10-K 1 d263746d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2011

or

 

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

For the transition period from            to            

Commission file number: 1-1969

 

 

Arbitron Inc.

(Exact name of registrant as specified in Its Charter)

 

Delaware   52-0278528

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9705 Patuxent Woods Drive

Columbia, Maryland 21046

(Address of principal executive offices) (Zip Code)

(410) 312-8000

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Registered

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.50 per share   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The aggregate market value of the registrant’s common stock as of June 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter (based upon the closing sale price of Arbitron’s common stock as reported by the New York Stock Exchange on that date), held by nonaffiliates, was $1,114,729,697.86.

The number of shares outstanding of the registrant’s common stock, par value $0.50 per share, as of the latest practicable date, February 17, 2012: 27,310,588 shares.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by reference from the registrant’s definitive proxy statement for the 2012 annual meeting of stockholders, which proxy statement will be filed no later than 120 days after the end of the registrant’s fiscal year ended December 31, 2011.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page No.  

FORWARD-LOOKING STATEMENTS

     4   
PART I   
ITEM 1.   

BUSINESS

     5   
  

Overview

     5   
  

Corporate Strategy

     6   
  

Industry Background and Markets

     6   
  

Portable People Meter Technology

     7   
  

Syndicated Radio Ratings Services

     8   
  

Other Media Services

     10   
  

Local Market Qualitative Consumer Information Services

     11   
  

Data and Software Services

     12   
  

International Operations

     13   
  

Customers, Sales and Marketing

     13   
  

Competition

     14   
  

Intellectual Property

     15   
  

Research and Development

     16   
  

Governmental Regulation

     16   
  

Media Rating Council Accreditation

     16   
  

Employees

     17   
  

Seasonality

     17   
  

Privacy and Data Security

     19   
  

Available Information

     19   
ITEM 1A.   

RISK FACTORS

     19   
  

Risk Factors Relating to Our Business and the Industry in Which We Operate

     19   
  

Risk Factors Relating to Our Indebtedness

     29   
  

Risk Factors Relating to Owning Our Common Stock

     30   
ITEM 1B.   

UNRESOLVED STAFF COMMENTS

     31   
ITEM 2.   

PROPERTIES

     31   
ITEM 3.   

LEGAL PROCEEDINGS

     31   
ITEM 4.   

MINE SAFETY DISCLOSURE

     32   
PART II   
ITEM 5.   

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     32   
ITEM 6.   

SELECTED FINANCIAL DATA

     32   

ITEM 7.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     33   
  

Overview

     33   
  

Zokem Oy

     34   
  

Credit Facility

     34   
  

General Economic Conditions

     34   
  

Critical Accounting Policies and Estimates

     35   
  

Results of Operations

     36   
  

Liquidity and Capital Resources

     39   
  

Off-Balance Sheet Arrangements

     43   
  

New Accounting Pronouncements

     43   
ITEM 7A.   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     44   
ITEM 8.   

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     45   
ITEM 9.   

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     84   
ITEM 9A.   

CONTROLS AND PROCEDURES

     84   
  

Evaluation of Disclosure Controls and Procedures

     84   
  

Management’s Report on Internal Control Over Financial Reporting

     84   
  

Changes in Internal Control Over Financial Reporting

     84   
ITEM 9B.   

OTHER INFORMATION

     84   
PART III   
ITEM 10.   

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     84   
ITEM 11.   

EXECUTIVE COMPENSATION

     85   
ITEM 12.   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     85   
ITEM 13.   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

     85   
ITEM 14.   

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     85   
PART IV   
ITEM 15.   

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     85  

SIGNATURES

     91   

 

 

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

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

 

 

 

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FORWARD-LOOKING STATEMENTS

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

In this report, Arbitron Inc. and its subsidiaries may be referred to as “Arbitron,” or the “Company,” or “we,” or “us,” or “our.”

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

 

   

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

 

   

renew contracts with key customers;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

There are a number of additional important factors that could cause actual events or our actual results to differ materially from those indicated by such forward-looking statements, including, without limitation, the factors set forth in “Item 1A. — Risk Factors” in this report, and other factors noted in Management’s Discussion and Analysis of Financial Condition and Results of Operations, particularly those noted under “Critical Accounting Policies and Estimates,” and elsewhere, and any subsequent periodic or current reports filed by us with the Securities and Exchange Commission.

 

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

PART I

 

ITEM 1. BUSINESS

Arbitron Inc., a Delaware corporation, was formerly known as Ceridian Corporation (“Ceridian”). Ceridian was formed in 1957, though a predecessor began operating in 1912. We commenced our audience research business in 1949. Our principal executive offices are located at 9705 Patuxent Woods Drive, Columbia, Maryland 21046 and our telephone number is (410)  312-8000.

Overview

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

 

   

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

 

   

estimating the size and composition of audiences to media other than radio, including mobile media, television viewed out-of-home, and content distributed on multiple platforms;

 

   

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

 

   

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

We refer to our local and network radio audience ratings services, collectively, as our “syndicated radio ratings services.” We provide our syndicated radio ratings services in local markets in the United States to radio broadcasters, advertising agencies, and advertisers. Our national services estimate the size and demographic composition of national radio audiences and the size and composition of audiences of network radio programs and commercials. Broadcasters use our data primarily to price and sell advertising time, and advertising agencies and advertisers use our data in purchasing advertising time.

We offer services estimating the size and demographic composition of audiences of media other than radio, such as mobile media and television viewed out-of-home. We generally refer to these services, collectively, as our “other media services.” In July 2011, we acquired Zokem Oy, a Finland-based mobile audience measurement company, which we now operate as Arbitron Mobile Oy (“Arbitron Mobile”). We also offer services estimating the media consumption and behavior of audiences to content distributed on multiple platforms. We generally refer to these services, as our “cross platform services.”

In addition to the services described above, we also provide qualitative information about consumers, including their lifestyles, shopping patterns, and use of media in local markets and across the United States. Generally referred to as “qualitative services,” we market these services to customers of our syndicated radio ratings services who wish to demonstrate the value of their advertising propositions. We also market our quantitative and qualitative audience and consumer information to customers outside of our traditional base, such as the advertising sales organizations of local cable television companies, national cable and broadcast television networks, and out-of-home media sales organizations.

We provide software applications allowing our customers to access our proprietary databases of media and marketing information. These applications enable our customers to analyze this information more effectively for sales, management, and programming purposes. Some of our software applications also allow our customers to access data owned by third parties, provided the customers have a separate license to use such third-party data.

 

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We have developed our electronic Arbitron Portable People MeterTM (“PPMTM”) technology, which we deploy across many of our customer offerings and have licensed to media information services companies to use in their media audience ratings services in countries outside of the United States. See “— Syndicated Radio Ratings Services — Portable People Meter Service” below. We have commercialized our PPM ratings service in 48 of the largest United States radio markets. We may choose to commercialize our PPM ratings service in additional markets in the future. We refer to each of the 48 United States radio markets in which we have commercialized our PPM service as a “PPM Market” and collectively, as the “PPM Markets.” For more information regarding the status of our MRC Accreditation, see “— Media Rating Council Accreditation” below.

Our syndicated radio ratings services have historically accounted for a substantial majority of our revenue. The syndicated radio ratings services and related software represented approximately 88 percent of total revenue in each of 2011, 2010, and 2009. Approximately 77 percent of our total revenue is derived from local radio ratings services, of which approximately 74 percent is from the PPM Markets and 26 percent is from the Diary markets. Our revenue from domestic sources and international sources was approximately 98 percent and two percent of total revenue for the year ended December 31, 2011, 99 percent and one percent for the year ended December 31, 2010, and 98 percent and two percent for the year ended December 31, 2009, respectively. Ten customers account for approximately 50 percent of our revenue. Additional information regarding revenues by service and by geographical area is provided in Note 16 in the Notes to Consolidated Financial Statements contained in this Annual Report on Form 10-K.

Corporate Strategy

Our leading strategic objectives include strengthening our syndicated radio ratings business, maintaining a competitive position, and expanding our other media and cross platform services to a broader range of customers and media, including broadcast television, cable, out-of-home media, satellite radio and television, Internet, mobile, place-based and other media. Key elements of our strategy to pursue these objectives include:

 

   

Enhancing the value of our services for our radio customers. We intend to continue to invest in research and quality enhancements while increasing utility in our radio ratings services. We plan to facilitate this by engaging with our customers, listening to and understanding their needs and requirements, and providing competitive solutions based on price, quality, and value.

 

   

Leveraging our PPM technology to expand into new services. Building on our experience in the radio audience ratings industry, we are engaged in other media and cross platform initiatives to explore opportunities to deploy our PPM technology to develop new information services for additional types of media and for content delivered on multiple platforms.

 

   

Diversifying revenues. We believe growth opportunities exist in adjacent markets. We intend to work to expand our customer base by developing and marketing new information services designed to assist customers in implementing marketing strategies. We continue to explore opportunities to further license our audience measurement technologies, including internationally.

 

   

Developing and commercializing the next-generation data collection and processing techniques. Our businesses require sophisticated data collection and processing systems, software and other technology. In light of the dynamic nature of the media industry, including in the digital space, we will need to continue to evolve our data collection, processing and software systems.

 

   

Deploying resources. We compete against companies that are larger and have greater capital and other resources. We will explore and evaluate strategic opportunities to efficiently and effectively deploy our resources to better enable us to compete with such companies.

Industry Background and Markets

Since 1965, we have delivered to the radio industry timely and actionable radio audience estimates and other information based on information collected from a representative sample of radio listeners. The presence of independent audience estimates in the radio industry has helped radio broadcasters to price and sell advertising time, and advertising agencies and advertisers to purchase advertising time. Arbitron ratings have also become a valuable tool for use in radio programming, distribution, and scheduling decisions.

In recent years, multiple sources of media have competed for consumers’ attention. As audiences have become more fragmented, advertisers have increasingly sought to tailor their advertising strategies to target specific demographic groups through specific media and across multiple types of media. The audience information needs of radio broadcasters, advertising agencies, and advertisers have

 

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correspondingly become more complex. Increased competition, including from nontraditional media, such as the Internet, and more complex informational requirements have heightened the desire of radio broadcasters for more frequent and timely data delivery, improved information management systems, larger sample sizes, and more sophisticated means to analyze this information. In addition, there is a continuing demand for radio and television audience information from the increasing number of commercial, noncommercial, and public broadcasters in other countries.

As the importance of reaching specific audiences with targeted marketing strategies increases, broadcasters, publishers, advertising agencies, and advertisers increasingly require that information regarding exposure to content in advertising is provided on a more granular basis and is coupled with more detailed information regarding lifestyles and purchasing behavior of consumers. We believe the desire to integrate purchase data information with advertising exposure information and our ability to estimate a single consumer’s cross platform advertising exposure may create future opportunities for innovative approaches to satisfy these information demands.

Portable People Meter Technology

In recent years, we have evolved our audience ratings services in the largest markets from diaries, which are completed by hand and returned by mail from survey participants, to portable electronic ratings devices, which passively collect information regarding exposure of survey participants (whom we refer to as “panelists”) to encoded media without additional manual effort by the panelists beyond carrying the device. We have pursued this strategy to improve quality by taking advantage of new technological capabilities and to address the vast proliferation of media delivery vehicles, both inside and outside of the home. We use our PPM technology to produce radio audience estimates in 48 of the largest United States local markets and out-of-home television. Outside of radio and television, our PPM technology can be further leveraged to measure audiences of out-of-home media, print, new digital platforms, mobile, time-shifted broadcasts (such as media recorded for later consumption using a DVR or similar technology), and broadcasts in retail, sports, music, and other venues.

Our proprietary PPM technology is capable of collecting data regarding panelists’ exposure to encoded media for cross platform programming and advertising purposes including, among others, broadcast and satellite radio, broadcast, cable and satellite television, Internet, mobile, and retail in-store audio and video broadcasts. The PPM device automatically detects proprietary codes that are inaudible to the human ear, which broadcasters insert in the audio portion of their programming using technology and encoders we generally license to the broadcasters at no cost. We refer to the insertion of our proprietary codes into the audio portion of broadcasters’ programming as “encoding” the broadcast. These proprietary codes identify the encoded media to which a panelist is exposed throughout the day and when the panelist is exposed to it without the panelist having to engage in any recall-based manual recording activities. The PPM device sends the collected codes to Arbitron for tabulation and use in creating our audience estimates.

We believe there are many advantages to our PPM technology. It is simple and easy for panelists to use. It requires no button pushing, recall, or other effort by the panelist to identify and record media to which they are exposed. The PPM technology can passively detect exposure to encoded media by identifying each source using our unique identification codes. We believe the PPM service can help support the media industry’s increased focus on providing accountability for the investments made by advertisers. It helps to shorten the time period between when programming runs and when audience estimates are reported, and can be utilized to provide cross platform ratings from the same panelist. The PPM technology also produces high-quality compliance data, which we believe is an additional advantage that makes the PPM data more accountable to advertisers than various recall-based data collection methods, such as diaries. The PPM technology can produce more granular data than the recall-based data collection methods, including minute by minute exposure data, which we believe can be of particular value to media programmers. Because our PPM ratings service panels have larger weekly and monthly samples than our Diary service, the audience estimates exhibit more stable listening trends between survey reports.

We have begun executing on our plan to gradually deploy in our PPM panels our PPM 360TM device, which uses wireless cellular technology to transmit media exposure data without the need for panelists to dock the PPM device in a base station.

The Audience Reaction™ service offered by Media Monitors, LLC (“Media Monitors”), an affiliate of Clear Channel Communications, Inc. (“Clear Channel”), allows Media Monitors to combine our PPM data with its airplay information to provide a service designed to help radio programmers, who also license our data, hear what audio was broadcast while observing changes in the audience estimates. Media Monitors uses minute-level data from our PPM ratings service for the MscoreTM index, which estimates how much a particular song aids in radio listenership retention. We receive a royalty from Media Monitors in connection with the license of these services.

Get-a-GRiP is a new service available to radio stations, advertisers and advertising agencies which combines our PPM radio ratings with Media Monitors® commercial occurrence data to deliver a unique view on Gross Rating Point (GRP) performance, including daily point levels for radio advertising campaigns that run in the PPM Markets.

 

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Syndicated Radio Ratings Services

Challenges

In our syndicated radio services we recruit a representative survey group from a random probability sample of the market to be measured. We seek to ensure the selected group of persons is representative of the behaviors and characteristics of the entire population in the applicable market and covers all of the demographic segments requested by our clients. Based on the information provided from the representative sample, we estimate the size and demographic composition of the radio audience in the relevant market using our proprietary methodologies. We face a number of challenges in our syndicated radio audience ratings services. Response rates are one measure of our effectiveness in obtaining consent from persons to participate in our surveys and panels. Overall response rates for survey research, in general, have declined over the past several decades, and it has become increasingly difficult and more costly for us to obtain consent from persons to participate in our surveys and panels. We have been adversely impacted by these industry trends. Another measure often employed by users of our data to assess quality in our ratings is sample proportionality, which refers to how well the distribution of the group participating in any individual survey compares to the distribution of the population in the local market. We strive to achieve a level of both response rates and sample proportionality in our surveys sufficient to maintain confidence in our ratings and acceptance by the industry, and to support accreditation by the MRC. If response rates continue to decline or we are unable to maintain sample proportionality in our surveys or the costs of recruitment initiatives significantly increase, our radio audience ratings business could be adversely affected.

As we have previously disclosed, over the past several years, we have engaged in dialogue and other interactions with governmental entities, including several state Attorneys General, the Federal Communications Commission (“FCC”), Committees of the U.S. House Representatives, and the PPM Coalition, a group of broadcasters and trade associations representing certain broadcasters and advertising agencies. Generally, these groups had alleged that the PPM methodology undercounts minority radio listeners and would harm minority radio broadcasters. We have denied these allegations and while we believe our PPM methodology is valid and reliable, we have agreed with certain of these groups to implement methodological changes designed to enhance our PPM ratings service, including implementation of increased cell phone household recruiting, targeted in-person recruiting, and address-based sampling.

We established internal benchmarks we strive to achieve for response rates and sample proportionality. It is more expensive for us to recruit survey participants in the manners described above as compared to our historical methods. Because we intend to continue to increase the number of cell phone households in our samples and the level of address-based and targeted in-person recruiting, we expect the expenditures required to support these methods will be material. We currently anticipate that the aggregate cost of cell phone household recruitment for the PPM and Diary services, address-based sampling and targeted in-person recruitment for the PPM service will be approximately $18.0 million in 2012, as compared to $15.5 million in 2011.

Portable People Meter Ratings Service

Collection of Listener Data Through PPM Methodology. In our PPM service, we gather data regarding panelists’ exposure to encoded audio material using our PPM devices. We recruit a panel of households to participate in the service (all persons aged six and older in the household) from a random probability sample of persons living in the PPM Markets. We ask the household members to participate in the panel for a period of up to two years, carrying our devices throughout their day. Panelists earn points based on their compliance with the task of carrying the device. Longer carry time results in greater points, which are the basis for monthly cash incentives we pay to our panelists. Demographic subgroups that our experience indicates may be less likely to comply with the survey task of carrying the device, such as younger adults, are offered higher premiums based on their compliance with the survey task. We consider the amount of the cash incentive we pay to our PPM panelists to be proprietary information.

The PPM system collects the codes and adds a date/time stamp and indication of whether the listener was at home or out-of-home to each listening occasion and the information is transmitted to us for processing, tabulation, and analysis in producing our audience estimates. We issue a ratings report in each measured market for 13 unique four-week ratings periods per year. We also issue interim weekly reports to station subscribers for programming information. Users access our ratings estimates through an Internet-based software system that we provide.

2011 PPM Ratings Service Quality Improvement Initiatives. In operating our PPM ratings service, we have experienced and expect to continue to experience operational challenges similar to those we have historically faced in our Diary-based service, including several of the challenges related to sample proportionality and response rates described above in “— Syndicated Radio Ratings Services — Challenges.” We expect to continue to implement additional measures to address these challenges.

 

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Since launching our PPM ratings service, we have implemented a series of initiatives and announced additional initiatives. We believe these initiatives reflect our commitment to ongoing improvement and our responsiveness to feedback from several governmental and customer entities. We believe these commitments and enhancements are consistent with our ongoing efforts to obtain and maintain MRC accreditation and to continuously improve our syndicated radio ratings services. We expect these initiatives will likely require expenditures that will be material in the aggregate.

Since 2010, we have been introducing a multimodal recruitment approach that is intended to increase the participation rate of key segments of our sample that are more likely to be comprised of youth and minorities. We have added targeted in-person recruitment to our multi-faceted PPM panelist recruitment approach that had previously included mailings and phone calls. We believe in-person recruitment can benefit all broadcasters as it targets population segments that are more likely to be reachable only by cell phone — including youths and minorities. We are also using address-based sampling to further improve geographic proportionality. By the end of 2011, we implemented address-based sampling and expanded targeted in-person recruiting across all of our PPM Markets. We also enhanced sampling controls in PPM Markets with a finer level of geographic control through “Geo Zones”, which are clusters of zip codes nested within a single sampling unit. In March 2011, we introduced Geo Zones in all high density areas and by August 2011, we expanded the use of Geo Zones to all PPM geographies.

Throughout 2011, we invested in other PPM ratings service quality enhancements. We implemented a two percent sample target increase in PPM Markets, which was in addition to an eight percent sample target increase in 2010.

We continue to operate in a highly challenging business environment. Our future performance will be impacted by our ability to address a variety of challenges and opportunities in the markets and industries we serve, including our ability to continue to maintain and improve the quality of our PPM ratings service, and manage increased costs for data collection, arising, among other ways, from increased cell phone household recruiting and targeted in-person recruiting. We maintain an ongoing commitment to continuous improvement and obtaining and/or maintaining MRC accreditation in all of our PPM Markets, and strive to develop and implement effective and efficient technological solutions to measure cross platform media and advertising.

International PPM. We have entered into arrangements with media information services companies pursuant to which those companies use our PPM technology in their audience ratings services in specific countries outside of the United States. We currently have arrangements with Kantar Media, which is owned by WPP Group plc, a global communications services group, and BBM Canada, a not for profit, member owned tri-partite industry organization. Generally, under these arrangements we sell PPM hardware and equipment to the company for use in its media measurement services and collect a royalty once the service is deemed commercial. Our PPM technology is currently being used for media ratings in seven countries in addition to the U.S. — Belgium, Canada, Denmark, Iceland, Kazakhstan, Norway, and Singapore. Five of the countries, Belgium, Canada, Denmark, Iceland, and Norway, use PPM technology for measuring both television and radio. Kantar Media has been awarded a six-year contract for the provision of a new electronic radio measurement service in Sweden. The first measurement report using PPM technology will be made available to Swedish broadcasters in August 2012 when the contract begins.

