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, 2006
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
incorporation or organization)
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(I.R.S. Employer Identification No.) |
142 West 57th Street
New York, New York 10019
(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 29,255,427 shares of common stock, par value $0.50 per share, outstanding as of
July 31, 2006.
ARBITRON INC.
INDEX
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Page No. |
PART I FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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Consolidated Balance Sheets June 30, 2006 and
December 31, 2005 |
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4 |
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Consolidated Statements of Income Three Months
Ended June 30, 2006 and 2005 |
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5 |
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Consolidated Statements of Income Six Months
Ended June 30, 2006 and 2005 |
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6 |
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Consolidated Statements of Cash Flows Six Months
Ended June 30, 2006 and 2005 |
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7 |
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Notes to Consolidated Financial Statements June 30, 2006 |
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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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18 |
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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 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 WorldWide®,
LocalMotion®,
Maximi$er®,
Maximi$er® Plus, Arbitron PD
Advantage®,
SmartPlus®, Arbitron Portable People MeterTM,
Marketing Resources PlusTM, MRP®, PrintPlusTM, MapMAKER
DirectSM, Media ProfessionalSM, Media Professional PlusSM,
QualitapSM, MediaMasterSM,
ProspectorSM, and Schedule-ItSM.
The trademarks Windows®, Media Rating Council® and Homescan®
are the registered trademarks of others.
3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARBITRON INC.
Consolidated Balance Sheets
(In
thousands, except par value data)
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June 30, |
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December 31, |
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2006 |
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2005 |
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(unaudited) |
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(audited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
21,307 |
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$ |
40,848 |
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Receivables from brokers |
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30,000 |
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Short-term investments |
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49,950 |
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52,560 |
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Trade accounts receivable, net of allowance for doubtful
accounts of $1,324 at June 30, 2006 and $1,165 at December 31, 2005 |
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28,371 |
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27,708 |
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Deferred tax assets |
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5,093 |
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5,703 |
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Inventories |
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4,516 |
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442 |
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Prepaid expenses and other current assets |
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3,665 |
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3,665 |
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Total current assets |
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112,902 |
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160,926 |
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Investment in affiliate |
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11,687 |
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12,959 |
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Property and equipment, net of accumulated depreciation of
$26,135 at June 30, 2006 and $22,816 at December 31, 2005 |
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36,030 |
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30,875 |
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Goodwill, net |
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40,558 |
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40,558 |
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Other intangibles, net |
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2,676 |
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3,578 |
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Noncurrent deferred tax assets |
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769 |
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911 |
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Other noncurrent assets |
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897 |
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1,073 |
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Total assets |
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$ |
205,519 |
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$ |
250,880 |
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Liabilities and Stockholders Equity |
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Current liabilities |
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Accounts payable |
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$ |
7,284 |
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$ |
8,605 |
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Accrued expenses and other current liabilities |
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25,260 |
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31,123 |
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Deferred revenue |
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64,343 |
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62,434 |
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Total current liabilities |
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96,887 |
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102,162 |
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Noncurrent liabilities |
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Long-term debt |
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50,000 |
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50,000 |
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Other noncurrent liabilities |
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7,104 |
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6,364 |
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Total liabilities |
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153,991 |
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158,526 |
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Stockholders equity |
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Common stock, $0.50 par value, authorized
500,000 shares, issued 32,338 shares at June 30, 2006 and
December 31, 2005 |
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16,169 |
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16,169 |
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Additional paid-in capital |
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35,364 |
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94,908 |
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Accumulated earnings (net distributions to Ceridian in
excess of accumulated earnings) prior to spin-off |
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(242,870 |
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(242,870 |
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Retained earnings subsequent to spin-off |
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247,682 |
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228,211 |
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Common stock held in treasury, 3,090 shares
at June 30, 2006 and 1,294 shares at December 31, 2005 |
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(1,545 |
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(647 |
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Accumulated other comprehensive loss |
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(3,272 |
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(3,417 |
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Total stockholders equity |
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51,528 |
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92,354 |
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Total liabilities and stockholders equity |
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$ |
205,519 |
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$ |
250,880 |
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See 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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2006 |
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2005 |
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Revenue |
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$ |
74,165 |
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$ |
69,816 |
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Costs and expenses |
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Cost of revenue |
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36,684 |
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29,869 |
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Selling, general and administrative |
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20,557 |
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16,909 |
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Research and development |
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10,031 |
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8,658 |
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Total costs and expenses |
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67,272 |
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55,436 |
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Operating income |
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6,893 |
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14,380 |
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Equity in net income of affiliate |
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5,053 |
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4,234 |
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Income before interest and income tax expense |
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11,946 |
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18,614 |
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Interest income |
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829 |
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819 |
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Interest expense |
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937 |
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1,016 |
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Income before income tax expense |
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11,838 |
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18,417 |
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Income tax expense |
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4,478 |
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3,022 |
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Net income |
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$ |
7,360 |
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$ |
15,395 |
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Net income per weighted-average common share |
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Basic |
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$ |
0.25 |
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$ |
0.49 |
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Diluted |
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$ |
0.24 |
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$ |
0.48 |
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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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29,945 |
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31,457 |
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Potentially dilutive securities |
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205 |
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369 |
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Diluted |
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30,150 |
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31,826 |
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See 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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2006 |
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2005 |
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Revenue |
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$ |
159,253 |
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$ |
149,011 |
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Costs and expenses |
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Cost of revenue |
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60,939 |
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50,286 |
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Selling, general and administrative |
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40,013 |
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32,863 |
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Research and development |
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20,012 |
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16,696 |
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Total costs and expenses |
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120,964 |
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99,845 |
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Operating income |
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38,289 |
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49,166 |
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Equity in net income of affiliate |
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2,678 |
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2,144 |
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Income before interest and income tax expense |
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40,967 |
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51,310 |
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Interest income |
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1,816 |
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1,428 |
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Interest expense |
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1,880 |
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2,067 |
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Income before income tax expense |
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40,903 |
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50,671 |
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Income tax expense |
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15,357 |
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15,440 |
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Net income |
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$ |
25,546 |
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$ |
35,231 |
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Net income per weighted-average common share |
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Basic |
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$ |
0.84 |
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$ |
1.13 |
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Diluted |
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$ |
0.83 |
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$ |
1.11 |
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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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30,500 |
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31,300 |
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Potentially dilutive securities |
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235 |
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378 |
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Diluted |
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30,735 |
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31,678 |
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See 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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2006 |
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2005 |
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Cash flows from operating activities
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Net income |
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$ |
25,546 |
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$ |
35,231 |
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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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3,455 |
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2,013 |
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Other amortization |
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902 |
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|
785 |
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Asset impairment charges |
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638 |
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Loss on asset disposals |
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177 |
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|
154 |
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Deferred income taxes |
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|
663 |
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|
1,276 |
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Equity in net income of affiliate |
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(2,678 |
) |
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(2,144 |
) |
Distributions from affiliate |
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3,950 |
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|
4,350 |
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Bad debt expense |
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470 |
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|
246 |
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Excess tax benefit from stock option exercises |
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4,054 |
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Non-cash share-based compensation |
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3,775 |
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|
196 |
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Changes in operating assets and liabilities, excluding effects
of business acquisitions |
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Trade accounts receivable |
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(965 |
) |
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|
123 |
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Inventories |
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(4,074 |
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|
28 |
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Prepaid expenses and other assets |
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(131 |
) |
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(601 |
) |
Accounts payable |
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(966 |
) |
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|
415 |
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Accrued expenses and other current liabilities |
|
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(7,269 |
) |
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(12,378 |
) |
Deferred revenue |
|
|
1,884 |
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|
2,993 |
|
Other noncurrent liabilities |
|
|
740 |
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|
1,026 |
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Net cash provided by operating activities |
|
|
26,117 |
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|
37,767 |
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Cash flows
from investing activities |
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Additions to property and equipment |
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(9,846 |
) |
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(4,821 |
) |
Purchases of short-term investments |
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(276,565 |
) |
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Sale of short-term investments |
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|
309,175 |
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Net cash provided by (used in) investing activities |
|
|
22,764 |
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|
|
(4,821 |
) |
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Cash flows from financing activities
|
|
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|
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|
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|
Proceeds from stock option exercises and stock purchase plan |
|
|
5,396 |
|
|
|
19,585 |
|
Excess tax benefit from stock option exercises |
|
|
722 |
|
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|
|
|
Dividends paid to stockholders |
|
|
(6,208 |
) |
|
|
(3,123 |
) |
Stock repurchases |
|
|
(68,529 |
) |
|
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|
|
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Net cash (used in) provided by financing activities |
|
|
(68,619 |
) |
|
|
16,462 |
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|
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Effect of exchange rate changes on cash |
|
|
197 |
|
|
|
(190 |
) |
|
|
|
|
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|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(19,541 |
) |
|
|
49,218 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
40,848 |
|
|
|
86,901 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
21,307 |
|
|
$ |
136,119 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
7
ARBITRON INC.
Notes to Consolidated Financial Statements
June 30, 2006
(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, 2005, was audited at that date, but all of the information and footnotes as of
December 31, 2005, 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, 2005.
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. Pro Forma Disclosures of Share-Based Payments
During the six months ended June 30, 2005, the Company applied the intrinsic-value-based
method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations including Financial Accounting Standards
Board (FASB) Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25, to account for its fixed-plan stock options.
