10-Q 1 nsr-2016930x10q.htm FORM 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
FORM 10-Q
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
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 001-32548
 
NeuStar, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
52-2141938
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
21575 Ridgetop Circle
Sterling, Virginia 20166
(Address of principal executive offices) (zip code)
(571) 434-5400
(Registrant’s telephone number, including area code)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    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  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
ý
 
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  ý
There were 54,572,524 shares of Class A common stock, $0.001 par value, and 1,864 shares of Class B common stock, $0.001 par value, outstanding at October 24, 2016.



NEUSTAR, INC.
INDEX
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
EX – 31.1
 
 
EX – 31.2
 
 
EX – 32.1
 
 
EX – 101 INSTANCE DOCUMENT
 
EX – 101 SCHEMA DOCUMENT
 
EX – 101 CALCULATION LINKBASE DOCUMENT
 
EX – 101 DEFINITION LINBASE DOCUMENT
 
EX – 101 LABELS LINKBASE DOCUMENT
 
EX – 101 PRESENTATION LINKBASE DOCUMENT
 



PART IFINANCIAL INFORMATION
Item 1.
Financial Statements
NEUSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
December 31,
2015
 
September 30,
2016
 
 
 
(unaudited)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
89,097

 
$
56,199

Restricted cash
2,363

 
2,287

Accounts receivable, net of allowance for doubtful accounts of $4,512 and $6,257, respectively
167,593

 
195,799

Unbilled receivables
17,712

 
14,001

Prepaid expenses and other current assets
30,216

 
31,942

Deferred costs
6,676

 
9,591

Income taxes receivable
5,883

 
41,324

Total current assets
319,540

 
351,143

Property and equipment, net
147,764

 
141,862

Goodwill
1,186,983

 
1,172,765

Intangible assets, net
529,279

 
447,902

Other assets, long-term
18,681

 
18,482

Total assets
$
2,202,247

 
$
2,132,154

See accompanying notes.


3


NEUSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
 
December 31,
2015
 
September 30,
2016
 
 
 
(unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY



Current liabilities:



Accounts payable
$
28,392


$
19,096

Accrued expenses
134,632


106,548

Deferred revenue
91,006


93,661

Notes payable
131,272


100,977

Capital lease obligations
4,791


2,028

Other liabilities
10,875


12,267

Total current liabilities
400,968


334,577

Deferred revenue, long-term
22,998


21,535

Notes payable, long-term
957,509


819,793

Capital lease obligations, long-term
1,831


60

Deferred income tax liabilities, long-term
38,701


36,649

Other liabilities, long-term
56,741


52,080

Total liabilities
1,478,748


1,264,694

Commitments and contingencies



Stockholders’ equity:



Preferred stock, $0.001 par value; 100,000,000 shares authorized; no shares issued and outstanding as of December 31, 2015 and September 30, 2016



Class A common stock, par value $0.001; 200,000,000 shares authorized; 80,233,896 and 81,786,092 shares issued; and 53,516,287 and 54,570,683 shares outstanding at December 31, 2015 and September 30, 2016, respectively
80


82

Class B common stock, par value $0.001; 100,000,000 shares authorized; 2,270 and 1,864 shares issued and outstanding at December 31, 2015 and September 30, 2016, respectively



Additional paid-in capital
729,273


759,742

Treasury stock, 26,717,609 and 27,215,409 shares at December 31, 2015 and September 30, 2016, respectively, at cost
(920,439
)

(932,515
)
Accumulated other comprehensive (loss) income
(1,904
)

1,135

Retained earnings
916,489


1,039,016

Total stockholders’ equity
723,499


867,460

Total liabilities and stockholders’ equity
$
2,202,247


$
2,132,154

See accompanying notes.

4


NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2016
 
2015
 
2016
Revenue
$
261,653

 
$
300,081

 
$
769,808

 
$
884,944

Operating expense:
 
 
 
 
 
 
 
Cost of revenue (excluding depreciation and amortization shown separately below)
67,108

 
93,560

 
198,817

 
275,148

Sales and marketing
48,911

 
50,824

 
146,587

 
160,435

Research and development
6,009

 
6,041

 
18,460

 
18,850

General and administrative
28,617

 
28,040

 
78,003

 
82,796

Depreciation and amortization
30,272

 
49,701

 
89,634

 
127,012

Restructuring charges

 
2,629

 

 
11,422

Separation costs

 
2,135

 

 
6,353

 
180,917

 
232,930

 
531,501

 
682,016

Income from operations
80,736

 
67,151

 
238,307

 
202,928

Other (expense) income:
 
 
 
 
 
 
 
Interest and other expense
(6,775
)
 
(22,179
)
 
(19,978
)
 
(54,981
)
Interest income
7

 
50

 
302

 
291

Income before income taxes
73,968

 
45,022

 
218,631

 
148,238

Provision (benefit) for income taxes
23,686

 
(8,009
)
 
77,077

 
25,711

Net income
$
50,282

 
$
53,031

 
$
141,554

 
$
122,527

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.93

 
$
0.97

 
$
2.57

 
$
2.26

Diluted
$
0.91

 
$
0.96

 
$
2.52

 
$
2.22

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
54,123

 
54,542

 
55,153

 
54,318

Diluted
55,125

 
55,432

 
56,078

 
55,127

See accompanying notes.

5


NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2016
 
2015
 
2016
Net income
$
50,282

 
$
53,031

 
$
141,554

 
$
122,527

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Available for sale investments, net of tax:
 
 
 
 
 
 
 
Change in net unrealized gains, net of tax
(50
)
 
66

 
(81
)
 
85

Reclassification for gains included in net income, net of tax
(15
)
 
2

 
(38
)
 
2

Net change in unrealized gains on investments, net of tax
(65
)
 
68

 
(119
)
 
87

Foreign currency translation adjustment, net of tax:
 
 
 
 
 
 
 
Change in foreign currency translation adjustment, net of tax
(2,067
)
 
1,589

 
(3,134
)
 
2,952

Reclassification adjustment included in net income, net of tax
158

 

 
572

 

Foreign currency translation adjustment, net of tax
(1,909
)
 
1,589

 
(2,562
)
 
2,952

Other comprehensive (loss) income, net of tax
(1,974
)
 
1,657

 
(2,681
)
 
3,039

Comprehensive income
$
48,308

 
$
54,688

 
$
138,873

 
$
125,566

See accompanying notes.