Diary Service

Collection of Listener Data Through Diary Methodology. We use listener diaries to gather radio listening data from a random probability sample group of persons aged 12 and over in households in the 284 United States local markets as of the Fall 2011 survey in which we currently provide Diary-based radio ratings, and we contact them by telephone and/or mail to solicit their agreement to participate in the survey. When participants in our Diary survey (whom we refer to as “diarykeepers”) agree to take part in a survey, we mail them a small, pocket-sized diary and ask them to record their listening in the diary over the course of a seven-day period. We ask diarykeepers to report in their diary the station(s) to which they listened, when they listened and where they listened, such as home, car, work, or other place. Although survey periods are 12 weeks long, no participant keeps a diary for more than seven days. Each diarykeeper receives a diary, instructions for filling it out and a small cash incentive. The incentive varies according to markets and demographic group and may include certain incentives designed to encourage response from demographic groups less likely to return diaries. In addition to the cash incentives included with the diaries, further cash incentives are used at other points in the survey process along with other communications such as follow-up letters and phone calls to maximize response rates. Diarykeepers mail the diaries to our operations center, where we conduct a series of quality control checks, enter the information into our database, and use it to produce periodic audience listening estimates. In 2011, we received and processed more than 880,000 diaries to produce our audience listening estimates. We measure each of our local markets at least twice each year, and larger markets four times per year.

 

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For information regarding MRC accreditation of our Diary service, see “— Media Rating Council Accreditation” below.

2011 Diary Service Quality Improvement Initiatives. Throughout 2011, we invested in Diary service quality enhancements, some of which are set forth below. As part of our continuous improvement program, we intend to invest in Diary service quality enhancements going forward. As the needs of our customers and the service continues to evolve, we may choose to focus on different areas for improvement during 2012 and beyond.

In 2011, we continued our testing of a week-long, web/mobile based survey as the primary means of data collection for the Diary service.

Effective with the Summer 2011 survey, high definition multicast and radio Internet streams that meet minimum reporting standards became eligible for reporting in diary markets. In the Fall 2011 survey, high definition multicast and radio Internet streams that met minimum reporting standards became eligible for reporting in our national services.

Effective with the Fall 2011 survey, we increased the percentage of cell phone households in the diary surveys from an average of 17% to an average of 20% across the aggregate of all diary metros.

Other Syndicated Radio Ratings Services

RADAR. Our RADAR service provides an estimate of national radio audiences and the audience size of network radio programs and commercials. We provide the audience estimates for a wide variety of demographics and dayparts for total radio listening and for more than 50 separate radio networks.

We provide network audience estimates by merging the radio listening of selected survey respondents and panelists with the reported times that network programs and commercials are aired on each affiliated station. We utilize the data produced by our Diary and PPM ratings services in producing these network audience estimates. We deliver the RADAR estimates through our RADAR Software Suite software application, which includes a number of tools for sophisticated analysis of network audiences. We provide this service to radio networks, advertising agencies and network radio advertisers on a quarterly basis.

For information regarding MRC accreditation of our RADAR service, see “— Media Rating Council Accreditation” below.

Nationwide. Nationwide is our national radio audience service that provides information on the size and demographic composition of radio audiences for commercial and public radio networks. Nationwide average quarter hour ratings estimates are based on a sample size of more than 350,000 Arbitron respondents and panelists for each 12-week reporting period.

Nationwide gives clients the ability to monitor trends in national radio network. It also gives customers a resource that helps to determine how various affiliates perform in different local markets.

For information regarding MRC accreditation of our Nationwide service, see “— Media Rating Council Accreditation” below.

Other Media Services

Except as indicated below, the following other media services are not part of a regular syndicated rating service accredited by the MRC, and we have not requested accreditation. Arbitron does provide one or more syndicated services that are accredited by the MRC.

Mobile Audience Services. In July 2011, we purchased Zokem Oy, a Finland-based mobile audience measurement company, which now operates as Arbitron Mobile Oy. Arbitron Mobile has developed a mobile software meter compatible with most mobile devices offered by major manufacturers, mobile device operating systems, and wireless service provider protocols. The Arbitron Mobile software meter can measure consumers’ mobile experience, online and offline, and includes the ability to measure the incidence and duration of software application usage and methods of processing mobile datasets. Arbitron Mobile’s customer base includes: media measurement companies, wireless service providers; Internet service providers; software service providers; wireless device manufacturers, media content owners, and advertising agencies and advertisers. As with our other research services, we plan to recruit panels of consumers who will agree to download the software meter onto their mobile device. Arbitron Mobile has historically licensed its intellectual property and provided largely custom research services to customers outside the United States.

 

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Out-of-Home Television Services. We use our PPM technology to measure panelists’ exposure to television outside of their home, including in restaurants, bars, hotels, airports, and the workplace. The out-of-home television services are designed to improve visibility into out-of-home television audiences for media companies and advertisers.

Cross Platform Services

Our cross platform initiative is designed to explore opportunities to deploy our PPM technology for application to other types of media and/or cross platform media. The focus of this initiative is to provide a more complete view of consumers’ interaction among multiple media, including television, radio, Internet, mobile, place-based, and other media. By leveraging the mobility and utility of our PPM technologies, we believe the cross platform services can complement existing data services, offer media greater insight into what constitutes their total audience, and help advertisers plan how to reach that audience.

In 2011, we provided local television plus radio audience studies and national television plus radio studies. In September 2011, ESPN signed a new three-year agreement that continues our cross-media measurement of the NFL and college football games they broadcast on television and radio.

In February 2011, the Coalition for Innovative Media Measurement announced that it selected us to administer athree-screen pilot test to measure participants’ behavior with content and advertising across television, Internet, and mobile media. As of December 31, 2011, we had recruited a unique panel of over 500 participants who agreed to carry a PPM device and download PC and mobile meters onto their personal computers and smartphones.

Local Market Qualitative Consumer Information Services

In our radio ratings service, we provide primarily quantitative data, such as how many people are listening. We also provide qualitative data, such as consumer and media usage information to radio stations, cable companies, television stations, out-of-home media, magazine and newspaper publishers, advertising agencies and advertisers. The qualitative data on listeners, viewers and readers provide more detailed socioeconomic information and information on what survey participants buy, where they shop and what forms of media they use. We provide these measures of consumer demographics, retail behavior, and media usage in local markets throughout the United States.

We provide qualitative services tailored to fit a customer’s specific market size and marketing requirements, such as:

 

   

the Scarborough Report, which is offered in larger markets, and the Scarborough Mid-Tier Local Market Consumer Study, which is offered in medium-sized markets;

 

   

the RetailDirect Service, which is offered in medium-sized markets;

 

   

the Qualitative Diary Service/LocalMotion Service, which is offered in smaller markets; and

 

   

Non-Syndicated Research Services.

Each service profiles a market, the consumers and the media choices in terms of key characteristics. These services cover major retail and media usage categories. We also provide training and support services that help our customers understand and use the local market consumer information we provide.

Scarborough. The MRC-accredited Scarborough service is provided through a joint venture between Arbitron and a subsidiary of The Nielsen Company (“Nielsen”) and is governed by a partnership agreement, which will automatically renew for an additional three year term in December 2012 unless either party provides advance written notice of its intent to terminate the partnership. Although our equity interest in the Scarborough Research joint venture is 49.5 percent, partnership voting rights and earnings are divided equally between Arbitron and Nielsen. The Scarborough service provides detailed information about media usage, retail and shopping habits, demographics and lifestyles in 77 large United States local markets, based on a sample of consumers in the relevant markets.

Scarborough data feature more than 2,000 media, retail and lifestyle characteristics, which can help radio stations, television stations, cable companies, advertising agencies and advertisers, newspaper and magazine publishers and out-of-home media companies develop an in-depth profile of their consumers. Examples of Scarborough categories include retail shopping (e.g., major

 

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stores shopped or purchases during the past 30 days), auto purchases (e.g., plan to buy new auto or truck), leisure activities (e.g., attended sporting events) and personal activities (e.g., golfing). Media information includes broadcast and cable television viewing, radio listenership, newspaper readership and integrated online audiences. This information is provided twice each year to newspapers, radio and television broadcasters, cable companies, out-of-home media, advertising agencies and advertisers in the form of the Scarborough Report. Scarborough also provides a Mid-Tier Local Market Consumer Study regarding media usage, retail and shopping habits, demographics, and lifestyles of adult consumers in 40 United States local markets.

We are the exclusive marketer of the Scarborough Report to radio broadcasters, cable companies, out-of-home media, and advertisers, and advertising agencies. Scarborough Research markets the Scarborough Report to newspapers, sports marketers and online service providers. Nielsen markets the Scarborough Report to television broadcasters.

RetailDirect Service. Our RetailDirect service is a locally oriented purchase data and media usage research service provided in 18 midsized United States local markets. This service, which utilizes diaries and telephone surveys, provides a profile of the audience in terms of local media, retail and consumer preferences so that local radio and television broadcasters, out-of-home media and cable companies have information to help them develop targeted sales and programming strategies. Retail categories include automotive, audio-video, furniture and appliances, soft drinks and beer, fast food, department stores, grocery stores, banks and hospitals. Media usage categories include local radio, broadcast television, cable networks, out-of-home media, newspapers, yellow pages and advertising circulars.

Qualitative Diary Service/LocalMotion Service. Our Qualitative Diary Service collects consumer and media usage information from Arbitron radio diarykeepers in 159 smaller United States local markets. The same persons who report their radio listenership in the market also answer 27 demographic, product and service questions. We collect consumer behavior information for key local market retail categories, such as automotive sales, grocery, fast food, furniture and bedding stores, beer, soft drinks and banking. The Qualitative Diary Service also collects information about other media, such as television news viewership, cable television viewership, out-of-home media exposure and newspaper readership. This qualitative service provided for cable television companies is known as LocalMotion.

Non-Syndicated Research Services. In addition to the cross platform services described above under “— Cross Platform Services,” our non-syndicated or custom research services serve companies seeking to demonstrate the value of their advertising propositions. For example, we have provided non-syndicated research services for subscribers including sports play-by-play broadcasters, digital out-of-home and place-based media companies, and radio station properties. Through our non-syndicated research services, we are also exploring additional applications of PPM data, including nonratings programming and marketing. We are also exploring providing services for companies that sell advertising on in-store (retail) media and sports arenas.

Data and Software Services

We provide our audience estimates in a number of different reports we publish and license to our customers. The cornerstone of our radio audience ratings services is the Radio Market Report, which is available in all local markets for which we currently provide radio ratings. The estimates contained in our Diary-based Radio Market Report service are accredited by and subject to the review of the MRC. The PPM-based Radio Market Report is currently accredited in nine markets and the service is subject to review by the MRC. The Radio Market Report provides audience estimates for those stations in a market that meet our minimum reporting standards. The estimates cover a wide variety of demographics and dayparts, which are the time periods for which we report audience estimates. Each Radio Market Report contains estimates to help radio stations, advertising agencies and advertisers understand who is listening to the radio, which stations they are listening to, and where and when they are listening. Our proprietary data regarding radio audience size and demographics are generally provided to customers through multiyear license agreements.

Software Applications. In addition to our data, we license software applications that provide our customers access to the audience estimates in our databases. These applications include Maximi$er®, TAPSCANTM and PD Advantage®, which are services for radio stations, and Media ProfessionalSM and SmartPlus®, which are services for advertising agencies and advertisers. The PPM Analysis Tool is used by both radio stations and advertising agencies. Broadcasters use these software applications to more effectively analyze and understand ratings information for sales, management and programming purposes. Advertisers and agencies use these software applications to help them plan and buy radio advertising. Some of our software applications also allow our customers to access data owned by third parties, provided the customers have a separate license to use such third-party data. For information regarding the status of our MRC Accreditation for the PPM Analysis Tool, see “— Media Rating Council Accreditation” below.

 

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The Maximi$er service includes a Windows-based application to access a market’s Arbitron radio Diary database on a client’s personal computer. Radio stations use the Maximi$er service to produce information about their stations and programming not otherwise available in Arbitron’s published Radio Market Reports.

The TAPSCAN software is one of the advertising industry’s leading radio analysis applications. It can help create illustrative tables, charts and graphs that make complex information more useful to potential advertisers. The software uses respondent-level data, and it includes cost-efficiency analyses, hour-by-hour estimates and trending, and automatic scheduling and goal tracking. In addition to local Arbitron Radio Report ratings estimates, the TAPSCAN Web service also allows radio stations, advertisers and advertising agencies to access our National Regional Database to analyze ratings information for customer-defined groupings of stations across multiple markets and custom groupings of counties. Our TAPSCAN Sales Management service provides software systems that help radio stations manage their advertising sales process and automate the daily tasks in a sales department. The TAPSCAN Sales Management applications combine a customer relationship management system with scheduling and research applications and inventory/pricing management tools. Another TAPSCAN service, QUALITAP, is also made available to television and cable outlets in the United States under a licensing arrangement with Marketron International, Inc.

The PPM Analysis Tool enables subscribers of PPM respondent level data to analyze PPM data at the most discrete level of granularity available to customers. Researchers and programming consultants use this tool to gain valuable insights through a variety of reports that present detailed analysis of PPM panelist behavior.

Our PD Advantage service offers radio station program directors in Diary markets the ability to create a variety of reports that help analyze the market, the audience, and their competition. PDA Web is a comparable service for radio program directors in PPM Markets.

Our SmartPlus and Media Professional services provide media buying software systems to local and regional advertising agencies for broadcast and print media. The Media Professional and SmartPlus services are designed to help advertising agencies and advertisers plan and buy radio advertising time quickly and easily. These services integrate radio planning and buying into one comprehensive research and media-buying tool. They allow advertising agencies and advertisers to uncover key areas critical to the buying process, including determining the most effective media target, understanding market trends and identifying potential new business. In addition to the licensing above, we offer third-party software providers and customers licenses to use proprietary software that will enable enhanced access to our respondent-level data.

International Operations

Finland. We currently operate a wholly-owned subsidiary, Arbitron Mobile Oy, organized under the laws of Finland. For more information regarding Arbitron Mobile Oy, see “Other Media Services — Mobile Audience Services” above.

India. We currently operate a wholly-owned subsidiary organized under the laws of India, which currently provides software development and testing services in India. During 2011, we increased staffing to perform these and additional duties.

Customers, Sales and Marketing

Our customers are primarily radio, cable and television broadcasters, advertising agencies, advertisers, buying services, retailers, out-of-home media, online media, mobile media, and print media. One customer, Clear Channel, represented approximately 19 percent of our revenue in 2011. We believe we are well positioned to provide new services and other offerings to meet the emerging needs of broadcasting groups.

We market our services in the United States through 105 sales account managers, customer trainers and client services representatives, as of December 31, 2011.

We have entered into a number of agreements with third parties to assist in marketing and selling our services in the United States. For example, Marketron International, Inc. distributes, on an exclusive basis, our QUALITAP software to television and cable outlets in the United States and Media Monitors uses minute-level radio data from our PPM ratings service for the Audience Reaction and MscoreTM services.

We support our sales and marketing efforts through the following:

 

   

conducting direct-marketing programs directed toward radio stations, cable companies, advertising agencies, television stations, out-of-home companies, broadcast groups and corporate advertisers;

 

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promoting Arbitron and the industries we serve through public relations programs aimed at the trade press of the broadcasting, out-of-home media, Internet, advertising and marketing industries, as well as select local and national consumer and business press;

 

   

gathering and publishing studies, which we make available for no charge on our Web site, on national summaries of radio listening, emerging trends in the radio industry, Internet streaming, out-of-home and other media industries, as well as the media habits of radio listeners and television, cable and Internet viewers;

 

   

participating in and sponsoring key industry and government forums, trade association meetings, and interest groups, such as the Advertising Research Foundation, the American Association of Advertising Agencies, the National Association of Broadcasters, the Association of National Advertisers, the Radio Advertising Bureau, the European Society for Opinion and Marketing Research, the Coalition for Innovative Media Measurement, the Television Bureau of Advertising, the Cabletelevision Advertising Bureau, Alliance for Women in Media, Women in Cable Telecommunications, the Cable & Telecommunications Association for Marketing, the National Association of Black Owned Broadcasters, Minority Media and Telecommunications Council, the Emma Bowen Foundation, the International Radio and Television Society, Media Rating Council, Committee on Local Radio Audience Measurement, Committee on Local Television Audience Measurement, national Radio Research Committee and the Outdoor Advertising Association of America, as well as numerous state and local advertising and broadcaster associations;

 

   

participating in the digital industry groups, such as the Interactive Advertising Bureau, South by Southwest festival, Ad Tech, and RAIN Summits;

 

   

participating in activities and strengthening relationships with national and local chapters of grassroots organizations, such as the National Council of La Raza, the National Urban League, the National Association for the Advancement of Colored People, and the Rainbow/PUSH Coalition; and

 

   

maintaining a presence at major industry conventions, such as those sponsored by the National Association of Broadcasters, the Radio Advertising Bureau, the American Association of Advertising Agencies, the Advertising Research Foundation, the Association of National Advertisers, the Cable Advertising Bureau and the Outdoor Advertising Association of America, Mobile World Congress, Pacific Telecommunications Council, Mobile Marketing Association, International Conference on Mobile Ubiquitous Computing, Systems, Services and Technologies, INfocmm Industry Forum and CTIA.

Competition

We believe the principal competitive factors in our markets are the credibility, reliability, utility, and wide acceptance by buyers and sellers of media advertisers of our audience research, the ability to provide quality analytical services for use with the audience information, and the end-user experience with services and price.

We are the leader in the radio audience ratings business in the United States. During 2011, we competed in the radio audience ratings business in some small United States markets with Eastlan Resources, a privately held research company.

We are aware of at least four companies: Civolution, GfK AG, Ipsos SA, and Nielsen, which are developing technologies that could compete with our PPM ratings service. Additionally, we are aware of several companies, including Anite plc, Ascom, CarrierIQ, Inc., comScore, Inc., Experian Simmons, Lumi Mobile, M:Metrics, Inc,, Médiamétrie, Nokia Siemens Networks, Nurago GmbH (GfK AG is the majority owner), Spirent Communications, and Telephia (a subsidiary of Nielsen) that compete with Arbitron Mobile’s mobile audience services.

Additionally, we compete with a large number of other providers of applications software, qualitative data, and proprietary qualitative studies used by broadcasters, cable companies, advertising agencies, advertisers, and out-of-home media companies. These competitors include Edison Research, Marketron Inc., and STRATA Marketing Inc., in the area of proprietary research, Donovan Data Systems, Interactive Media Systems, and Telmar Information Services Corp., in the area of applications software, and The Media Audit (a division of International Demographics, Inc.), GfK Mediamark Research and Intelligence LLC (a subsidiary of GfK AG) and Simmons Market Research Bureau (a subsidiary of Experian Marketing Solutions) in the area of qualitative data.

 

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In our cross platform services, we currently compete with several companies offering media measurement, return on investment and/or advertising targeting solutions, including among others, comScore, Inc., Canoe Ventures, Kantar Media, Nielsen, Rentrak Corporation, TiVo, TRA Global, Inc. (“TRA”), and Media Behavior Institute LLC (joint venture of Nielsen and Gfk AG/MRI).

Intellectual Property

Our intellectual property is, in the aggregate, of material importance to our business and those of our subsidiaries. We rely upon a combination of patents, copyrights, trademarks, service marks, trade secret laws, license agreements, confidentiality procedures and other contractual restrictions to establish and protect proprietary rights in our methods and services as well as those of our subsidiaries. As of December 31, 2011, 44 United States patents were issued and active and 62 United States patent applications were pending on our behalf. Internationally, 189 foreign patents were issued and active and 225 foreign patent applications were pending on our behalf. Our patents relate to our data collection, processing systems, software and hardware applications, mobile measurement technology, PC-based measurement technology, the PPM technology and its methods, and other intellectual property assets. Some patents relating to the PPM technology and its methods expire at various times beginning in mid-2012. These include patents relating to previous generations and some elements of our current PPM technology and its methods, including some spread spectrum encoding, motion sensing, and basic audio and video matching. We do not believe these patents are core to the PPM technology or that the expiration of these patents will materially adversely affect our business. Our rights to limit others from practicing the methods covered by the expiring patents may be limited.

Our audience listening estimates are original works of authorship protectable under United States federal and state copyright laws. We publish the Radio Market Report monthly, quarterly or semiannually, depending on the Arbitron market surveyed, while we publish the Radio County Coverage Report annually. We seek copyright registration for each Radio Market Report and for each Radio County Coverage Report published in the United States. We may also seek copyright protection for our proprietary software and for databases comprising the Radio Market Report and other services containing our audience estimates and respondent-level data. We generally provide our proprietary data regarding audience size and demographics to customers through multiyear license agreements.