Under this method, compensation expense was recorded on the date of option grant only if the
current market price of the underlying stock exceeded the exercise price of the options. In the
case of issuances of stock awards, compensation expense was recorded based upon the quoted market
value of shares of common stock on the date of grant. Any resulting compensation expense was
recognized ratably over the vesting period. Statement of Financial Accounting Standards (SFAS)
No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation (as amended by SFAS No. 148,
Accounting for Stock-Based CompensationTransitions and Disclosures), established accounting and
disclosure requirements using a fair-value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company adopted only the disclosure
requirements of SFAS No. 123 for fiscal reporting periods through December 31, 2005. Effective
January 1, 2006, the Company adopted SFAS No. 123R, Share-Based Payments Revised. See Note 13 for
the additional disclosures required by SFAS No. 123R for the fair-value-based method of accounting.
The following table illustrates the effect on net income and net income per share if the
fair-value-based method had been applied to all outstanding and unvested awards during the three
and six months ended June 30, 2005, (dollars in thousands, except per share data):
8
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2005 |
|
Net income, as reported |
|
$ |
15,395 |
|
|
$ |
35,231 |
|
Add: Stock-based compensation expense, net of tax |
|
|
62 |
|
|
|
121 |
|
Less: Stock-based compensation expense
determined under fair value method, net of tax |
|
|
1,796 |
|
|
|
2,828 |
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
13,661 |
|
|
$ |
32,524 |
|
|
|
|
|
|
|
|
Basic net income per weighted-average
common share, as reported |
|
$ |
0.49 |
|
|
$ |
1.13 |
|
Pro forma basic net income per
weighted-average common share |
|
$ |
0.43 |
|
|
$ |
1.04 |
|
Diluted net income per weighted-average
common share, as reported |
|
$ |
0.48 |
|
|
$ |
1.11 |
|
Pro forma diluted net income per weighted-
average common share |
|
$ |
0.43 |
|
|
$ |
1.03 |
|
|
|
|
|
|
|
|
|
|
Options granted to employees and directors |
|
|
59,466 |
|
|
|
554,932 |
|
Weighted-average exercise price |
|
$ |
41.03 |
|
|
$ |
40.90 |
|
Weighted-average fair value |
|
$ |
13.52 |
|
|
$ |
13.72 |
|
Weighted-average assumptions: |
|
|
|
|
|
|
|
|
Expected lives in years |
|
|
6.5 |
|
|
|
6.5 |
|
Expected volatility |
|
|
28.5 |
% |
|
|
28.6 |
% |
Expected dividend rate |
|
|
1.0 |
% |
|
|
1.0 |
% |
Risk-free interest rate |
|
|
3.78 |
% |
|
|
3.86 |
% |
3. New Accounting Pronouncements
Effective January 1, 2006, the
Company adopted SFAS No. 123R, Share-Based Payments Revised. See Note 13 for the additional disclosures
required by SFAS No. 123R.
In July 2006, the FASB issued FASB Interpretation (FIN) 48, Accounting for Uncertainty in
Income Taxes (FIN 48) which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that the Company recognize in its financial statements, the impact of a tax
position, if it is not more-likely-thannot that such position will be sustained on audit, based on
the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of
the Companys 2007 fiscal year, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings for that year. The management of the Company
is currently evaluating the impact of adopting FIN 48 to the Companys financial statements.
4. Long-Term Debt
Long-term debt consisted of senior-secured fixed-rate notes in the amount of $50.0 million as
of June 30, 2006, and December 31, 2005. The notes bear interest at a fixed rate of 9.96% and
mature on January 31, 2008. The fair values of the senior-secured notes as of June 30, 2006, and
December 31, 2005, were $51.0 million and $51.8 million, respectively, and were estimated using a
cash flow valuation model and
9
available
market data for securities with similar maturity dates. The senior-secured notes agreement contains certain
financial covenants and also contains a make-whole provision that applies in the event of early
prepayment of principal. The senior-secured notes limit, among other things, the Companys ability
to incur additional indebtedness, grant or incur liens on its assets, pay cash dividends, make
investments or acquisitions, repurchase or redeem capital stock and engage in certain mergers or
consolidations. The Company has been in compliance with its covenants under the senior-secured
notes agreement since the inception of all borrowings.
If a default occurs under the terms of Arbitrons senior-secured notes, the lenders could
proceed against the lenders collateral, which includes a first-priority lien on substantially all
of the assets of Arbitron and its domestic subsidiaries and a pledge of the capital stock of all of
its domestic subsidiaries and of 65% of the capital stock of its foreign subsidiaries. In
addition, a default may result in higher rates of interest and the inability to obtain additional
financing. Under the terms of the senior-secured notes, all of the Companys subsidiaries
guarantee the senior-secured notes. Interest paid for each of the three and six month periods
ended June 30, 2006, and 2005 was approximately $1.2 million and $2.5 million, respectively.
Non-cash amortization of deferred financing costs classified as interest expense during the three
months ended June 30, 2006, and 2005 was $0.1 million and less than $0.1 million, respectively.
Non-cash amortization of deferred financing costs classified as interest expense during each of the
six month periods ended June 30, 2006, and 2005 was $0.1 million.
5. Stockholders Equity
Changes in stockholders equity for the six months ended June 30, 2006, 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, 2005 |
|
|
31,044 |
|
|
$ |
16,169 |
|
|
$ |
(647 |
) |
|
$ |
94,908 |
|
|
$ |
(242,870 |
) |
|
$ |
228,211 |
|
|
$ |
(3,417 |
) |
|
$ |
92,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,546 |
|
|
|
|
|
|
|
25,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued |
|
|
196 |
|
|
|
|
|
|
|
98 |
|
|
|
4,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock repurchased |
|
|
(1,992 |
) |
|
|
|
|
|
|
(996 |
) |
|
|
(69,004 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit from
stock option
exercises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,075 |
) |
|
|
|
|
|
|
(6,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive
loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June
30, 2006 |
|
|
29,248 |
|
|
$ |
16,169 |
|
|
$ |
(1,545 |
) |
|
$ |
35,364 |
|
|
$ |
(242,870 |
) |
|
$ |
247,682 |
|
|
$ |
(3,272 |
) |
|
$ |
51,528 |
|
|
|
|
A quarterly cash dividend of $0.10 per common share was paid to stockholders on July 3, 2006.
10
6. Short-term Investments
Short-term investments as of June 30, 2006, and December 31, 2005, consisted of $50.0 million
and $52.6 million, respectively, in municipal and other government-issued variable rate demand
notes and auction-rate securities recorded by the Company at fair value. In addition, the Company
recorded a $30.0 million receivable from brokers on unsettled trades as of December 31, 2005. 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 and six months ended June 30, 2006, gross purchases of available-for-sale
securities were $54.1 million and $276.6 million, respectively, and gross proceeds from sales of
available-for-sale securities were $92.6 million and $309.2 million for the three and six months
ended June 30, 2006, respectively. There were no purchases or sales of short-term investments
during the three and six months ended June 30, 2005.
7. Inventories
Inventories as of June 30, 2006, and December 31, 2005, consisted of $4.5 million and $0.4
million, respectively, of Portable People Meter (PPM) equipment held for resale to international
licensees of PPM. The inventory is accounted for on a first-in, first-out (FIFO) basis.
8. 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, 2006 and 2005 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 stock options are used to repurchase the
Companys common stock at the average market price for the period. At June 30, 2006, there were
options to purchase 2,514,252 shares of the Companys common stock outstanding, of which, options
to purchase 1,427,187 shares of the Companys common stock 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.
On January 24, 2006, the Company announced that its Board of Directors authorized a program to
repurchase up to $70.0 million of its outstanding common stock through either periodic open-market
or private transactions at then-prevailing market prices through December 31, 2006. As of June 30,
2006, the Company completed the program by repurchasing 1,991,944 shares for an aggregate purchase
price of $70.0 million.
9. Contingencies
The Company is involved, from time to time, in litigation and proceedings arising out of the
ordinary course of business. Legal costs for services rendered in the course of these proceedings
are charged to expense as they are incurred.
During 2005, the Pennsylvania Department of Revenue concluded a sales tax audit 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 incurred
to $3.8 million as of June 30, 2006.
11
Currently, the Company is in the appeals process with the Commonwealth of Pennsylvania,
and is continuing to contest the assessment in its entirety. Consistent with the findings of a
previous Pennsylvania sales tax audit, 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. Although the Company anticipates a successful outcome, it cannot guarantee that a
favorable settlement will occur. Given the nature of this uncertainty, no loss has been recognized
as of June 30, 2006.
10. Comprehensive Income and Accumulated Other Comprehensive Loss
The Companys comprehensive income comprises net income and foreign
currency translation adjustments, 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, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
7,360 |
|
|
$ |
15,395 |
|
|
$ |
25,546 |
|
|
$ |
35,231 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment, net of tax expense of $76 and $89 for the three and
six month periods in 2006 and tax benefit of
$53 and $71 for the three and six month
periods in 2005, respectively. |
|
|
123 |
|
|
|
(119 |
) |
|
|
145 |
|
|
|
(149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
123 |
|
|
|
(119 |
) |
|
|
145 |
|
|
|
(149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
7,483 |
|
|
$ |
15,276 |
|
|
$ |
25,691 |
|
|
$ |
35,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive loss were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Foreign currency translation adjustment |
|
$ |
222 |
|
|
$ |
77 |
|
Additional minimum pension liability |
|
|
(3,494 |
) |
|
|
(3,494 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(3,272 |
) |
|
$ |
(3,417 |
) |
|
|
|
|
|
|
|
12
11. Retirement Plans
Certain of Arbitrons United States employees participate in a defined-benefit pension plan
that closed to new participants effective January 1, 1995. Arbitron subsidizes health care
benefits for eligible retired employees who participate in the pension plan and were hired before
January 1, 1992.