6


NEUSTAR, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Nine Months Ended 
 September 30,
 
2015
 
2016
Operating activities:
 
 
 
Net income
$
141,554

 
$
122,527

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
89,634

 
127,012

Stock-based compensation
28,111

 
32,087

Loss on debt modification and extinguishment

 
6,354

Amortization of deferred financing costs and original issue discount on debt
2,561

 
13,438

Tax benefit from equity awards
(341
)
 
(267
)
Deferred income taxes
(2,301
)
 
13,172

Provision for doubtful accounts
5,982

 
5,399

Gain on disposal of assets
(678
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(7,644
)
 
(34,458
)
Unbilled receivables
(777
)
 
3,705

Prepaid expenses and other current assets
(4,406
)
 
(1,047
)
Deferred costs
(1,357
)
 
(4,317
)
Income taxes
(856
)
 
(38,453
)
Other assets
(264
)
 
4,160

Other liabilities
3,457

 
(3,749
)
Accounts payable and accrued expenses
5,395

 
(36,869
)
Deferred revenue
(7,393
)
 
8

Net cash provided by operating activities
250,677

 
208,702

Investing activities:
 
 
 
Purchases of property and equipment
(22,448
)
 
(38,030
)
Businesses acquired, net of cash acquired
(84,130
)
 
12

Net cash used in investing activities
(106,578
)
 
(38,018
)
Financing activities:
 
 
 
(Increase) decrease in restricted cash
(188
)
 
76

Payments under notes payable obligations
(6,094
)
 
(179,170
)
Debt issuance costs

 
(10,201
)
Principal repayments on capital lease obligations
(3,887
)
 
(4,547
)
Proceeds from issuance of stock
7,676

 
562

Tax benefit from equity awards
341

 
267

Repurchase of restricted stock awards and common stock
(109,605
)
 
(11,027
)
Net cash used in financing activities
(111,757
)
 
(204,040
)
Effect of foreign exchange rates on cash and cash equivalents
(493
)
 
458

Net increase (decrease) in cash and cash equivalents
31,849

 
(32,898
)
Cash and cash equivalents at beginning of period
326,577

 
89,097

Cash and cash equivalents at end of period
$
358,426

 
$
56,199

See accompanying notes.

7

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016



1.
DESCRIPTION OF BUSINESS AND ORGANIZATION
NeuStar, Inc. (the Company or Neustar) offers authoritative, hard-to-replicate data sets and proprietary analytics that provide insights to help clients promote and protect their businesses. The Company’s proprietary, cloud-based platforms and differentiated data sets offer informative, real-time analytics, which enable clients to make actionable, data-driven decisions. The Company provides chief marketing officers a comprehensive suite of services to plan their media spend, identify and locate desired customers, invest effectively in marketing campaigns, deliver relevant offers and measure the performance of these activities. Security professionals use the Company’s solutions to maximize web performance and protect against malicious attacks. The Company enables the exchange of essential operating information across multiple carriers to provision and manage services, assisting clients with fast and accurate order processing and immediate routing of customer inquiries. The Company provides communications service providers in the United States critical infrastructure that enables the dynamic routing of calls and text messages.
On June 21, 2016, the Company announced its intention to separate into two independent and publicly traded companies. One company will consist of the majority of the Company's Information Services, which consists of Marketing Services, Security Services and related Data Services. The other company will focus on providing Order Management and Numbering Services. Order Management and Numbering Services will provide Local Number Portability Administration, number administration and ancillary numbering services as well as order and inventory management solutions. The Company intends to accomplish the separation through a tax-free spin-off, which the Company expects to occur in 2017. The separation is subject to final approval by the Company's Board of Directors, as well as a number of market and regulatory conditions, including, among others, effectiveness of the Form 10 to be filed with the Securities and Exchange Commission.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the full fiscal year. The consolidated balance sheet as of December 31, 2015 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by U.S. GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. Significant estimates and assumptions are inherent in the analysis and the measurement of deferred tax assets; identification and valuation of acquired intangible assets; and recoverability of goodwill. The Company bases its estimates on historical experience and assumptions that it believes are reasonable. Actual results could differ from those estimates.
Separation Costs
In the second quarter of 2016 the Company announced its intention to separate into two independent and publicly traded companies. Separation costs are expensed as incurred and include professional fees for outside advisory services including legal, finance, accounting and related services.

8

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


Reclassifications
Within the consolidated statement of cash flows for the nine months ended September 30, 2015, the Company reclassified $9.0 million from cash provided by operating activities to cash used in financing activities related to the exercise of equity awards and presentation of tax benefits to conform with current period presentation.
Fair Value of Financial Instruments
Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurements and Disclosure Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value and requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1. Observable inputs, such as quoted prices in active markets;
Level 2. Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3. Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company evaluates assets and liabilities subject to fair value measurements on a recurring and non-recurring basis to determine the appropriate level at which to classify them for each reporting period. Due to their short-term nature, the carrying amounts reported in the accompanying unaudited consolidated financial statements approximate the fair value for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. The Company determines the fair value of its term loan facilities, the 2013 Term Facility (as defined in Note 5), the 2015 Incremental Term Facility (as defined in Note 5) and the Amended 2013 Term Facility (as defined in Note 5), using pricing service quotations as quoted by Bloomberg (Level 2) (see Note 5). The Company believes the carrying value of its Amended 2013 Revolving Facility (as defined in Note 5) approximates the fair value of the debt as the term and interest rate approximates the market rate (Level 2) (see Note 5). The Company determines the fair value of its Senior Notes using a secondary market price on the last trading day in each period as quoted by Bloomberg (Level 2) (see Note 5).
The estimated fair values of the Company’s financial instruments are as follows (in thousands):
 
December 31, 2015
 
September 30, 2016
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
2013 Term Facility (including current portion, net of discount)
$
300,328

 
$
296,013

 
$

 
$

2015 Incremental Term Facility (including current portion, net of discount)
337,947

 
341,326

 

 

2013 Amended Term Facility (including current portion, net of discount)

 

 
464,292

 
465,466

2013 Revolving Facility
175,000

 
175,000

 

 

Amended 2013 Revolving Facility

 