We market a number of our services under United States federally registered trademarks that are helpful in creating brand recognition in the marketplace. Some of our registered trademarks and service marks include: the Arbitron name and logo, Maximi$er, RetailDirect and RADAR. The Arbitron name and logo is of material importance to our business. We have a registration pending for Arbitron PPM in class 35 (conducting audience measurement services). We also have a number of common-law trademarks, including Media Professional, and QUALITAP. We have registered our name as a trademark in the United Kingdom, Mexico, the European Union, Australia, Singapore, Brazil, Canada, Argentina, Columbia, Russia, New Zealand, Taiwan, Hong Kong, Israel, Kazakhstan, Kenya, Chile and Japan, and are exploring the registration of our marks in other foreign countries.

We have filed applications to register Arbitron Mobile, Arbitron Mobile Index, and Arbitron Mobile Trends Panels name in Argentina, Australia, Bahrain, Brazil, Canada, Chile, China, Egypt, European Community, Hong Kong, India, Indonesia, Japan, Jordan, Kuwait, Lebanon, Malaysia, Mexico, Norway, Oman, Pakistan, Qatar, Russia, Saudi Arabia, Singapore, South Africa, South Korea, Switzerland, Taiwan, Turkey, UAE and the United States, in classes 9 and 35.

The laws of some countries might not protect our intellectual property rights to the same extent as the laws of the United States. Effective patent, copyright, trademark and trade secret protection may not be available in every country in which we market or license our data and services.

We believe our success depends primarily on the innovative skills, technical competence, customer service and marketing abilities of our personnel. We enter into confidentiality and assignment-of-inventions agreements with substantially all of our employees and enter into nondisclosure agreements with substantially all of our suppliers and customers to limit access to and disclosure of our proprietary information.

We must protect against the unauthorized use or misappropriation of our audience estimates, databases and technology by third parties. There can be no assurance that the copyright laws and other statutory and contractual arrangements we currently depend upon will provide us sufficient protection to prevent the use or misappropriation of our audience estimates, databases and technology in the future. The failure to protect our proprietary information, intellectual property rights and, in particular, our audience estimates and databases, could severely harm our business.

 

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Additionally, claims by third parties that our current or future products or services infringe upon their intellectual property rights may harm our business. Intellectual property litigation is complex and expensive, and the outcome of such litigation is difficult to predict. We have been involved in litigation relating to the enforcement of our copyrights covering our radio listening estimates and patents covering our proprietary technology. Although we have generally been successful in these cases, there can be no assurance that the copyright laws and other statutory and contractual arrangements we currently depend upon will provide us sufficient protection to prevent the use or misappropriation of our audience estimates, databases and technology in the future. Litigation, regardless of outcome, may result in substantial expense and a significant diversion of our management and technical personnel. Any adverse determination in any litigation may subject us to significant liabilities to third parties, require us to license disputed rights from other parties, if licenses to these rights could be obtained, or require us to cease using certain technology.

Research and Development

Our research and development activities have related primarily to the development of new services, customer software, PPM equipment and maintenance and enhancement of our legacy operations and reporting systems. We expect that we will continue research and development activities on an ongoing basis, particularly in light of the rapid technological changes affecting our business. We expect that the majority of the effort will be dedicated to improving the overall quality and efficiency of our data collection and processing systems, developing new software applications that will assist our customers in realizing the full potential of our audience ratings services, developing our PPM technology and developing a single-source service that will be able to measure audience and other information from a number of different forms of media and media delivery methods. Research and development expenses during fiscal years 2011, 2010 and 2009 totaled $38.4 million, $39.1 million, and $42.0 million, respectively.

Governmental Regulation

Our PPM equipment has been certified to meet FCC requirements relating to emissions standards and standards for modem connectivity. Additionally, all PPM equipment has been certified to meet the safety standards of Underwriters Laboratories Inc. (commonly referred to as UL), as well as Canadian and European safety and environmental standards.

Our media research activities are subject to an agreement with the United States Federal Trade Commission in accordance with a Decision and Order issued in 1962 to CEIR, Inc., a predecessor company. This order originally arose in connection with a television ratings business, and we believe that today it applies to our media ratings services. The order requires full disclosure of the methodologies we use and prohibits us from making representations in selling or offering to sell an audience ratings service without proper qualifications and limitations regarding probability sample, sampling error and accuracy or reliability of data. It prohibits us from making statements that any steps or precautions are taken to ensure the proper maintenance of diaries unless such steps or precautions are in fact taken. It also prohibits us from making overly broad statements regarding the media behavior a survey reflects. The order further prohibits us from representing the data as anything other than estimates and from making a statement that the data are accurate to any precise mathematical value. The order requires that we make affirmative representations in our reports regarding nonresponse by survey participants and the effect of this nonresponse on the data, the hearsay nature of a survey participant’s response, the fact that projections have been made, and the limitations and deficiencies of the techniques or procedures used. We believe that we have conducted and continue to conduct our radio audience ratings services in compliance with the order.

Federal and state regulations restrict telemarketing to individuals who request to be included on a do-not-call list. Currently, these regulations do not apply to survey research, but there can be no assurance that these regulations will not be made applicable to survey research in the future. In addition, federal regulations prohibit calls made by autodialers to wireless lines without consent from the subscriber. Because consumers are able to transfer a wireless number to a landline carrier or a landline number to a wireless carrier, it can be difficult for us to identify efficiently wireless numbers in advance of placing an autodialed call.

Media Rating Council Accreditation

The MRC is a voluntary, nonprofit organization, comprised of broadcasters, advertisers, advertising agencies, and other users of media research, which reviews and accredits audience ratings services. The MRC accreditation process is voluntary and there is no requirement, legal or otherwise, that rating services seek accreditation or submit to an MRC audit. MRC accreditation is not a prerequisite to commercialization of any of our audience ratings services.

Although accreditation is not required, we are pursuing MRC accreditation for several of our syndicated audience ratings services. We currently intend to continue to use commercially reasonable efforts in good faith to pursue MRC accreditation of our PPM ratings service in each PPM Market where we have commercialized or may commercialize the service in the future.

 

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As of the date we filed this Annual Report on Form 10-K with the Securities and Exchange Commission, the quarter-hour-based radio ratings data produced by the PPM ratings service is accredited by the MRC in nine local markets, Atlanta; Cincinnati; Houston-Galveston; Kansas City; Milwaukee-Racine; Minneapolis-St. Paul; Philadelphia; Phoenix; and St. Louis. At the end of 2011, the MRC accredited the quarter-hour-based radio ratings data produced by the PPM ratings service in fourteen local markets, five of which, Cleveland, Portland, OR, Riverside-San-Bernardino, Salt Lake City-Ogden-Provo, and Tampa-St. Petersburg-Clearwater, subsequently lost accreditation in February 2012. We have applied for accreditation in all PPM Markets. As we have disclosed, the MRC has previously denied accreditation in certain of the markets and we continue to seek accreditation in all unaccredited PPM Markets.

Our Diary-based Radio Market Report service is accredited by and subject to the review of the MRC. The MRC has accredited our Diary-based Radio Market Report service since 1968. On December 6, 2010, we announced the MRC had withdrawn its accreditation of our RADAR and Nationwide services. For information regarding MRC accreditation status, see — Media Rating Council Accreditation.”

In March 2011, we announced the MRC had also accredited the Arbitron PPM Analysis Tool. Designed specifically for accredited monthly average-quarter-hour PPM data, the PPM Analysis Tool is a software application providing standard audience analysis reports including rankers, trend reports, and audience composition reports.

In April 2011, we announced the MRC had accredited our TAPSCAN Web software, a Web-based sales proposal and analysis software system for radio. Reports created using the software and MRC accredited data indicate the report is accredited by the MRC. However, reports created using data from the 39 unaccredited PPM markets are not MRC-accredited.

Additional Arbitron services that are currently accredited by the MRC are Scarborough, Maximi$er and Media Professional software, the Custom Survey Area Report (“CSAR”) and the Radio County Coverage services.

The MRC accreditation review is ongoing and continuous. To obtain or to merit continued accreditation of our services, we must: (1) adhere to the MRC’s minimum standards for Media Rating Research; (2) supply full information to the MRC regarding details of our operations; (3) conduct our media ratings services substantially in accordance with representations to our subscribers and the MRC; (4) submit to, and pay the cost of, thorough annual audits of our accredited services by certified public accounting firms engaged by the MRC; and (5) commit to continuous improvement of our media ratings services.

Employees

As of December 31, 2011, we employed 954 people on a full-time basis and approximately 420 people on a part-time basis in the United States and 251 people on a full-time basis internationally. None of our U.S. or India employees are covered by a collective bargaining agreement. Our employees in Finland are covered by a collective bargaining agreement. We believe our employee relations are good.

Seasonality

Revenue

We recognize revenue for services over the term of license agreements as services are delivered while expenses are recognized as incurred. As of Fall 2011 we gather radio-listening data in 284 U.S. local markets, including 236 Diary markets and 48 PPM Markets.

In PPM Markets, we deliver ratings 13 times per year, with four PPM ratings reports delivered in the fourth quarter in 2011. As a result, we expect to recognize more revenue in PPM Markets in the fourth quarter than in each of the first three quarters of the year.

During the transition period from Diary service to PPM service in each PPM Market, there were changes in the seasonality pattern because during the initial quarter in which the PPM ratings service was commercialized in a market, we recognized revenue based on the delivery of both the final quarterly Diary ratings and the initial monthly PPM ratings for that market.

All 236 Diary markets are measured at least twice per year (April-May-June for the “Spring Survey” and October-November-December for the “Fall Survey”). In addition, we measure 48 larger Diary markets an additional two times per year (January-February-March for the “Winter Survey” and July-August-September for the “Summer Survey”). We generally deliver our Diary

 

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ratings reports and recognize the related revenue in the quarter after the survey is measured. Consequently, our Diary revenue is generally higher in the first and third quarters as a result of the delivery of the Fall Survey and Spring Survey to all Diary markets compared to revenue in the second and fourth quarters, when delivery of the Winter Survey and Summer Survey, respectively, is made only to 48 larger Diary markets.

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

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

Costs and expenses

The transition from Diary service to PPM service in the PPM Markets also had an impact on the seasonality of costs and expenses. PPM costs and expenses generally increased six to nine months in advance of the commercialization of each market as we built the PPM panels. These build-up costs were incremental to the costs associated with our Diary-based ratings service and we recognized these increased costs as incurred rather than upon the delivery of a particular survey.

Now that all our planned PPM Markets are commercialized, and because we conduct our PPM services continuous throughout the year, we do not expect significant seasonality in PPM costs and expenses. In our Diary service, our expenses are generally higher in the second and fourth quarters as we conduct the Spring and Fall Surveys for all 236 of our Diary Markets.

 

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Equity earnings/losses in Scarborough Research

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

Privacy and Data Security

We are currently subject to U.S. and international data protection and privacy statutes, rules, and regulations, and may in the future become subject to additional such statutes, rules, and regulations. These statutes, rules, and regulations may affect our collection, use, storage, and transfer of personally identifiable information. Complying with these laws may require us to make certain investments, make modifications to existing services, or prohibit us from offering certain types of services. Failing to comply could result in civil and criminal liability, negative publicity, data being blocked from use, and liability under contracts with our customers, vendors, and partners.

Available Information

We routinely post important information on our Web site at www.arbitron.com, and interested persons may obtain, free of charge, copies of filings (including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports) that we have made with the Securities and Exchange Commission through a hyperlink at this site to a third-party Securities and Exchange Commission filings Web site (as soon as reasonably practicable after such filings are filed with, or furnished to, the Securities and Exchange Commission). The Securities and Exchange Commission maintains an Internet site that contains our reports, proxy and information statements, and other information. The Securities and Exchange Commission’s Web site address is www.sec.gov. Also available on our Web site are our Corporate Governance Policies and Guidelines, Code of Ethics for the Chief Executive Officer and Financial Managers, Code of Ethics and Conduct, Stock Ownership Guidelines for Executive Officers and Non-Employee Managers, the Audit Committee Charter, the Nominating and Corporate Governance Committee Charter and the Compensation and Human Resources Committee Charter. Copies of these documents are also available in print, free of charge, to any stockholder who requests a copy by contacting our Treasury Manager.

 

ITEM 1A. RISK FACTORS

Risk Factors Relating to Our Business and the Industry in Which We Operate

Our business, financial position, and operating results are dependent on the performance of our quantitative radio audience ratings service.

Our quantitative radio audience ratings service and related software sales represented 88 percent of our total revenue for 2011. We expect such sales related to our radio audience ratings service will continue to represent a substantial portion of our revenue for the foreseeable future. Any factors adversely affecting the pricing of, demand for, or market acceptance of our quantitative radio audience ratings service and related software, such as competition, technological change, legislation or regulation, alternative means of valuing advertising transactions, economic challenges, or further ownership shifts in the radio industry, could adversely impact our business, financial position, and operating results.

We may be unsuccessful in obtaining and/or maintaining MRC accreditation for our ratings services, and we may be required to expend significant resources in order to obtain and/or maintain MRC accreditation for our ratings services, any of which could adversely impact our business.

As of the date we filed this Annual Report on Form 10-K with the Securities and Exchange Commission, the MRC accredited the quarter-hour-based radio ratings data produced by the PPM ratings service in nine local markets: Atlanta; Cincinnati; Houston-Galveston; Kansas City; Milwaukee-Racine; Minneapolis-St. Paul; Philadelphia; Phoenix; and St. Louis. At the end of 2011, the MRC accredited the quarter-hour-based radio ratings data produced by the PPM ratings service in fourteen local markets, five of which, Cleveland, Portland, OR, Riverside-San-Bernardino, Salt Lake City-Ogden-Provo, and Tampa-St. Petersburg-Clearwater, lost accreditation in February 2012. The MRC has accredited our Diary-based ratings service. On December 6, 2010, we announced the MRC withdrew its accreditation of our RADAR and Nationwide services.

 

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If the efforts required to obtain and/or maintain MRC accreditation of our services are substantially greater than our current expectations, or if we are required to make significant changes with respect to methodology and panel composition and management in order to establish the service meets the MRC accreditation standards in any current or future market, or for any other reason, we may be required to make additional expenditures, the amount of which could be material.

These or any future denials or revocations of accreditation could cause users of our audience estimates to experience reduced confidence in our ratings or otherwise negatively impact demand for our services, any of which could adversely impact our financial performance.

Privacy and data protection laws may restrict our activities and increase our costs.

Various statutes and rules regulate conduct in areas such as privacy and data protection which may affect our collection, use, storage, and transfer of personally identifiable information both abroad and in the United States. Compliance with these laws and regulations may require us to make certain investments or may dictate that we not offer certain types of products and services or only offer such services or products after making necessary modifications. Failure to comply with these laws and regulations may result in, among other things, civil and criminal liability, negative publicity, data being blocked from use, and liability under contractual warranties. In addition, there is an increasing public concern regarding data and consumer protection issues, and the number of jurisdictions with data protection laws has been increasing. There is also the possibility that the scope of existing privacy laws may be expanded. For example, several countries including the United States have regulations that restrict telemarketing to individuals who request to be included on a do-not-call list. Typically, these regulations target sales activity and do not apply to survey research. If the laws were extended to include survey research, our ability to recruit research participants could be adversely affected. These or future initiatives may adversely affect our ability to generate or assemble data or to develop or market current or future products or services, which could negatively impact our business.

Concern over data security and privacy, including any violations of privacy laws, perceived misuse of personal information, or failure to adhere to the privacy commitments that we make, could cause public relations problems and could impair our ability to recruit panelists or maintain panels of sufficient size and scope, which in turn could adversely affect our ability to provide our products.

Any perception of our practices as an invasion of privacy, whether legal or illegal, may subject us to public criticism. Existing and future privacy laws and increasing sensitivity of consumers to unauthorized disclosures and the collection or use of personal information and media usage information may create negative public reaction related to our business practices. U.S. legislators and various media sources have expressed concern over the collection of media usage and behavioral information from online, mobile, and telecommunications providers. In addition, U.S. and European lawmakers and regulators have expressed concern over the collection of personally identifiable information and have issued directives regulating these activities across the European Union. Such actions may have a negative effect on businesses that collect or use media usage information generally or substantially increase the cost of maintaining a business that collects or uses media usage information. Additionally, public concern has grown regarding certain kinds of downloadable software known as “spyware.” These concerns might cause panelists to refrain from downloading software from the Internet, including our proprietary technology, which could make it difficult to recruit additional panelists or maintain a panel of sufficient size and scope to provide meaningful marketing intelligence. Any resulting reputational harm, potential claims asserted against us or decrease in the size or scope of our panel could reduce the demand for our services, increase the cost of recruiting panelists and adversely affect our ability to provide our services to our customers. Any of these effects could harm our business.

Our services involve the storage and transmission of proprietary information. If our security measures are breached and unauthorized access is obtained, our services may be perceived as not being secure and panelists and survey respondents may hold us liable for disclosure of personal data, and customers and venture partners may hold us liable or reduce their use of our services.

We store and transmit large volumes of proprietary information and data that contains personally identifiable information about individuals. Security breaches could expose us to a risk of loss of this information, litigation, and possible liability and our reputation could be damaged. For example, hackers or individuals who attempt to breach our network security could, if successful, misappropriate proprietary information or cause interruptions in our services. If we experience any breaches of our network security or sabotage, we might be required to expend significant capital and resources to protect against or to alleviate problems. We may not be able to remedy any problems caused by hackers or saboteurs in a timely manner, or at all. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target and, as a result, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security occurs, the perception of the effectiveness of our security measures could be harmed and we could lose current and potential clients.

 

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Any unauthorized disclosure or theft of private information we gather could harm our business.

Unauthorized disclosure of personally identifiable information regarding our panelists and survey respondents, whether through breach of our secure network by an unauthorized party, employee theft or misuse, or otherwise, could harm our business. If there were an inadvertent disclosure of personally identifiable information, or client confidential information, or if a third party were to gain unauthorized access to the personally identifiable or client confidential information we possess, our operations could be seriously disrupted and we could be subject to claims or litigation arising from damages suffered by panel members or pursuant to the agreements with our customers. In addition, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding the unauthorized disclosure of personal information. Finally, any perceived or actual unauthorized disclosure of the information we collect could harm our reputation, substantially impair our ability to attract and retain panelists and have an adverse impact on our business.

We launched a cross platform initiative, which is a developing area where we have limited experience. If we are not successful in developing the cross platform initiative, it could have a material adverse impact on our business.

We launched a cross platform media initiative in 2009, which leverages our PPM technology and panels. We do not have significant experience in designing, operating, maintaining or integrating cross platform services among television, radio, Internet, mobile, place-based, and other media. We are uncertain of the demand for these services, whether these services will be accepted in the marketplace, and the price at which customers would be willing to subscribe. This initiative may fail, or incur significant losses. Our entry into cross platform may bring risks of which we are currently unaware and could have a material adverse impact on our business.

We may acquire or invest in other companies, products or technologies, which may be costly, dilutive to our earnings and, in the event we experience difficulties in assimilating and integrating the personnel, technologies, operating systems and products and services of acquired businesses, less beneficial than we anticipate.

As part of our business strategy, we may acquire or invest in other companies, products or technologies that complement our current product and service offerings, enhance our technical capabilities, expand our operations into new markets, or offer other growth opportunities. Such acquisitions may be costly and potentially dilutive to existing shareholders in the event we offer capital stock as consideration in an acquisition. Acquisitions could also pose risks to our operations and operating results, including the possibilities of:

 

   

increased costs relating to the integration of acquired businesses or technologies;

 

   

difficulties assimilating the acquired operations, personnel, technologies or products into our company;

 

   

loss of key personnel at an acquired business who decide not to work for us;

 

   

diversion of management’s attention from our existing operations;

 

   

adverse effects on relationships with our existing suppliers, customers or partners;

 

   

a need for additional capital or debt financing to complete acquisitions; and

 

   

the impairment of the investment or intangible assets acquired.

The described risks would be magnified as the size of an acquisition increases or if the acquisitions are in geographic or business markets in which we have little or no prior experience. As a result of these and other challenges, we may not realize any anticipated benefits from acquisitions even if we can find suitable acquisition opportunities at what we believe to be attractive valuations, which cannot be assured.

 

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Technological change may render our services obsolete and it may be difficult for us to develop new services or enhance existing ones.