The components of periodic benefit costs for the defined-benefit pension plan and
postretirement plan were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined-Benefit |
|
|
Postretirement |
|
|
|
Pension Plan |
|
|
Plan |
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
242 |
|
|
$ |
202 |
|
|
$ |
8 |
|
|
$ |
10 |
|
Interest cost |
|
|
413 |
|
|
|
387 |
|
|
|
17 |
|
|
|
20 |
|
Expected return on plan assets |
|
|
(494 |
) |
|
|
(410 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
5 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
Amortization of net loss |
|
|
180 |
|
|
|
140 |
|
|
|
5 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
346 |
|
|
$ |
325 |
|
|
$ |
30 |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined-Benefit |
|
|
Postretirement |
|
|
|
Pension Plan |
|
|
Plan |
|
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service cost |
|
$ |
483 |
|
|
$ |
405 |
|
|
$ |
17 |
|
|
$ |
20 |
|
Interest cost |
|
|
826 |
|
|
|
775 |
|
|
|
33 |
|
|
|
40 |
|
Expected return on plan assets |
|
|
(988 |
) |
|
|
(820 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
11 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
Amortization of net loss |
|
|
359 |
|
|
|
279 |
|
|
|
10 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
691 |
|
|
$ |
650 |
|
|
$ |
60 |
|
|
$ |
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arbitron estimates that it will contribute $2.0 million in 2006 to the defined-benefit pension
plan.
12. Taxes
The effective tax rate was reduced from 37.75% for the year ended December 31, 2005 to 37.2%
for the six months ended June 30, 2006, to reflect the impact of increased tax-exempt interest
income. During the second quarter 2005, Arbitron recognized a reversal of certain liabilities for
tax contingencies related to prior periods. The net benefit of the reversal was $3.9 million.
Income taxes paid for the six months ended June 30, 2006, and 2005 was $15.0 million and $13.8
million, respectively.
13
13. Share-Based Compensation
The following table sets forth information with regard to the financial statement impact of
adopting SFAS No. 123R, effective January 1, 2006, (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2006 |
|
|
June 30, 2006 |
|
Cost of revenue |
|
$ |
182 |
|
|
$ |
313 |
|
Selling, general and administrative |
|
|
1,958 |
|
|
|
3,066 |
|
Research and development |
|
|
126 |
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(2,266 |
) |
|
|
(3,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense |
|
|
(2,266 |
) |
|
|
(3,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1,398 |
) |
|
$ |
(2,223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per weighted-average common share |
|
$ |
(0.05 |
) |
|
$ |
(0.07 |
) |
Diluted earnings per weighted-average common share |
|
$ |
(0.05 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
Net cash used by operating activities |
|
$ |
(263 |
) |
|
$ |
(722 |
) |
Net cash provided by financing activities |
|
$ |
263 |
|
|
$ |
722 |
|
The share-based compensation expense charged against operating income for the Companys
share-based compensation plans was approximately $3.8 million for the six months ended June 30,
2006, consisting of $3.3 million, $0.3 million, and $0.2 million, for selling, general and
administrative expense, cost of revenue, and research and development, respectively. The Companys
share-based compensation expense was approximately $2.4 million for the three months ended June 30,
2006, consisting of $2.1 million, $0.2 million, and $0.1 million, for selling, general and
administrative expense, cost of revenue, and research and development, respectively. The
share-based compensation expense for the three and six months ended June 30, 2006, included $0.1
million of expense related to deferred stock units granted to nonemployee directors, which were
historically required to be expensed prior to the implementation of SFAS No. 123R. Share-based
compensation expense for the three and six months ended June 30, 2005 was $0.1 million and $0.2
million, respectively. The total income tax benefit recognized in the income statement for
share-based compensation arrangements was $0.9 million and $1.4 million for the three and six
months ended June 30, 2006, respectively. There was no capitalized share-based compensation cost
incurred as of June 30, 2006.
The Company has two stock incentive plans (SIPs) from which awards of stock options,
nonvested share awards and performance unit awards are granted to eligible participants: the 1999
SIP, which was approved by the Companys stockholders, and the 2001 SIP, which was not approved by
the Companys stockholders. The Companys 1999 and 2001 SIPs permit the grants of share-based
awards, including stock options and nonvested share awards, for up to 5,204,009 shares of common
stock. The Company believes that such awards align the interests of its employees with those of its
shareholders. Eligible participants in the 1999 and 2001 SIPs include all employees of the Company
and any nonemployee director, consultant, and independent contractor of the Company.
The Companys policy for issuing shares upon option exercise or conversion of its nonvested share
awards and deferred stock units is to issue new shares of common stock, unless treasury stock is
available at the time of exercise or conversion.
14
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 months ended June 30, 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 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,
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 (as defined in the SIPs).
The Company uses historical data to estimate option exercise and employee termination in order
to determine the expected term of the option; identified groups of employees 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 employees 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. The fair value of each option granted during the three
and six months ended June 30, 2006, is estimated on the date of grant using a Black-Scholes option
valuation model that uses the assumptions noted in the following table.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, 2006 |
|
June 30, 2006 |
Expected volatility |
|
27.34% |
|
27.33% |
Expected dividends |
|
1.00% |
|
1.00% |
Expected term (in years) |
|
5.25 - 6.00 |
|
5.25 - 6.00 |
Risk-free rate |
|
4.96 - 5.07% |
|
4.37 - 5.07% |
The weighted-average risk-free rate for options granted during the three and six months ended
June 30, 2006 was 4.99% and 4.70%, respectively. The weighted-average expected term for options
granted during the three and six months ended June 30, 2006 was 5.52 years and 5.74 years,
respectively.
A summary of option activity under the SIPs as of June 30, 2006, and changes during the six
months then ended, is presented below:
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Average |
|
Contractual |
|
Intrinsic Value |
Options |
|
Shares |
|
Exercise Price |
|
Term (Years) |
|
($000) |
Outstanding at January 1, 2006 |
|
|
2,416,733 |
|
|
$ |
34.97 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
299,113 |
|
|
|
39.51 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(174,514 |
) |
|
|
25.64 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(27,080 |
) |
|
|
29.06 |
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2006 |
|
|
2,514,252 |
|
|
$ |
36.22 |
|
|
|
5.98 |
|
|
$ |
7,259 |
|
|
|
|
Vested or expected to vest at
June 30, 2006 |
|
|
2,508,502 |
|
|
$ |
36.21 |
|
|
|
5.97 |
|
|
$ |
7,259 |
|
|
|
|
Exercisable at June 30, 2006 |
|
|
1,752,100 |
|
|
$ |
34.73 |
|
|
|
4.73 |
|
|
$ |
7,210 |
|
|
|
|
The weighted-average grant-date fair value of options granted during the six months ended June
30, 2006 and 2005 was $12.56 and $13.72, respectively. The weighted-average grant-date fair value
of options granted during the three months ended June 30, 2006 and 2005 was $12.73 and $13.52,
respectively. The total intrinsic value of options exercised during the six months ended June 30,
2006 and 2005 was $1.9 million and $10.6 million, respectively. The total intrinsic value of
options exercised during the three months ended June 30, 2006, and 2005 was $0.7 million and $3.7
million, respectively.
As of June 30, 2006, there was $5.3 million of total unrecognized compensation cost related to
options granted under the SIPs. Cash received from option exercises for the six months ended June
30, 2006, and 2005 was $4.8 million and $19.0 million, respectively. The tax benefit realized for
the tax deductions from option exercises totaled $0.7 million and $4.1 million for the six months
ended June 30, 2006 and 2005, respectively.
Nonvested Share Awards
A summary of the status of the Companys nonvested share awards as of June 30, 2006, and
changes during the six months ended June 30, 2006, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Grant-Date Fair |
Nonvested Share Awards |
|
Shares |
|
Value |
Outstanding at January 1, 2006 |
|
|
14,250 |
|
|
$ |
40.90 |
|
Granted |
|
|
79,482 |
|
|
|
38.88 |
|
Vested |
|
|
(1,500 |
) |
|
|
40.90 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2006 |
|
|
92,232 |
|
|
$ |
39.16 |
|
|
|
|
|
|
|
|
|
|
Expected to vest at June 30, 2006 |
|
|
92,232 |
|
|
$ |
39.16 |
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006, there was $3.3 million of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the SIPs. Nonvested share awards
generally vest over four or five years. The aggregate cost of nonvested share-based awards is
expected to be recognized over a weighted-average period of 3.69 years. The total fair value of
share awards vested during the three and six month periods ended June 30, 2006, was less than $0.1
million and $0.1 million, respectively.