 
175,000

 
175,000

Senior Notes (including current portion)
300,000

 
249,000

 
300,000

 
273,213

Restricted Cash
As of December 31, 2015 and September 30, 2016, cash of $2.4 million and $2.3 million, respectively, was restricted as collateral for certain of the Company’s outstanding letters of credit and for deposits on leased facilities.
Identifiable Intangible Assets
Identifiable intangible assets are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used and are periodically reviewed for impairment. During the three and nine months ended September 30, 2016, the Company recorded an

9

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


intangible asset impairment charge of $11.1 million related to an asset group (see “Impairment of Long-Lived Assets” below). There were no intangible asset impairment charges recognized during the three and nine months ended September 30, 2015.
The Company’s identifiable intangible assets are amortized as follows:
 
 
Years
 
Method
 
Acquired technologies
3 – 8
 
Straight-line
 
Client lists and relationships
3 – 13
 
Straight-line
 
Trade names and trademarks
3
 
Straight-line
 
Non-compete agreement
3
 
Straight-line
Amortization expense related to identifiable intangible assets is included in depreciation and amortization expense in the consolidated statements of operations.
Impairment of Long-Lived Assets
In accordance with Property, Plant and Equipment Topic of the FASB ASC, the Company reviews long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company measures recoverability of assets to be held and used by comparing the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Recoverability measurement and estimating undiscounted cash flows are performed at the lowest possible level for which there are identifiable cash flows. If the carrying amount of the assets exceeds the future undiscounted cash flows expected to be generated by those assets, such assets fail the recoverability test and an impairment charge would be recognized and measured as the amount by which the carrying amount of the assets exceeds the fair value. Assets to be disposed of are recorded at the lower of the carrying amount or fair value less costs to sell.
During the third quarter of 2016, the Company determined that it will discontinue the use of certain technology acquired from Aggregate Knowledge, Inc. (AKI). The Company performed an impairment analysis and concluded that the carrying amount of the AKI asset group exceeded the estimated future undiscounted cash flows of the AKI asset group. The Company performed a recoverability test, determined that the fair value of these long-lived assets was less than the carrying value, and recorded a total impairment charge of $11.1 million, consisting of charges of $10.1 million to write down the carrying value of acquired technology and $1.0 million to write down the carrying value of customer lists and relationships (see Note 4). This $11.1 million impairment charge is included in depreciation and amortization expense on the consolidated statement of operations.
Recent Accounting Pronouncements - Effective
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (Topic 805): Business Combinations, which requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The standard is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The guidance is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of the standard, with earlier application permitted for financial statements that have not been issued. The Company’s adoption of this ASU did not impact its consolidated financial statements.
Recent Accounting Pronouncements - Not Yet Effective
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This standard clarifies how certain cash receipts and cash payments should be classified on the statement of cash flows. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, although early adoption is permitted. The Company currently intends to adopt this standard on January 1, 2018 and is currently evaluating the impact of adoption on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718). This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and

10

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company currently intends to adopt this standard on January 1, 2017 and is currently evaluating the impact of adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires that long-term lease arrangements be recognized on the balance sheet. The standard is effective for interim and annual periods beginning after December 31, 2018, and early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under this standard, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB decided to defer by one year the effective dates of the standard. As a result, the standard will be effective for annual and interim periods beginning after December 15, 2017. Companies may adopt the standard as early as the original effective date (i.e. annual reporting periods beginning after December 15, 2016). Early adoption prior to that date is not permitted. The standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or a modified retrospective adoption, meaning the standard is applied only to the most current period presented. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
3.
ACQUISITIONS
Bombora Acquisition
On July 30, 2015, the Company acquired Bombora Technologies Pty Ltd (Bombora) and expanded the Company’s registry services. As of September 30, 2016, the final purchase price was $87.7 million. During the nine months ended September 30, 2016, the Company completed the allocation of the purchase price, which did not result in any material changes to either the purchase price or the preliminary valuation of acquired assets and assumed liabilities. Pro forma financial information for this acquisition has not been presented because the financial impact is not material.
MarketShare Acquisition
On December 9, 2015, the Company completed its acquisition of MarketShare Partners, LLC (MarketShare), a marketing analytics technology provider to major brands. The acquisition of MarketShare expanded the Company’s marketing services by creating a complete data-driven solution for Chief Marking Officers as they plan, optimize and allocate their entire marketing budget and resources across all channels. 
The transaction was accounted for under the acquisition method of accounting in accordance with the Business Combination Topic of the FASB ASC. The total preliminary purchase price was $442.4 million, consisting of cash consideration of $429.1 million and non-cash consideration of $13.3 million paid in shares of NeuStar Class A Common Stock, which shares are subject to certain transfer restrictions. During the nine months ended September 30, 2016, the Company recorded working capital and escrow adjustments of $1.3 million, reducing the preliminary purchase price to $441.1 million. In addition, the Company adjusted its preliminary valuation of acquired assets and assumed liabilities based upon new information that was received pertaining to acquisition date fair values. During the nine months ended September 30, 2016, the Company adjusted the preliminary valuation the deferred tax asset balance by $16.7 million, the accounts payable and accrued expenses balance by $1.0 million, and the accounts receivable balance by $0.3 million.

11

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


The allocation of the preliminary purchase price is pending the finalization of the fair value of acquired deferred income tax assets and assumed income and non-income based tax liabilities. The following table summarizes the current preliminary purchase price allocation based on the estimated fair value of the acquired assets and assumed liabilities and reflects the measurement period adjustments recorded during the nine months ended September 30, 2016 (in thousands):
Cash and cash equivalents
$
7,504

Accounts receivable
8,954

Prepaids and other assets
6,344

Accounts payable and accrued expenses
(9,330
)
Deferred revenue
(2,062
)
Deferred tax asset
5,844

Net tangible assets acquired
17,254

Customer relationships
30,000

Acquired identified technology
100,000

Goodwill
293,832

Total preliminary purchase price allocation
$
441,086

As of September 30, 2016, of the total goodwill balance of $293.8 million, approximately $203.0 million is expected to be deductible for tax purposes.
Pro Forma Financial Information for the MarketShare Acquisition
The following unaudited pro forma financial information summarizes the Company’s results of operations for the period indicated as if the Company’s acquisition of MarketShare had been completed as of the beginning of the earliest period presented. These pro forma amounts (unaudited and in thousands) are not indicative of the results that would have actually been obtained if the acquisition occurred as of the beginning of the periods presented and should not be construed as representative of the future consolidated results of operations or financial condition of the combined entity. The pro forma financial information for all periods presented also includes the effect of the related 2015 acquisition financing, amortization expense from the acquired intangible assets, adjustments to interest expense and related tax effects.
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
 
Pro forma revenue
$
275,183

 
$
807,648

 
Pro forma income from operations
$
73,573

 
$
209,037

 
Pro forma net income
$
41,112

 
$
103,061

 
Caller Authentication Assets Acquisition
On December 18, 2015, the Company acquired caller authentication assets from Transaction Network Services, Inc., enhancing its position in the caller authentication market that includes subscriber data storage, database management, caller identification and verification services. As of September 30, 2016, the estimated preliminary purchase price was $220.0 million, of which $22.0 million was deposited into escrow to satisfy post-closing indemnification claims. The preliminary purchase price is subject to the finalization of the acquisition date fair value of acquired deferred income tax assets and assumed non-income based tax liabilities. Pro forma financial information for this acquisition has not been presented because the financial impact is not material.