We operate in businesses that require sophisticated data collection, processing systems, software and other technology. Some of the technologies supporting the industries we serve are changing rapidly. We will be required to adapt to changing technologies, either by developing and marketing new products and services or by enhancing our existing products and services, to meet client demand. Additionally, advertising-supported media may be challenged by new technologies that could have an effect on the advertising industry, our customers, and our services. Our continued success will depend on our ability to adapt to changing technologies and to improve the performance, features, and reliability of our services in response to changing customer and industry demands.

Moreover, the introduction of new products and services embodying new technologies and the emergence of new industry standards could render existing products and services obsolete. Our continued success will depend on our ability to adapt to changing technologies, manage and process ever-increasing amounts of data and information and improve the performance, features and reliability of our existing products and services in response to changing client and industry demands. We may experience difficulties that could delay or prevent the successful design, development, testing, introduction or marketing of our products and services. New products and services, or enhancements to existing products and services, may not adequately meet the requirements of current and prospective clients or achieve any degree of significant market acceptance. If we fail to meet marketplace needs, other companies may provide competitive products and services, which could reduce demand for our offerings.

The success of our business depends on our ability to recruit persons to participate in our research surveys.

Our businesses use meters and diaries to gather data from participants. It is increasingly difficult and costly to obtain consent from persons to participate in our research. In addition, it is increasingly difficult and costly to ensure the selected probability sample of persons mirrors the behaviors and characteristics of the entire population and covers all of the demographic segments requested by our clients. Additionally, as consumers adopt modes of communication other than traditional telephone service, such as mobile, cable and Internet calling, it may become more difficult for our services to reach and recruit participants for our audience measurement services. If we are unsuccessful in our efforts to recruit appropriate participants and maintain adequate participation levels, our clients may lose confidence in our ratings services and we could lose the support of the relevant industry groups. If this were to happen, our audience measurement services may be materially and adversely affected.

We have limited experience designing, recruiting and maintaining PPM panels. If we are unable to operate and maintain PPM panels that appropriately balance research quality, panel size and operational cost, our financial results may suffer.

The commercial viability of our PPM ratings service and, potentially, other new business initiatives, is dependent on our ability to design, recruit, and maintain panels of persons to carry our Portable People Meters, and to ensure appropriate panel composition to accommodate a broad variety of media research services. Our research methodologies require us to maintain panels of sufficient size and appropriately representative demographic composition. Our research methodologies also require our panelists to comply with certain standards, such as carrying the meter for a minimum number of hours each day and other survey tasks, in order for us to use the data collected by the meter in estimating ratings.

We have commercialized the PPM ratings service in 48 PPM Markets. Maintaining the panels may prove to be more complex and resource intensive for us to manage than we currently anticipate.

Participation in a PPM panel requires panelist households to make a longer-term commitment than participation in our Diary-based ratings service. Designing, recruiting, and maintaining PPM panels are substantially different than recruiting participants for our Diary-based ratings service. We have limited experience in operating such PPM panels and we may encounter unanticipated difficulties as we attempt to do so. Without historical benchmarks on key sample performance metrics, it will be challenging for us to maintain the appropriate balance of research quality, panel size, and operational costs. Designing, recruiting, and maintaining such panels may also cause us to incur expenses substantially in excess of our current expectations.

If we are unable to successfully design, recruit and maintain such PPM panels, or if we are required to incur expenses substantially in excess of our current expectations in order to do so, it could adversely impact our ability to obtain and/or maintain MRC accreditation of our PPM ratings service, adversely impact our ongoing dialogues with regulatory and governmental entities, or otherwise adversely impact our business, financial position and operating results.

 

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In 2011, we began implementing certain methodological enhancements. If we are unable to implement the enhancements as designed and for the anticipated cost or if the enhancements do not have the results we anticipate, our business could be adversely impacted.

During 2010, we committed to methodological enhancements designed to enhance our recruitment of participants, including targeted in-person recruiting and the implementation of a pure address-based sample frame. In 2011, we began implementing these enhancements. If we are unable to implement the enhancements as we have designed them and for the cost we anticipate, our business could be adversely impacted. Additionally, if the methodological enhancements do not provide the results we anticipate, we may have to spend more money to produce the desired results by using a different method, which could adversely impact our business.

Data collection costs are increasing faster than has been our historical experience and if we are unable to become more efficient in our data collection and our management of associated costs, our operating margins and results of operations could suffer.

Our success will depend on our ability to reach and recruit participants and to achieve response rates sufficient to maintain our audience ratings services. As consumers adopt modes of communication other than telephone landlines, such as cell phones and cable or Internet calling, it is becoming increasingly difficult for us to reach and recruit participants. Recent government estimates have indicated the percentage of cell-phone-only households has been increasing nationally. We seek to include in our samples a statistically representative number of persons that reside in cell-phone-only households. We recruit cell-phone-only households based on the government estimates, and thus, our ability to recruit is based on available data, which may not be up-to-date and is only provided in regional estimates, not market-by-market. It has been our experience that recruiting cell phone households and recruiting potential panelists in person is significantly more expensive than recruiting landline households. We have announced initiatives to increase the percentage of our cell phone households in our Diary and PPM samples and to increase our in person recruitment efforts, which could adversely impact our operating margins and results of operations.

We currently acquire our cell phone sample from a single vendor and if our sample volume increases or we are unable to utilize this vendor, it could be more expensive for us to acquire the necessary sample and may delay the full implementation of our improvement initiatives for cell phone sampling, which may harm our business.

We use an address-based sampling methodology to recruit cell phone households. We currently acquire the sample from a single vendor. As our address-based sample volume increases, it may be more difficult for our vendor and more expensive for us to acquire the necessary sample. If this vendor is unable to satisfy all of our requirements, we would have to bring some or all of the operations in-house or hire and train one or more additional vendors, which could increase expenses and delay the full implementation of improvement initiatives focused on cell phone sampling, which could harm our business.

We are subject to governmental oversight or influence, which may harm our business.

Federal, state, and local governmental entities, including state attorneys general, have asserted that our operations are subject to oversight or influence by them. Our ratings services in 48 large markets have undergone a change from manual, recall-based Diary methodology to electronic, PPM-based methodology. This change has been subject to public attention, in particular, our PPM ratings service has been subject to increasing scrutiny by governmental entities. We expect continued governmental oversight relating to this business.

The governmental oversight environment could have a significant effect on us and our business. Among other things, we could be fined or required to make other payments, prohibited from engaging in some of our business activities, or subject to limitations or conditions on our business activities. Significant governmental oversight action against us could have material adverse financial effects, cause significant reputational harm, or harm business prospects. New laws or regulations or changes in the enforcement of existing laws or regulations applicable to us may also adversely affect our business.

Foreign currency exchange rates may adversely affect our results of operations and financial condition.

Sales and purchases in currencies other than the U.S. dollar expose us to fluctuations in foreign currencies relative to the U.S. dollar and may adversely affect our results of operations and financial condition. Increased strength of the U.S. dollar will increase the effective price of our services sold in U.S. dollars into other countries, which may require us to lower our prices or adversely affect sales to the extent we do not increase local currency prices. Decreased strength of the U.S. dollar could adversely affect the cost of materials, products and services purchased overseas. Our international sales and expenses are also translated into U.S. dollars for reporting purposes and the strengthening or weakening of the U.S. dollar could result in unfavorable translation effects.

 

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Criticism of our audience ratings service by various governmental entities, industry groups, and market segments could adversely impact our business.

Due to the high-profile nature of our services in the media and marketing information services industry, we could become the target of additional government regulation, legislation, litigation, activism, or negative public relations efforts by various industry groups, market segments, and other interested parties. We strive to be fair, transparent, and impartial in the production of our audience measurement services, and the quality of our U.S. ratings services are voluntarily subject to review and accreditation by the Media Rating Council, a voluntary trade organization, whose members include many of our key client constituencies. However, criticism of our business by special interests, and by clients with competing and often conflicting demands on our measurement services, could result in government regulation. While we believe that further government interactions and regulation are unnecessary, no assurance can be given that legislation will not be enacted in the future that would subject our business to regulation, which could adversely affect our business.

We expect to operate in new business areas that require sophisticated data collection, processing systems, software, and rapidly-changing technology, which may require us to make significant investments in research and development and intellectual property. If we are not successful in doing so, it could adversely affect our business.

As traditional methods of media consumption evolve, we expect to operate in business areas that involve technology, methods, and services that are new to us. We may not achieve a significant degree of market acceptance for these new technologies, methods, and services, nor can we be certain that we will not infringe the intellectual property rights of third parties when offering future services in these new areas. Our existing intellectual property rights may not cover any new technologies, methods, and services that we develop. We may face an increased number of intellectual property rights claims. The terms of the resolution of any such legal proceedings and claims could:

 

   

prohibit us from utilizing such technologies and methods or offering such services;

 

   

require us to redesign or rebrand such technologies, methods, or services;

 

   

require us to pay substantial damages;

 

   

divert resources (financial, time, and personnel) to defend; or

 

   

require us to expend financial resources to obtain licenses to use a third party’s intellectual property rights (and there is no certainty that a financial licensing arrangement may be even available to us on acceptable terms, or at all).

As a result, we may be required to make significant investments in research and development as we design and develop or acquire new technology, methods, and services.

We have operations outside of the United States that subject us to legal, business, political, cultural and other risks of international operations.

We are expanding our international business activities, which subjects us to a number of risks and burdens, including:

 

   

staffing and managing international operations across different geographic areas;

 

   

multiple, conflicting and changing governmental laws and regulations;

 

   

the possibility of protectionist laws and business practices that favor local companies;

 

   

price and currency exchange rates and controls;

 

   

taxes and tariffs;

 

   

different business practices and legal standards, particularly with respect to intellectual property;

 

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difficulties in collecting accounts receivable, including longer payment cycles;

 

   

political, social, and economic instability;

 

   

designing and maintaining effective operating and financial controls;

 

   

the possibility of failure of internal controls, including any failure to detect unauthorized transactions; and

 

   

increased costs relating to personnel management as a result of government and other regulations.

In addition, economic conditions in our overseas markets may negatively impact the demand for our products abroad and benefits we receive from those operations.

Work stoppages, union and works council campaigns, labor disputes and other matters associated with our international employees could adversely impact our results of operations and cause us to incur incremental costs.

Certain of our international employees are subject to non-U.S. collective labor arrangements. We are subject to potential work stoppages, union and works council campaigns and potential labor disputes, any of which could adversely impact our productivity and results of operations.

If the recent difficult economic environment worsens, it could adversely impact demand for our services, our customers’ revenues or their ability to pay for our services.

Our customers derive most of their revenue from transactions involving the sale or purchase of advertising. During recent challenging economic times, advertisers have reduced advertising expenditures, impacting advertising agencies and media. As a result, advertising agencies and media companies have been and may continue to be less likely to purchase our services, which has and could continue to adversely impact our business, financial position, and operating results.

Continued market disruptions could cause broader economic downturns, which also may lead to lower demand for our services or to our customers that have expiring contracts with us not to renew or to renew for fewer services, increased incidence of customers’ inability to pay their accounts, an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable, insolvency, or bankruptcy of our customers, any of which could adversely affect our results of operations, liquidity, cash flows, and financial condition. If the economic environment worsens or does not improve for an extended period into the future, it may also lead to an increase of incidences of customers’ inability to pay their accounts, an increase in our provision for doubtful accounts, and a further increase in collection cycles for accounts receivable or insolvency of our customers. Additionally, we periodically receive requests from our customers for pricing concessions. The current economic environment could exacerbate the level of requests.

If the recent difficult economic environment worsens, potential disruptions in the credit markets could adversely affect our business, including the availability and cost of short-term funds for liquidity requirements and our ability to meet long-term commitments, which could adversely affect our results of operations, cash flows, and financial condition.

If internal funds are not available from our operations, we may be required to rely on the banking and credit markets to meet our financial commitments and short-term liquidity needs. Disruptions in the capital and credit markets, as were experienced in recent years, could adversely affect our ability to draw on our revolving credit facility. Our access to funds under that credit facility is dependent on the ability of the banks that are parties to the facility to meet their funding commitments. Those banks may not be able to meet their funding commitments to us if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from Arbitron and other borrowers within a short period of time.

Longer-term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives, or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring capital expenditures and investments, and reducing or eliminating future share repurchases, dividend payments or other discretionary uses of cash. Any disruption and the measures we take in response could adversely affect our business.

 

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We may fail to attract or retain the qualified research, sales, marketing, information technology, and managerial personnel, and key executive officers required to operate our business successfully.

Our success is largely dependent on the skills, experience, and efforts of our senior management and certain other key personnel. If, for any reason, one or more senior executives or key personnel were not to remain active in our company, our results of operations could be adversely affected.

Our success will depend on our ability to protect our intellectual property rights, which may require substantial expense to obtain, enforce and defend our intellectual property rights which could adversely affect our business.

We believe that the success of our business will depend, in part, on:

 

   

obtaining patent protection for our technology, proprietary methods, and services, and in particular, our PPM ratings service;

 

   

defending and enforcing our patents once obtained;

 

   

preserving our trade secrets;

 

   

defending and enforcing our copyrights for our data services and audience estimates;

 

   

operating without infringing upon patents and proprietary rights held by others; and

 

   

acquiring, developing and enhancing various intellectual property rights associated with services and products across multiple forms of media apart from radio.

We rely on a combination of contractual provisions, confidentiality procedures and patent, copyright, trademark, service mark and trade secret laws to protect the proprietary aspects of our technology, data and estimates. Some patents related to our PPM technology and its methods expire at various times beginning in 2012. Our patents, when viewed in the aggregate, are of material importance to us. These legal measures afford only limited protection, and competitors may gain access to our intellectual property and proprietary information. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights. We have been involved in litigation relating to the enforcement of the copyrights covering our radio listening estimates. Although we have generally been successful in these cases, there can be no assurance that the copyright laws and other statutory and contractual arrangements we currently depend upon will provide us sufficient protection to prevent the use or misappropriation of our audience estimates, databases and technology in the future. Litigation, regardless of outcome, could result in substantial expense and a significant diversion of resources with no assurance of success and could adversely impact our business, financial position and operating results.

In addition, despite the foregoing efforts to obtain, protect and enforce our intellectual property rights, Arbitron may be required to defend against third-party claims that our technology potentially infringes their proprietary rights, or that our issued patents are invalid, or other issues related to our intellectual property rights. As a result, we may incur substantial expense in defending against such allegations and/or in settling such claims. Such claims could divert management’s attention and require significant expenditures with no assurances of success.

Costs or judgments associated with significant legal proceedings may adversely affect our results of operations.

We are party to a number of legal proceedings and governmental entity investigations and other interactions. It is possible that the effect of these unresolved matters or costs and/or judgments incurred by us in connection with such proceedings or interactions could be material to our consolidated results of operations. For a discussion of these unresolved matters, see “Item 3. Legal Proceedings.” These matters have resulted in, and may continue to result in, a diversion of our management’s time and attention as well as significant costs and expenses.

 

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Our future growth and success will depend on our ability to compete successfully with companies that may have financial, marketing, technical, and other advantages over us.

We compete with many companies, some of which are larger and have access to greater capital resources. We believe our future growth and success will depend on our ability to compete successfully with other companies that provide similar services in the same markets, some of which may have financial, marketing, technical, and other advantages. We cannot provide any assurance we will be able to compete successfully, and the failure to do so could have a material adverse impact on our business, financial position, and operating results.

The loss or insolvency of any of our key customers would significantly reduce our revenue and operating results.

We are dependent on a number of key customers, the loss or insolvency of which would significantly reduce our revenue and operating results. In 2011, Clear Channel represented approximately 19 percent of our revenue. Several other large customers represented significant portions of our 2011 revenue.

We cannot provide any assurances we could replace the revenue that would be lost if any of our key customers failed to renew all or part of their agreements with us. The loss or insolvency of any of our key customers would materially and adversely impact our business, financial position and operating results.

Our agreements with our customers are not exclusive and contain no renewal obligations. The failure of our customers to renew all or part of their contracts could have an adverse impact on our business, financial position and operating results.

Our customer agreements do not prohibit our customers from entering into agreements with any other competing service provider, and once the term of the agreement (usually one to seven years) expires, there is generally no automatic renewal feature in our customer contracts. It is not unusual for our customer contracts to expire before renewal negotiations are concluded. Therefore, there may be significant uncertainty as to whether a particular customer will renew all or part of its contract and, if so, the particular terms of such renewal. If a customer owning stations in a significant number of markets does not renew its contracts, this would have an adverse impact on our business, financial position and operating results.

Long-term agreements with our customers limit our ability to increase the prices we charge for our services if our costs increase.

We generally enter into long-term contracts with our customers, including contracts for delivery of our radio audience ratings services. The term of these customer agreements usually ranges from one to seven years. Over the term of these agreements our costs of providing services may increase, or increase at rates faster than our historical experience. Although our customer contracts generally provide for annual price increases, there can be no assurance these contractual revenue increases will exceed any increased cost of providing our services, which could have an adverse impact on our business, financial position and operating results.

The success of our radio audience ratings business depends on diarykeepers who record their listening habits in diaries and return these diaries to us and on panelists who carry our PPM devices. Our failure to collect these diaries or to recruit compliant participants could adversely impact our business.

We use listener diaries and electronic data gathered from participants who agree to carry our PPM devices to gather radio listening data from sample households in the United States local markets for which we currently provide radio ratings. A representative sample of the population in each local market is randomly selected for each survey. To encourage their participation in our surveys, we give participants a cash incentive. It is becoming increasingly difficult and more costly to obtain consent from the sample to participate in the surveys, especially among younger demographic groups. Achieving adequate response rates is important to maintain confidence in our ratings, the support of the industry and accreditation by the MRC. Our failure to successfully recruit compliant survey participants could adversely impact our business, financial position and operating results. Our survey and panel participants do so, on a voluntary basis only, and there can be no assurance they will continue to do so.

Errors, defects or disruptions in the hardware or software used to produce or deliver our services could diminish demand for our services and subject us to substantial liability.

Because our services are complex and we have deployed a variety of new computer hardware and software, both developed in-house and acquired from third-party vendors, our hardware or software used to produce or deliver our services may have errors or defects that could result in unanticipated downtime for our subscribers and harm our reputation and our business. We have from time to time found defects in the hardware or software used to produce or deliver our services and new errors in our existing software services may be detected in the future. In addition, our customers may use our software services in unanticipated ways that may cause

 

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a disruption in software service for other customers attempting to access our data. Because the services we provide are important to our customers’ businesses, any errors, defects, or disruptions in the hardware or software used to produce or deliver our services could hurt our reputation and may damage our customers’ businesses. If that occurs, customers could elect not to renew, or delay or withhold payment to us, we could lose future sales, or customers may make claims against us, which could adversely impact our business, financial position, and results of operations.

Interruptions, delays, or unreliability in the delivery of our services could adversely affect our reputation and reduce our revenues.

Our customers currently access our services via the Internet. We currently rely on third parties to provide data services and disaster recovery data services. Despite any precautions we may take, any unsuccessful or delayed data transfers may impair the delivery of our services. Further, any damage to, or failure of, our systems generally could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business may be further harmed if customers and potential customers believe our services are unreliable.

We rely on third parties to provide data and services in connection with our current business and we may require additional third-party data and services to expand our business in the future, which, if unavailable for our use or not available to us on acceptable terms, could adversely impact our business.

In the event that third-party data and services are unavailable for our use or are not available to us on acceptable terms, our business could be adversely impacted. Further, in order for us to build on our experience in the radio audience ratings industry and expand into ratings for other types of media, we may need to enter into agreements with third parties. Our inability to enter into these agreements with third parties at all or upon favorable terms, when necessary, could adversely impact our growth and business.

We are dependent on our proprietary software and hardware systems for current and future business requirements. Significant delays in the completion of these systems, cost overages and/or inadequate performance or failure of the systems once completed could adversely impact our business, financial position and operating results.

We are increasingly reliant on our proprietary software and hardware systems. We are engaged in an effort to upgrade, enhance, and, where necessary, replace our internal processing software for Diary and PPM ratings services, and our client software. Significant delays in the completion of these systems, or cost overages, could have an adverse impact on our business and inadequate performance or failure of these systems, once completed, could adversely impact our business, financial position and operating results.

If our proprietary systems such as PPM devices, in-home beacons, media encoders, or related firmware inadequately perform or fail, our ability to provide our PPM ratings services could be significantly impacted and such impact could materially and adversely impact our business, financial position and operating results.

Operation of the PPM ratings service is dependent on a limited number of vendors that assemble the PPM equipment according to our proprietary design as well as on those who manufacture parts.