16
Deferred Stock Units
A summary of the status of the Companys deferred stock units as of June 30, 2006, and changes
during the six months ended June 30, 2006, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Grant-Date Fair |
Nonvested Deferred Stock Units |
|
Shares |
|
Value |
|
Outstanding at January 1, 2006 |
|
|
|
|
|
|
|
|
Granted |
|
|
22,101 |
|
|
|
38.77 |
|
Vested |
|
|
(3,915 |
) |
|
|
35.92 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at June 30, 2006 |
|
|
18,186 |
|
|
$ |
38.88 |
|
|
|
|
|
|
|
|
|
|
Vested at June 30, 2006 |
|
|
16,000 |
|
|
$ |
38.92 |
|
|
|
|
|
|
|
|
|
|
Expected to vest at June 30, 2006 |
|
|
18,186 |
|
|
$ |
38.88 |
|
|
|
|
|
|
|
|
|
|
As of June 30, 2006, the total unrecognized compensation cost related to deferred stock units
granted under the SIPs to employees and non-employee directors was $0.7 million and $0,
respectively. Deferred stock units granted to employees vest over a three-year period and are
convertible to shares of common stock, subsequent to their termination of employment. Deferred
stock units granted to non-employee directors vest immediately upon grant, are convertible to
shares of common stock subsequent to their termination of service as a director, and are
issued at the fair market value of the Companys stock upon the date of grant. The aggregate cost of deferred stock units granted to
employees is expected to be recognized over a three-year period beginning January 1, 2007. The
total fair value of deferred stock units granted to non-employee directors and vested during the
six months ended June 30, 2006 was $0.1 million.
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 approximately $0.1 million for the three and six months ended
June 30, 2006. The number of ESPP shares granted during the three and six months ended June 30,
2006, was 10,268 and 19,746 shares, respectively.
17
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 related to those consolidated financial statements contained elsewhere in
this 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, 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 whether
we will be able to:
|
|
|
renew all or part of contracts with large customers as they expire; |
|
|
|
|
successfully execute our business strategies, including implementation of our Portable People Meter (PPMSM)
services and to execute potential joint-venture or third-party agreements; |
|
|
|
|
effectively manage the impact of any further consolidation in the radio and advertising agency industries; |
|
|
|
|
keep up with 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; and |
|
|
|
|
successfully develop and implement technical devices to measure multi-media and
advertising in an increasingly competitive environment. |
Additional important factors known to Arbitron that could cause forward-looking statements to
turn out to be incorrect 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, 2005.
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.
18
Overview
Arbitron is an international media and marketing research firm primarily serving radio, cable
television, advertising agencies, advertisers, outdoor and out-of-home media and, through its
Scarborough joint venture, broadcast television and print media. Arbitron currently has four main
services:
|
|
|
measuring radio audiences in local markets in the United States and Mexico; |
|
|
|
|
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, outdoor and out-of-home
media, online industries and, through its Scarborough joint venture, broadcast
television and print media. |
Portable People Meter
For several years, Arbitron has pursued a strategy of evolving its data collection
business from diaries, which are completed by hand and returned by mail from respondents, to
portable electronic measurement devices, which passively provide measurement services without
additional manual effort by respondents beyond carrying or wearing the meter. This strategy has
been pursued to improve quality by taking advantage of new technological capabilities and to
address the vast increase in media delivery vehicles, both inside and outside of the home.
Arbitron has developed a Portable People Meter (PPM) system capable of measuring radio, broadcast
television, cable television, Internet broadcasts, satellite radio and television audiences, and
retail store video and audio broadcasts.
In May 2000, Arbitron entered into an agreement with Nielsen Media Research, Inc. (Nielsen
Media Research), a provider of U.S. television and cable audience measurement services, under
which Arbitron granted Nielsen Media Research an option to join Arbitron in the potential
commercial deployment of the PPM for audience measurement in the United States, for both the
television and radio industries, and the costs of such commercialization would be shared with
Nielsen Media Research. On March 1, 2006, Arbitron announced that Nielsen Media Research, Inc. did
not exercise its option and the option was terminated.
Arbitron currently is concentrating its efforts on previously announced plans to create a PPM
ratings service for radio, as well as develop services for broadcast television and the cable
television industry. On March 14, 2006, Arbitron announced that it would begin the rollout of the
PPM system as its radio ratings service in the top 50 markets in the United States. Under its
current rollout schedule, PPM is expected to be introduced into the top 10 radio markets by the
fall of 2008, and into all of the top 50 radio markets two to three years thereafter. Pending
accreditation by the Media Rating Council (MRC), Houston is expected to become the first radio
market to be electronically measured before the end of 2006. Arbitron is committed to pursuing
continued MRC accreditation of the PPM service as additional markets are rolled out.
On May 18, 2006, Arbitron announced that CBS Radio, which is one of the largest major-market
operators in the United States and in 2005 represented approximately nine percent of Arbitrons
revenue, had entered into a seven-year agreement for PPM radio ratings when the new audience
ratings technology is deployed in the 35 CBS Radio markets encompassed in Arbitrons previously
announced PPM rollout plan. In addition to CBS Radio, 10 other radio broadcasters have recently
signed long-term contracts to use PPM, if Arbitron deploys the PPM service.
To date, Arbitron has signed contracts with a number of national and regional advertising
agencies to use radio audience estimates based on the PPM, if Arbitron deploys the PPM service.
These agencies account for more than 90% of the national advertising dollars spent on radio advertising.
19
Arbitron believes this is
a significant start in an effort to gain a critical mass of industry support for deploying the PPM
as a local market radio ratings system.
Although additional milestones remain and there is the possibility that commercialization of
the PPM could be delayed, or that a competitor might preempt PPM commercialization entirely,
Arbitron continues to believe that the PPM service represents a significant enhancement to and a
viable replacement for its diary-based ratings service and is an essential component of the
Companys future growth.
As Arbitron has previously disclosed, commercialization of the PPM will require a substantial
financial investment. While the Company has preserved some of its cash and short-term investments
in anticipation of such requirements, the expenditures likely to be incurred in connection with
such commercialization are significant. The Company currently estimates that the aggregate capital
expenditure associated with PPM commercialization for audience ratings measurement will be
approximately $25.0 million for the first two to three years of commercialization. Arbitron also
anticipates that, over the same period, its results of operations will be negatively impacted as a
result of the rollout of this PPM service, which impact likely will be material. Ultimately, the
Company believes that, while commercialization of PPM for the radio ratings service will have a
near-term negative impact on the Companys results of operations, its operating margins can be
restored to historical levels by the end of the rollout period, although there can be no assurance
that this will be the case.
The amount of capital required for deployment of the PPM and the impact of the rollout on the
Companys results of operations will be greatly affected by the speed with which the radio industry
requests PPM technology and the timing of the rollout. If the radio industry is slow to accept
PPM, as opposed to the use of diaries or some other competing alternative, then it will take longer
to roll out the commercialization of the PPM, and the costs associated with that deployment will be
delayed. On the other hand, if the radio industry asks for electronic measurement sooner rather
than later, Arbitrons capital needs will intensify, and the near-term negative impact on the
Companys results of operations will be more significant.
In June 2005, Clear Channel Communications, Inc. (Clear Channel), which is the largest owner
of radio stations in the United States and represented approximately 19 percent of Arbitrons
revenue in 2005, announced that it was issuing a Request for Proposals to create a
state-of-the-art radio ratings system to replace the current diary measurement system to which it
subscribes. This process is ongoing. Clear Channel has organized a cross-industry evaluation team
to review the proposals and this team has identified Arbitron as one of the few companies to move
forward to the next level of review.
Portable People Meter National Marketing Panel (Project Apollo)
Arbitron began testing additional marketing research applications of the PPM technology in
2003. One application that Arbitron began testing was the use of the PPM as the media collection
tool for a national marketing-oriented panel designed to correlate advertising with shopping
behavior and sales. The objective is to provide multimedia exposure data combined with sales data
from a single source to produce a measure of advertising effectiveness for advertisers, agencies
and broadcasters.
In September 2004, Arbitron announced that Arbitron and VNU, Inc. (VNU) agreed to jointly
explore the development of a new national marketing research service, called Project Apollo, that
collects multimedia and purchase information from a common sample of consumers. In April 2005,
Arbitron and VNU entered into a cost-sharing agreement to share costs and capital expenditures
associated with the development and deployment of the pilot panel. Although this contract has
expired, Arbitron and VNU have agreed to continue sharing costs and capital expenditures while they
negotiate the terms of a formal joint venture for this service. In January 2006, Arbitron
announced that a test panel of more than 5,000 households and 11,000 people had been installed as
part of the demonstration of the national marketing research service. Six advertisers, including
Procter and Gamble, which in the aggregate spend more than $6.2 billion on advertising on measured
media, are collaborating with Arbitron and VNU to help ensure that the service properly addresses
the needs of marketers. These companies have signed, or are expected to sign, an agreement to
receive Project Apollo pilot panel data.
20
The national marketing research service is a new service, for which market acceptance is
not yet known. This service would require substantial additional expenditures if it ultimately
proves to be a viable commercial service. During the six months ended June 30, 2006, the Company
incurred approximately $2.8 million of incremental expenditures relating to the national marketing
pilot as compared to the same period of 2005. If a decision is made to commercialize this service,
substantial additional expenditures would be incurred in the next few years.
Since the pilot program for the PPM national marketing service is in progress and customer
response is preliminary, it is not yet possible to provide a meaningful assessment of future costs
associated with a potential commercialization of this service. However, the same general cost
pattern would apply as with the PPM ratings servicesubstantial costs would have to be incurred in
advance of revenues, which would result in a negative impact on results of operations in the first
two to three years of commercialization, which impact likely would be material.