12

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


4.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company’s goodwill as of December 31, 2015 and September 30, 2016 is as follows (in thousands):
 
December 31,
2015
 
Acquisitions
 
Adjustments (1)
 
Foreign Currency Translation
 
September 30,
2016
Gross goodwill
$
1,280,585

 
$

 
$
(17,655
)
 
$
3,437

 
$
1,266,367

Accumulated impairments
(93,602
)
 

 

 

 
(93,602
)
Net goodwill
$
1,186,983

 
$

 
$
(17,655
)

$
3,437

 
$
1,172,765

(1) During the nine months ended September 30, 2016, the Company adjusted the preliminary purchase price paid for certain of its 2015 acquisitions based on adjustments to the preliminary valuation of assets acquired and liabilities assumed in the 2015 acquisitions (see Note 3).
Intangible Assets
Intangible assets consist of the following (in thousands):
 
December 31, 2015
 
September 30, 2016
 
Weighted-
Average
Amortization
Period
(in years)

Intangible assets:
 
 
 
 
 
Client lists and relationships
$
578,085

 
$
581,685

 
8.9
Accumulated amortization
(196,806
)
 
(247,205
)
 
 
Client lists and relationships, net
381,279

 
334,480

 
 
 
 
 
 
 
 
Acquired technology
214,212

 
204,451

 
6.2
Accumulated amortization
(66,335
)
 
(91,029
)
 
 
Acquired technology, net
147,877

 
113,422

 
 
 
 
 
 
 
 
Trade name
8,030

 
8,011

 
3.0
Accumulated amortization
(7,919
)
 
(8,011
)
 
 
Trade name, net
111

 

 
 
 
 
 
 
 
 
Non-compete agreement
100

 
100

 
3.0
Accumulated amortization
(88
)
 
(100
)
 
 
Non-compete agreement, net
12

 

 
 
Intangible assets, net
$
529,279

 
$
447,902

 
 
During the third quarter of 2016, the Company performed a recoverability test of its AKI asset group and determined that the fair value of these long-lived assets was less than the carrying value. The Company recorded an impairment charge of $11.1 million, consisting of charges of $10.1 million to write down the carrying value of acquired technology and $1.0 million to write down the carrying value of customer lists and relationships.
Amortization expense related to intangible assets, which is included in depreciation and amortization expense, was approximately $16.5 million and $23.8 million for the three months ended September 30, 2015 and 2016, respectively, and $48.0 million and $72.4 million for the nine months ended September 30, 2015 and 2016, respectively. Amortization expense related to intangible assets for the years ended December 31, 2016, 2017, 2018, 2019, 2020 and thereafter is expected to be

13

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


approximately $94.1 million, $82.6 million, $79.3 million, $72.9 million, $43.9 million and $147.6 million, respectively. Intangible assets as of September 30, 2016 will be fully amortized during the year ended December 31, 2028.
5.
NOTES PAYABLE
Notes payable consist of the following (in thousands):
 
December 31,
2015
 
September 30,
2016
2013 Term Facility (net of discount)
$
300,328

 
$

2013 Term Facility deferred financing fees
(1,683
)
 

2015 Incremental Term Facility (net of discount)
337,947

 

2015 Incremental Term Facility deferred financing fees
(9,012
)
 

Amended 2013 Term Facility (net of discount)

 
464,292

Amended 2013 Term Facility deferred financing fees

 
(5,798
)
2013 Revolving Facility
175,000

 

2013 Revolving Facility deferred financing fees
(2,162
)
 

Amended 2013 Revolving Facility

 
175,000

Amended 2013 Revolving Facility deferred financing fees

 
(2,147
)
Senior Notes
300,000

 
300,000

Senior Notes deferred financing fees
(11,637
)
 
(10,577
)
Total
1,088,781

 
920,770

Less: current portion, net of discount
(131,272
)
 
(100,977
)
Long-term portion
$
957,509

 
$
819,793

Credit Facilities and Senior Notes
On January 22, 2013, the Company entered into a credit facility that provided for a $325 million senior secured term loan facility (2013 Term Facility) and a $200 million senior secured revolving credit facility (2013 Revolving Facility, and together with the 2013 Term Facility, the 2013 Credit Facilities). In addition, the Company closed an offering of $300 million aggregate principal amount of senior notes (Senior Notes).
On December 9, 2015, the Company amended its 2013 Credit Facilities to provide for (i) the permissibility of an incremental term facility under the 2013 Credit Agreement (the 2013 Credit Agreement), (ii) the addition of a senior secured leverage financial measurement covenant; (iii) streamlined conditions for the incurrence of an incremental term facility to be used for a permitted acquisition; (iv) a required escrow and prepayment (such prepayment to be for the benefit of the incremental facility lenders) by the Company under certain specified circumstances; and (v) certain tax related changes favorable to the Company to the terms of the 2013 Credit Agreement and related security agreement.
On December 9, 2015, the Company borrowed $350 million under its incremental term facility (the 2015 Incremental Term Facility). The proceeds of the 2015 Incremental Term Facility were used to consummate the acquisition of MarketShare and to pay related fees and expenses.
On September 28, 2016, the Company entered into the third amendment to the 2013 Credit Facilities to (i) extend the maturity date of the 2013 Revolving Facility (the Amended 2013 Revolving Facility) to January 22, 2019, (ii) consolidate the remaining principal balance outstanding under the 2013 Term Facility and the 2015 Incremental Term Facility into a single term loan facility (the Amended 2013 Term Facility, and together with the Amended 2013 Revolving Facility, the Amended 2013 Credit Facilities) and provide a maturity date of January 22, 2019, (iii) set the annual amortization percentage of the Amended 2013 Term Facility at 22% through December 31, 2017 and 10% thereafter and (iv) lower the eurodollar rate margin and base rate margin for the Amended 2013 Term Facility to (a) if the Consolidated Leverage Ratio (as defined in the Credit Agreement) is less than 2 to 1 after March 1, 2017, 3% and 2%, respectively, and (b) if the Consolidated Leverage Ratio is 2 to 1 or greater, 3.25% and 2.25%, respectively.
The Company may voluntarily prepay the borrowings under the Amended 2013 Credit Facilities at any time in minimum amounts of $1 million or an integral multiple of $500,000 in excess thereof. The Amended 2013 Credit Facilities provide for

