we refer to
the 46 markets in which Clear Channel operates that are included in
the PPM roll-out plan, collectively, as the Clear Channel PPM
Markets). Pursuant to the terms of the agreement, Arbitron will
provide Clear Channel with PPM ratings services, as and when the new
audience ratings technology is deployed in the Clear Channel PPM
Markets. Until such time as the PPM ratings technology is deployed in
a particular market, the Company will continue to provide Clear
Channel with its diary-based ratings services in that market. As the
PPM ratings technology is deployed in a particular market, the
diary-based ratings agreement will lapse and the new agreement will
become applicable to such market. The new agreement also extends the
diary-based ratings agreement in the Clear Channel PPM Markets that
do not enter into PPM pre-currency prior to December 31, 2008 until
such time as the PPM service is commercialized in those markets, but
not later than December 31, 2011. The existing agreement between the
Company and Clear Channel for diary-based ratings in markets outside
of the Clear Channel PPM Markets is not amended by the new agreement
and is currently scheduled to expire December 31, 2008.
On February 9, 2007, The Media Audit/Ipsos announced that they will receive funding from a
number of broadcasters, including Clear Channel, to test their competing electronic ratings system
in the Houston market.
In May 2006, Arbitron announced that it had entered into a license agreement with CBS Radio to
provide diary-based services and PPM radio ratings to all of its stations, as the new ratings
technology is deployed, through the first quarter of 2014.
Arbitrons quantitative radio audience measurement business and related software sales
accounted for approximately 76% and 86% of its revenue for the three and six months ended June 30,
2007, respectively. The Company expects that for the year ended December 31, 2007, Arbitrons
quantitative radio audience measurement business and related software sales will account for
approximately 85% of its revenue, which is consistent with historic annual trends. Quarterly
fluctuations in this percentage are reflective of the seasonal delivery schedule of the Companys
radio audience measurement business.
Electronic Measurement Initiatives. Arbitron has begun execution of its plan to progressively
roll out its PPM ratings service to the top 50 radio markets by the end of 2010. Measurement by the
PPM service began in pilot mode in Houston in June 2005. In January 2007, the Houston methodology
was accredited by the Media Rating Council (MRC). In July 2007, the PPM service replaced the
diary-based service in Houston.
A PPM panel was installed in Philadelphia beginning in August 2006. The Philadelphia PPM radio
measurement data have been audited by the MRC. On the basis of the completion of this audit, the
sharing of the audit results with the MRCs audit committee, and the completion of a two-month
precurrency period for training and electronic measurement transition, the PPM service in
Philadelphia replaced the diary service in April 2007. The Philadelphia PPM data are not yet
accredited the process of obtaining accreditation continues. Commercialization of the remaining
top 50 radio markets by the end of 2010 is currently on schedule with Arbitrons previously
announced rollout plan.
20
Currently, approximately 26,000 panelists have been installed worldwide for PPM-supported
services, including the PPM radio ratings service, and through the Project Apollo LLC (Project
Apollo), a jointly owned limited liability company with Nielsen Media Research, Inc. to explore
the feasibility of the commercialization of a national marketing service panel.
Commercialization of the PPM radio rating service and exploration of other strategic
applications of the PPM technology, including the national marketing panel service, will require a
substantial financial investment. Arbitron believes that during the PPM rollout period its costs
and expenses will increase and substantial capital expenditures will be required. In addition, the
management of Arbitron expects that, if the decision to commercialize the national market panel
service is made, Arbitrons expenses will increase as a result of continued deployment costs
associated with the national marketing panel service and the strategic development of its
electronic ratings business.
Arbitron believes that, while commercialization of the PPM ratings service and other strategic
applications of the PPM technology will have a near-term negative impact on its results of
operations, which impact likely will be material, its operating margins can be restored through the
completion of the PPM transition process in the top 50 radio markets, although there can be no
assurance that this will be the case.
Arbitron announced in April 2007 that broadcasters in Iceland have selected the PPM system as
the audience measurement currency system for both radio and television, making Iceland the first
country to use the PPM systems multimedia measurement capabilities. The six-year contract was
awarded to the Reykjavik-based research and consulting firm Capacent, supported by TNS Norway,
through a competitive request for proposals for electronic audience measurement. Arbitron announced
in June 2007 that the radio industry in Denmark selected the PPM system as its electronic audience
measurement system. The five-year contract was awarded to TNS Gallup, an international licensee of
the PPM technology. Beginning January 2008, a national panel of 750 Danish consumers will be
equipped with the PPM device to collect overnight radio-listening data. Danish broadcasters will
use the PPM data for commercial sales and program planning.
One of Arbitrons key corporate strategy objectives is to expand its information services to a
broader range of media types, including broadcast television, cable, out-of-home media, satellite
radio and television, Internet broadcasts and mobile media. On July 23, 2007, the MRC accredited
the average-quarter-hour, time-period television ratings data produced by the PPM ratings service
in Houston. The PPM service in Houston is the first accredited portable meter service, collecting
data on radio, local television and cable use from one sample of consumers, at home and away from
home.
Response Rates and Sample Proportionality
Arbitron must achieve response rates sufficient to maintain confidence in its ratings, the
support of the industry and accreditation by the Media Rating
Council. Consistent with general industry trends, overall response rates have
declined over the past several years, and it has become increasingly difficult and more costly for
the Company to obtain consent from persons to participate in its surveys.