Portable People Meter International
Arbitron has entered into commercial agreements with a number of international media
information services companies pursuant to which the companies have been granted a license to use
Arbitrons PPM encoding technology in their audience measurement services in specific countries
outside the United States. Use of the PPM continues to make progress internationally. On March 24,
2006, Arbitron announced that TNS Inc. (TNS), a PPM licensee, signed a five-year contract with
the Kazakhstan television Joint Industry Committee to provide trading currency television audience
measurement using Arbitrons PPM system. TNS and the Steadman Group also announced plans to
provide industry audience measurement for radio, television, and print to Kenya.
On May 18, 2006, Arbitron announced that RAJAR (Radio Joint Audience Research Limited), the
industry radio ratings consortium for the United Kingdom, in combination with BARB (Broadcasters
Audience Research Board), the joint industry committee responsible for television audience
measurement in the United Kingdom, have selected Arbitrons PPM system for an electronic radio and
television audience measurement demonstration panel in London, a market of more than six million
persons. This two-year panel will operate in parallel to the current ratings systems in the United
Kingdom and the data will be analyzed separately.
These international licenses are not currently a material part of Arbitrons business.
Significant Concentrations
Arbitrons quantitative radio audience measurement business and related software sales
accounted for approximately 78% and 87% of its revenue for the three and six months ended June 30,
2006, respectively. The Company expects that for the year ended December 31, 2006, 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 our radio
audience measurement business. Consolidation in the radio broadcasting industry has led to
Arbitrons dependence on a limited number of key customers.
In 2005, Clear Channel and CBS Radio, formerly known as Infinity Broadcasting Corp.,
represented approximately 19 percent and nine percent, respectively, of Arbitrons revenue.
Arbitrons agreements with these customers are not exclusive and contain no renewal obligations.
Arbitron currently has license agreements with Clear Channel to provide radio ratings and software
services for Clear Channels radio stations and networks through the Companys Fall 2008 survey.
In May 2006, Arbitron announced that the Company has entered into a license agreement with CBS
Radio to provide diary-based services and PPM radio ratings, when the new audience ratings
technology is deployed, through the Companys Winter 2014 survey.
21
Arbitron cannot give any assurances that it could replace the revenue that would be lost if a
key customer failed to renew all or part of its agreements with Arbitron. The loss of a key
customer would materially impact Arbitrons business, financial position and operating results.
Response Rates and Sample Proportionality
Arbitron uses listener diaries to gather radio listening data from sample households in the
United States local markets for which it currently provides radio ratings. A representative sample
of the population in each local market is randomly selected for each survey. This sample is
recruited by telephone to keep a diary of their radio listening for one week. Participants are
asked to designate in their diary the station(s) to which they are listening, when they are
listening and where they are listening, such as home, car, work or other place. To encourage their
participation in the survey, Arbitron gives diarykeepers a modest cash incentive. Arbitron
processes more than 1.4 million diaries every year to produce its audience listening estimates. It
is increasingly difficult and more costly to obtain consent from the phone sample to participate in
the surveys. Arbitron must achieve response rates sufficient to maintain confidence in its
ratings, the support of the industry and accreditation by the MRC. Response rates are a quality
measure of survey performance and an important factor impacting costs associated with data
collection. Overall response rates have declined over the past several years. If response rates
continue to decline further, Arbitrons radio audience measurement business could be adversely
affected. Arbitron has committed extensive efforts and resources to address the decline of response
rates.
A 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 good
proportionality in its surveys among younger demographic groups 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. Arbitron has conducted a number of research tests over
the past two years addressing this issue, including calling cellular phones to place diaries. The
Company expects to phase in cellular-phone-only households into the Arbitron sample frame beginning
in 2008.
In March 2006, Arbitron announced a comprehensive set of initiatives to bolster response rates
and improve sample proportionality for young men in the Companys diary-based markets. These
initiatives include providing for substantial increases in cash incentives and other survey
treatments. We continue to research and test new measures to address these sample quality
challenges.
Small Market Initiatives
In May 2005, Arbitron announced a program designed to increase the stability of radio audience
estimates in certain small markets by applying a quarterly rolling-sample approach to surveys
covering 110 small markets. The goal of this program is to provide quality enhancements for our
service in certain small markets and increase the reliability of reported data by reducing the
fluctuations in audience estimates from measurement period to measurement period. By combining the
quarterly measurement of the related surveys, the sample size for analyzing audience demographics
for these small markets will be increased without any increased cost to our customers. The first
phase of this program was successfully implemented during the Fall 2005 survey, with all affected
reports issued during the three months ended March 31, 2006. The result of these enhancements was
a 40 50% reduction in ratings share variation. The second phase is scheduled to begin with the
release of the Spring 2008 radio survey results.
Stock Repurchase
On January 24, 2006, Arbitron announced that its Board of Directors authorized a program to
repurchase up to $70.0 million of its outstanding common stock through either periodic open-market
or private transactions at then-prevailing market prices through December 31, 2006.
22
As of
June 30, 2006, the program was
completed with 1,991,944 shares being repurchased for an aggregate purchase price of $70.0 million.
New Accounting Pronouncement
Effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 123R (SFAS No. 123R), Share-Based Payments Revised. See
Notes 2 and 13 in the Notes to the Consolidated Financial Statements for the additional disclosures required by SFAS No. 123R.
In July 2006, the FASB issued FASB Interpretation (FIN) FIN 48, Accounting for Uncertainty
in Income Taxes (FIN 48) which clarifies the accounting for uncertainty in tax positions. This
Interpretation requires that the Company recognize in its financial statements, the impact of a tax
position, if that position is more likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the
Companys 2007 fiscal year, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings of that year. The management of the Company
is currently evaluating the impact of adopting FIN 48 to the Companys financial statements.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are those that are both important to the
presentation of the Companys financial position and results of operations, and require
managements most difficult, complex or subjective judgments.
The Company 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. During the six months ended June 30, 2006, Arbitron recorded an impairment charge of $0.6
million for internally developed PPM software associated with the Nielsen Media Research election
not to join Arbitron in the commercial deployment of PPM. As of June 30, 2006, and December 31,
2005, the Companys capitalized software developed for internal use had carrying amounts of $17.7
million and $15.2 million, respectively, including $6.9 million and $6.7 million, respectively, of
software related to the PPM.
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, interpretation of current tax laws
and possible outcomes of current and future audits conducted by domestic and foreign tax
authorities. Changes in tax law or interpretation of tax laws and the resolution of current and
future tax audits could significantly impact the amounts provided for income taxes in the
consolidated financial statements. Assumptions, judgments and estimates relative to the value of a
deferred tax asset take into account predictions 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, 2006 to the Three Months Ended June 30, 2005
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Increase |
|
|
Percentage of |
|
|
|
June 30, |
|
|
(Decrease) |
|
|
Revenue |
|
|
|
2006 |
|
|
2005 |
|
|
Dollars |
|
|
Percent |
|
|
2006 |
|
|
2005 |
|
Revenue |
|
$ |
74,165 |
|
|
$ |
69,816 |
|
|
$ |
4,349 |
|
|
|
6.2 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
36,684 |
|
|
|
29,869 |
|
|
|
6,815 |
|
|
|
22.8 |
% |
|
|
49.5 |
% |
|
|
42.8 |
% |
Selling, general and administrative |
|
|
20,557 |
|
|
|
16,909 |
|
|
|
3,648 |
|
|
|
21.6 |
% |
|
|
27.7 |
% |
|
|
24.2 |
% |
Research and development |
|
|
10,031 |
|
|
|
8,658 |
|
|
|
1,373 |
|
|
|
15.9 |
% |
|
|
13.5 |
% |
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
67,272 |
|
|
|
55,436 |
|
|
|
11,836 |
|
|
|
21.4 |
% |
|
|
90.7 |
% |
|
|
79.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
6,893 |
|
|
|
14,380 |
|
|
|
(7,487 |
) |
|
|
(52.1 |
%) |
|
|
9.3 |
% |
|
|
20.6 |
% |
Equity in net income of affiliate |
|
|
5,053 |
|
|
|
4,234 |
|
|
|
819 |
|
|
|
19.3 |
% |
|
|
6.8 |
% |
|
|
6.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and
income tax expense |
|
|
11,946 |
|
|
|
18,614 |
|
|
|
(6,668 |
) |
|
|
(35.8 |
%) |
|
|
16.1 |
% |
|
|
26.7 |
% |
Interest income |
|
|
829 |
|
|
|
819 |
|
|
|
10 |
|
|
|
1.2 |
% |
|
|
1.1 |
% |
|
|
1.2 |
% |
Interest expense |
|
|
937 |
|
|
|
1,016 |
|
|
|
(79 |
) |
|
|
(7.8 |
%) |
|
|
1.3 |
% |
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
11,838 |
|
|
|
18,417 |
|
|
|
(6,579 |
) |
|
|
(35.7 |
%) |
|
|
16.0 |
% |
|
|
26.4 |
% |
Income tax expense |
|
|
4,478 |
|
|
|
3,022 |
|
|
|
1,456 |
|
|
|
48.2 |
% |
|
|
6.0 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,360 |
|
|
$ |
15,395 |
|
|
$ |
(8,035 |
) |
|
|
(52.2 |
%) |
|
|
10.0 |
% |
|
|
22.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per weighted-average
common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.25 |
|
|
$ |
0.49 |
|
|
$ |
(0.24 |
) |
|
|
(49.0 |
%) |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.24 |
|
|
$ |
0.48 |
|
|
$ |
(0.24 |
) |
|
|
(50.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share |
|
$ |
0.10 |
|
|
$ |
0.10 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT (1) |
|
$ |
11,946 |
|
|
$ |
18,614 |
|
|
$ |
(6,668 |
) |
|
|
(35.8 |
%) |
|
|
|
|
|
|
|
|
EBITDA (1) |
|
$ |
14,215 |
|
|
$ |
20,002 |
|
|
$ |
(5,787 |
) |
|
|
(28.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT and EBITDA Reconciliation (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,360 |
|
|
$ |
15,395 |
|
|
$ |
(8,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
4,478 |
|
|
|
3,022 |
|
|
|
1,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(829 |
) |
|
|
(819 |
) |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
937 |
|
|
|
1,016 |
|
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT (1) |
|
|
11,946 |
|
|
|
18,614 |
|
|
|
(6,668 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,269 |
|
|
|
1,388 |
|
|
|
881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (1) |
|
$ |
14,215 |
|
|
$ |
20,002 |
|
|
$ |
(5,787 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 the Companys results. For further
discussion of these non-GAAP financial measures, see paragraph below entitled EBIT and EBITDA of
this quarterly report. |
24
The following table sets forth information with regard to share-based compensation expense
recognized under SFAS No. 123R and APB 25 for the three months ended June 30, 2006, and June 30,
2005, respectively:
Supplementary Information: Share-Based Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
Cost of revenue |
|
$ |
182 |
|
|
$ |
|
|
|
|
182 |
|
Selling, general and administrative |
|
|
2,047 |
|
|
|
100 |
|
|
|
1,947 |
|
Research and development |
|
|
126 |
|
|
|
|
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
2,355 |
|
|
|
100 |
|
|
|
2,255 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(2,355 |
) |
|
|
(100 |
) |
|
|
(2,255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
902 |
|
|
|
39 |
|
|
|
863 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(1,453 |
) |
|
$ |
(62 |
) |
|
$ |
(1,392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per weighted-average
common share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.05 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.05 |
) |
Diluted |
|
$ |
(0.05 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.05 |
) |
Revenue. Revenue increased 6.2% to $74.2 million for the three months ended June 30,
2006, from $69.8 million for the same period in 2005, due significantly to a $2.4 million increase
in Scarborough revenue, which resulted from a 16 market increase in the number of delivered
Scarborough markets for the three months ended June 30, 2006, as compared to the same period of
2005. The remainder of the increase in revenues was primarily due to increased revenue from the
licensing of analytical software applications.
Cost of Revenue. Cost of revenue increased by 22.8% to $36.7 million for the three months
ended June 30, 2006, from $29.9 million for the same period in 2005, and as a percentage of revenue
to 49.5% in 2006 from 42.8% in 2005. The increase in cost of revenue was primarily attributable to
a $4.1 million increase in Arbitrons core quantitative and qualitative and software application
services, which includes a $2.2 million increase in royalties and a $2.0 million increase in data
collection costs. The increase in royalties resulted primarily from a 16 market increase in
delivered Scarborough markets for the three months ended June 30, 2006 as compared to the same
period of 2005. Increased spending of $1.7 million related to the Project Apollo pilot panel for
the national marketing research service also contributed to the overall increase in cost of
revenue.
Selling, General and Administrative. Selling, general and administrative expenses increased
21.6% to $20.6 million for the three months ended June 30, 2006, from $16.9 million for the same
period in 2005, and increased as a percentage of revenue to 27.7% in 2006 from 24.2% in 2005. The
adoption of SFAS No. 123R, effective January 1, 2006, resulted in approximately $1.9 million of
additional compensation expense related to the Companys share-based awards. In addition,
approximately $1.6 million of the increase in selling, general and administrative expenses was due
to an increase in Arbitrons core quantitative, qualitative and software application services,
including a $0.4 million increase in marketing costs associated with the strategic development of
our ratings business.
Research and Development. Research and development expenses increased 15.9% to approximately
$10.0 million during the three months ended June 30, 2006, from $8.7 million for the same period in
2005, and increased as a percentage of revenue to 13.5% in 2006 from 12.4% in 2005. Increased
spending resulted from the Companys continued development of the next generation of client
software, and applications and infrastructure to support PPM and the diary-based service. The
Company expects that its research and development expenses will increase in the future as a result
of the strategic development of our ratings business.
25
Operating Income. Operating income decreased 52.1% to $6.9 million for the three months ended
June 30, 2006, from $14.4 million for the same period in 2005. Operating margin percentage
decreased to 9.3% in 2006 from 20.6% in 2005. Operating margins for the year ended December 31,
2006, will be negatively impacted due to higher costs related to the national marketing service and
the PPM ratings service, as well as continued expensing related to the Companys share-based
awards.
Equity in Net Income of Affiliate. Equity in net income of affiliate (relating to the
Companys Scarborough joint venture) increased 19.3% to $5.1 million for the three months ended
June 30, 2006, from $4.2 million for the same period in 2005. The increase in equity in net income
of affiliate was primarily related to the timing of 16 delivered markets mentioned previously.
Interest Income. Interest income was relatively flat for the three months ended June 30, 2006,
as compared to the same period of 2005.
Interest Expense. Interest expense decreased by 7.8% to $0.9 million for the three months
ended June 30, 2006 from approximately $1.0 million for the same period in 2005, due to increased
capitalization of interest incurred in association with higher balances of internally developed
software.
Income Tax Expense. The effective tax rate was reduced from 37.5%, which excludes the impact
of the $3.9 million tax benefit recognized for certain tax contingencies during the three months
ended June 30, 2005, to 37.2% for the three months ended June 30, 2006, to reflect the impact of
increased tax-exempt interest income.
Net Income. Net income decreased 52.2% to $7.4 million for the three months ended June 30,
2006, from $15.4 million for the same period in 2005, due primarily to $1.4 million in additional
share-based compensation expense, net of tax, and increased expenses related to Project Apollo and
the strategic development of our ratings business. The Company also expects that higher costs in
the remainder of 2006 related to the deployment of Project Apollo will continue to adversely impact
annual net income. The Company also expects that significant increases in PPM ratings expenses will
be incurred to support future large-scale PPM commercialization efforts.
EBIT and EBITDA. Arbitron has presented EBIT and EBITDA, both non-GAAP financial measures, as
supplemental information that management of Arbitron believes is useful to investors to evaluate
the Companys results because they exclude certain items that are not directly related to the
Companys core operating performance. EBIT is calculated by adding back net interest expense and
income tax expense to net income. EBITDA is calculated by adding back net interest expense, income
tax expense, 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 by 35.8% to $11.9 million, and EBITDA
decreased by 28.9% to $14.2 million for the three months ended June 30, 2006, from $18.6 million
and $20.0 million, respectively, for the same period in 2005.
26
Comparison of the Six Months Ended June 30, 2006 to the Six Months Ended June 30, 2005
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Increase |
|
|
Percentage of |
|
|
|
June 30, |
|
|
(Decrease) |
|
|
Revenue |
|
|
|
2006 |
|
|
2005 |
|
|
Dollars |
|
|
Percent |
|
|
2006 |
|
|
2005 |
|
Revenue |
|
$ |
159,253 |
|
|
$ |
149,011 |
|
|
$ |
10,242 |
|
|
|
6.9 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
60,939 |
|
|
|
50,286 |
|
|
|
10,653 |
|
|
|
21.2 |
% |
|
|
38.3 |
% |
|
|
33.7 |
% |
Selling, general and administrative |
|
|
40,013 |
|
|
|
32,863 |
|
|
|
7,150 |
|
|
|
21.8 |
% |
|
|
25.1 |
% |
|
|
22.1 |
% |
Research and development |
|
|
20,012 |
|
|
|
16,696 |
|
|
|
3,316 |
|
|
|
19.9 |
% |
|
|
12.6 |
% |
|
|
11.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
120,964 |
|
|
|
99,845 |
|
|
|
21,119 |
|
|
|
21.2 |
% |
|
|
76.0 |
% |
|
|
67.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
38,289 |
|
|
|
49,166 |
|
|
|
(10,877 |
) |
|
|
(22.1 |
%) |
|
|
24.0 |
% |
|
|
33.0 |
% |
Equity in net income of affiliate |
|
|
2,678 |
|
|
|
2,144 |
|
|
|
534 |
|
|
|
24.9 |
% |
|
|
1.7 |
% |
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and
income tax expense |
|
|
40,967 |
|
|
|
51,310 |
|
|
|
(10,343 |
) |
|
|
(20.2 |
%) |
|
|
25.7 |
% |
|
|
34.4 |
% |
Interest income |
|
|
1,816 |
|
|
|
1,428 |
|
|
|
388 |
|
|
|
27.2 |
% |
|
|
1.1 |
% |
|
|
1.0 |
% |
Interest expense |
|
|
1,880 |
|
|
|
2,067 |
|
|
|
(187 |
) |
|
|
(9.0 |
%) |
|
|
1.2 |
% |
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
40,903 |
|
|
|
50,671 |
|
|
|
(9,768 |
) |
|
|
(19.3 |
%) |
|
|
25.7 |
% |
|
|
34.0 |
% |
Income tax expense |
|
|
15,357 |
|
|
|
15,440 |
|
|
|
(83 |
) |
|
|
(0.5 |
%) |
|
|
9.6 |
% |
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
25,546 |
|
|
$ |
35,231 |
|
|
$ |
(9,685 |
) |
|
|
(27.5 |
%) |
|
|
16.1 |
% |
|
|
23.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per weighted-average
common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.84 |
|
|
$ |
1.13 |
|
|
$ |
(0.29 |
) |
|
|
(25.7 |
%) |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.83 |
|
|
$ |
1.11 |
|
|
$ |
(0.28 |
) |
|
|
(25.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share |
|
$ |
0.20 |
|
|
$ |
0.20 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT (1) |
|
$ |
40,967 |
|
|
$ |
51,310 |
|
|
$ |
(10,343 |
) |
|
|
(20.2 |
%) |
|
|
|
|
|
|
|
|
EBITDA (1) |
|
$ |
45,324 |
|
|
$ |
54,108 |
|
|
$ |
(8,784 |
) |
|
|
(16.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT and EBITDA Reconciliation (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
25,546 |
|
|
$ |
35,231 |
|
|
$ |
(9,685 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
15,357 |
|
|
|
15,440 |
|
|
|
(83 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
(1,816 |
) |
|
|
(1,428 |
) |
|
|
388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
1,880 |
|
|
|
2,067 |
|
|
|
(187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT (1) |
|
|
40,967 |
|
|
|
51,310 |
|
|
|
(10,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
4,357 |
|
|
|
2,798 |
|
|
|
1,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (1) |
|
$ |
45,324 |
|
|
$ |
54,108 |
|
|
$ |
(8,784 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 the Companys results. For further
discussion of these non-GAAP financial measures, see paragraph below entitled EBIT and EBITDA of
this quarterly report. |
27
The following table sets forth information with regard to share-based compensation expense
recognized under SFAS No. 123R and APB 25 for the six months ended June 30, 2006, and June 30,
2005, respectively:
Supplementary Information: Share-Based Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
Cost of revenue |
|
$ |
313 |
|
|
$ |
|
|
|
|
313 |
|
Selling, general and administrative |
|
|
3,238 |
|
|
|
196 |
|
|
|
3,042 |
|
Research and development |
|
|
224 |
|
|
|
|
|
|
|
224 |
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
3,775 |
|
|
|
196 |
|
|
|
3,579 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(3,775 |
) |
|
|
(196 |
) |
|
|
(3,579 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
1,446 |
|
|
|
75 |
|
|
|
1,371 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(2,329 |
) |
|
$ |
(121 |
) |
|
$ |
(2,208 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per weighted-average
common share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.08 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.07 |
) |
Diluted |
|
$ |
(0.08 |
) |
|
$ |
(0.00 |
) |
|
$ |
(0.07 |
) |
Revenue. Revenue increased 6.9% to $159.3 million for the six months ended June 30, 2006,
from $149.0 million for the same period in 2005, due primarily to a $5.2 million increase in
quantitative data license revenue caused by an increase in the ratings subscriber base, contract
renewals, and price escalations in multiyear customer contracts. A $2.4 million increase in
Scarborough revenue, which resulted from a 16 market increase in the number of delivered
Scarborough markets, and a $1.8 million increase in revenue from the licensing of analytical
software applications also increased revenues for the six months ended June 30, 2006 as compared to
the same period of 2005.
Cost of Revenue. Cost of revenue increased by 21.2% to $60.9 million for the six months ended
June 30, 2006, from $50.3 million for the same period in 2005, and as a percentage of revenue to
38.3% in 2006 from 33.7% in 2005. The increase in cost of revenue was primarily attributable to a
$6.6 million increase in Arbitrons core quantitative and qualitative and software application
services, which includes a $3.3 million increase in data collection and processing costs and a $2.8
million increase in royalties. The increase in royalties resulted primarily from a 16 market
increase in delivered Scarborough markets for the six months ended June 30, 2006, as compared to
the same period of 2005. Increased spending of $3.0 million and $1.1 million related to the
Project Apollo pilot panel for the national marketing research service and PPM international
business, respectively, also contributed to the overall increase in cost of revenue.
Selling, General and Administrative. Selling, general and administrative expenses increased
21.8% to $40.0 million for the six months ended June 30, 2006, from $32.9 million for the same
period in 2005, and increased as a percentage of revenue to 25.1% in 2006 from 22.1% in 2005. The
adoption of SFAS No. 123R, effective January 1, 2006, resulted in approximately $3.0 million of
additional compensation expense related to the Companys share-based awards. Approximately $3.5
million of the increase in selling, general and administrative expenses was due to an increase in
Arbitrons core quantitative, qualitative and software application services, including a $1.3
million increase in marketing costs associated with the strategic development of our ratings
business. Asset impairment charges related to internally developed software associated with the
Nielsen Media Research election not to join Arbitron in the commercial deployment of PPM accounted
for $0.6 million of the increase in selling, general, and administrative expenses.
Research and Development. Research and development expenses increased 19.9% to approximately
$20.0 million during the six months ended June 30, 2006, from $16.7 million for the same period in
2005, and increased as
28
a percentage of revenue to 12.6% in 2006 from 11.2% in 2005. Increased
spending of $3.4 million resulted from the Companys continued development of the next generation
of client software, and applications and infrastructure to support PPM and the diary-based service.
The Company expects that its research and development expenses will increase in the future as a
result of the strategic development of our ratings business.
Operating Income. Operating income decreased 22.1% to $38.3 million for the six months ended
June 30, 2006, from $49.2 million for the same period in 2005. Operating margin percentage
decreased to 24.0% in 2006 from 33.0% in 2005. Operating margins for the year ended December 31,
2006 will be negatively impacted due to higher research and development costs related to the
national marketing service and the PPM ratings service.
Equity in Net Income of Affiliate. Equity in net income of affiliate (relating to the
Companys Scarborough joint venture) increased 24.9% to $2.7 million for the six months ended June
30, 2006, from $2.1 million for the same period in 2005. The increase in equity in net income of
affiliate was primarily related to the timing of 16 delivered markets mentioned previously.
Interest Income. Interest income increased 27.2% to $1.8 million for the six months ended June
30, 2006, from $1.4 million for the same period in 2005. The $0.4 million increase was due to
higher interest rates for the six months ended June 30, 2006, as compared to the same period of
2005.
Interest Expense. Interest expense decreased by 9.0% to $1.9 million for the six months ended
June 30, 2006 from approximately $2.1 million for the same period in 2005, due to increased
capitalization of interest incurred in association with higher balances of equipment associated
with higher balances of internally developed software.
Income Tax Expense. The effective tax rate was reduced from 37.5%, which excludes the impact
of the $3.9 million tax benefit recognized for certain tax contingencies during the three months
ended June 30, 2005, to 37.2% for the six months ended June 30, 2006, to reflect the impact of
increased tax-exempt interest income.
Net Income. Net income decreased 27.5% to $25.5 million for the six months ended June 30,
2006, from $35.2 million for the same period in 2005, due primarily to $2.2 million in additional
share-based compensation expense, net of tax, and increased expenses related to Project Apollo and
the strategic development of our ratings business. The Company also expects that higher costs in
the remainder of 2006 related to the deployment of Project Apollo will continue to adversely impact
annual net income. The Company also expects that significant increases in PPM ratings expenses will
be incurred to support future large-scale PPM commercialization efforts.
EBIT and EBITDA. Arbitron has presented EBIT and EBITDA, both non-GAAP financial measures, as
supplemental information that management of Arbitron believes is useful to investors to evaluate
the Companys results because they exclude certain items that are not directly related to the
Companys core operating performance. EBIT is calculated by adding back net interest expense and
income tax expense to net income. EBITDA is calculated by adding back net interest expense, income
tax expense, 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 by 20.2% to $41.0 million, and EBITDA
decreased by 16.2% to $45.3 million for the six months ended June 30, 2006, from $51.3 million and
$54.1 million, respectively, for the same period in 2005.
29
Liquidity and Capital Resources
Working capital was $16.0 million and $58.8 million as of June 30, 2006, and December 31,
2005, respectively. Cash and cash equivalents were $21.3 million and $40.8 million as of June 30,
2006, and December 31, 2005, respectively. In addition, short-term investments and receivables
from brokers, collectively, were $50.0 million and $82.6 million as of June 30, 2006 and December
31, 2005, respectively. Management expects that the Companys cash position, along with these
readily convertible assets, as of June 30, 2006, and cash flow generated from operations will be
sufficient to support the Companys operations for the foreseeable future.
Net cash provided by operating activities was $26.1 million and $37.8 million for the six
months ended June 30, 2006, and 2005, respectively. The $11.7 million decrease in net cash
provided by operating activities was mainly attributable to a $9.7 million decrease in net income,
partially offset by a non-cash compensation increase of $3.6 million in share-based compensation
due to the January 1, 2006 adoption of SFAS No. 123R. Increased operating expenses significantly
impacted the decrease in net income, including those associated with developing the next generation
of client software, and applications and infrastructure to support PPM and the diary-based service;
developing the national marketing research service through the Project Apollo pilot panel; and
growing the PPM international business.
In accordance with SFAS No. 123R, effective January 1, 2006, the excess tax benefit from stock
option exercises is required to be presented in the Companys cash flow statement as an investing
activity rather than as an operating activity for periods subsequent to the adoption of SFAS No.
123R. Therefore, the $4.1 million excess tax benefit from stock option exercises for the six
months ended June 30, 2005, which continues to be presented as an operating activity, adversely
impacts the change in net cash provided by operating activities for the six months ended June 30,
2006, as compared to the same period of 2005.
Additionally, net cash from operating activities was impacted by a $4.1 million decrease
related to increased purchases of PPM international inventory in 2006. The increase related to
changes in accrued expenses and other current liabilities was primarily due to a $3.9 million tax
reserve reversal in 2005.
Net cash provided by investing activities was $22.8 million for the six months ended June 30,
2006, and net cash used in investing activities was $4.8 million for the six months ended June 30,
2005. The $27.6 million increase in cash provided by investing activities was driven primarily by
net sales of short-term investments of $32.6 million in available-for-sale variable rate demand
notes issued by municipal government agencies and auction-rate securities, partially offset by
increased capital spending of $5.0 million, which was largely related to PPM metering equipment
purchases during 2006 for the PPM ratings service and Project Apollo.
Net cash used in financing activities was $68.6 million for the six months ended June 30,
2006, and net cash provided by financing activities was $16.5 million for the six months ended June
30, 2005. The $85.1 million fluctuation in financing activities was primarily attributable to
$68.5 million in repurchases of the Companys outstanding common stock during the six months ended
June 30, 2006. No stock repurchases were made during the same period of 2005. Arbitrons first
quarterly dividend payment to Company stockholders was paid in April 2005. A $3.1 million increase
in dividend payments resulted for the six months ended June 30, 2006 as compared to the same period
of 2005 because two quarterly dividend payments to Company stockholders were made during the first
six months of 2006 as compared to the one payment made for the first six months of 2005. The $14.2
million decrease in stock option exercises for the six months ended June 30, 2006, as compared to
the same period of 2005, was the result of significantly less options nearing expiration and lower
average stock prices.
Arbitrons $50.0 million in senior-secured notes matures on January 31, 2008. Arbitrons
senior-secured notes contain non-investment-grade financial terms, covenants and operating
restrictions that increase the cost of financing and restrict financial flexibility. Under the
terms of the senior-secured notes, Arbitron is required to maintain certain leverage and coverage
ratios and meet other financial conditions. The senior-secured notes agreement contains certain
financial covenants and also contains a make-whole provision that applies in the event of early
prepayment of principal. The senior-secured notes limit, among other things, the Companys ability
to incur additional indebtedness, grant or incur liens on its assets, pay cash dividends, make
investments or acquisitions, repurchase or redeem capital stock and engage in certain mergers or
consolidations. Under the terms of the senior-secured notes, all of the Companys subsidiaries
guarantee the senior-secured notes. The terms of the senior-secured notes may restrict or prohibit
Arbitrons ability to raise additional capital when needed or could prevent
30
Arbitron from making acquisitions or investing in other growth initiatives. Arbitron has been in compliance with all
covenants since the inception of all borrowings.
In 2005, Clear Channel and CBS Radio, formerly known as Infinity Broadcasting Corp.,
represented approximately 19 percent and nine percent, respectively, of Arbitrons revenue.
Arbitrons agreements with these customers are not exclusive and contain no renewal obligations.
Arbitron currently has license agreements with Clear Channel to provide radio ratings and software
services for Clear Channels radio stations and networks through the Companys Fall 2008 survey.
In May 2006, Arbitron announced that the Company has entered into a license agreement with CBS
Radio to provide diary-based services and PPM radio ratings, when the new audience ratings
technology is deployed, through the Companys Winter 2014 survey. Arbitron cannot give any
assurances that it will retain current customers or that it will be able to replace the revenue
that is lost should a key customer fail to renew its agreements with Arbitron.
As discussed above in Portable People Meter, commercialization of the PPM for radio ratings
services will require a substantial financial investment by Arbitron. While the Company has
preserved some of its cash and short-term investments in anticipation of such requirements, the
expenditures likely to be incurred in connection with such commercialization are significant. The
Company currently believes that the aggregate capital expenditure associated with PPM
commercialization for audience ratings measurement will be approximately $25.0 million for the
first two to three years of commercialization.
Similarly, as previously discussed, the Company is pursuing a possible additional application
of the PPM technology that involves use of the PPM as a media collection tool for a national
marketing-oriented panel designed to correlate advertising with shopping behavior and sales. The
Company is participating with VNU in the development and deployment of a national marketing pilot
panel as a demonstration of this service. If a decision is made to commercialize this service,
substantial additional expenditures would be incurred in the next few years.
Arbitron expects to fund the national marketing pilot panel, the expected commercialization of
the PPM radio ratings service and the possible commercialization of the PPM marketing research
applications service with its existing cash position and short-term investments, future excess cash
from operations or through the most advantageous source of capital at the time, which may include
the incurrence of new debt through borrowings, sales of common and preferred stock and/or joint
venture capital 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 297
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.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest 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 $0.4 million on interest income over a six month period.
The Company currently has no exposure to interest rate risk with respect to debt securities
because the Companys only outstanding debt is its senior-secured notes that bear interest at a
fixed rate of 9.96%. The Company does not use derivatives for speculative or trading purposes.
Because the Company currently has no outstanding floating rate debt, a hypothetical market
interest rate change of 1% would have no effect on the Companys results of operations. The fair
values of the senior-secured notes as of June 30, 2006, and December 31, 2005, were $51.0 million
and $51.8 million, respectively, and were estimated using a cash flow valuation model and available
market data for securities with similar maturity dates. A hypothetical market interest rate change
of 1% would have an impact of approximately $0.7 million on the fair value of the Companys
senior-secured notes.
Foreign Currency 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 Rule 13a-15(e) of the rules promulgated
under the Securities Exchange Act of 1934, as amended) 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
During the quarter ended June 30, 2006, the Company began using a new accounts receivable
system to manage its records of billing and collections activity. Other financial reporting modules
of this system will continue to be installed in phases. In conjunction with this implementation,
the Companys management evaluated the effectiveness of the design of internal controls over
financial reporting for this system. There have been no other changes in the Companys internal
control over financial reporting during the quarterly period ended June 30, 2006, 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 January 24, 2006, Arbitron announced that its Board of Directors authorized a program to
repurchase up to $70.0 million of its outstanding common stock from time to time in either open
market or private transactions at then prevailing market prices through December 31, 2006. The
Company completed the repurchase program by June 30, 2006. The following table outlines the stock
repurchase activity during the three months ended June 30, 2006.
|
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|
|
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|
|
|
|
|
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 |
|
|
817,000 |
|
|
$ |
33.62 |
|
|
|
817,000 |
|
|
$ |
35,636,344 |
|
May 1-31 |
|
|
516,100 |
|
|
|
35.99 |
|
|
|
516,100 |
|
|
|
17,063,337 |
|
June 1-30 |
|
|
456,744 |
|
|
|
37.36 |
|
|
|
456,744 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,789,844 |
|
|
$ |
35.26 |
|
|
|
1,789,844 |
|
|
$ |
29 |
|
|
|
|
|
|
|
|
|
|
|
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|
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Arbitrons annual meeting of stockholders was held on May 24, 2006. There were 30,733,843
shares of Arbitron common stock outstanding and entitled to vote at the annual meeting. Of the
30,733,843 shares of Arbitron common stock entitled to vote at the annual meeting, a total of
29,090,393 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 |
Alan W. Aldworth |
|
|
28,855,353 |
|
|
|
235,040 |
|
Shellye L. Archambeau |
|
|
29,053,534 |
|
|
|
36,859 |
|
Erica Farber |
|
|
28,988,647 |
|
|
|
101,746 |
|
Philip Guarascio |
|
|
29,053,003 |
|
|
|
37,390 |
|
Larry E. Kittelberger |
|
|
28,855,162 |
|
|
|
235,231 |
|
Stephen B. Morris |
|
|
28,988,104 |
|
|
|
102,289 |
|
Luis G. Nogales |
|
|
28,918,788 |
|
|
|
171,605 |
|
Lawrence Perlman |
|
|
28,988,361 |
|
|
|
102,032 |
|
Richard A. Post |
|
|
27,524,918 |
|
|
|
1,565,475 |
|
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
6. EXHIBITS
|
|
|
Exhibit No. |
|
Description |
Exhibit 10.1
|
|
Form of Executive Retention Agreement (Filed as
Exhibit 10.1 to Arbitrons Current Report on
Form 8-K, dated June 5, 2006, and incorporated
herein by reference)* |
|
|
|
Exhibit 10.2
|
|
Radio Station License Agreement to Receive and
Use Arbitron PPM Data and Estimates, effective
May 18, 2006, by and between the Company and CBS
Radio Inc. |
|
|
|
Exhibit 10.3
|
|
Master Station License Agreement to Receive and
Use Arbitron Radio Audience Estimates, effective
May 18, 2006, by and between the Company and CBS
Radio Inc. |
|
|
|
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 |
|
|
|
* |
|
Indicates management contract or compensatory plan, contract or arrangement. |
|
|
|
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.
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ARBITRON INC. |
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By:
|
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/s/ SEAN R. CREAMER
|
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|
|
|
|
|
|
Sean R. Creamer |
|
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|
|
|
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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) |
|
|
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|
|
|
|
|
|
|
|
Date: August 3, 2006 |
|
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35