14

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


mandatory prepayments with the net cash proceeds of certain debt issuances, insurance receipts, and dispositions. The Amended 2013 Credit Facilities also contain certain events of default, upon the occurrence of which, and so long as such event of default is continuing, the amounts outstanding may, at the option of the required lenders, accrue interest at an increased rate and payments of such outstanding amounts could be accelerated, or other remedies undertaken.
As of September 30, 2016, outstanding borrowings under the Amended 2013 Revolving Facility were $175.0 million and available borrowings under the same facility were $7.0 million, exclusive of outstanding letters of credit totaling $18.0 million.
Senior Notes
On January 22, 2013, the Company closed an offering of $300 million aggregate principal amount of 4.50% senior notes due 2023. The Senior Notes are the general unsecured senior obligations of the Company and are guaranteed on a senior unsecured basis by certain of its domestic subsidiaries, or the Subsidiary Guarantors. Interest is payable on the Senior Notes semi-annually in arrears at an annual rate of 4.50%, on January 15 and July 15 of each year, beginning on July 15, 2013.
If the Company experiences certain changes of control together with a ratings downgrade, it will be required to offer to purchase all of the Senior Notes then outstanding at a purchase price equal to 101.00% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. If the Company sells certain assets and does not repay certain debt or reinvest the proceeds of such sales within certain time periods, it will be required to offer to repurchase the Senior Notes with such proceeds at 100.00% of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
The Senior Notes contain customary events of default, including among other things, payment default, failure to provide certain notices and defaults related to bankruptcy events. The Senior Notes also contain customary negative covenants.
Future Principal Payments
Future principal payments under the Amended 2013 Credit Facilities and the Senior Notes as of September 30, 2016, are as follows (in thousands):
2016
$
27,439

2017
109,757

2018
49,889

2019
459,369

2020

Thereafter
300,000

Total future principal payments
$
946,454

In October 2016, the Company made $40.0 million in voluntary prepayments towards the outstanding principal balance of its Amended 2013 Credit Facilities.
Deferred Financing Costs
On September 28, 2016, the Company amended its 2013 Credit Facilities. Certain creditors in the 2013 Term Facility and the 2015 Incremental Term Facility reinvested in the Amended 2013 Term Facility and the change in the present value of future cash flows between the investments was less than 10%. Accordingly, the Company accounted for this refinancing event for these creditors as a debt modification. Previously deferred fees and costs for existing debt will be amortized over the term of the Amended 2013 Term Facility. Fees paid to the creditors in connection with the amendment were included in the loss on debt extinguishment. The proportionate fees incurred with third parties directly related to the modification were included in debt modification expense. Certain investors in the 2013 Term Facility and the 2015 Incremental Term Facility either did not invest in the Amended 2013 Term Facility or the change in the present value of future cash flows between the investments was greater than 10%. Accordingly, the Company accounted for this refinancing event for these investors as a debt extinguishment. Previously deferred fees and costs for existing debt were included in the loss on debt extinguishment. Fees paid to the creditors in connection with the amendment will be amortized over the term of the Amended 2013 Term Facility. The proportionate fees incurred with third parties directly related to the modification will be amortized over the term of the Amended 2013 Term Facility.

15

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


Further, the borrowing capacity of certain investors under the Amended 2013 Revolving Facility was greater than or equal to the borrowing capacity under the 2013 Revolving Facility. Accordingly, fees and costs incurred related to the amendment on September 28, 2016, as well as unamortized deferred financing costs, associated with the 2013 Revolving Facility, will be amortized over the term of the Amended 2013 Revolving Facility. The borrowing capacity of certain investors under the Amended 2013 Credit Facility was less than the borrowing capacity under the 2013 Revolving Facility. Accordingly, fees paid in 2016 to the creditor and third-party costs incurred in connection with the amendment on September 28, 2016 will be amortized over the term of the Amended 2013 Revolving Facility. Unamortized deferred financing costs associated with the 2013 Revolving Facility were written off in proportion to an investor's decrease in borrowing capacity.
In applying debt modification accounting, the Company recorded $6.4 million in interest and other expense, comprised of $6.0 million in loss on debt extinguishment and $0.4 million in debt modification expense, in connection with this refinancing event.
6.
STOCKHOLDERS’ EQUITY
As of September 30, 2016, a total of 2,736,526 shares were available for grant or award under the Company’s stock incentive plans and a total of 176,474 shares were available to be issued under the Company’s Employee Stock Purchase Plan. On June 15, 2016, at the Company’s annual meeting of stockholders, the Company’s stockholders approved a proposal to make an additional 3,000,000 shares available for grant under the Company’s stock incentive plans. These shares will become available for grant once registered on a Form S-8 filed with the SEC.
Stock-based compensation expense recognized for the three months ended September 30, 2015 and 2016 was $10.4 million and $11.6 million, respectively, and $28.1 million and $32.1 million for the nine months ended September 30, 2015 and 2016, respectively. As of September 30, 2016, total unrecognized compensation expense was estimated at $54.6 million, which the Company expects to recognize over a weighted average period of approximately 1.4 years. Total unrecognized compensation expense as of September 30, 2016 is estimated based on outstanding non-vested stock options, non-vested restricted stock units and non-vested performance vested restricted stock units (PVRSUs). Stock-based compensation expense may increase or decrease in future periods for subsequent grants or forfeitures.
Stock Options
The Company utilizes the Black-Scholes option pricing model to estimate the fair value of stock options granted. The following table summarizes the Company’s stock option activity:
 
Shares
 
Weighted-
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
(in millions)
 