Another measure often used by clients to assess quality in Arbitrons surveys is
proportionality, which refers to how well the distribution of the sample for any individual survey
matches the distribution of the population in the market. In recent years, Arbitrons ability to
deliver survey samples of young adults that match the percentage of this demographic group in the
total population has deteriorated, caused in part by the trend among some households to
disconnect their landline phones, effectively removing these households from the Arbitron sample
frame. As consumers adopt modes of telecommunication other than telephone landlines, such as mobile
phones and cable or Internet calling, it is becoming increasingly difficult for Arbitron to reach
and recruit participants. Recruiting mobile phone-only households will lead to increased costs.
21
Arbitron has committed extensive efforts and resources to address the decline of response
rates and to maintain sample proportionality, including a comprehensive set of initiatives to
bolster response rates and improve sample proportionality among African-American, Hispanic, and
young male respondents in Arbitrons diary-based markets. These initiatives include providing for
substantial increases in cash incentives and other survey treatments. The most significant response
rate initiatives in 2007 include the completion of the rollout of the 2006 response rate and
proportionality action plan and the opening of a third Arbitron owned and operated participant
interviewing center during the first quarter of 2007. Arbitrons experience is that the internal
interviewing centers outperform the outsourced calling center vendors that they replace. Management
believes that significant additional expenditures will be required in the future with respect to
response rates and sample proportionality.
As the PPM service is rolled out, Arbitrons management expects to incur similar challenges in
the operation of an electronic measurement service, as are faced in the Companys diary-based
service; including those challenges related to response rate and sample proportionality. Arbitron
also expects that additional measures to
address these challenges will be implemented and require expenditures incremental to those required
for its diary-based service.
Pennsylvania Sales Tax Assessment
During 2005, the Pennsylvania Department of Revenue concluded a sales tax audit of the Company
and notified the Company of an assessment of $3.6 million, including outstanding sales tax and
accumulated interest since 2001. Since 2005, the assessment has increased due to additional
interest to $3.9 million as of June 30, 2007.
Currently, the Company continues to contest the assessment in its entirety. Consistent
with the findings of a previous Pennsylvania sales tax audit of the Company, the Company contends
that it continues to provide nontaxable services to its Pennsylvania customers and intends to
vigorously defend this position during the appeals process. The Commonwealth of Pennsylvania has
denied the Companys administrative appeals, and the dispute was submitted to the Commonwealth
Court of Pennsylvania for consideration. Currently, the Company is discussing settlement options
with the Office of Attorney General in an effort to avoid protracted litigation and the related
costs and has offered to settle the disputed matter. The Office of Attorney General has not yet
responded to the Companys offer.
Given the nature of this uncertainty, and the pending settlement offer, $0.5 million was
recognized during the quarter ended June 30, 2007, in accordance with FAS No. 5 Accounting for
Contingencies.
New Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation (FIN) 48, Accounting for Uncertainty in
Income Taxes (FIN 48"), an interpretation of FASB Statement No. 109, Accounting for Income Taxes.
FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition
threshold that a tax position is required to meet before being recognized in the financial
statements. The Company adopted FIN 48, effective January 1, 2007. The impact of applying FIN 48
to the Companys consolidated financial statements was immaterial.
Effective December 31, 2006, the Company adopted SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans (SFAS No. 158). Arbitron currently
measures plan assets and benefit obligations as of September 30 each year. In accordance with the
provisions of SFAS No. 158, the measurement date will be required to be as of the date of the
Companys fiscal year-end statement of financial position effective for fiscal years ending after
December 15, 2008.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157),
which defines fair value, establishes guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements
but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The management of the
Company is evaluating the impact of SFAS No. 157, but does not currently expect the adoption of
SFAS No. 157, effective January 1, 2008, to have a material impact on the Companys consolidated
financial statements.
22
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS No. 159), which permits companies to choose to measure many financial
instruments and certain other items at fair value that are not currently required to be measured at
fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The
management of the Company is evaluating the potential impact of SFAS No. 159 on the consolidated
financial statements.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that are both important to the
presentation of Arbitrons financial position and results of operations, and require managements
most difficult, complex or subjective judgments.
Arbitron capitalizes software development costs with respect to significant internal-use
software initiatives or enhancements in accordance with Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use. The costs are capitalized
from the time that the preliminary project stage is completed and management considers it probable
that 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. Management performs an assessment
quarterly to determine if it is probable that 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, 2007, and December 31, 2006, Arbitrons capitalized software developed for
internal use had carrying amounts of $19.9 million and $19.3 million, respectively, including $9.3
million and $9.0 million, respectively, of software related to the PPM system.
Arbitron uses 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 liabilities and assets for the future tax consequences of events
that have been recognized in an entitys financial statements or tax returns. Management 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. Assumptions, judgments, and estimates relative to the current provision for income taxes
take into account current tax laws, interpretations 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. 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 taxes inaccurate. Any of the assumptions, judgments and
estimates mentioned above could cause actual income tax obligations to differ from estimates, thus
impacting Arbitrons financial position and results of operations.