We will need to purchase equipment used in the PPM ratings service and we are currently dependent on two vendors to assemble our PPM equipment. The equipment must be assembled by the vendors in a timely manner, in the quantities needed and with the quality necessary to function appropriately in the market. Certain specialized parts used in the PPM equipment may impact the manufacturing and the timing of the delivery of the equipment to us. We may become liable for design or manufacturing defects in the PPM equipment. In addition, if countries and states enact additional regulations limiting certain materials, we may be required to redesign some of our PPM components to meet these regulations. A redesign process, whether as a result of changed environmental regulations or our ability to obtain quality parts, may impact the manufacturing and timing of the delivery of the equipment to us. Our failure to obtain, in a timely manner, sufficient quantities of quality equipment to meet our needs could adversely impact the commercial deployment of the PPM ratings service and therefore could adversely impact our operating results.

Ownership shifts in the radio broadcasting industry may put pressure on the pricing of our quantitative radio audience ratings service and related software sales, thereby leading to decreased earnings growth.

Ownership shifts in the radio broadcasting industry could put pressure on the pricing of our quantitative radio audience ratings service and related software sales, from which we derive a substantial portion of our total revenue. We price our quantitative radio

 

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audience ratings service and related software applications on a per radio station, per service or per product basis, negotiating licenses and pricing with the owner of each radio station or group of radio stations. If we agree to make substantial price concessions, it could adversely impact our business, financial position and operating results.

The marketing of enhanced access to our respondent-level data to third-party data processors could adversely impact the revenue derived from our existing software licenses.

We market our respondent-level database and the related software we use to calculate our audience estimates to certain third parties, which allows them enhanced access to our respondent-level database. Previously, limited access to our respondent-level data was available only to those customers who licensed certain software services directly from us. As we license our enhanced access to the respondent-level data and software, sales of our existing software services may be adversely impacted.

Advertisers are pursuing increased accountability from the media industry for a return on their investments made in media, which could reduce demand for our services.

If advertisers see radio as less accountable, advertisers may shift advertising expenditures away from media that they perceive as less accountable. As a result, advertising agencies and radio stations may be less likely to purchase our media information services, which could have an adverse impact on our business, financial position and operating results.

Long-term disruptions in the mail, public utilities, telecommunication infrastructure and/or air service could adversely impact our business.

Our business is dependent on the use of the mail, public utilities, telecommunication infrastructure and air service. Long-term disruptions in one or more of these services, or orders of civil authority, which could be caused by events such as weather, natural disasters, the outbreak of war, the escalation of hostilities and/or acts of terrorism could adversely impact our business, financial position and operating results.

If the lump-sum payments made to retiring participants in our defined benefit plans exceed the total of the service cost and the interest cost in any year, we would need to record a loss, which may materially reduce our operating results.

Our defined benefit plans allow participants to receive a lump-sum distribution for benefits earned in lieu of annuity payments when they retire from Arbitron. If the lump-sum distributions made for a calendar year exceed the total of the service cost and interest cost, we must recognize in that year’s results of operations the pro rata portion of unrecognized actuarial loss equal to the percentage reduction of the projected benefit obligation. During the years ended December 31, 2010, 2009, and 2008, lump-sum payments in certain of our defined benefit plans exceeded the total of the service cost and the interest cost. This resulted in the recognition of a loss in the amount of $1.2 million, $1.8 million, and $1.7 million for the years ended December 31, 2010, 2009, and 2008, respectively. While this did not occur in 2011, we cannot predict if or when the lump-sum payments in certain of our defined benefit plans may again exceed the total of the service cost and the interest cost. Any resulting adjustment could materially reduce operating results. See Note 12 in the Notes to Consolidated Financial Statements contained in this Annual Report on Form 10-K for more information regarding our retirement plans.

If our subsidiary in India fails to attract or retain talented software developers and is not successful, we may incur losses.

The success of our subsidiary in India may be dependent on our ability to attract and retain talented software developers. The market for highly skilled workers in software development in India is becoming increasingly more competitive. If we are unable to attract and retain employees, we may need to shut down the facility, and this could adversely impact our financial position and operating results.

Risk Factors Relating to Our Indebtedness

Our credit facility contains restrictive covenants that limit our financial flexibility, which could adversely affect our ability to conduct our business.

On November 21, 2011, we entered into a five-year, $150.0 million revolving credit facility that contains financial terms, covenants and operating restrictions that could restrict our financial flexibility and could adversely impact our ability to conduct our business. These include:

 

   

the requirement that we maintain certain leverage and coverage ratios; and

 

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restrictions on our ability to sell certain assets, incur additional indebtedness and grant or incur liens on our assets.

These restrictions may limit or prohibit our ability to raise additional debt capital when needed or could prevent us from investing in growth initiatives. Our ability to comply with these financial requirements and other restrictions may be affected by events beyond our control, and our inability to comply with them could result in a default under the terms of the agreement.

If a default occurs, either because we are unable to generate sufficient cash flow to service debt or because we fail to comply with one or more of the restrictive covenants, the lenders could elect to declare all of the then-outstanding borrowings, as well as accrued interest and fees, to be immediately due and payable. In addition, a default may result in the application of higher rates of interest on the amounts due, resulting in higher interest expense being incurred by us.

Further, as discussed above in “Risk Factors Relating to Our Business and the Industry in Which We Operate,” continued or intensified disruption in the credit markets may adversely affect our ability to draw on our credit facility, which could adversely affect our business.

Risk Factors Relating to Owning Our Common Stock

Changes in market conditions, or sales of our common stock, could adversely impact the market price of our common stock.

The market price of our common stock depends on various financial and market conditions, which may change from time to time and which are outside of our control.

Sales of a substantial number of shares of our common stock, or the perception that such sales could occur, also could adversely impact prevailing market prices for our common stock. In addition to the possibility that we may sell shares of our common stock in a public offering at any time, we also may issue shares of common stock in connection with grants of restricted stock or upon exercise of stock options that we grant to our directors, officers and employees. All of these shares will be available for sale in the public markets from time to time.

It may be difficult for a third party to acquire us, which could depress the stock price of our common stock.

Delaware corporate law and our Amended and Restated Certificate of Incorporation and Bylaws contain provisions that could have the effect of delaying, deferring or preventing a change in control of Arbitron or the removal of existing management or directors and, as a result, could prevent our stockholders from being paid a premium for their common stock over the then-prevailing market price. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock. These include:

 

   

a stockholders’ rights plan, which likely will limit, through November 21, 2012, the ability of a third party to acquire a substantial amount of our common stock without prior approval by the Board of Directors;

 

   

restriction from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder under Section 203 of the Delaware General Corporation Law;

 

   

authorization to issue one or more classes of preferred stock that can be created and issued by the Board of Directors without prior stockholder approval, with rights senior to common stockholders;

 

   

advance notice requirements for the submission by stockholders of nominations for election to the Board of Directors and for proposing matters that can be acted upon by stockholders at a meeting; and

 

   

requirement of a supermajority vote of 80 percent of the stockholders to exercise the stockholders’ right to amend the Bylaws.

Our Amended and Restated Certificate of Incorporation also contains the following provisions, which could prevent transactions that are in the best interest of stockholders:

 

   

requirement of a supermajority vote of two-thirds of the stockholders to approve some mergers and other business combinations; and

 

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restriction from engaging in a “business combination” with a “controlling person” unless either a modified supermajority vote is received or the business combination will result in the termination of ownership of all shares of our common stock and the receipt of consideration equal to at least “fair market value.”

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

Our headquarters is located at 9705 Patuxent Woods Drive, Columbia, Maryland. In addition, we have five regional sales offices located in the metropolitan areas of New York City, New York; Atlanta, Georgia; Chicago, Illinois; Dallas, Texas; and Los Angeles, California; and operations offices in Dallas, Texas; Birmingham, Alabama; Espoo, Finland; and Kochi, India. We conduct all of our operations in leased facilities. Most of these leases contain renewal options and require payments for taxes, insurance and maintenance in addition to base rental payments. We believe that our facilities are sufficient for their intended purposes and are adequately maintained.

 

ITEM 3. LEGAL PROCEEDINGS

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

On April 30, 2008, Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund filed a securities class action lawsuit in the United States District Court for the Southern District of New York on behalf of a purported Class of all purchasers of Arbitron common stock between July 19, 2007, and November 26, 2007. The plaintiff asserts that Arbitron, Stephen B. Morris (our former Chairman, President and Chief Executive Officer), and Sean R. Creamer (currently our Executive Vice President, Chief Operating Officer and formerly Chief Financial Officer) violated federal securities laws. The plaintiff alleges misrepresentations and omissions relating, among other things, to the delay in commercialization of our PPM ratings service in November 2007, as well as stock sales during the period by company insiders who were not named as defendants and Messrs. Morris and Creamer. The plaintiff sought class certification, compensatory damages plus interest and attorneys’ fees, among other remedies. On September 22, 2008 the plaintiff filed an Amended Class Action Complaint. On November 25, 2008, Arbitron, Mr. Morris, and Mr. Creamer each filed Motions to Dismiss the Amended Class Action Complaint. In September 2009, the plaintiff sought leave to file a Second Amended Class Action Complaint in lieu of oral argument on the pending Motions to Dismiss. The court granted leave to file a Second Amended Class Action Complaint and denied the pending Motions to Dismiss without prejudice. On or about October 19, 2009, the plaintiff filed a Second Amended Class Action Complaint. Briefing on motions to dismiss the Second Amended Class Action Complaint was completed in March 2010. Arbitron and each of Mr. Morris and Mr. Creamer again moved to dismiss the Second Amended Class Action Complaint. On September 24, 2010, the Court granted Mr. Creamer’s motion to dismiss the plaintiff’s claims against him, and all claims against Mr. Creamer were dismissed with prejudice. The motions to dismiss the Second Amended Class Action Complaint by Arbitron and Mr. Morris were denied. Arbitron and Mr. Morris each then filed answers denying the claims. On September 6, 2011, the Court entered an order granting the plaintiff’s motion to certify the action as a class action, to appoint the lead plaintiff as class representative, and to appoint its counsel as lead counsel. The court defined the class as all purchasers of common stock of the Company who were damaged through purchasing stock during the period July 19, 2007 through November 26, 2007. On February 3, 2012, as a result of a mediation process overseen by an independent mediator, the Company and its insurers agreed to settle the case for $7 million, which will be funded by insurance. Because this is a class action, settlements of this type are subject to preliminary and final review by the Court with an opportunity for class members to respond to the proposed settlement and object if they so desire. That process typically takes 4-5 months and has not yet begun.

On or about June 13, 2008, a purported stockholder derivative lawsuit, Pace v. Morris, et al., was filed against Arbitron, as a nominal defendant, each of our directors, and certain of our current and former executive officers in the Supreme Court of the State of New York for New York County. The derivative lawsuit is based on essentially the same substantive allegations as the securities class action lawsuit. The derivative lawsuit asserts claims against the defendants for misappropriation of information, breach of fiduciary duty, abuse of control, and unjust enrichment. On July 28, 2011 the derivative plaintiff filed an amended complaint that reiterates, in

 

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large part, the claims of the original complaint filed in 2008. The amended complaint also adds claims for breach of fiduciary duty related to the retirement of Mr. Morris in 2009 and the resignation of Mr. Skarzynski in 2010. The derivative plaintiff seeks equitable and/or injunctive relief, restitution and disgorgement of profits, plus attorneys’ fees and costs, among other remedies.

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

We are involved from time to time in a number of judicial and administrative proceedings considered ordinary with respect to the nature of our current and past operations, including employment-related disputes, contract disputes, government proceedings, customer disputes, and tort claims. In some proceedings, the claimant seeks damages as well as other relief, which, if granted, would require substantial expenditures on our part. Some of these matters raise difficult and complex factual and legal issues, and are subject to many uncertainties, including, but not limited to, the facts and circumstances of each particular action, and the jurisdiction, forum and law under which each action is pending. Because of this complexity, final disposition of some of these proceedings may not occur for several years. As such, we are not always able to estimate the amount of our possible future liabilities. There can be no certainty that we will not ultimately incur charges in excess of present or future established accruals or insurance coverage. Although occasional adverse decisions (or settlements) may occur, we believe that the likelihood that final disposition of these proceedings will, considering the merits of the claims, have a material adverse impact on our financial position or results of operations is remote.

 

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “ARB.” As of February 17, 2012, there were 27,310,588 shares outstanding and 2,933 stockholders of record of our common stock.

The following table sets forth the high and low sale prices of our common stock as reported on the NYSE Composite Tape and the dividends declared per share of our common stock for each quarterly period for the two years ended December 31, 2011 and 2010.

 

2011

   1Q      2Q      3Q      4Q      Full Year  

High

   $ 44.95       $ 43.03       $ 44.61       $ 42.69       $ 44.95   

Low

   $ 35.29       $ 35.23       $ 30.46       $ 32.42       $ 30.46   

Dividend

   $ 0.10       $ 0.10       $ 0.10       $ 0.10       $ 0.40   

 

2010

   1Q      2Q      3Q      4Q      Full Year  

High

   $ 29.06       $ 33.52       $ 31.82       $ 42.55       $ 42.55   

Low

   $ 21.21       $ 25.37       $ 23.71       $ 25.21       $ 21.21   

Dividend

   $ 0.10       $ 0.10       $ 0.10       $ 0.10       $ 0.40   

The transfer agent and registrar for our common stock is The Bank of New York.

 

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below should be read together with the information under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Arbitron’s consolidated financial statements and related notes included in this Annual Report on Form 10-K. Our statements of income for the years ended December 31, 2011, 2010, and 2009 and balance sheet data as of December 31, 2011, and 2010 set forth below are derived from audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The statement of income data for the years ended December 31, 2008, and 2007 and balance sheet data as of December 31, 2009, 2008, and 2007 are derived from audited consolidated financial statements of Arbitron not included in this Annual Report on Form 10-K.

 

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     As of and for the Years Ended December 31,  
     2011     2010      2009      2008     2007  
     (In thousands, except per share data)  

Statement of Income Data

            

Revenue

   $ 422,310      $ 395,379       $ 384,952       $ 368,824      $ 338,469   

Costs and expenses

     337,204        329,729         330,111         312,359        279,187   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

     85,106        65,650         54,841         56,465        59,282   

Equity in net income of affiliate(s)

     7,255        7,092         7,637         6,677        4,057   

Impairment of investment

     (3,477     —           —           —          —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income from continuing operations before interest and income tax expense

     88,884        72,742         62,478         63,142        63,339   

Interest expense (income), net

     537        970         1,346         1,593        (1,453
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income from continuing operations before income tax expense

     88,347        71,772         61,132         61,549        64,792   

Income tax expense

     35,056        27,294         18,972         24,330        24,288   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income from continuing operations

     53,291        44,478         42,160         37,219        40,504   

Loss from discontinued operations, net of taxes

     —          —           —           (39     (324
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 53,291      $ 44,478       $ 42,160       $ 37,180      $ 40,180   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net Income Per Weighted Average Common Share

            

Basic

            

Continuing operations

   $ 1.96      $ 1.66       $ 1.59       $ 1.37      $ 1.38   

Discontinued operations

     —          —           —           (0.00     (0.01
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income per share, basic

   $ 1.96      $ 1.66       $ 1.59       $ 1.37      $ 1.37   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Diluted

            

Continuing operations

   $ 1.93      $ 1.64       $ 1.58       $ 1.37      $ 1.37   

Discontinued operations

     —          —           —           (0.00     (0.01
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income per share, diluted

   $ 1.93      $ 1.64       $ 1.58       $ 1.36      $ 1.35   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Cash dividends declared per share

   $ 0.40      $ 0.40       $ 0.40       $ 0.40      $ 0.40   

Weighted average common shares used in calculations

            

Basic

     27,181        26,759         26,493         27,094        29,399   

Diluted

     27,659        27,105         26,676         27,259        29,665   

Balance Sheet Data

            

Current assets

   $ 96,140      $ 94,823       $ 77,637       $ 74,318      $ 69,928   

Total assets

     238,968        229,241         206,287         200,070        181,853   

Long-term debt, including the short-term portion thereof

     —          53,000         68,000         85,000        12,000   

Stockholders’ equity (deficit)

   $ 126,816      $ 77,651       $ 30,575       $ (14,495   $ 48,200   

Share-based Compensation Data

            

Share-based compensation expense

   $ 8,020      $ 6,478       $ 10,031       $ 8,415      $ 6,532   

Certain per share data amounts may not total due to rounding.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

Historically, our quantitative radio ratings services and related software have accounted for a substantial majority of our revenue. Our quantitative radio ratings services and related software accounted for approximately 88 percent of our total revenue in each of the years ended December 31, 2011, 2010, and 2009. We have one segment which meets the quantitative thresholds for being a reportable segment. While we expect our quantitative radio ratings services and related software licensing will continue to account for the majority of our revenue for the foreseeable future, we are actively seeking opportunities to diversify our revenue base by, among other things, leveraging the investment we have made in our PPM ratings service and technology.

 

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We have commercialized our PPM ratings service in 48 of the largest United States radio markets. We may choose to commercialize our PPM ratings service in additional markets in the future. These agreements provide for a higher fee for PPM-based ratings than we charged for our Diary-based ratings. Our customer contracts are typically structured to phase in higher PPM service rates over multiple years, including 2012 for some customers.

As we commercialized the PPM ratings service over several years, we incurred expenses to build the PPM panel in each PPM Market in the months before commercializing the service in that market. These costs were incremental to the costs associated with our Diary-based ratings service during those periods. With the completion of our previously announced commercialization plan as of December 31, 2010, our future performance will be impacted by our ability to address a variety of challenges and opportunities in the markets and industries we serve, including our ability to continue to maintain and improve the quality of our PPM and Diary ratings service, and manage increased costs for data collection, arising among other ways, from address-based sampling, targeted in-person recruiting and increased numbers of cell phone households, which are more expensive for us to recruit than households with landline phones. We currently anticipate that the aggregate cost of cell phone household recruitment for the PPM and Diary services, address-based sampling in PPM Markets, and targeted in-person recruitment for the PPM service will be approximately $18.0 million in 2012, as compared to approximately $15.5 million in 2011.

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

Zokem Oy

On July 28, 2011, we acquired Zokem Oy, a Finland-based mobile audience measurement and analytics firm, which is now Arbitron Mobile Oy. The purchase price for the acquisition was approximately $10.6 million in cash plus a contingent consideration arrangement which we currently estimate has a fair value of approximately $0.9 million. The arrangement provides for possible additional cash payments to be made by us to the former Zokem shareholders through 2015 of up to $12.0 million, contingent upon Arbitron Mobile reaching certain future financial performance targets.

Credit Facility

On November 21, 2011, the Company terminated its credit facility agreement originally signed on December 20, 2006, which was scheduled to expire on December 20, 2011 (“2006 Credit Facility”). There were no outstanding borrowings under the 2006 Credit Facility at the time of the termination. Also, on November 21, 2011, the Company entered into a new agreement with a consortium of lenders to provide up to $150.0 million of financing through a five-year, unsecured revolving credit facility expiring on November 21, 2016. The agreement contains an expansion feature to increase the total financing available by up to $75.0 million to an aggregate of $225.0 million. See “— Liquidity and Capital Resources — Credit Facility” below for further information regarding the terms of our current credit facility agreement.

General Economic Conditions

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

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

 

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Critical Accounting Policies and Estimates

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

Software development costs. We capitalize software development costs with respect to significant internal use software initiatives or enhancements from the time the preliminary project stage is completed and management considers it probable the software will be used to perform the function intended, until the time the software is placed in service for its intended use. Once the software is placed in service, the capitalized costs are amortized over periods of three to five years. We perform an assessment quarterly to determine if it is probable all capitalized software will be used to perform its intended function. If an impairment exists, the software cost is written down to estimated fair value. As of December 31, 2011, and 2010, our capitalized software developed for internal use had carrying amounts of $28.9 million and $24.4 million, respectively, including $10.4 million and $12.4 million, respectively, of software related to the PPM service.

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

We include, in our tax calculation methodology, an assessment of the uncertainty in income taxes by establishing recognition thresholds for our tax positions. Inherent in our calculation are critical judgments by management related to the determination of the basis for our tax positions. For further information regarding our unrecognized tax benefits, see Note 11 in the Notes to Consolidated Financial Statements contained in this Annual Report on Form 10-K.

Insurance receivables. During 2008, we became involved in two securities-law civil actions and a governmental interaction primarily related to the commercialization of our PPM service. Since 2008, we have incurred a total of $12.1 million in legal fees and expenses in connection with these matters. As of December 31, 2011, we have received an aggregate of $7.9 million in insurance reimbursements related to these legal fees and expenses. As of December 31, 2011, and 2010, our insurance claims receivable related to these legal actions was approximately $1.0 million and $0.6 million, respectively, and these amounts are included in our prepaid expenses and other current assets on our balance sheet. See Note 6 in our Notes to Consolidated Financial Statements for additional information concerning our insurance recovery receivables.

Cost method investment. We account for our investment in TRA’s preferred stock using the cost method of accounting. TRA is closely held and there is not an efficient market in which buyers and sellers determine the fair value of these securities. We periodically assess the fair value of our investment in TRA through comparative analysis and analysis of TRA’s actual and projected financial results. Our assessment of the fair value of TRA requires the use of estimates and judgment. During the fourth quarter ended December 31, 2011, we determined that the fair value of our investment in TRA fell below its carrying value and we recorded a $3.5 million impairment charge.

Contingent consideration. The agreement governing the acquisition of Zokem Oy, now Arbitron Mobile Oy, provides for possible additional cash payments to be made by us to the former Zokem shareholders through 2015 of up to $12.0 million, contingent upon Arbitron Mobile reaching certain financial performance targets in the future. We estimated the fair value of this contingent consideration to be approximately $0.9 million as of the July 28, 2011 acquisition date. We periodically estimate the fair value of the contingent consideration and any change in fair value will be recognized in our consolidated financial results of operations. An increase in the earn-out expected to be paid will result in a charge to operations in the quarter the anticipated fair value of contingent consideration increases, while a decrease in the earn-out expected to be paid will result in a credit to operations in the quarter the anticipated fair value of contingent consideration decreases. The estimate of the fair value of contingent consideration requires subjective assumptions to be made of future operating results. We estimated that the fair value of the earn-out decreased less than $0.1 million during the period from the date of acquisition to December 31, 2011. Future revisions to these assumptions could materially change our estimate of the fair value of contingent consideration and therefore materially affect our future financial results and financial condition.

 

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Results of Operations

Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010

The following table sets forth information with respect to our consolidated statements of income for the years ended December 31, 2011 and 2010:

Consolidated Statements of Income

(Dollars in thousands, except per share amounts)

(Unaudited)

 

     Years Ended      Increase     Percentage of  
     December 31,      (Decrease)     Revenue  
     2011     2010      Dollars     Percent     2011     2010  

Revenue

   $ 422,310      $ 395,379       $ 26,931        6.8     100.0     100.0
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

 

Costs and expenses

             

Cost of revenue

     220,381        215,329         5,052        2.3     52.2     54.5

Selling, general and administrative

     78,407        75,255         3,152        4.2     18.6     19.0

Research and development

     38,416        39,145         (729     (1.9 %)      9.1     9.9
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

 

Total costs and expenses

     337,204        329,729         7,475        2.3     79.8     83.4
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

 

Operating income

     85,106        65,650         19,456        29.6     20.2     16.6

Equity in net income of affiliate

     7,255        7,092         163        2.3     1.7     1.8

Impairment of investment

     (3,477     —           (3,477     NM        0.8     NM   
  

 

 

   

 

 

    

 

 

     

 

 

   

Income before interest and tax expense

     88,884        72,742         16,142        22.2     21.0     18.4

Interest income

     27        14         13        92.9     0.0     0.0

Interest expense

     564        984         (420     (42.7 %)      0.1     0.2
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

 

Income before income tax expense

     88,347        71,772         16,575        23.1     20.9     18.2

Income tax expense

     35,056        27,294         7,762        28.4     8.3     6.9
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

 

Net income

   $ 53,291      $ 44,478       $ 8,813        19.8     12.6     11.2
  

 

 

   

 

 

    

 

 

       

Income per weighted average common share

             

Basic

   $ 1.96      $ 1.66       $ 0.30        18.1    
  

 

 

   

 

 

    

 

 

       

Diluted

   $ 1.93      $ 1.64       $ 0.29        17.7    
  

 

 

   

 

 

    

 

 

       

Cash dividends declared per common share

   $ 0.40      $ 0.40       $ —          —         
  

 

 

   

 

 

    

 

 

       

Other data:

             

EBIT (1)

   $ 88,884      $ 72,742       $ 16,142        22.2    

EBITDA (1)

   $ 119,139      $ 100,250       $ 18,889        18.8    

EBIT and EBITDA Reconciliation (1)

             

Net income

   $ 53,291      $ 44,478       $ 8,813        19.8    

Income tax expense

     35,056        27,294         7,762        28.4    

Interest income

     27        14         13        92.9    

Interest expense

     564        984         (420     (42.7 %)     
  

 

 

   

 

 

    

 

 

       

EBIT (1)

     88,884        72,742         16,142        22.2    

Depreciation and amortization

     30,255        27,508         2,747        10.0    
  

 

 

   

 

 

    

 

 

       

EBITDA (1)

   $ 119,139      $ 100,250       $ 18,889        18.8    
  

 

 

   

 

 

    

 

 

       

NM - Not meaningful

Certain percentage amounts may not total due to rounding.

 

(1) EBIT (earnings before interest and income taxes) and EBITDA (earnings before interest, income taxes, depreciation and amortization) are non-GAAP financial measures that we believe are useful to investors in evaluating our results. For further discussion of these non-GAAP financial measures, see paragraph below entitled “— EBIT and EBITDA.”

 

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Revenue. Revenue increased by 6.8% or $26.9 million for the year ended December 31, 2011, as compared to the same period in 2010. PPM-based ratings service revenue increased by $51.3 million primarily due to a full year impact for the 15 PPM Markets commercialized during 2010, as well as price escalators in other PPM Markets commercialized prior to 2010. In addition, revenue for 2011 was impacted by a $1.6 million increase in software service revenue, and a $1.0 million increase in PPM International revenue. These increases in revenue were partially offset by a $27.5 million decrease in revenue related to the transition from our Diary-based ratings service.

Cost of Revenue. Cost of revenue increased by 2.3% or $5.1 million for the year ended December 31, 2011, as compared to the same period in 2010. Cost of revenue increased primarily due to a $1.5 million increase related to our computer center operations, a $1.3 million increase in labor costs, a $1.3 million increase in PPM-related costs, a $0.8 million increase in cross platform services costs, a $0.6 million increase in PPM International costs, and $0.5 million associated with our Arbitron Mobile service acquired during the third quarter of 2011. These increases in cost of revenue were partially offset by a $2.0 million decrease for Diary-based service costs related primarily to the corresponding reduction in the number of Diary markets.

Selling, General, and Administrative. Selling, general, and administrative increased by 4.2% or $3.2 million for the year ended December 31, 2011, as compared to the same period in 2010. Selling, general, and administrative increased primarily due to $2.7 million in Arbitron Mobile-related costs and expenses incurred during 2011, a $2.5 million increase in share-based and long-term employee incentive compensation expense, a $2.0 million increase in short-term employee incentive compensation expense, and a $0.9 million increase in bad debt expense incurred in 2011 as compared to 2010. These increases were partially offset by a $3.7 million decrease in employee separation charges, and a $1.2 million supplemental retirement plan settlement charge incurred during 2010, but not in 2011.

Research and Development. Research and development decreased by 1.9% or $0.7 million for the year ended December 31, 2011, as compared to the same period in 2010. Research and development decreased primarily due to a $2.9 million reduction in development costs related to our Diary service, partially offset by a $1.0 million increase in labor and royalty costs associated with acquisition of assets from IMMI, which was completed during the second quarter of 2010, and $0.7 million in Arbitron Mobile-related costs and expenses incurred during 2011. See Note 5 in our Notes to Consolidated Financial Statements for additional information concerning our acquisitions.

Impairment of investment. During the fourth quarter ended December 31, 2011, we determined that the fair value of our investment in TRA fell below its carrying value and we recorded a $3.5 million pre-tax impairment charge. No such impairment charge was recorded in 2010.

Income tax expense. Income tax expense increased by 28.4% or $7.8 million for the year ended December 31, 2011, as compared to the same period in 2010. The effective tax rate increased from 38.0% in 2010 to 39.7% in 2011 primarily due to a valuation allowance with respect to the U.S. deferred tax asset arising from the 2011 net operating loss incurred by Arbitron Mobile.

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

EBIT increased by 22.2% or $16.1 million for the year ended December 31, 2011, as compared to the same period in 2010, primarily due to higher revenue from PPM price escalators in 2011. EBITDA increased by 18.8% or $18.9 million because this non-GAAP financial measure excludes depreciation and amortization, which for 2011 increased by $2.7 million as compared to 2010.

 

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Comparison of Year Ended December 31, 2010 to Year Ended December 31, 2009

The following table sets forth information with respect to our consolidated statements of income for the years ended December 31, 2010 and 2009.

Consolidated Statements of Income

(Dollars in thousands, except per share amounts)

(Unaudited)

 

     Years Ended
December 31,
    Increase
(Decrease)
    Percentage
of Revenue
 
     2010     2009     Dollars     Percent     2010     2009  

Revenue

   $ 395,379      $ 384,952      $ 10,427        2.7     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses

            

Cost of revenue

     215,329        196,269        19,060        9.7     54.5     51.0

Selling, general and administrative

     75,255        81,866        (6,611     (8.1 )%      19.0     21.3

Research and development

     39,145        42,008        (2,863     (6.8 )%      9.9     10.9

Restructuring and reorganization

     —          9,968        (9,968     (100.0 )%      0.0     2.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     329,729        330,111        (382     (0.1 )%      83.4     85.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     65,650        54,841        10,809        19.7     16.6     14.2

Equity in net income of affiliate

     7,092        7,637        (545     (7.1 )%      1.8     2.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before interest and tax expense

     72,742        62,478        10,264        16.4     18.4     16.2

Interest income

     14        49        (35     (71.4 )%      0.0     0.0

Interest expense

     984        1,395        (411     (29.5 )%      0.2     0.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     71,772        61,132        10,640        17.4     18.2     15.9

Income tax expense

     27,294        18,972        8,322        43.9     6.9     4.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 44,478      $ 42,160      $ 2,318        5.5     11.2     11.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income per weighted average common share

            

Basic

   $ 1.66      $ 1.59      $ 0.07        4.4    
  

 

 

   

 

 

   

 

 

   

 

 

     

Diluted

   $ 1.64      $ 1.58      $ 0.06        3.8    
  

 

 

   

 

 

   

 

 

   

 

 

     

Cash dividends declared per common share

   $ 0.40      $ 0.40      $ —          —         
  

 

 

   

 

 

   

 

 

   

 

 

     

Other data:

            

EBIT(1)

   $ 72,742      $ 62,478      $ 10,264        16.4    

EBITDA(1)

   $ 100,250      $ 85,847      $ 14,403        16.8    

EBIT and EBITDA Reconciliation(1)

            

Net income

   $ 44,478      $ 42,160      $ 2,318        5.5    

Income tax expense

     27,294        18,972        8,322        43.9    

Interest (income)

     (14     (49     35        (71.4 )%     

Interest expense

     984        1,395        (411     (29.5 )%     
  

 

 

   

 

 

   

 

 

       

EBIT(1)

     72,742        62,478        10,264        16.4    

Depreciation and amortization

     27,508        23,369        4,139        17.7    
  

 

 

   

 

 

   

 

 

       

EBITDA(1)

   $ 100,250      $ 85,847      $ 14,403        16.8    
  

 

 

   

 

 

   

 

 

       

Certain per share data and percentage amounts may not total due to rounding.

 

(1) EBIT (earnings before interest and income taxes) and EBITDA (earnings before interest, income taxes, depreciation and amortization) are non-GAAP financial measures we believe are useful to investors in evaluating our results. For further discussion of these non-GAAP financial measures, see paragraph below entitled “— EBIT and EBITDA.”

Revenue. Revenue increased by 2.7% or $10.4 million for the year ended December 31, 2010, as compared to the same period in 2009 primarily due to higher fees charged for PPM-based ratings than for Diary-based ratings within the PPM Markets commercialized. PPM-based ratings service revenue increased by $70.2 million primarily due to the partial year impact of the 15 PPM Markets commercialized during 2010 and the full year impact of the 19 PPM Markets commercialized in 2009, as well as price escalators in all PPM commercialized markets. Included in the above net increase in revenue related to our PPM service is a $4.0 million decrease in pre-currency revenue from $7.9 million for 19 PPM Markets commercialized during 2009 to $3.9 million for the 15 smaller PPM Markets commercialized during 2010.

 

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This increase in PPM revenue was substantially offset by a $54.5 million decrease in revenue related to the transition from our Diary-based ratings service, as well as a $4.7 million reduction in revenue associated with two customers, primarily attributable to Cumulus but also including Clear Channel, for our Diary-based radio ratings service in a limited number of small and medium-sized markets. PPM International revenue decreased by $0.9 million largely due to decreased equipment sales.

Included in the above fluctuations in revenue related to our Diary-based ratings service and our PPM ratings service is a $17.7 million aggregate decrease in revenue from customers, including Univision, that were subscribers in 2009 but either did not subscribe or reduced their level of subscribed services in 2010.

Cost of Revenue. Cost of revenue increased by 9.7% or $19.1 million for the year ended December 31, 2010, as compared to the same period in 2009. Cost of revenue increased primarily due to $15.0 million of increased PPM service-related costs incurred to build and manage PPM panels for the 48 PPM Markets commercialized as of December 31, 2010, as compared to the 33 PPM Markets commercialized as of December 31, 2009. In addition, we incurred $2.5 million of increased costs associated with our cross platform services and $2.1 million of increased recruitment costs related to cell phone household recruiting for both the Diary and PPM services and targeted in-person recruiting for our PPM service. These increases were partially offset by a $0.9 million decrease for PPM International related to lower revenues.

Selling, General, and Administrative. Selling, general, and administrative decreased by 8.1% or $6.6 million for the year ended December 31, 2010, as compared to the same period in 2009. Selling, general, and administrative decreased primarily due to a $4.6 million decrease in selling and marketing expenses resulting from cost containment and reduction initiatives, a $3.7 million net decrease in non-cash share-based compensation resulting primarily from CEO successions during 2009 and 2010, and a $3.5 million decrease in legal fees. These decreases were partially offset by an increase of $2.8 million in severance charges, and a $1.2 million supplemental retirement plan settlement loss incurred during the first quarter of 2010.

Research and Development. Research and development decreased by 6.8% or $2.9 million for the year ended December 31, 2010, as compared to the same period in 2009. Research and development decreased primarily due to a $1.4 million reduction in development costs related to our PPM service, a $0.8 million reduction in development costs related to cross platform services, and a $0.6 million decrease associated with the development of our client software.

Restructuring and Reorganization. During 2009, we reduced our workforce by approximately 10 percent of our full-time employees. No restructuring expenses were incurred during 2010, as compared to $10.0 million of pre-tax restructuring charges, related principally to severance, termination benefits, outplacement support, and certain other expenses in connection with our restructuring plan.

Income Tax Expense. The effective tax rate increased to 38.0% for the year ended December 31, 2010, from 31.0% for the year ended December 31, 2009, primarily due to a state tax benefit recognized as a result from a favorable state tax ruling received during the fourth quarter of 2009.

EBIT and EBITDA. EBIT increased by 16.4% or $10.3 million for the year ended December 31, 2010, as compared to the same period in 2009, primarily due to higher revenue in 2010 while total costs and expenses were relatively unchanged. EBITDA increased by 16.8% or $14.4 million because this non-GAAP financial measure excludes depreciation and amortization, which for 2010 increased by $4.1 million as compared to 2009.

Liquidity and Capital Resources

Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010

 

     As of December  31,
2011
     As of December  31,
2010
    Change  

Cash and cash equivalents

   $ 19,715       $ 18,925      $ 790   

Working capital surplus (deficiency)

   $ 16,250       $ (32,333   $ 48,583   

Working capital, excluding deferred revenue and current portion of credit facility

   $ 53,330       $ 57,146      $ (3,816

Total debt

   $ —         $ 53,000      $ (53,000

We have relied upon our cash flow from operations, supplemented by borrowings under our available revolving credit facility (“Credit Facility”) as needed, to fund our dividends, capital expenditures, and contractual obligations. We expect, based on current

 

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and anticipated levels of operating performance, our cash flow from operations, cash and cash equivalents, and availability under our Credit Facility will be sufficient to support our operations for the next 12 to 24 months. See “— Credit Facility” for further discussion of the relevant terms and covenants.

Operating activities. For the year ended December 31, 2011, the net cash provided by operating activities was $104.6 million, which was primarily due to $119.1 million in EBITDA, increased by $8.0 million of non-cash share-based compensation and a $3.5 million non-cash impairment of investment charge. These increases were partially offset by $31.7 million in income taxes paid. EBITDA is discussed and reconciled to net income in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.”

Net cash provided by operating activities for the year ended December 31, 2011, was positively impacted by a $3.5 million decrease in prepaid income taxes. In addition, net cash provided by operating activities included a $4.5 million increase in payroll, bonus, and benefit accruals. These net increases in operating activities for the year ended December 31, 2011, were partially offset by a $4.9 million decrease in operating activities associated with our accounts receivable, which grew primarily due to price escalators associated with our PPM ratings service.

Investing activities. Net cash used in investing activities for the years ended December 31, 2011, and 2010, was $42.5 million and $39.2 million, respectively. This $3.3 million increase in cash used in investing activities was due primarily to a $8.1 million net increase in business acquisitions, which included a $10.6 million cash outlay for the purchase of Zokem Oy during 2011, and a $2.5 million asset acquisition during 2010. In addition, capital expenditures increased by $1.5 million for 2011, as compared to 2010, due primarily to a $5.1 million increase in internally developed and purchased software, largely offset by a $3.0 million decrease in metering equipment and other PPM-related capital expenditures. These increases in investing activities were partially offset by decreases related to a $4.5 million patent licensing arrangement and a $1.8 million investment in TRA during 2010.

Financing activities. Net cash used in financing activities for the years ended December 31, 2011, and 2010, was $61.2 million and $21.9 million, respectively. The $39.3 million increase in net cash used in financing activities was due primarily to a $38.0 million increase in the net repayment of our outstanding obligations under our 2006 Credit Facility during 2011, as compared to 2010, and a $1.1 million repayment related to Zokem Oy debt assumed in the related acquisition. Net cash used in financing activities also included an increase related to a $3.8 million reduction in stock option exercises for 2011, as compared to 2010, when a substantial number of stock options were nearing their expiration. These increases to net cash used in financing activities were partially offset by a $3.8 million reversal of a bank overdraft payable during the first quarter of 2010.

Repatriation of Foreign Earnings

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

Comparison of Year Ended December 31, 2010 to Year Ended December 31, 2009

Liquidity indicators

 

     As of December 31,
2010
    As of December 31,
2009
    Change  

Cash and cash equivalents

   $ 18,925      $ 8,217      $ 10,708   

Working capital surplus (deficiency)

   $ (32,333   $ (10,737   $ (21,596

Working capital, excluding deferred revenue and current portion of credit facility

   $ 57,146      $ 32,411      $ 24,735   

Total debt

   $ 53,000      $ 68,000      $ (15,000

We have relied upon our cash flow from operations, supplemented by borrowings under our Credit Facility as needed, to fund our dividends, capital expenditures, and contractual obligations. See “Credit Facility” for further discussion of the relevant terms and covenants.

 

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Operating activities. For the year ended December 31, 2010, the net cash provided by operating activities was $71.8 million, which was primarily due to $100.3 million in EBITDA, increased by $6.5 million of non-cash share-based compensation. These increases were partially offset by $24.9 million in income taxes paid. EBITDA is discussed and reconciled to net income in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.”

Net cash provided by operating activities was negatively impacted by $8.6 million due to increased accounts receivable balances, which resulted substantially from increased billings related to the completion of our plan to commercialize our PPM ratings service in the PPM Markets.

Investing activities. Net cash used in investing activities for the years ended December 31, 2010, and 2009, was $39.2 million and $35.1 million, respectively. This $4.1 million increase in cash used in investing activities was due to a $4.5 million licensing arrangement entered during the first quarter of 2010, as well as a $2.5 million asset acquisition during the second quarter of 2010, partially offset by a $1.6 million decrease in purchases of equity and other investments.

Net cash used in investing activities for 2010 as compared to 2009 was also offset by a $1.3 million decrease in capital expenditures, primarily consisting of decreases of $0.9 million in software development and purchased costs and $0.4 million related to lower leasehold improvement purchases.

Financing activities. Net cash used in financing activities for the years ended December 31, 2010, and 2009, was $21.9 million and $22.8 million, respectively. This $0.9 million decrease in net cash used in financing activities was due primarily to a $6.6 million increase in proceeds from stock option exercises and stock purchase plans, which resulted from an increase in our company stock price during 2010, as well as a $2.0 million decrease in the net repayment of our outstanding obligations under our Credit Facility during 2010 as compared to 2009. These decreases to net cash used in financing activities were substantially offset by a $7.7 million change related to the recording of a bank overdraft payable in 2009.

Credit Facility

On November 21, 2011, we terminated our credit facility agreement originally signed on December 20, 2006 (the “2006 Credit Facility”). Also, on November 21, 2011, we entered into the Credit Facility, a new agreement with a consortium of lenders to provide up to $150.0 million of financing through a five-year, unsecured revolving credit facility expiring on November 21, 2016. The agreement contains an expansion feature to increase the total financing available under the Credit Facility by up to $75.0 million to an aggregate of $225.0 million. Such increased financing would be provided by one or more existing Credit Facility lending institutions, subject to the approval of the lending banks, and/or in combination with one or more new lending institutions, subject to the approval of the Credit Facility’s administrative agent. Interest on borrowings under the Credit Facility is calculated based on a floating rate for a duration of up to six months, at which time the interest rate is reset based upon the LIBOR (or, with the consent of each lender, nine or 12 months).

Our Credit Facility contains financial terms, covenants and operating restrictions that potentially restrict our financial flexibility. The material debt covenants under our Credit Facility include both a maximum leverage ratio and a minimum interest coverage ratio. The leverage ratio is a non-GAAP financial measure equal to the amount of our consolidated total indebtedness, as defined in our Credit Facility, divided by a contractually defined adjusted Earnings Before Interest, Taxes, Depreciation and Amortization and non- cash compensation (“Consolidated EBITDA”) for the trailing four-quarter period. The interest coverage ratio is a non-GAAP financial measure equal to Consolidated EBITDA divided by total interest expense. Both ratios are designed as measures of our ability to meet current and future debt obligations. The following table presents the actual ratios and their threshold limits as defined by the Credit Facility as of December 31, 2011:

 

Covenant

   Threshold      Actual  

Maximum leverage ratio

     3.25         0.00   

Minimum interest coverage ratio

     3.00         226.0   

As of December 31, 2011, based upon these financial covenants, there was no default or limit on our ability to borrow the unused portion of our Credit Facility.

Our Credit Facility contains customary events of default, including nonpayment and breach covenants. In the event of default, repayment of borrowings under the Credit Facility could be accelerated. Our Credit Facility also contains cross default provisions

 

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whereby a default on any material indebtedness, as defined in the Credit Facility, could result in the acceleration of our outstanding debt and the termination of any unused commitment under the Credit Facility. The agreement potentially limits, among other things, our ability to sell assets, incur additional indebtedness, and grant or incur liens on our assets. Under the terms of the Credit Facility, all of our material domestic subsidiaries, if any, must guarantee the commitment. Currently, we do not have any material domestic subsidiaries as defined under the terms of the Credit Facility. Although we do not believe the terms of our Credit Facility limit the operation of our business in any material respect, the terms of the Credit Facility may restrict or prohibit our ability to raise additional debt when needed or could prevent us from investing in other growth initiatives. As of December 31, 2011, we had outstanding letters of credit of $0.2 million. There were no outstanding borrowings under the Credit Facility as of December 31, 2011. As of December 31, 2010, our outstanding borrowings under the 2006 Credit Facility were $53.0 million. We have been in compliance with the terms of the 2006 Credit Facility and our current Credit Facility since the inception of each agreement. As of February 24, 2012, we had no outstanding borrowings under the Credit Facility.

 

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Contractual Obligations

The following table summarizes our contractual cash obligations as of December 31, 2011 (in thousands):

 

     Payments Due By Period  
     Less Than
1 Year
     1 - 3
Years
     3 - 5
Years
     More Than
5 Years
     Total  

Operating leases (A)

     7,991         11,404         10,291         13,427         43,113   

Purchase obligations (B)

     5,624         —           —           —           5,624   

Contributions for retirement plans (C)

     2,865         —           —           —           2,865   

Unrecognized tax benefits (D)

     678         381         241         —           1,300   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 17,158       $ 11,785       $ 10,532       $ 13,427       $ 52,902   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(A) See Note 10 in the Notes to Consolidated Financial Statements.
(B) Other than for PPM equipment purchases, we generally do not make unconditional, noncancelable purchase commitments. We enter into purchase orders in the normal course of business, and they generally do not exceed one-year terms.
(C) Amount represents an estimate of our cash contribution for 2012 for our retirement plans. Future cash contributions will be determined based upon the funded status of the plan. See Note 12 in the Notes to Consolidated Financial Statements.
(D) The amount related to unrecognized tax benefits in the table includes $0.2 million of interest and penalties. See Note 11 in the Notes to the Consolidated Financial Statements.

Off-Balance Sheet Arrangements

We did not enter into any off-balance sheet arrangements during the years ended December 31, 2011, 2010 or 2009, nor did we have any off-balance sheet arrangements outstanding as of December 31, 2011, or 2010.

New Accounting Pronouncements

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

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements. In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820) — Fair Value Measurement (“ASU 2011-04”), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. ASU 2011-04 is effective for the Company for interim and annual periods ended during 2012 and will be applied prospectively. The Company does not expect its pending adoption of this guidance to have a material impact on the Company’s consolidated financial statements.

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

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

In November 2011, we entered into our Credit Facility with a consortium of lenders to provide us up to $150.0 million of financing. Interest on borrowings under the Credit Facility is calculated based on a floating rate for a duration of up to six months, at which time the interest rate is reset based upon the LIBOR. As of December 31, 2011, we reported no outstanding borrowings under the Credit Facility. Therefore, a hypothetical market interest rate change of 1% would have zero impact on our results of operations over a 12-month period. A hypothetical market interest rate change of 1% would have no impact on either the carrying amount or the fair value of the Credit Facility. We do not use derivatives for speculative or trading purposes.

Foreign Currency Risk

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

As of December 31, 2011, we have $4.0 million in recorded intercompany balances on our Finnish and Indian subsidiary balance sheets, which are impacted by fluctuations in currency exchange rates. As the exchange rates increase or decrease, our intercompany balances will be exposed to translation adjustment charges and/or credits, which will be recognized in our financial earning results.

The translation of the statements of income and balance sheets of our international subsidiaries is made using the foreign currency exchange rates as of the end of each reporting period and the translation adjustments are recorded in accumulated other comprehensive income (loss) on our consolidated balance sheet until the net investment in such foreign subsidiaries is liquidated. As of December 31, 2011, the cumulative net currency translation adjustment recorded on our balance sheet reduced our shareholders’ equity by $2.2 million.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The report of the independent registered public accounting firm and financial statements are set forth below (see Item 15(a) for a list of financial statements and financial statement schedules):

ARBITRON INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Reports of Independent Registered Public Accounting Firm

     46   

Consolidated Balance Sheets as of December 31, 2011 and 2010

     48   

Consolidated Statements of Income for the Years Ended December 31, 2011, 2010 and 2009

     49   

Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December  31, 2011, 2010 and 2009

     50   

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 2010 and 2009

     51   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009

     52   

Notes to Consolidated Financial Statements

     53   

Consolidated Schedule of Valuation and Qualifying Accounts

     83   

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Arbitron Inc.:

We have audited the accompanying consolidated balance sheets of Arbitron Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity (deficit), comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2011. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed under item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arbitron Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Arbitron Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 24, 2012, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Baltimore, Maryland

February 24, 2012

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Arbitron Inc.:

We have audited Arbitron Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Arbitron Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Arbitron Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Arbitron Inc. as of December 31, 2011 and 2010, and the related consolidated statements of income, stockholders’ equity (deficit), comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2011, and our report dated February 24, 2012, expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Baltimore, Maryland

February 24, 2012

 

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ARBITRON INC.

Consolidated Balance Sheets

December 31, 2011 and 2010

(In thousands, except par value data)

 

     2011     2010  

Assets

    

Current assets

    

Cash and cash equivalents

   $ 19,715      $ 18,925   

Trade accounts receivable, net of allowance for doubtful accounts of $4,615 in 2011 and $4,708 in 2010

     62,886        59,808   

Prepaid expenses and other current assets

     7,141        11,332   

Deferred tax assets

     6,398        4,758   
  

 

 

   

 

 

 

Total current assets

     96,140        94,823   

Equity and other investments

     14,913        18,385   

Property and equipment, net

     70,651        70,332   

Goodwill, net

     45,430        38,895   

Other intangibles, net

     10,526        6,272   

Other noncurrent assets

     1,308        534   
  

 

 

   

 

 

 

Total assets

   $ 238,968      $ 229,241   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable

   $ 10,534      $ 10,007   

Accrued expenses and other current liabilities

     32,276        27,670   

Current portion of long-term debt

     —          53,000   

Deferred revenue

     37,080        36,479   
  

 

 

   

 

 

 

Total current liabilities

     79,890        127,156   

Noncurrent deferred tax liabilities

     1,302        2,695   

Other noncurrent liabilities

     30,960        21,739   
  

 

 

   

 

 

 

Total liabilities

     112,152        151,590   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

Stockholders’ equity

    

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

     —          —     

Common stock, $0.50 par value, 500,000 shares authorized, 32,338 shares issued as of December 31, 2011, and 2010

     16,169        16,169   

Retained earnings

     128,772        74,184   

Common stock held in treasury, 5,048 shares in 2011 and 5,285 shares in 2010

     (2,524     (2,642

Accumulated other comprehensive loss

     (15,601     (10,060
  

 

 

   

 

 

 

Total stockholders’ equity

     126,816        77,651   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 238,968      $ 229,241   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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ARBITRON INC.

Consolidated Statements of Income

Years Ended December 31, 2011, 2010, and 2009

(In thousands, except per share data)

 

     2011     2010      2009  

Revenue

   $ 422,310      $ 395,379       $ 384,952   
  

 

 

   

 

 

    

 

 

 

Costs and expenses

       

Cost of revenue

     220,381        215,329         196,269   

Selling, general and administrative

     78,407        75,255         81,866   

Research and development

     38,416        39,145         42,008   

Restructuring and reorganization

     —          —           9,968   
  

 

 

   

 

 

    

 

 

 

Total costs and expenses

     337,204        329,729         330,111   
  

 

 

   

 

 

    

 

 

 

Operating income

     85,106        65,650         54,841   

Equity in net income of affiliate

     7,255        7,092         7,637   

Impairment of investment

     (3,477     —           —     
  

 

 

   

 

 

    

 

 

 

Income before interest and income tax expense

     88,884        72,742         62,478   

Interest income

     27        14         49   

Interest expense

     564        984         1,395   
  

 

 

   

 

 

    

 

 

 

Income before income tax expense

     88,347        71,772         61,132   

Income tax expense

     35,056        27,294         18,972   
  

 

 

   

 

 

    

 

 

 

Net income

   $ 53,291      $ 44,478       $ 42,160   
  

 

 

   

 

 

    

 

 

 

Income per weighted-average common share

       

Basic

   $ 1.96      $ 1.66       $ 1.59   

Diluted

   $ 1.93      $ 1.64       $ 1.58   

Weighted-average common shares used in calculations

       

Basic

     27,181        26,759         26,493   

Potentially dilutive securities

     478        346         183   
  

 

 

   

 

 

    

 

 

 

Diluted

     27,659        27,105         26,676   
  

 

 

   

 

 

    

 

 

 

Dividends declared per common share outstanding

   $ 0.40      $ 0.40       $ 0.40   
  

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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ARBITRON INC.

Consolidated Statements of Stockholders’ Equity (Deficit)

Years Ended December 31, 2011, 2010, and 2009

(In thousands)

 

     Number of
Shares
Outstanding
     Common
Stock
     Retained
Earnings
    Common Stock
Held in
Treasury
    Accumulated
Other
Comprehensive
Loss
    Total
Stockholders’
Equity (Deficit)
 

Balance at December 31, 2008

     26,410         16,169         (12,697     (2,964     (15,003     (14,495

Net income

     —           —           42,160        —          —          42,160   

Other comprehensive income (loss)

              

Foreign currency translation

     —           —           —          —          (42     (42

Retirement and post-retirement liabilities

     —           —           —          —          6,694        6,694   

Income tax benefit

     —           —           —          —          (2,631     (2,631

Dividends declared

     —           —           (10,597     —          —          (10,597

Common stock issued from treasury stock

     178         —           1,188        89        —          1,277   

Non-cash share-based compensation

     —           —           10,031        —          —          10,031   

Reduced tax benefits from share-based awards

     —           —           (1,822     —          —          (1,822
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2009

     26,588         16,169         28,263        (2,875     (10,982     30,575   

Net income

     —           —           44,478        —          —          44,478   

Other comprehensive income (loss)

              

Foreign currency translation

     —           —           —          —          61        61   

Retirement and post-retirement liabilities

     —           —           —          —          1,763        1,763   

Income tax benefit

     —           —           —          —          (902     (902

Dividends declared

     —           —           (10,711     —          —          (10,711

Common stock issued from treasury stock

     467         —           5,650        233        —          5,883   

Non-cash share-based compensation

     —           —           6,478        —          —          6,478   

Excess tax benefits from share-based awards

     —           —           26        —          —          26   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

     27,055         16,169         74,184        (2,642     (10,060     77,651   

Net income

     —           —           53,291        —          —          53,291   

Other comprehensive income (loss)

              

Foreign currency translation

     —           —           —          —          (1,688     (1,688

Retirement and post-retirement liabilities

     —           —           —          —          (6,327     (6,327

Income tax benefit

     —           —           —          —          2,474        2,474   

Dividends declared

     —           —           (10,879     —          —          (10,879

Common stock issued from treasury stock

     235         —           3,229        118        —          3,347   

Non-cash share-based compensation

     —           —           8,020        —          —          8,020   

Excess tax benefits from share-based awards

     —           —           927        —          —          927   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

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

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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ARBITRON INC.

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2011, 2010, and 2009

(In thousands)

 

     2011     2010     2009  

Net income

   $ 53,291      $ 44,478      $ 42,160   

Other comprehensive income (loss), net of tax

      

Change in foreign currency translation adjustment

     (1,688     (150     (26

Change in retirement liabilities, net of tax benefit (expense) of $2,474, $(691), and $(2,647) for 2011, 2010, and 2009, respectively

     (3,853     1,072        4,047   
  

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (5,541     922        4,021   
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 47,750      $ 45,400      $ 46,181   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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ARBITRON INC.

Consolidated Statements of Cash Flows

Years Ended December 31, 2011, 2010, and 2009

(in thousands)

 

     2011     2010     2009  

Cash flows from operating activities

      

Net income

   $ 53,291      $ 44,478      $ 42,160   

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

      

Depreciation and amortization of property and equipment

     28,542        26,686        23,228   

Amortization of other intangible assets

     1,713        822        141   

Loss on asset disposals and impairments of property and equipment

     2,123        3,011        2,088   

Loss due to retirement plan settlements

     —          1,222        1,803   

Loss on impairment of investment

     3,477        —          —     

Deferred income taxes

     (1,707     6,147        (1,690

Reduced tax benefits on share-based awards

     —          —          (1,822

Equity in net income of affiliate

     (7,255     (7,092     (7,637

Distributions from affiliate

     7,250        7,425        9,000   

Bad debt expense

     2,234        1,375        2,723   

Non-cash share-based compensation

     8,020        6,478        10,031   

Changes in operating assets and liabilities

      

Trade accounts receivable

     (4,884     (8,576     (5,293

Prepaid expenses and other assets

     4,211        70        2,020   

Accounts payable

     1,340        (1,959     (3,157

Accrued expense and other current liabilities

     2,817        (1,465     312   

Deferred revenue

     601        (6,669     (14,156

Other noncurrent liabilities

     2,825        (143     (2,427
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     104,598        71,810        57,324   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

Additions to property and equipment

     (31,967     (30,425     (31,681

License of other intangible assets

     —          (4,500     —     

Purchases of equity and other investments

     —          (1,780     (3,400

Payments for business acquisitions, net of cash acquired

     (10,553     (2,500     —     
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (42,520     (39,205     (35,081
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Proceeds from stock option exercises and stock purchase plan

     3,775        7,560        988   

Tax benefits realized from share-based awards

     927        26        —     

Payments for deferred financing costs

     (998     —          —     

Dividends paid to stockholders

     (10,849     (10,667     (10,584

Change in bank overdraft payables

     —          (3,833     3,833   

Debt borrowings

     15,000        10,000        33,000   

Debt repayments

     (69,103     (25,000     (50,000
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (61,248     (21,914     (22,763
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (40     17        79   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     790        10,708        (441

Cash and cash equivalents at beginning of year

     18,925        8,217        8,658   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 19,715      $ 18,925      $ 8,217   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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ARBITRON INC.

Notes to Consolidated Financial Statements

 

1. Basis of Presentation

Basis of Consolidation

The consolidated financial statements of Arbitron Inc. (“Arbitron” or the “Company”) for the year ended December 31, 2011, reflect the consolidated financial position, results of operations and cash flows of the Company and its wholly-owned subsidiaries: Arbitron Holdings Inc., Arbitron Mobile Oy, Astro West LLC, Cardinal North LLC, Ceridian Infotech (India) Private Limited, Arbitron International, LLC, and Arbitron Technology Services India Private Limited. All significant intercompany balances and transactions have been eliminated in consolidation. The Company has one segment which meets the quantitative thresholds for being a reportable segment.

Description of Business

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

 

   

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

 

   

estimating the size and demographics of audiences of other media services, including mobile media and out-of-home television viewing, and measuring usage and estimating the size and demographics of audiences across multiple platforms of media;

 

   

providing qualitative consumer, shopping, and media usage information services; and

 

   

providing software used for accessing and analyzing the Company’s media audience and marketing information data.

 

2. Summary of Significant Accounting Policies

Revenue Recognition

Syndicated or recurring products and services are licensed on a contractual basis. Revenues for such products and services are recognized over the term of the license agreement as products or services are delivered. Customer billings in advance of delivery are recorded as a deferred revenue liability. Deferred revenue relates primarily to quantitative radio measurement surveys which are delivered to customers in the subsequent quarterly or monthly period. Software revenue is recognized ratably over the life of the agreement. Through the standard software license agreement, customers are provided enhancements and upgrades, if any, that occur during their license term at no additional cost. Customer agreements with multiple licenses are reviewed for separate revenue recognition for deliverables specified by the agreements. Sales tax charged to customers is presented on a net basis within the consolidated income statement and excluded from revenues.

Expense Recognition

Direct costs associated with the Company’s data collection, diary processing and maintenance of the Company’s Portable People Meter (PPM) ratings service are recognized when incurred and are included in cost of revenue. Selling, general, and administrative expenses are recognized when incurred. Research and development expenses are recognized when incurred and consist primarily of expenses associated with the development of new products and customer software and other technical expenses including maintenance of operations and reporting systems.

Cash Equivalents

Cash equivalents consist primarily of highly liquid investments with insignificant interest rate risk and original maturities of three months or less.

 

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Trade Accounts Receivable

Trade accounts receivable are recorded at invoiced amounts. The allowance for doubtful accounts is estimated based on historical trends of past due accounts and write-offs, as well as a review of specific accounts.

Inventories

Inventories consist of PPM equipment held for resale to international licensees of the PPM service. The inventory is accounted for on a first-in, first-out (FIFO) basis, and is included in prepaids and other current assets in the accompanying consolidated balance sheet.

Property and Equipment

Property and equipment are recorded at cost and depreciated or amortized on a straight-line basis over the estimated useful lives of the assets, which are as follows:

 

Computer equipment

   3 years

Purchased and internally developed software

   3 – 5 years

Leasehold improvements

   Shorter of useful life or life of lease

Machinery, furniture and fixtures

   3 – 6 years

Repairs and maintenance are charged to expense as incurred. Gains and losses on dispositions are included in the consolidated results of operations at the date of disposal.

Expenditures for significant software purchases and software developed for internal use are capitalized. For software developed for internal use, external direct costs for materials and services and certain payroll and related fringe benefit costs are capitalized as well. 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.

Equity and Other Investments

Equity and other investments are accounted for using either the equity method or the cost method, depending upon the nature of the Company’s investment interests. The equity method is used when the Company has an ownership interest of 50% or less and the ability to exercise significant influence or has a majority ownership interest but does not have the ability to exercise effective control. The cost method is used when the Company has an ownership interest of 20% or less and does not have the ability to exercise significant influence.

Goodwill and Other Intangible Assets

Goodwill represents the excess of costs over fair value of assets of businesses acquired. Goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and are regularly reviewed for impairment.

Goodwill and intangible assets not subject to amortization are tested annually for impairment or more frequently if events and circumstances indicate that the asset might be impaired. The Company performs its annual impairment test at the reporting unit level as of January 1st for each fiscal year. An impairment loss is recognized to the extent that the carrying amount of the asset exceeds its fair value.

Impairment of Long-Lived Assets

Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an

 

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impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and effective with the date classified as held for sale, are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale, as well as the results of operations and cash flows of the disposal group, if any, are presented separately in the appropriate sections of the consolidated financial statements for all periods presented.

Income Taxes

Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Net Income per Weighted Average Common Share

The computations of basic and diluted net income per weighted-average common share for 2011, 2010, and 2009 are based on the Company’s weighted-average shares of common stock and potentially dilutive securities outstanding. Potentially dilutive securities are calculated in accordance with the treasury stock method, which assumes the proceeds from the exercise of all stock options are used to repurchase the Company’s common stock at the average market price for the period. As of December 31, 2011, 2010, and 2009, there were stock options to purchase 2,043,774 shares, 2,020,767 shares, and 2,852,161 shares of the Company’s common stock outstanding, respectively, of which stock options to purchase 1,116,106 shares, 1,179,840 shares, and 2,052,132 shares of the Company’s common stock, respectively, were excluded from the computation of the diluted net income per weighted-average common share, either because the stock options’ exercise prices were greater than the average market price of the Company’s common shares or assumed repurchases from proceeds from the stock options’ exercise were antidilutive.

Translation of Foreign Currencies

Financial statements of foreign subsidiaries are translated into United States dollars at current rates at the end of the period except that revenue and expenses are translated at average current exchange rates during each reporting period. Net translation exchange gains or losses and the effect of exchange rate changes on intercompany transactions of a long-term nature are recorded in accumulated other comprehensive loss in stockholders’ equity. Gains and losses from translation of assets and liabilities denominated in other than the functional currency of the operation are recorded in income as incurred.

Advertising Expense

The Company recognizes advertising expense the first time advertising takes place. Advertising expense for the years ended December 31, 2011, 2010 and 2009, was $1.4 million, $1.0 million, and $2.3 million, respectively.

Accounting Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items, if any, subject to such estimates and assumptions may include: valuation allowances for receivables and deferred income tax assets, loss contingencies, and assets and obligations related to employee benefits. Actual results could differ from those estimates.

Legal Matters

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.

 

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Leases

The Company conducts all of its operations in leased facilities and leases certain equipment which have minimum lease obligations under noncancelable operating leases. Certain of these leases contain rent escalations based on specified percentages. Most of the leases contain renewal options and require payments for taxes, insurance and maintenance. Rent expense is charged to operations as incurred except for escalating rents, which are charged to operations on a straight-line basis over the life of the lease.

New Accounting Pronouncements

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

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements. In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820) — Fair Value Measurement (“ASU 2011-04”), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. ASU 2011-04 is effective for the Company for interim and annual periods ended during 2012 and will be applied prospectively. The Company does not expect its pending adoption of this guidance to have a material impact to the Company’s consolidated financial statements.

 

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3. Equity and Other Investments

The Company’s equity and other investments consisted of the following (in thousands):

 

     December 31,
2011
     December 31,
2010
 

Scarborough

   $ 13,210       $ 13,205   

TRA preferred stock

     1,703         5,180   
  

 

 

    

 

 

 

Equity and other investments

   $ 14,913       $ 18,385   
  

 

 

    

 

 

 

The Company’s 49.5% investment in Scarborough Research (“Scarborough”), a Delaware general partnership, is accounted for using the equity method of accounting. The Company’s preferred stock investment in TRA Global, Inc., a Delaware corporation (“TRA”), is accounted for using the cost method of accounting. See Note 15 for further information regarding the Company’s TRA investment as of December 31, 2011 and the $3.5 million impairment charge recorded in 2011. The following table shows the investment activity for each of the Company’s affiliates during 2011, 2010, and 2009.

Summary of Investment Activity in Affiliates (in thousands)

 

     Year Ended December 31, 2011     Year Ended December 31, 2010     Year Ended December 31, 2009  
     Scarborough     TRA     Total     Scarborough     TRA      Total     Scarborough     TRA      Total  

Beginning balance

   $ 13,205      $ 5,180      $ 18,385      $ 13,538      $ 3,400       $ 16,938      $ 14,901        —         $ 14,901   

Equity in net income

     7,255        —          7,255        7,092        —           7,092        7,637        —           7,637   

Impairment loss

     —          (3,477     (3,477     —          —           —          —          —           —     

Distributions

     (7,250     —          (7,250     (7,425     —           (7,425     (9,000     —           (9,000

Cash investments

     —          —          —          —          1,780         1,780        —          3,400         3,400   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 13,210      $ 1,703      $ 14,913      $ 13,205      $ 5,180       $ 18,385      $ 13,538      $ 3,400       $ 16,938   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Under the Scarborough partnership agreement, the Company has the exclusive right to license Scarborough’s services to radio broadcasters, cable companies, out-of-home media, and advertisers and advertising agencies. The Company pays a royalty fee to Scarborough based on a percentage of revenues. Royalties of $26.2 million, $26.2 million, and $25.8 million for 2011, 2010, and 2009, respectively, are included in cost of revenue in the Company’s consolidated statements of income. Accrued royalties due to Scarborough as of December 31, 2011, and 2010, of $5.1 million and $6.0 million, respectively, are recorded in accrued expenses and other current liabilities in the consolidated balance sheets.

Scarborough’s revenue was $65.7 million, $64.3 million, and $64.1 million in 2011, 2010 and 2009, respectively. Scarborough’s net income was $14.5 million, $14.2 million, and $15.3 million, respectively in the same periods. Scarborough’s total assets and liabilities as of December 31, 2011, were $25.0 million and $2.9 million, respectively, and $33.0 million and $2.1 million, as of December 31, 2010, respectively.

 

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4. Property and Equipment

Property and equipment as of December 31, 2011, and 2010 consist of the following (in thousands):

 

     2011     2010  

Purchased and internally developed software

   $ 73,561      $ 62,731   

Portable People Meter equipment

     49,601        45,240   

Computer equipment

     21,776        21,231   

Leasehold improvements

     17,833        17,537   

Machinery, furniture and fixtures

     8,598        9,221   
  

 

 

   

 

 

 
     171,369        155,960   

Accumulated depreciation and amortization

     (100,718     (85,628
  

 

 

   

 

 

 

Property and equipment, net

   $ 70,651      $ 70,332   
  

 

 

   

 

 

 

 

     For the Years Ended December 31,  

Additional Information

   2011      2010      2009  

Depreciation and Amortization of Property and Equipment:

        

Cost of revenue

   $ 26,319       $ 24,778       $ 20,702   

Selling, general, and administrative

     1,748         1,628         2,207   

Research and development

     475         280         319   
  

 

 

    

 

 

    

 

 

 

Total depreciation and amortization expense

   $ 28,542       $ 26,686       $ 23,228   
  

 

 

    

 

 

    

 

 

 

Impairment charges associated with property and equipment

   $ 162       $ 628       $ —     

Loss on asset disposals

   $ 1,961       $ 2,383       $ 2,088   

Interest capitalized during the year

   $ 39       $ 34       $ 52   

 

5. Goodwill and Other Intangible Assets

Goodwill is measured for impairment annually as of January 1 at the reporting unit level. A valuation is also performed when conditions arise that management determines could potentially trigger an impairment. As of January 1, 2011, the Company had one reporting unit (“Arbitron reporting unit”) to which all of the Company’s goodwill at that time had been allocated. For these purposes, the Company’s estimate of the fair value of the Arbitron reporting unit is equal to the Company’s market capitalization value calculated as the closing price of the Company’s common stock on the New York Stock Exchange on the impairment valuation date times the number of shares of our common stock outstanding on that date. For the fiscal years ended December 31, 2011, and 2010, the Company has determined that the estimated fair value of the Arbitron reporting unit substantially exceeds its carrying value, and therefore, no impairment exists as of those dates.

The following table presents additional information regarding the Company’s goodwill (in thousands):

 

     2011     2010  

Balance at January 1,

   $ 38,895      $ 38,500   

Additions

     7,132        395   

Translation effect

     (597     —     
  

 

 

   

 

 

 

Balance at December 31,

   $ 45,430      $ 38,895   
  

 

 

   

 

 

 

Zokem Oy. On July 28, 2011, a wholly-owned subsidiary of the Company acquired Zokem Oy and the acquired goodwill was allocated to a reporting unit other than the Arbitron reporting unit. No conditions have arisen since the acquisition date to indicate an impairment. The purchase price was $10.6 million in cash plus a contingent consideration arrangement with an estimated fair value of approximately $0.9 million as of the acquisition date. The agreement provides for possible additional cash payments to be made by the Company to the former Zokem shareholders through 2015 of up to $12.0 million, which are contingent upon Zokem reaching certain financial performance targets in the future. The approximate $0.9 million fair value estimate was determined by applying the income approach method. The key assumptions used in the fair value valuation include a probability-weighted range of performance targets for the four-year measurement period of 2012 through 2015 and an adjusted discount rate. The Company periodically reassesses the fair value of the contingent consideration.

 

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The following table shows the adjusted assets and liabilities acquired as of July 28, 2011 (in thousands):

 

Asset and liabilities acquired

   Amount  

Trade receivables

   $ 334   

Computer equipment

     31   

Other intangible assets

  

Acquired software and trademarks

     5,150   

Non-compete agreement

     543   

Customer relationships

     907   
  

 

 

 

Total assets

     6,965   
  

 

 

 

Accounts payable

     (130

Other current liabilities

     (197

Debt assumed

     (1,103

Noncurrent liabilities

     (1,217
  

 

 

 

Net assets acquired

     4,318   

Goodwill

     7,132   
  

 

 

 

Total purchase price, net of cash acquired

   $ 11,450   
  

 

 

 

The other intangible assets are being amortized over a weighted average life of 5.0 years. The amount of acquisition-related costs incurred and charged to selling, general and administrative expense during 2011 was $0.7 million.

Integrated Media Measurement, Inc. On June 15, 2010, a wholly-owned subsidiary of the Company purchased the technology portfolio, trade name, and equipment of Integrated Media Measurement, Inc. The Company paid $2.5 million for these assets, which included $1.8 million of other intangible assets, $0.3 million of computer equipment, and $0.4 million of goodwill.

Digimarc Corporation. On March 23, 2010, the Company entered into a licensing arrangement with Digimarc Corporation (“Digimarc”) to receive a non-exclusive, worldwide and irrevocable license to a substantial portion of Digimarc’s domestic and international patent portfolio. The Company paid $4.5 million for this other intangible asset.

 

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Other intangible assets are being amortized to expense over their estimated useful lives. The following table presents additional information regarding the Company’s other intangible assets (in thousands):

Other intangible assets

 

     December 31, 2011  
     Acquired
software and
trademarks
    Patent
licenses
    Non-
compete
covenant
    Customer lists     Total  

Gross balance

   $ 6,425      $ 4,500      $ 489      $ 2,230      $ 13,644   

Accumulated Amortization

     (947     (1,130     (104     (937     (3,118
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net

   $ 5,478      $ 3,370      $ 385      $ 1,293      $ 10,526   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2010  
     Acquired
software and
trademarks
    Patent
licenses
    Non-
compete
covenant
     Customer lists     Total  

Gross balance

   $ 1,785      $ 4,500      $ —         $ 1,413      $ 7,698   

Accumulated Amortization

     (193     (487     —           (746     (1,426
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net

   $ 1,592      $ 4,013      $ —         $ 667      $ 6,272   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     2011      2010      2009  

Amortization expense for other intangibles

   $ 1,713       $ 822       $ 141   

Future amortization expense for other intangible assets is estimated to be as follows:

 

     Amount  

2012

   $ 2,431   

2013

   $ 2,326   

2014

   $ 2,186   

2015

   $ 1,953   

2016

   $ 1,291   

Thereafter

   $ 339   

As of December 31, 2011, and 2010, the Company had no intangible assets with indefinite useful lives.

 

6. Prepaids and Other Current Assets

Prepaids and other current assets as of December 31, 2011, and 2010, consist of the following (in thousands):

 

     December 31, 2011      December 31, 2010  

Prepaid income taxes

   $ 1,984       $ 5,518   

Survey participant incentives and prepaid postage

     1,770         2,467   

Insurance recovery receivables

     993         601   

Other

     2,394         2,746   
  

 

 

    

 

 

 

Prepaids and other current assets

   $ 7,141       $ 11,332   
  

 

 

    

 

 

 

 

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During 2008, the Company became involved in two securities-law civil actions and a governmental interaction primarily related to the commercialization of the Company’s PPM service. The management of the Company believes a portion of these legal fees and costs are covered by the Company’s Directors and Officers insurance policy and therefore has recognized an insurance recovery receivable. From 2008 until 2011, the Company had incurred approximately $12.1 million in legal fees and costs in defense of its positions related thereto, and as of December 31, 2011, the Company had received $7.9 million in insurance reimbursements related to these legal actions. From 2008 until December 31, 2010, the Company had incurred approximately $9.7 million in legal fees and costs in defense of its positions related thereto, and as of December 31, 2010, the Company had received $5.9 million in insurance reimbursements. In addition, see the discussion in “Item 3. Legal Proceedings” about the proposed settlement of the class action.

For 2011, 2010, and 2009, the Company incurred approximately $2.4 million, $0.9 million, and $2.6 million, respectively, in related legal fees, which were recognized as increases to selling, general, and administrative expense. These legal fees were offset by $2.4 million, $0.9 million and $0.7 million in anticipated insurance recoveries, which were recognized as reductions to selling, general and administrative expense during 2011, 2010, and 2009, respectively. The insurance recovery receivable as of December 31, 2011 and 2010 was $1.0 million and $0.6 million, respectively.

 

7. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of December 31, 2011, and 2010, consisted of the following (in thousands):

 

     2011      2010  

Employee compensation and benefits

   $ 20,585       $ 15,914   

Royalties due to Scarborough

     5,061         5,996   

Dividend payable

     2,727         2,697   

Other

     3,903         3,063   
  

 

 

    

 

 

 
   $ 32,276       $ 27,670   
  

 

 

    

 

 

 

 

8. Debt

On November 21, 2011, the Company terminated its credit facility agreement originally signed on December 20, 2006 (the “2006 Credit Facility”). Also, on November 21, 2011, the Company entered into a new agreement with a consortium of lenders to provide up to $150.0 million of financing to the Company through a five-year, unsecured revolving credit facility (the “Credit Facility”) expiring on November 21, 2016. The agreement contains an expansion feature to increase the total financing available under the Credit Facility by up to $75.0 million to an aggregate of $225.0 million. Such increased financing would be provided by one or more existing Credit Facility lending institutions, subject to the approval of the lending banks, and/or in combination with one or more new lending institutions, subject to the approval of the Credit Facility’s administrative agent. The Credit Facility includes a $20.0 million maximum letter of credit commitment. As of December 31, 2011, the Company had outstanding letters of credit of $0.2 million.

The Credit Facility has two borrowing options, a Eurodollar rate option or an alternate base rate option, as defined in the Credit Facility. Under the Eurodollar option, the Company may elect interest periods of one, two, three or six months (or, with the consent of each lender, nine or twelve months) at the inception date and each renewal date. Borrowings under the Eurodollar option bear interest at the London Interbank Offered Rate (LIBOR) plus a margin of 1.05% to 1.40%. Borrowings under the base rate option bear interest at the higher of the lead lender’s prime rate, the Federal Funds rate plus 50 basis points, or the one-month LIBOR rate adjusted for the statutory reserve rate plus 1%. The specific margins, under the Eurodollar rate option, is determined based on the Company’s leverage ratio and is subject to adjustment every 90 days. The Credit Facility contains a facility fee provision whereby the Company is charged a fee, ranging from 0.20% to 0.35%, applied to the total amount of the commitment.

Interest paid in 2011, 2010, and 2009, was $0.5 million, $0.9 million, and $1.4 million, respectively. Interest capitalized in 2011, 2010, and 2009 was less than $0.1 million for each of 2011 and 2010, and $0.1 million for 2009. Non-cash amortization of deferred financing costs classified as interest expense was $0.1 million in each of 2011, 2010, and 2009. As of December 31, 2011, there were no outstanding borrowings under the Credit Facility. As of December 31, 2010, the outstanding borrowings under the 2006 Credit Facility were $53.0 million and the related interest rate on such borrowings was 0.83%.

The Credit Facility contains certain financial covenants, and limits, among other things, the Company’s ability to sell certain assets, incur additional indebtedness, and grant or incur liens on its assets. The material debt covenants under the Company’s Credit Facility include both a maximum leverage ratio (“leverage ratio”) and a minimum interest coverage ratio (“interest coverage ratio”). The

 

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leverage ratio is a non-GAAP financial measure equal to the amount of the Company’s consolidated total indebtedness, as defined in the Credit Facility, divided by a contractually defined adjusted Earnings Before Interest, Taxes, Depreciation and Amortization and non-cash compensation (“Consolidated EBITDA”) for the trailing four-quarter period. The interest coverage ratio is a non-GAAP financial measure equal to the same contractually defined Consolidated EBITDA divided by total interest expense. Both ratios are designed as measures of the Company’s ability to meet current and future obligations.

As of December 31, 2011, based upon these financial covenants, there was no default or limit on the Company’s ability to borrow the unused portion of the Credit Facility.

The Credit Facility also contains customary events of default, including nonpayment and breach covenants. In the event of default, repayment of borrowings under the Credit Facility, as well as the payment of accrued interest and fees, could be accelerated. The Credit Facility also contains cross default provisions whereby a default on any material indebtedness, as defined in the Credit Facility, could result in the acceleration of our outstanding debt and the termination of any unused commitment under the Credit Facility. In addition, a default may result in the application of higher rates of interest on the amounts due. The Company currently has no material outstanding debt.

Under the terms of the Credit Facility, all of the Company’s material domestic subsidiaries, if any, guarantee the commitment. As of December 31, 2011, the Company had no material domestic subsidiaries as defined by the terms of the Credit Facility. As of December 31, 2011, the Company was in compliance with the terms of its Credit Facility.

 

9. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss as of December 31, 2011, and 2010, were as follows (in thousands):

 

     2011     2010  

Retirement plan liabilities, net of tax

   $ (13,453   $ (9,600

Foreign currency translation

     (2,148     (460
  

 

 

   

 

 

 

Accumulated other comprehensive loss

   $ (15,601   $ (10,060
  

 

 

   

 

 

 

 

10. Commitments and Contingencies

Leases

The Company conducts all of its operations in leased facilities and leases certain equipment which have minimum lease obligations under noncancelable operating leases. Certain of these leases contain rent escalations based on specified percentages. Most of the leases contain renewal options and require payments for taxes, insurance and maintenance. Rent expense is charged to operations as incurred except for escalating rents, which are charged to operations on a straight-line basis over the life of the lease.

A summary of rental expense for the three years ended December 31, 2011, 2010, and 2009, is presented below, as well as the future minimum lease commitments under noncancelable operating leases having an initial term of more than one year (in thousands):

 

     2011     2010     2009  

Summary of rental expense

      

Minimum rentals

   $ 8,914      $ 9,088      $ 9,724   

Less: Sublease rentals

     (868     (938     (859
  

 

 

   

 

 

   

 

 

 

Rental expense

   $ 8,046      $ 8,150      $ 8,865   
  

 

 

   

 

 

   

 

 

 

Summary of future lease commitments

      

2012

     7,991       

2013

     6,272       

2014

     5,132       

2015

     5,250       

2016

     5,041       

Thereafter

     13,427       
  

 

 

     

Minimum payments required (a)

   $ 43,113       
  

 

 

     

 

(a) Minimum payments have not been reduced by sublease rentals of $2,117 due in future years under noncancelable subleases.

 

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Legal Matters

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.

The Company is involved in a number of governmental interactions primarily related to the commercialization of our PPM service. A contingent loss in the amount of $0.4 million and $0.5 million for these claims was recorded in accrued expenses and other current liabilities on the Company’s consolidated balance sheets as of December 31, 2011, and December 31, 2010, respectively.

 

11. Income Taxes

The provision for income taxes is based on income recognized for consolidated financial statement purposes and includes the effects of permanent and temporary differences between such income and income recognized for income tax return purposes. As a result of the reverse spin-off from Ceridian, deferred tax assets consisting of net operating loss (“NOL”) and credit carryforwards were transferred from Ceridian to the Company, along with temporary differences related to the Company’s business. The NOL carryforwards will expire in various amounts from 2012 to 2029. Arbitron Mobile also incurred losses in 2011 available for U.S. carryforward subject to the separate return limitation year rules.

The components of income before income tax expense and a reconciliation of the statutory federal income tax rate to the income tax rate on income before income tax expense for the years ended December 31, 2011, 2010, and 2009 are as follows (dollars in thousands):

 

     2011     2010     2009  

Income (loss) before income tax expense:

      

U.S.

   $ 89,188     $ 70,657      $ 59,853   

International

     (841     1,115        1,279   
  

 

 

   

 

 

   

 

 

 

Total

   $ 88,347      $ 71,772      $ 61,132   
  

 

 

   

 

 

   

 

 

 

Income tax expense (benefit):