Weighted-
Average
Remaining
Contractual
Life
(in years)
Outstanding at December 31, 2015
1,356,904

 
$
24.70

 
 
 
 
Granted

 

 
 
 
 
Exercised
(133,794
)
 
16.28

 
 
 
 
Forfeited
(172,559
)
 
26.77

 
 
 
 
Outstanding at September 30, 2016
1,050,551

 
$
25.44

 
$
1.5

 
2.2
Exercisable at September 30, 2016
944,211

 
$
25.33

 
$
1.5

 
1.9
The aggregate intrinsic value of options exercised for the nine months ended September 30, 2016 was $1.0 million.
Performance Vested Restricted Stock Units
The fair value of a PVRSU is measured by reference to the closing market price of the Company’s common stock on the date of the grant. The Company recognizes the estimated fair value of PVRSUs, net of estimated forfeitures, as stock-based compensation expense over the vesting period, which considers each performance period or tranche separately, based upon the Company’s determination of the level of achievement of the performance target.
During the three months ended September 30, 2016, the Company revised its estimate of the level of achievement of the performance target for the 2016 performance year, resulting in a decrease in stock-based compensation expense. The

16

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


Company’s consolidated net income for the three and nine months ended September 30, 2016 was $53.0 million and $122.5 million, respectively, and diluted net income per common share was $0.96 and $2.22 per share, respectively. If the Company had continued to use the previous estimate of achievement for each respective period, the as adjusted net income for the three and nine months ended September 30, 2016 would have been approximately $52.2 million and $121.0 million, respectively, and the as adjusted diluted net income per common share would have been approximately $0.94 and $2.19 per share, respectively.
The following table summarizes the Company’s non-vested PVRSU activity for the nine months ended September 30, 2016:
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value
(in millions)
Non-vested at December 31, 2015
1,366,572

 
$
26.78

 
 
Granted
1,123,061

 
24.08

 
 
Vested
(882,243
)
 
28.29

 
 
Forfeited
(211,584
)
 
26.94

 
 
Non-vested at September 30, 2016
1,395,806

 
$
23.63

 
$
37.1

The aggregate intrinsic value of PVRSUs vested during the nine months ended September 30, 2016 was approximately $21.8 million. The Company repurchased 339,783 shares of common stock for an aggregate purchase price of $8.4 million pursuant to the participants’ rights under the Company’s stock incentive plans to elect to use common stock to satisfy their minimum tax withholding obligations.
Restricted Stock Units
The following table summarizes the Company’s restricted stock units activity for the nine months ended September 30, 2016:
 
Shares
 
Weighted-
Average
Grant Date
Fair Value
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at December 31, 2015
2,074,120

 
$
30.42

 
 
Granted
1,172,334

 
24.00

 
 
Vested
(535,753
)
 
32.12

 
 
Forfeited
(231,194
)
 
28.39

 
 
Outstanding at September 30, 2016
2,479,507

 
$
27.21

 
$
66.0

The aggregate intrinsic value of restricted stock units vested during the nine months ended September 30, 2016 was approximately $13.0 million. The Company repurchased 191,249 shares of common stock for an aggregate purchase price of $4.6 million pursuant to the participants’ rights under the Company’s stock incentive plans to elect to use common stock to satisfy their minimum tax withholding obligations.

17

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


7.
BASIC AND DILUTED NET INCOME PER COMMON SHARE
The following table provides a reconciliation of the numerators and denominators used in computing basic and diluted net income per common share (in thousands, except per share data):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2016
 
2015
 
2016
Computation of basic net income per common share:
 
 
 
 
 
 
 
Net income
$
50,282

 
$
53,031

 
$
141,554

 
$
122,527

Weighted average common shares and participating securities outstanding – basic
54,123

 
54,542

 
55,153

 
54,318

Basic net income per common share
$
0.93

 
$
0.97

 
$
2.57

 
$
2.26

Computation of diluted net income per common share:
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
54,123

 
54,542

 
55,153

 
54,318

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock-based awards
1,002

 
890

 
925

 
809

Weighted average common shares outstanding – diluted
55,125

 
55,432

 
56,078

 
55,127

Diluted net income per common share
$
0.91

 
$
0.96

 
$
2.52

 
$
2.22

Diluted net income per common share reflects the potential dilution of common stock equivalents such as options and warrants, to the extent the impact is dilutive. Common stock options to purchase an aggregate of 754,059 and 1,190,512 shares were excluded from the calculation of the denominator for diluted net income per common share due to their anti-dilutive effect for the three months ended September 30, 2015 and 2016, respectively. Common stock options to purchase an aggregate of 776,001 and 1,433,707 shares were excluded from the calculation of the denominator for diluted net income per common share due to their anti-dilutive effect for the nine months ended September 30, 2015 and 2016, respectively.
8.
RESTRUCTURING CHARGES
2016 Restructuring
During the three and nine months ended September 30, 2016, the Company recorded restructuring charges of $2.6 million and $11.4 million, respectively, related to estimated severance and severance-related costs.
9.
INTEREST AND OTHER EXPENSE
Interest and other expense consists of the following (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2016
 
2015
 
2016
Interest and other expense:
 
 
 
 
 
 
 
Interest expense
$
6,475

 
$
15,191

 
$
19,321

 
$
47,718

Loss on debt modification and extinguishment

 
6,354

 

 
6,354

Gain on asset disposals
(23
)
 
(123
)
 
(277
)
 
(115
)
Foreign currency transaction loss
323

 
757

 
934

 
1,024

Total interest and other expense
$
6,775

 
$
22,179

 
$
19,978

 
$
54,981

10.
INCOME TAXES
The Company’s effective tax rate, including discrete tax benefits of $26.4 million, decreased to 17.3% for the nine months ended September 30, 2016 from 35.3% for the nine months ended September 30, 2015, primarily due to a discrete