23
Results of Operations
Comparison of the Three Months Ended June 30, 2007 to the Three Months Ended June 30, 2006
The following table sets forth information with respect to the consolidated statements of
income of Arbitron:
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Increase |
|
|
Percentage of |
|
|
|
June 30, |
|
|
(Decrease) |
|
|
Revenue |
|
|
|
2007 |
|
|
2006 |
|
|
Dollars |
|
|
Percent |
|
|
2007 |
|
|
2006 |
|
Revenue |
|
$ |
79,047 |
|
|
$ |
74,165 |
|
|
$ |
4,882 |
|
|
|
6.6 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
46,468 |
|
|
|
36,684 |
|
|
|
9,784 |
|
|
|
26.7 |
% |
|
|
58.8 |
% |
|
|
49.5 |
% |
Selling, general and administrative |
|
|
20,461 |
|
|
|
20,557 |
|
|
|
(96 |
) |
|
|
(0.5 |
%) |
|
|
25.9 |
% |
|
|
27.7 |
% |
Research and development |
|
|
11,830 |
|
|
|
10,031 |
|
|
|
1,799 |
|
|
|
17.9 |
% |
|
|
15.0 |
% |
|
|
13.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
78,759 |
|
|
|
67,272 |
|
|
|
11,487 |
|
|
|
17.1 |
% |
|
|
99.6 |
% |
|
|
90.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
288 |
|
|
|
6,893 |
|
|
|
(6,605 |
) |
|
|
(95.8 |
%) |
|
|
0.4 |
% |
|
|
9.3 |
% |
Equity in net income of affiliates |
|
|
5,089 |
|
|
|
5,053 |
|
|
|
36 |
|
|
|
0.7 |
% |
|
|
6.4 |
% |
|
|
6.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and income tax expense |
|
|
5,377 |
|
|
|
11,946 |
|
|
|
(6,569 |
) |
|
|
(55.0 |
%) |
|
|
6.8 |
% |
|
|
16.1 |
% |
Interest income |
|
|
670 |
|
|
|
829 |
|
|
|
(159 |
) |
|
|
(19.2 |
%) |
|
|
0.8 |
% |
|
|
1.1 |
% |
Interest expense |
|
|
96 |
|
|
|
937 |
|
|
|
(841 |
) |
|
|
(89.8 |
%) |
|
|
0.1 |
% |
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
5,951 |
|
|
|
11,838 |
|
|
|
(5,887 |
) |
|
|
(49.7 |
%) |
|
|
7.5 |
% |
|
|
16.0 |
% |
Income tax expense |
|
|
2,163 |
|
|
|
4,478 |
|
|
|
(2,315 |
) |
|
|
(51.7 |
%) |
|
|
2.7 |
% |
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,788 |
|
|
$ |
7,360 |
|
|
$ |
(3,572 |
) |
|
|
(48.5 |
%) |
|
|
4.8 |
% |
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per weighted-average common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.13 |
|
|
$ |
0.25 |
|
|
$ |
(0.12 |
) |
|
|
(48.0 |
%) |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.13 |
|
|
$ |
0.24 |
|
|
$ |
(0.11 |
) |
|
|
(45.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT (1) |
|
$ |
5,377 |
|
|
$ |
11,946 |
|
|
$ |
(6,569 |
) |
|
|
(55.0 |
%) |
|
|
|
|
|
|
|
|
EBITDA (1) |
|
$ |
8,094 |
|
|
$ |
14,215 |
|
|
$ |
(6,121 |
) |
|
|
(43.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT and EBITDA Reconciliation (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,788 |
|
|
$ |
7,360 |
|
|
$ |
(3,572 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
2,163 |
|
|
|
4,478 |
|
|
|
(2,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(670 |
) |
|
|
(829 |
) |
|
|
(159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
96 |
|
|
|
937 |
|
|
|
(841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT (1) |
|
|
5,377 |
|
|
|
11,946 |
|
|
|
(6,569 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,717 |
|
|
|
2,269 |
|
|
|
448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (1) |
|
$ |
8,094 |
|
|
$ |
14,215 |
|
|
$ |
(6,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
EBIT (earnings before interest and income taxes) and EBITDA (earnings before interest, income
taxes, depreciation and amortization) are non-GAAP financial measures that the management of
Arbitron believes are useful to investors in evaluating Arbitrons results. For further discussion
of these non-GAAP financial measures, see paragraph below entitled EBIT and EBITDA of this
quarterly report. |
24
Revenue. Revenue increased 6.6% for the three months ended June 30, 2007, as compared to the
same period in 2006, due primarily to $5.2 million of increases related to the ratings subscriber
base, contract renewals, and price escalations in multiyear customer contracts for Arbitrons
quantitative data license revenue, partially offset by a $0.4 million decrease in PPM International
revenues.
Cost of Revenue. Cost of revenue increased by 26.7% for the three months ended June 30, 2007,
as compared to the same period in 2006. The increase in cost of revenue was primarily attributable
to an $11.6 million increase in Arbitrons quantitative, qualitative and software application
services, which was comprised substantially of a $4.1 million increase in PPM rollout costs largely
associated with the management and recruitment of the PPM panels for the Philadelphia, New York,
Los Angeles, and Chicago markets; a $2.0 million increase in expenses associated with PPM ratings
costs that were classified as research and development in 2006 and as cost of revenue in 2007; a
$1.8 million increase in diary data collection and processing costs; a $1.2 million increase
associated with response rate initiatives; a $1.4 million increase in royalties, substantially
associated with our Scarborough affiliate; and a $0.7 million increase due to operating costs
associated with the opening of a third participant interviewing center during the first quarter of
2007. These increases were partially offset by a $1.6 million decrease in Project Apollo costs,
which, due to the formation of Project Apollo in February 2007, are now being expensed directly by
the affiliate. Arbitron records its share of the net operating results of the affiliate through the
equity in net income of affiliates line of the Companys consolidated income statement. The
management of Arbitron expects that Arbitrons cost of revenue will continue to increase in the
future as a result of its efforts to commercialize the PPM ratings service and support the rollout
of this service over the next two to three years.
Selling, General and Administrative. Selling, general and administrative expenses decreased
slightly by 0.5% for the three months ended June 30, 2007, as compared to the same period in 2006.
The decrease in selling, general and administrative expenses was due primarily to a $1.0 million
decrease associated with lower incentive plan expenses and a $0.8 million decrease in sales and
marketing costs resulting from cost saving initiatives related to the Companys sales force, which
were substantially offset by a $0.6 million increase in expenses for merger and acquisition
advisory services incurred during the three months ended June 30, 2007, a $0.5 million increase
related to the accrual of estimated settlement costs associated with a Pennsylvania sales tax
assessment, and a $0.3 million increase in expenses and amortization related to the Companys
accounts receivable and contract management system that was implemented during June 2006.
Research and Development. Research and development expenses increased 17.9% during the three
months ended June 30, 2007, as compared to the same period in 2006. The increase in research and
development expenses resulted primarily from a $1.5 million increase in expenses associated with
Arbitrons continued development of the next generation of its client software, a $1.1 million
increase related to applications and infrastructure to support the PPM service, and a $0.7 million
increase in expenses in support of the Companys diary ratings service, substantially offset by a
$2.0 million decrease in expenses associated with PPM ratings costs that were classified as
research and development in 2006 and as cost of revenue in 2007.
Equity in net income of affiliates. Equity in net income of affiliates (relating collectively
to Arbitrons Scarborough joint venture and jointly-owned Project Apollo) remained flat for the
three months ended June 30, 2007, as compared to the same period in 2006. The formalization of
Project Apollo occurred during February 2007. The purpose of Project Apollo is to complete the
development and testing of the Project Apollo marketing research service and the expansion of the
pilot panel to a full national service if the test results meet expectations and generate
marketplace support. Arbitrons increase in its share of Scarboroughs net income of $0.7 million
was offset by a $0.7 million share of the Project Apollo loss for the three months ended June 30,
2007, as compared to the same period of 2006. Arbitron expects that its equity in net income of
affiliates will continue to be adversely impacted due to the costs incurred during the testing of
the national marketing research service. If the decision is made to commercialize the national
marketing panel service, there will be significant costs incurred to increase the size of the panel
to a commercial level. These cost increases will be incurred in advance of receiving expected
revenue from the service.
Interest Income. Interest income decreased 19.2% during the three months ended June 30, 2007,
as compared to the same period in 2006 due to lower average cash and short-term investment
balances.
25
Interest Expense. Interest expense decreased 89.8% for the three months ended June 30, 2007,
as compared to the same period in 2006, due to Arbitrons prepayment of its $50.0 million
senior-secured notes obligation on October 18, 2006.
Income Tax Expense. The income tax rate for the three months ended June 30, 2007 was 36.3% as
compared to 37.8% for the same period of 2006. The effective tax rate, excluding certain immaterial
discrete items, was increased from 37.2% for the six months ended June 30, 2006 to 37.7% for the
six months ended June 30, 2007, to reflect the increase in certain nondeductible expenses.
Net Income. Net income decreased 48.5% for the three months ended June 30, 2007, as compared
to the same period in 2006, due primarily to planned expenses required to build Arbitrons PPM
panels for the Philadelphia and New York markets, and to support the strategic development of
Arbitrons PPM ratings business.
EBIT and EBITDA. Arbitrons management believes that presenting EBIT and EBITDA, both non-GAAP
financial measures, as supplemental information helps investors, analysts, and others, if they so
choose, in understanding and evaluating Arbitrons operating performance in some of the same
manners that management does because EBIT and EBITDA exclude certain items that are not directly
related to Arbitrons core operating performance. Arbitrons management references 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 net interest income from
net income and adding back income tax expense to net income. EBITDA is calculated by deducting net
interest income from net income and adding back income tax expense, and depreciation and
amortization to net income. EBIT and EBITDA should not be considered substitutes either for net
income, as indicators of Arbitrons operating performance, or for cash flow, as measures of
Arbitrons 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 decreased 55.0% and EBITDA decreased 43.1% for the three months ended June 30,
2007, as compared to the same period in 2006, due primarily to planned expenses required to build
Arbitrons PPM panels for the Philadelphia and New York markets, and to support the strategic
development of Arbitrons PPM ratings business.
26
Comparison of the Six Months Ended June 30, 2007 to the Six Months Ended June 30, 2006
The following table sets forth information with respect to the consolidated statements of
income of Arbitron:
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Increase |
|
|
Percentage of |
|
|
|
June 30, |
|
|
(Decrease) |
|
|
Revenue |
|
|
|
2007 |
|
|
2006 |
|
|
Dollars |
|
|
Percent |
|
|
2007 |
|
|
2006 |
|
Revenue |
|
$ |
170,824 |
|
|
$ |
159,253 |
|
|
$ |
11,571 |
|
|
|
7.3 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
78,718 |
|
|
|
60,939 |
|
|
|
17,779 |
|
|
|
29.2 |
% |
|
|
46.1 |
% |
|
|
38.3 |
% |
Selling, general and administrative |
|
|
40,818 |
|
|
|
40,013 |
|
|
|
805 |
|
|
|
2.0 |
% |
|
|
23.9 |
% |
|
|
25.1 |
% |
Research and development |
|
|
22,567 |
|
|
|
20,012 |
|
|
|
2,555 |
|
|
|
12.8 |
% |
|
|
13.2 |
% |
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
142,103 |
|
|
|
120,964 |
|
|
|
21,139 |
|
|
|
17.5 |
% |
|
|
83.2 |
% |
|
|
76.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
28,721 |
|
|
|
38,289 |
|
|
|
(9,568 |
) |
|
|
(25.0 |
%) |
|
|
16.8 |
% |
|
|
24.0 |
% |
Equity in net income of affiliates |
|
|
1,333 |
|
|
|
2,678 |
|
|
|
(1,345 |
) |
|
|
(50.2 |
%) |
|
|
0.8 |
% |
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and
income tax expense |
|
|
30,054 |
|
|
|
40,967 |
|
|
|
(10,913 |
) |
|
|
(26.6 |
%) |
|
|
17.6 |
% |
|
|
25.7 |
% |
Interest income |
|
|
1,251 |
|
|
|
1,816 |
|
|
|
(565 |
) |
|
|
(31.1 |
%) |
|
|
0.7 |
% |
|
|
1.1 |
% |
Interest expense |
|
|
191 |
|
|
|
1,880 |
|
|
|
(1,689 |
) |
|
|
(89.8 |
%) |
|
|
0.1 |
% |
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
31,114 |
|
|
|
40,903 |
|
|
|
(9,789 |
) |
|
|
(23.9 |
%) |
|
|
18.2 |
% |
|
|
25.7 |
% |
Income tax expense |
|
|
11,831 |
|
|
|
15,357 |
|
|
|
(3,526 |
) |
|
|
(23.0 |
%) |
|
|
6.9 |
% |
|
|
9.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,283 |
|
|
$ |
25,546 |
|
|
$ |
(6,263 |
) |
|
|
(24.5 |
%) |
|
|
11.3 |
% |
|
|
16.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per weighted-average
common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.65 |
|
|
$ |
0.84 |
|
|
$ |
(0.19 |
) |
|
|
(22.6 |
%) |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.64 |
|
|
$ |
0.83 |
|
|
$ |
(0.19 |
) |
|
|
(22.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
|
$ |
0.20 |
|
|
$ |
0.20 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT (1) |
|
$ |
30,054 |
|
|
$ |
40,967 |
|
|
$ |
(10,913 |
) |
|
|
(26.6 |
%) |
|
|
|
|
|
|
|
|
EBITDA (1) |
|
$ |
35,447 |
|
|
$ |
45,324 |
|
|
$ |
(9,877 |
) |
|
|
(21.8 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT and EBITDA Reconciliation (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,283 |
|
|
$ |
25,546 |
|
|
$ |
(6,263 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
11,831 |
|
|
|
15,357 |
|
|
|
(3,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(1,251 |
) |
|
|
(1,816 |
) |
|
|
(565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
191 |
|
|
|
1,880 |
|
|
|
(1,689 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT (1) |
|
|
30,054 |
|
|
|
40,967 |
|
|
|
(10,913 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
5,393 |
|
|
|
4,357 |
|
|
|
1,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (1) |
|
$ |
35,447 |
|
|
$ |
45,324 |
|
|
$ |
(9,877 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
EBIT (earnings before interest and income taxes) and EBITDA (earnings before interest, income
taxes, depreciation and amortization) are non-GAAP financial measures that the management of
Arbitron believes are useful to investors in evaluating Arbitrons results. For further discussion
of these non-GAAP financial measures, see paragraph below entitled EBIT and EBITDA of this
quarterly report. |
27
Revenue. Revenue increased 7.3% for the six months ended June 30, 2007, as compared to the
same period in 2006, due primarily to $10.4 million of increases related to the ratings subscriber
base, contract renewals, and price escalations in multiyear customer contracts for Arbitrons
quantitative data license revenue, a $0.9 million increase in Continental Research revenue, and a
$0.4 million increase in PPM International revenue.
Cost of Revenue. Cost of revenue increased by 29.2% for the six months ended June 30, 2007, as
compared to the same period in 2006. The increase in cost of revenue was primarily attributable to
an $19.3 million increase in Arbitrons quantitative, qualitative and software application
services, which was comprised substantially of a $6.8 million increase in PPM rollout costs largely
associated with the management and recruitment of the PPM panels for the Philadelphia, New York,
Los Angeles, and Chicago markets; a $3.7 million increase in expenses associated with PPM ratings
costs that were classified as research and development in 2006 and as cost of revenue in 2007; a
$2.4 million increase in diary data collection and processing costs; a $2.2 million increase
associated with response rate initiatives; a $1.5 million increase due to operating costs
associated with the opening of a third participant interviewing center during the first quarter of
2007; a $0.9 million increase associated with computer center costs and a $1.3 million increase in
royalties, substantially associated with our Scarborough affiliate. These increases were partially
offset by a $2.6 million decrease in Project Apollo costs, which, due to the formation of Project
Apollo in February 2007, are now being expensed directly by the affiliate. Arbitron records its
share of the net operating results of the affiliate through the equity in net income of affiliates
line of the Companys consolidated income statement. The management of Arbitron expects that
Arbitrons cost of revenue will continue to increase in the future as a result of its efforts to
commercialize the PPM ratings service and support the rollout of this service over the next two to
three years.
Selling, General and Administrative. Selling, general and administrative expenses increased by
2.0% for the six months ended June 30, 2007, as compared to the same period in 2006. The increase
in selling, general and administrative expenses was due primarily to a $1.2 million increase in
expenses for merger and acquisition advisory services incurred during the six months ended June 30,
2007; a $0.9 million increase in expenses and amortization related to the Companys accounts
receivable and contract management system that was implemented during June 2006, and a $0.5 million
increase related to the accrual of estimated settlement costs associated with a Pennsylvania sales
tax assessment; substantially offset by a $1.0 million decrease associated with lower incentive
plan expenses and a $0.9 million decrease in sales and marketing costs resulting from cost saving
initiatives related to the Companys sales force.
Research and Development. Research and development expenses increased 12.8% during the six
months ended June 30, 2007, as compared to the same period in 2006. The increase in research and
development expenses resulted primarily from a $2.6 million increase in expenses associated with
Arbitrons continued development of the next generation of its client software, a $2.1 million
increase related to applications and infrastructure to support the PPM service, and a $1.5 million
increase associated with various U.S. Media Service development costs. These increases were
substantially offset by a $3.7 million decrease in expenses associated with PPM ratings costs that
were classified as research and development in 2006 and as cost of revenue in 2007.
Equity in net income of affiliates. Equity in net income of affiliates (relating collectively
to Arbitrons Scarborough joint venture and jointly-owned Project Apollo) decreased 50.2% for the
six months ended June 30, 2007, as compared to the same period in 2006. The formalization of
Project Apollo occurred during February 2007. The purpose of Project Apollo is to complete the
development and testing of the Project Apollo marketing research service and the expansion of the
pilot panel to a full national service if the test results meet expectations and generate
marketplace support. Arbitrons $1.8 million share of the Project Apollo loss for the six months
ended June 30, 2007, is the primary cause of the $1.3 million decrease in the equity in net income
of affiliates for the six months ended June 30, 2007, as compared to the same period of 2006.
Arbitron expects that its equity in net income of affiliates will continue to be adversely impacted
due to the costs incurred during the testing of the national marketing research service. If the
decision is made to commercialize the national marketing panel service, there will be significant
costs incurred to increase the size of the panel to a commercial level. These cost increases will
be incurred in advance of receiving expected revenue from the service.
28
Interest Income. Interest income decreased 31.1% during the six months ended June 30, 2007, as
compared to the same period in 2006 due to lower average cash and short-term investment balances,
which were partially offset by higher interest rates.
Interest Expense. Interest expense decreased 89.8% for the six months ended June 30, 2007, as
compared to the same period in 2006, due to Arbitrons prepayment of its $50.0 million
senior-secured notes obligation on October 18, 2006.
Income Tax Expense. The income tax rate for the six months ended June 30, 2007 was 38.0% as
compared to 37.5% for the same period of 2006. The effective tax rate, excluding certain immaterial
discrete items, was increased from 37.2% for the six months ended June 30, 2006 to 37.7% for the
six months ended June 30, 2007 to reflect the increase in certain nondeductible expenses.
Net Income. Net income decreased 24.5% for the six months ended June 30, 2007, as compared to
the same period in 2006, due primarily to planned expenses required to build Arbitrons PPM panels
for the Philadelphia and New York markets, and to support the strategic development of Arbitrons
PPM ratings business. Incremental expenses incurred in support of Arbitrons diary ratings service
also contributed to the decrease in net income, partially offset by a decrease in interest expense
due to Arbitrons prepayment of its senior-secured notes obligation on October 18, 2006.
EBIT and EBITDA. Arbitrons management believes that presenting EBIT and EBITDA, both non-GAAP
financial measures, as supplemental information helps investors, analysts, and others, if they so
choose, in understanding and evaluating Arbitrons operating performance in some of the same
manners that management does because EBIT and EBITDA exclude certain items that are not directly
related to Arbitrons core operating performance. Arbitrons management references 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 net interest income from
net income and adding back income tax expense to net income. EBITDA is calculated by deducting net
interest income from net income and adding back income tax expense, and depreciation and
amortization to net income. EBIT and EBITDA should not be considered substitutes either for net
income, as indicators of Arbitrons operating performance, or for cash flow, as measures of
Arbitrons 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 decreased 26.6% and EBITDA decreased 21.8% for the six months ended June 30, 2007,
as compared to the same period in 2006 due primarily to planned expenses required to build
Arbitrons PPM panels for the Philadelphia and New York markets, and to support Arbitrons diary
and PPM ratings services.
29
Liquidity and Capital Resources
Working capital was $20.2 million and ($4.6) million as of June 30, 2007, and December 31,
2006, respectively. Excluding the deferred revenue liability, which does not require a significant
additional cash outlay by Arbitron, working capital was $86.7 million and $62.3 million as of June
30, 2007, and December 31, 2006, respectively. Cash and cash equivalents were $32.4 million and
$33.6 million as of June 30, 2007, and December 31, 2006, respectively. In addition, short-term
investments were $38.9 million and $27.6 million as of June 30, 2007, and December 31, 2006,
respectively. Management expects that Arbitrons cash position, along with these readily
convertible assets, as of June 30, 2007, and cash flow generated from operations and its available
revolving credit facility, will be sufficient to support Arbitrons operations for the foreseeable
future.
Net cash provided by operating activities was $19.7 million and $26.1 million for the six
months ended June 30, 2007, and 2006, respectively. The $6.4 million decrease in net cash provided
by operating activities was mainly attributable to a $8.0 million decrease in the change in accrued
expenses and other current liabilities, and a $6.3 million decrease in net income resulting
primarily from planned costs required to build Arbitrons PPM panels for the commercialization
rollout of the PPM service. These decreases in cash were partially offset by a $5.6 million
increase due to the prior year increase in purchases of PPM international inventory, a $1.3 million
decrease due to the timing of vendor payments and a $1.0 million net increase in depreciation and
amortization due to increased capitalization of PPM equipment and related software, as well as
software related to the accounts receivable and contract management system implemented during the
second quarter of 2006. The decrease in the change in accrued expenses and other current
liabilities resulted primarily from the timing of $4.7 million in expenditures for accrued payroll
and benefit costs for the six months ended June 30, 2007, as compared to the same period of 2006; a
$1.9 million fluctuation associated with the formation of the Project Apollo LLC in the six months
ended June 30, 2007; and $1.1 million in lower taxes due to reduced earnings for the six months
ended June 30, 2007, as compared to the same period of 2006.
Net cash used by investing activities was $22.5 million for the six months ended June 30,
2007, and net cash provided by investing activities was $22.8 million for the six months ended June
30, 2006. The $45.3 million fluctuation in investing activities was driven primarily by $43.8
million in increased net purchases of variable-rate demand notes issued by municipal government
agencies and auction-rate securities for the six months ended June 30, 2007, as compared to the
same period of 2006. More short-term investments were purchased for the six months ended June 30,
2007 due to the excess cash available and on hand. During the same period of 2006, short-term
investments were sold on a net basis to support the completion of the stock repurchase program
authorized under the Companys then outstanding $70.0 million stock repurchase program.
Net cash provided by financing activities was $1.4 million for the six months ended June 30,
2007, and net cash used in financing activities was $68.6 million for the six months ended June 30,
2006. The $70.1 million fluctuation in financing activities was primarily attributable to $63.4
million in decreased repurchases of Arbitrons outstanding common stock during the six months ended
June 30, 2007, as compared to the same period of 2006. A $5.7 million increase in proceeds from
stock option exercises was the result of higher average stock prices, as well as higher average
exercise prices for the six months ended June 30, 2007, as compared to the same period of 2006.
On December 20, 2006, Arbitron entered into an agreement with a consortium of lenders to
provide up to $150.0 million of financing to Arbitron through a five-year, unsecured revolving
credit facility (2006 Credit Facility). The agreement contains an expansion feature for Arbitron
to increase the financing available under the 2006 Credit Facility up to $200.0 million. Interest
on borrowings under the 2006 Credit Facility will be calculated based on a floating rate for a
duration of up to six months as selected by Arbitron.
Arbitrons 2006 Credit Facility contains financial terms, covenants and operating restrictions
that potentially restrict financial flexibility. Under the terms of the 2006 Credit Facility,
Arbitron is required to maintain certain leverage and coverage ratios and meet other financial
conditions. The agreement contains certain financial covenants and limits, among other things,
Arbitrons ability to sell assets, incur additional indebtedness, and grant or incur liens on its
assets. Under the terms of the 2006 Credit Facility, all of Arbitrons material domestic
subsidiaries, if any, guarantee the commitment. Currently, Arbitron does not have any material
domestic subsidiaries as defined under the terms of the 2006 Credit Facility. Although the
management of Arbitron does not believe that the terms of its 2006 Credit Facility limit the
operation of its business in any material respect, the terms of the 2006 Credit Facility may
restrict or prohibit Arbitrons ability to raise additional debt capital when needed or could
prevent Arbitron from investing in other growth initiatives. Arbitron has been in compliance with
the terms of the 2006 Credit Facility since its inception.
30
On November 16, 2006, Arbitron announced that its Board of Directors authorized a program to
repurchase up to $100.0 million of its outstanding common stock through either periodic open-market
or private transactions at then-prevailing market prices through December 31, 2008. As of July 30,
2007, the number of shares of Arbitrons outstanding common stock repurchased under this program
was 293,400 shares for $14.4 million.
Commercialization of the PPM radio ratings service and exploration of other strategic
applications of the PPM technology, including the national marketing panel service, will require a
substantial financial investment. Arbitron believes that during the PPM rollout period its costs
and expenses will increase and substantial capital expenditures will be required. In addition, the
management of Arbitron expects that, if the decision is made to commercialize the national
marketing panel service, Arbitrons expenses will increase as a result of continued deployment
costs associated with the strategic development of its electronic ratings business and the national
marketing panel service being developed through Project Apollo, which was jointly formed between
Arbitron and Nielsen Media Research Inc. in February 2007.
Arbitron believes that, while commercialization of the PPM ratings service and other strategic
applications of the PPM technology, including the possible commercialization of the Project Apollo
national marketing panel service, will have a near-term negative impact on its results of
operations during the first three to four years of commercialization, which impact likely will be
material, its operating margins can be restored through the completion of the PPM transition
process in the top 50 radio markets, although there can be no assurance that this will be the case.
If a decision is made to commercialize these services, substantial additional expenditures would be
incurred during the next few years.
Arbitron expects to fund the expected commercialization of the PPM radio ratings service, and
the Project Apollo pilot program for the national marketing panel service with its existing cash
position and short-term investments, future cash from operations or through the most advantageous
source of capital at the time, which may include borrowings under its current credit facility,
sales of common and preferred stock and/or joint-venture transactions. Arbitron believes that one
or more of these sources of capital will be available to fund its PPM-related cash needs, but there
can be no assurance that the external sources of capital will be available on favorable terms, if
at all.
Seasonality
Arbitron recognizes revenue for services over the terms of license agreements as services are
delivered, and expenses are recognized as incurred. Arbitron gathers radio-listening data in 299
United States local markets. All 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, all major
markets are measured two additional times per year (January-February-March for the Winter Survey
and July-August-September for the Summer Survey). Arbitrons revenue is generally higher in the
first and third quarters as a result of the delivery of the Fall Survey and Spring Survey,
respectively, to all markets, compared to revenue in the second and fourth quarters, when delivery
of the Winter Survey and Summer Survey, respectively, is only provided to major markets. Arbitrons
expenses are generally higher in the second and fourth quarters as the Spring Survey and Fall
Survey are being conducted. The transition from the diary service to the PPM service in the top 50
markets will have an impact on the seasonality of revenue and costs and expenses. Although revenue
in the top 50 markets is recognized ratably over the year in both the diary and PPM services, there
will be fluctuations in the depth of the seasonality pattern during the periods of transition
between the services in each market. The larger impact on the seasonality pattern is related to the
costs and expenses to produce the services. PPM costs and expenses will accelerate six to nine
months in advance of the commercialization of each market as the panel is built. These increased
costs will be recognized as incurred rather than upon the delivery of a particular quarterly
survey, and will vary from the cost pattern associated with the delivery of the diary service.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company holds its cash and cash equivalents in highly liquid securities. The Company also
holds short-term investments, which consist of investment grade, highly liquid securities
classified as available-for-sale. A hypothetical interest rate change of 1% would have an impact
of approximately $0.3 million on interest income over a six-month period.
Foreign Currency Exchange Rate Risk
Arbitrons foreign operations are not significant at this time, and, therefore, Arbitrons
exposure to foreign currency risk is minimal.
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
Companys management, including the Companys President and Chief Executive Officer and the
Companys Chief Financial Officer, of the effectiveness of the design and operation of the
Companys 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 Companys President and Chief
Executive Officer and the Companys Chief Financial Officer concluded that the Companys 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 Companys 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, 2007, that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.
32
PART II OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On November 16, 2006, Arbitron announced that its Board of Directors authorized a program to
repurchase up to $100.0 million of its outstanding common stock through either periodic open-market
or private transactions at then-prevailing market prices over a period of two years through
December 31, 2008. The following table outlines the stock repurchase activity during the three
months ended June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
Maximum Dollar Value |
|
|
|
|
|
|
|
|
|
|
of Shares Purchased |
|
of Shares That May |
|
|
Total Number of |
|
Average Price |
|
as Part of |
|
Yet Be Purchased |
|
|
Shares |
|
Paid |
|
Publicly |
|
Under the |
Period |
|
Purchased |
|
Per Share |
|
Announced Program |
|
Program |
April 1-30 |
|
|
62,000 |
|
|
$ |
48.15 |
|
|
|
62,000 |
|
|
$ |
97,014,395 |
|
May 1-31 |
|
|
37,100 |
|
|
|
48.96 |
|
|
|
37,100 |
|
|
|
95,198,046 |
|
June 1-30 |
|
|
7,500 |
|
|
|
49.80 |
|
|
|
7,500 |
|
|
|
94,824,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
106,600 |
|
|
$ |
48.55 |
|
|
|
106,600 |
|
|
$ |
94,824,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Arbitrons annual meeting of stockholders was held on May 15, 2007. There were 29,926,654
shares of Arbitron common stock outstanding and entitled to vote at the annual meeting. Of the
29,926,654 shares of Arbitron common stock entitled to vote at the annual meeting, a total of
26,855,891 shares were present in person or by proxy at the annual meeting. The following people
designated by Arbitrons Board of Directors as nominees for director were elected at the annual
meeting, with the voting as follows:
|
|
|
|
|
|
|
|
|
Nominee |
|
Votes For |
|
Votes Withheld |
Shellye L. Archambeau |
|
|
26,328,529 |
|
|
|
527,362 |
|
Philip Guarascio |
|
|
26,725,710 |
|
|
|
130,181 |
|
William T. Kerr |
|
|
26,687,498 |
|
|
|
168,393 |
|
Larry E. Kittelberger |
|
|
26,328,979 |
|
|
|
526,912 |
|
Stephen B. Morris |
|
|
26,816,750 |
|
|
|
39,141 |
|
Luis G. Nogales |
|
|
26,684,894 |
|
|
|
170,999 |
|
Richard A. Post |
|
|
22,900,618 |
|
|
|
3,955,273 |
|
The Amendment to the Arbitron Inc. 1999 Stock Incentive Plan was approved at the annual
meeting, with the voting as follows:
|
|
|
|
|
|
|
|
|
Total Votes For |
|
Total Votes Against |
|
Total Votes Abstain |
23,746,704 |
|
|
588,886 |
|
|
|
21,206 |
|
No additional items were on the agenda of the annual meeting of stockholders and no other
items were brought to a vote during the meeting .
33
ITEM 5. OTHER INFORMATION
On May 15, 2007, the stockholders of Arbitron approved an amendment to the Companys 1999
Stock Incentive Plan (the Plan), that increased the number of shares of common stock with respect
to which awards may be granted under the Plan by 400,000 shares to a total of 4,604,009 shares.
The foregoing description of the amendment to the Plan is qualified in its entirety by
reference to the full text of the amended Plan, which is attached hereto as Exhibit 10.2 and
incorporated herein by reference.
ITEM
6. EXHIBITS
|
|
|
Exhibit No. |
|
Description |
Exhibit 10.1
|
|
Form of Radio Station License
Agreement to Receive and Use Arbitron PPM Data and Estimates by and
between Arbitron and Clear Channel Broadcasting, Inc. dated
June 26, 2007* |
|
|
|
Exhibit 10.2
|
|
Arbitron Inc. 1999 Stock Incentive Plan (as amended May 15, 2007) |
|
|
|
Exhibit 31.1
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
Exhibit 31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
Exhibit 32.1
|
|
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
A request for confidential treatment has been submitted with respect to this exhibit. The copy
filed as an exhibit omits the information subject to the request for confidential treatment. |
34
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 of Finance and Planning
and Chief Financial Officer (on behalf of the
registrant and as the registrants principal
financial and principal accounting officer)
|
|
|
|
Date: August 3, 2007 |
|
|
35