18

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


income tax benefit of $23.1 million recorded in the third quarter of 2016 for a worthless stock deduction associated with the liquidation of one of the Company’s domestic subsidiaries for tax purposes. The Company intends to treat the common stock of this subsidiary as worthless for U.S. income tax purposes on its 2016 U.S. federal and state income tax returns.
As of December 31, 2015 and September 30, 2016, the Company had unrecognized tax benefits of $7.5 million and $7.7 million, respectively, of which $6.9 million and $7.0 million, respectively, would affect the Company’s effective tax rate if recognized.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. During the three and nine months ended September 30, 2015 and 2016, potential interest and penalties were insignificant. Interest and penalties are primarily due to uncertain tax positions assumed in acquisitions. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.
The Company files income tax returns in the United States federal jurisdiction and in many state and foreign jurisdictions. The tax years 2009 through 2015 remain open to examination by the major taxing jurisdictions to which the Company is subject. During the first quarter of 2016, the IRS completed an examination of the 2010 federal income tax return of Neustar Information Services, Inc. No adjustments were made as a result of the audit.
The Company anticipates that the amount of reasonably possible unrecognized tax benefits that could decrease over the next 12 months due to the expiration of certain statutes of limitations and settlement of tax audits is not material to the Company's consolidated financial statements.
11.
SEGMENT INFORMATION
The Company engages in business activities as a single entity and the chief operating decision maker reviews consolidated operating results and allocates resources based on consolidated reports. The Company has a single operating segment.
Enterprise-Wide Disclosures
Revenue by geographical areas is based on the billing address of the Company’s clients. Geographic area revenue and service revenue from external clients for the three and nine months ended September 30, 2015 and 2016, and geographic area property and equipment as of December 31, 2015 and September 30, 2016 are as follows (in thousands):
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2015
 
2016
 
2015
 
2016
Revenue by geographical areas:
 
 
 
 
 
 
 
United States
$
240,652

 
$
274,212

 
$
713,696

 
$
810,656

International
21,001

 
25,869

 
56,112

 
74,288

Total revenue
$
261,653

 
$
300,081

 
$
769,808

 
$
884,944

 
 
 
 
 
 
 
 
Revenue by service:
 
 
 
 
 
 
 
Marketing Services
$
41,108

 
$
63,277

 
$
119,224

 
$
184,871

Security Services
43,150

 
51,020

 
123,243

 
148,990

Data Services
51,198

 
58,155

 
148,592

 
167,119

NPAC Services
126,197

 
127,629

 
378,749

 
383,964

Total revenue
$
261,653

 
$
300,081

 
$
769,808

 
$
884,944


19

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


 
December 31,
2015
 
September 30,
2016
Property and equipment, net
 
 
 
United States
$
145,077

 
$
139,791

Australia
2,171

 
1,431

Other
516

 
640

Total property and equipment, net
$
147,764

 
$
141,862

12.
SUPPLEMENTAL GUARANTOR INFORMATION
The following schedules present condensed consolidating financial information of the Company as of December 31, 2015 and September 30, 2016 and for the three and nine months ended September 30, 2015 and 2016 for (a) Neustar, Inc., the parent company; (b) certain of the Company’s 100% owned domestic subsidiaries (collectively, the Subsidiary Guarantors); and (c) certain wholly-owned domestic and foreign subsidiaries of the Company (collectively, the Non-Guarantor Subsidiaries). Investments in subsidiaries are accounted for using the equity method; accordingly, entries necessary to consolidate the parent company and all of the guarantor and non-guarantor subsidiaries are reflected in the eliminations column. Intercompany amounts that will not be settled between entities are treated as contributions or distributions for purposes of these condensed consolidated financial statements. The guarantees are full and unconditional and joint and several. A Subsidiary Guarantor will be released from its obligations under the Senior Notes when: (a) the Subsidiary Guarantor is sold or sells substantially all of its assets; (b) the Subsidiary Guarantor is designated as an unrestricted subsidiary as defined by the Senior Notes; (c) the Subsidiary Guarantor’s guarantee of indebtedness under the Senior Notes is released (other than discharge through repayment); or (d) the requirements for legal or covenant defeasance or discharge of the indenture have been satisfied.

20

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2015
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
48,061

 
$
27,092

 
$
13,944

 
$

 
$
89,097

Restricted cash
1,260

 
1,103

 

 

 
2,363

Accounts receivable, net
91,899

 
71,062

 
4,632

 

 
167,593

Unbilled receivables
2,357

 
14,694

 
661

 

 
17,712

Prepaid expenses and other current assets
23,080

 
8,551

 
1,868

 
(3,283
)
 
30,216

Deferred costs
1,119

 
2,876

 
2,681

 

 
6,676

Income taxes receivable
10,661

 

 

 
(4,778
)
 
5,883

Intercompany receivable
26,030

 

 

 
(26,030
)
 

Total current assets
204,467

 
125,378

 
23,786

 
(34,091
)
 
319,540

Property and equipment, net
135,445

 
9,302

 
3,017

 

 
147,764

Goodwill
94,153

 
984,017

 
108,813

 

 
1,186,983

Intangible assets, net
13,751

 
462,848

 
52,680

 

 
529,279

Net investments in subsidiaries
1,545,227

 

 

 
(1,545,227
)
 

Other assets, long-term
16,071

 
1,283

 
2,635

 
(1,308
)
 
18,681

Total assets
$
2,009,114

 
$
1,582,828

 
$
190,931

 
$
(1,580,626
)
 
$
2,202,247

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
18,945

 
$
7,522

 
$
1,925

 
$

 
$
28,392

Accrued expenses
98,761

 
29,262

 
6,609

 

 
134,632

Income taxes payable

 
3,068

 
1,496

 
(4,564
)
 

Deferred revenue
24,929

 
46,153

 
19,924

 

 
91,006

Notes payable
131,272

 

 
3,283

 
(3,283
)
 
131,272

Capital lease obligations
3,927

 

 
864

 

 
4,791

Other liabilities
9,937

 
279

 
659

 

 
10,875

Intercompany payable

 
18,199

 
7,831

 
(26,030
)
 

Total current liabilities
287,771

 
104,483

 
42,591

 
(33,877
)
 
400,968

Deferred revenue, long-term
8,239

 
9,734

 
5,025

 

 
22,998

Notes payable, long-term
957,509

 

 

 

 
957,509

Capital lease obligations, long-term
1,825

 

 
6

 

 
1,831

Deferred income tax liabilities, long-term

 
42,865

 
7,658

 
(11,822
)
 
38,701

Other liabilities, long-term
41,978

 
8,652

 
6,111

 

 
56,741

Total liabilities
1,297,322

 
165,734

 
61,391

 
(45,699
)
 
1,478,748

Total stockholders’ equity
711,792

 
1,417,094

 
129,540

 
(1,534,927
)
 
723,499

Total liabilities and stockholders’ equity
$
2,009,114

 
$
1,582,828

 
$
190,931

 
$
(1,580,626
)
 
$
2,202,247


21

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2016
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
36,354

 
$
10,856

 
$
8,989

 
$

 
$
56,199

Restricted cash
1,260

 
1,027

 

 

 
2,287

Accounts receivable, net
98,916

 
91,667

 
5,216

 

 
195,799

Unbilled receivables
1,897

 
11,398

 
706

 

 
14,001

Prepaid expenses and other current assets
24,971

 
4,739

 
2,232

 

 
31,942

Deferred costs
1,575

 
4,622

 
3,394

 

 
9,591

Income taxes receivable
41,952

 

 
781

 
(1,409
)
 
41,324

Intercompany receivable
12,506

 

 

 
(12,506
)
 

Total current assets
219,431

 
124,309

 
21,318

 
(13,915
)
 
351,143

Property and equipment, net
130,503

 
9,067

 
2,292

 

 
141,862

Goodwill
94,153

 
967,320

 
111,292

 

 
1,172,765

Intangible assets, net
11,590

 
387,189

 
49,123

 

 
447,902

Net investments in subsidiaries
1,486,252

 

 

 
(1,486,252
)
 

Other assets, long-term
12,639

 
2,750

 
3,093

 

 
18,482

Total assets
$
1,954,568

 
$
1,490,635

 
$
187,118

 
$
(1,500,167
)
 
$
2,132,154

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
10,537

 
$
7,908

 
$
651

 
$

 
$
19,096

Accrued expenses
66,653

 
32,539

 
7,356

 

 
106,548

Deferred revenue
22,595

 
52,555

 
18,511

 

 
93,661

Notes payable
100,977

 
6,964

 
3,124

 
(10,088
)
 
100,977

Capital lease obligations
2,002

 

 
26

 

 
2,028

Income taxes payable

 
1,409

 

 
(1,409
)
 

Other liabilities
8,656

 
2,568

 
1,043

 

 
12,267

Intercompany payable
556

 

 
1,862

 
(2,418
)
 

Total current liabilities
211,976

 
103,943

 
32,573

 
(13,915
)
 
334,577

Deferred revenue, long-term
8,255

 
6,978

 
6,302

 

 
21,535

Notes payable, long-term
819,793

 

 

 

 
819,793

Capital lease obligations, long-term
60

 

 

 

 
60

Deferred income tax liabilities, long-term
9,438

 
20,247

 
6,964

 

 
36,649

Other liabilities, long-term
39,757

 
5,598

 
6,725

 

 
52,080

Total liabilities
1,089,279

 
136,766

 
52,564

 
(13,915
)
 
1,264,694

Total stockholders’ equity
865,289

 
1,353,869

 
134,554

 
(1,486,252
)
 
867,460

Total liabilities and stockholders’ equity
$
1,954,568

 
$
1,490,635

 
$
187,118

 
$
(1,500,167
)
 
$
2,132,154



22

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2015
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
176,980

 
$
85,273

 
$
9,426

 
$
(10,026
)
 
$
261,653

Operating expense:
 
 
 
 
 
 
 
 
 
Cost of revenue (excluding depreciation and amortization shown separately below)
42,633

 
28,169

 
4,680

 
(8,374
)
 
67,108

Sales and marketing
34,789

 
15,452

 
272

 
(1,602
)
 
48,911

Research and development
5,479

 
526

 
4

 

 
6,009

General and administrative
25,633

 
2,543

 
491

 
(50
)
 
28,617

Depreciation and amortization
13,044

 
15,940

 
1,288

 

 
30,272

 
121,578

 
62,630

 
6,735

 
(10,026
)
 
180,917

Income from operations
55,402

 
22,643

 
2,691

 

 
80,736

Other (expense) income:
 
 
 
 
 
 
 
 
 
Interest and other expense
(6,719
)
 
112

 
(168
)
 

 
(6,775
)
Interest income
(7
)
 
5

 
9

 

 
7

Income before income taxes and equity income in consolidated subsidiaries
48,676

 
22,760

 
2,532

 

 
73,968

Provision for income taxes
28,303

 
(5,727
)
 
1,110

 

 
23,686

Income before equity income in consolidated subsidiaries
20,373

 
28,487

 
1,422

 

 
50,282

Equity income in consolidated subsidiaries
29,909

 
296

 

 
(30,205
)
 

Net income
$
50,282

 
$
28,783

 
$
1,422

 
$
(30,205
)
 
$
50,282

Comprehensive income
$
51,887

 
$
28,837

 
$
(2,211
)
 
$
(30,205
)
 
$
48,308




23

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2016
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue
$
170,937

 
$
127,628

 
$
13,735

 
$
(12,219
)
 
$
300,081

Operating expense:
 
 
 
 
 
 
 
 
 
Cost of revenue (excluding depreciation and amortization shown separately below)
42,051

 
57,563

 
5,045

 
(11,099
)
 
93,560

Sales and marketing
29,200

 
19,725

 
2,900

 
(1,001
)
 
50,824

Research and development
5,636

 
(79
)
 
484

 

 
6,041

General and administrative
24,297

 
2,988

 
874

 
(119
)
 
28,040

Depreciation and amortization
13,788

 
33,462

 
2,451

 

 
49,701

Restructuring charges
1,190

 
951

 
488

 

 
2,629

Separation costs
2,135

 

 

 

 
2,135

 
118,297


114,610


12,242


(12,219
)

232,930

Income from operations
52,640

 
13,018

 
1,493

 

 
67,151

Other (expense) income:
 
 
 
 
 
 
 
 
 
Interest and other expense
(21,647
)
 
(799
)
 
267

 

 
(22,179
)
Interest income
502

 
126

 
(578
)
 

 
50

Income before income taxes and equity income in consolidated subsidiaries
31,495


12,345


1,182




45,022

(Benefit) provision for income taxes
(17,090
)
 
9,553

 
(472
)
 

 
(8,009
)
Income before equity income in consolidated subsidiaries
48,585


2,792


1,654




53,031

Equity income in consolidated subsidiaries
4,445

 
194

 

 
(4,639
)
 

Net income
$
53,030


$
2,986


$
1,654


$
(4,639
)

$
53,031

Comprehensive income
$
52,119

 
$
3,009

 
$
4,198

 
$
(4,638
)
 
$
54,688



24

NEUSTAR, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2016


CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2015
(in thousands)
 
NeuStar, Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenue