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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 
For the quarterly period ended December 31, 2010
 
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 0-13163
   
Acxiom Corporation
(Exact Name of Registrant as Specified in Its Charter)
   
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
71-0581897
(I.R.S. Employer
Identification No.)
   
P.O. Box 8180, 601 E. Third Street,
Little Rock, Arkansas
(Address of Principal Executive Offices)
72201
(Zip Code)
   
(501) 342-1000
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
   
      Yes  [X]
     No  [ ]
     
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such filings).
 
Yes [X]
No [ ]
     
 
 
1

 
           
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer [X]
 
Accelerated filer   [ ]
   
 
Non-accelerated filer [ ]
 
Smaller reporting company [ ]
   
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act.)
 
   
Yes  [ ]
No  [X]
     
             
The number of shares of Common Stock, $ 0.10 par value per share outstanding as of February 1, 2011 was 80,346,320.
 
 
 
 
 


 

 

ACXIOM CORPORATION AND SUBSIDIARIES
INDEX
REPORT ON FORM 10-Q
December 31, 2010
 
 
 Part I.    Financial Information     Page No.
   Item 1.      Financial Statements        
Condensed Consolidated Balance Sheets
   
        as of December 31, 2010 and March 31, 2010 (Unaudited)  
     
   4
        Condensed Consolidated Statements of Operations    
        for the Three Months ended December 31, 2010 and 2009 (Unaudited) 
 
   5
        Condensed Consolidated Statements of Operations    
        for the Nine Months ended December 31, 2010 and 2009 (Unaudited) 
 
   6
        Condensed Consolidated Statement of Equity and Comprehensive Income    
        for the Nine Months ended December 31, 2010 (Unaudited)        7
     
        Condensed Consolidated Statements of Cash Flows    
        for the Nine Months ended December 31, 2010 and 2009 (Unaudited)    
 
   8-9
        Notes to Condensed Consolidated Financial Statements
 
   10-22
 
 Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations
 
   23-33
 
 Item 3.     Quantitative and Qualitative Disclosure about Market Risk
 
   34
   Item 4.     Controls and Procedures    34
 
Part II.    Other Information
   
   Item 1.     Legal Proceedings    35
   Item 6.     Exhibits    35
     
 Signature    36
 
 
 
 

 

PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements
ACXIOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
 
   
December 31, 2010
   
March 31, 2010
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 203,936     $ 224,104  
Trade accounts receivable, net
    171,695       168,522  
Deferred income taxes
    11,863       11,874  
Refundable income taxes
    2,071       -  
Other current assets
    55,468       54,205  
Total current assets
    445,033       458,705  
Property and equipment, net of accumulated depreciation and amortization
    258,702       236,839  
Software, net of accumulated amortization
    31,018       38,845  
Goodwill
    488,381       470,261  
Purchased software licenses, net of accumulated amortization
    43,077       51,356  
Deferred costs, net
    85,792       68,914  
Data acquisition costs, net
    19,820       21,931  
Other assets, net
    14,429       16,569  
    $ 1,386,252     $ 1,363,420  
LIABILITIES AND EQUITY
               
Current liabilities:
               
Current installments of long-term debt
  $ 30,764     $ 42,106  
Trade accounts payable
    43,757       42,774  
Accrued expenses
               
Payroll
    32,485       36,517  
Other
    69,786       75,632  
Deferred revenue
    66,441       55,567  
Income taxes
    -       2,460  
Total current liabilities
    243,233       255,056  
Long-term debt
    414,307       458,629  
Deferred income taxes
    69,174       61,284  
Other liabilities
    8,834       9,954  
Commitments and contingencies
               
Equity:
               
Common stock
    11,746       11,662  
Additional paid-in capital
    832,065       814,929  
Retained earnings
    526,152       482,243  
Accumulated other comprehensive income
    9,554       4,167  
Treasury stock, at cost
    (738,601 )     (738,601 )
Total Acxiom stockholders' equity
    640,916       574,400  
Noncontrolling interest
    9,788       4,097  
Total equity
    650,704       578,497  
    $ 1,386,252     $ 1,363,420  
See accompanying notes to consolidated financial statements.
               

 

 

ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
 
                                                                 
      For the Three Months ended  December 31  
   
2010
   
2009
 
Revenue:
           
Services
  $ 232,798     $ 218,340  
Products
    66,312       65,467  
Total revenue
    299,110       283,807  
Operating costs and expenses:
               
Cost of revenue
               
Services
    178,586       163,206  
Products
    48,258       46,727  
Total cost of revenue
    226,844       209,933  
Selling, general and administrative
    41,331       43,477  
Gains, losses and other items, net
    (3,640 )     538  
Total operating costs and expenses
    264,535       253,948  
Income from operations
    34,575       29,859  
Other income (expense):
               
Interest expense
    (6,006 )     (5,687 )
Other, net
    (299 )     198  
Total other expense
    (6,305 )     (5,489 )
Earnings before income taxes
    28,270       24,370  
Income taxes
    7,856       10,212  
Net earnings
  $ 20,414     $ 14,158  
Less: Net loss attributable to noncontrolling interest
    (409 )     (104 )
Net earnings attributable to Acxiom
  $ 20,823     $ 14,262  
                 
Earnings per share:
               
Basic
  $ 0.25     $ 0.18  
Diluted
  $ 0.25     $ 0.18  
                 
Earnings per share attributable to Acxiom stockholders:
               
Basic
  $ 0.26     $ 0.18  
Diluted
  $ 0.25     $ 0.18  
                 
See accompanying notes to condensed consolidated financial statements.
               


  5
 

 


ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
                                                                              
     For the Nine Months ended December 31  
   
2010
   
2009
 
Revenue:
           
Services
  $ 669,038     $ 627,879  
Products
    192,136       183,014  
Total revenue
    861,174       810,893  
Operating costs and expenses:
               
Cost of revenue
               
Services
    518,923       488,574  
Products
    142,349       138,775  
Total cost of revenue
    661,272       627,349  
Selling, general and administrative
    119,560       119,084  
Gains, losses and other items, net
    (3,619 )     858  
Total operating costs and expenses
    777,213       747,291  
Income from operations
    83,961       63,602  
Other income (expense):
               
Interest expense
    (18,164 )     (16,615 )
Other, net
    (639 )     303  
Total other expense
    (18,803 )     (16,312 )
Earnings before income taxes
    65,158       47,290  
Income taxes
    22,611       19,493  
Net earnings
  $ 42,547     $ 27,797  
Less: Net loss attributable to noncontrolling interest
    (1,362 )     (104 )
Net earnings attributable to Acxiom
  $ 43,909     $ 27,901  
                 
Earnings per share:
               
Basic
  $ 0.53     $ 0.35  
Diluted
  $ 0.52     $ 0.35  
                 
Earnings per share attributable to Acxiom stockholders:
               
Basic
  $ 0.55     $ 0.35  
Diluted
  $ 0.54     $ 0.35  
                 
See accompanying notes to condensed consolidated financial statements.
               




 

 

ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY AND COMPREHENSIVE INCOME
NINE MONTHS ENDED DECEMBER 31, 2010
(Unaudited)
(Dollars in thousands)

                                 
Accumulated
                         
   
Common Stock
   
Additional
               
other
   
Treasury Stock
             
   
Number
         
paid-in
   
Comprehensive
   
Retained
   
comprehensive
   
Number
         
Noncontrolling
   
Total
 
   
of shares
   
Amount
   
Capital
   
Income
   
earnings
   
income
   
of shares
   
Amount
   
interest
   
equity
 
Balances at March 31, 2010
    116,619,682     $ 11,662     $ 814,929           $ 482,243     $ 4,167       (37,154,236 )   $ (738,601 )   $ 4,097     $ 578,497  
Employee stock awards, benefit plans and other issuances
    501,147       50       7,273     $ -       -       -       -       -       -       7,323  
Restricted stock units vested
    335,665       34       (34 )     -       -       -       -       -       -       -  
Non-cash share-based compensation
    -       -       9,897       -       -       -       -       -       -       9,897  
Purchase of GoDigital
    -       -       -       -       -       -       -       -       6,573       6,573  
Noncontrolling interest equity contribution
    -       -       -       -       -       -       -       -       480       480  
Comprehensive income:
                                                                               
Foreign currency translation
    -       -       -       3,741       -       3,741       -       -       -       3,741  
Unrealized gain on interest rate swap
    -       -       -       1,646       -       1,646       -       -       -       1,646  
Net earnings (loss)
    -       -       -       43,909       43,909       -       -       -       (1,362 )     42,547  
Total comprehensive income
                          $ 49,296                                                  
Balances at December 31, 2010
    117,456,494     $ 11,746     $ 832,065             $ 526,152     $ 9,554       (37,154,236 )   $ (738,601 )   $ 9,788     $ 650,704  
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
                                                                                 
 
See accompanying notes to condensed consolidated financial statements

 
 7

 

ACXIOM CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
                                                                              
     For the Nine Months ended December 31  
   
2010
   
2009
 
Cash flows from operating activities:
           
Net earnings
  $ 42,547     $ 27,797  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation and amortization
    108,586       124,912  
Loss (gain) on disposal or impairment of assets, net
    (272 )     410  
Deferred income taxes
    4,245       23,100  
Non-cash share-based compensation expense
    9,897       8,288  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    (7,913 )     5  
Other assets
    (4,590 )     11,913  
Deferred costs
    (28,407 )     (15,381 )
Accounts payable and other liabilities
    (11,653 )     (31,214 )
Deferred revenue
    11,744       1,548  
Net cash provided by operating activities
    124,184       151,378  
 
Cash flows from investing activities:
               
Capitalized software development costs
    (3,592 )     (6,661 )
Capital expenditures
    (46,808 )     (31,372 )
Payments received (paid) for investments
    175       (1,000 )
Sale of assets
    -       1,058  
Data acquisition costs
    (10,716 )     (14,231 )
Net cash paid in acquisitions
    (12,927 )     (3,428 )
Net cash used in investing activities
    (73,868 )     (55,634 )
 
Cash flows from financing activities:
               
Payments of debt
    (78,089 )     (72,442 )
Fees for debt refinancing
    -       (4,563 )
Sale of common stock
    7,323       3,014  
Acquisition of treasury stock
    -       (307 )
Noncontrolling interests equity contributions
    480       457  
Net cash used in financing activities
    (70,286 )     (73,841 )
Effect of exchange rate changes on cash
    (198 )     1,513  
Net change in cash and cash equivalents
    (20,168 )     23,416  
Cash and cash equivalents at beginning of period
    224,104       177,166  
 
Cash and cash equivalents at end of period
  $ 203,936     $ 200,582  
                 


 
  8

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Dollars in thousands)
                                                                              
     For the Nine Months ended December 31  
   
2010
   
2009
 
 
Supplemental cash flow information:
           
Cash paid (received) during the period for:
           
Interest
  $ 17,728     $ 16,807  
Income taxes
    22,995       (8,450 )
Payments on capital leases and installment payment arrangements
    17,105       22,607  
Payments on software and data license liabilities
    1,177       6,134  
Prepayments of debt
    53,533       37,500  
Other debt payments, excluding line of credit
    6,274       6,201  
Non-cash investing and financing activities:
               
Acquisition of property and equipment under capital leases and installment payment arrangements
    22,429       18,247  
Enterprise software licenses acquired under software obligations
    -       611  
 
 
See accompanying notes to condensed consolidated financial statements.
               
                 
                 
                 
                 


 
  9

 

ACXIOM CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.           BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

These condensed consolidated financial statements have been prepared by Acxiom Corporation (“Registrant,” “Acxiom” or “the Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC” or “the Commission”).  In the opinion of the Registrant’s management all adjustments necessary for a fair presentation of the results for the periods included have been made and the disclosures are adequate to make the information presented not misleading.  All such adjustments are of a normal recurring nature.  Certain note information has been omitted because it has not changed significantly from that reflected in notes 1 through 19 of the Notes to Consolidated Financial Statements filed as part of Item 8 of the Registrant’s annual report on Form 10-K for the fiscal year ended March 31, 2010 (“2010 Annual Report”), as filed with the Commission on May 26, 2010.  This report and the accompanying condensed consolidated financial statements should be read in connection with the 2010 Annual Report.  The financial information contained in this report is not necessarily indicative of the results to be expected for any other period or for the full fiscal year ending March 31, 2011.

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States.  Actual results could differ from those estimates.  Certain of the accounting policies used in the preparation of these condensed consolidated financial statements are complex and require management to make judgments and/or significant estimates regarding amounts reported or disclosed in these financial statements.  Additionally, the application of certain of these accounting policies is governed by complex accounting principles and their interpretation.  A discussion of the Company’s significant accounting principles and their application is included in note 1 and in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, to the Company’s 2010 Annual Report.

Accounting Changes

The FASB’s Emerging Issues Task Force has issued new accounting guidance for revenue arrangements with multiple deliverables.  Under previous accounting guidance, one of the requirements for recognition of revenue for a delivered item under a multiple element arrangement was that there must be objective and verifiable evidence of the standalone selling price of the undelivered item.  The new guidance eliminates that requirement and requires an entity to estimate the selling price of each element in the arrangement.  In addition, absent specific software revenue guidance, the residual method of allocating arrangement consideration is no longer permitted.  Under the new guidance, a multiple-deliverable arrangement is separated into more than one unit of accounting if the delivered items have value to the client on a stand-alone basis and, if the arrangement includes a general right of return related to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.  If these criteria are not met, the arrangement is accounted for as one unit of accounting, which would result in revenue being recognized ratably over the contract term or being deferred until the earlier of when those criteria are met or when the last undelivered item is delivered.  If the arrangement is separated into multiple units of accounting, the arrangement consideration is allocated to the separate units of accounting based on each unit’s relative selling price.

The relative selling price for each unit of accounting in a multiple-element arrangement is established using vendor-specific objective evidence (VSOE), if available, third-party evidence (TPE), if available, or management’s best estimate of stand-alone selling price (BESP).  In most cases, the Company has neither VSOE nor TPE and therefore uses BESP.  The objective of BESP is to determine the price at which the company would transact a sale if the product or service were sold on a stand-alone basis.  Management’s BESP is determined by considering multiple factors, primarily including actual contractual selling prices when the item is sold on a stand-alone basis, as well as market conditions, competition, internal costs, profit objectives and pricing practices.  The amount of revenue recognized for a delivered element is limited to an amount that is not contingent upon future delivery of additional products or services.  As pricing and marketing strategies evolve, we may modify our pricing practices in the future, which could result in changes to BESP, or to the development of VSOE or TPE for individual products or services.  As a result, future revenue recognition for multiple-element arrangements could differ from recognition in the current period.  Our relative selling prices are analyzed on an annual basis, or more frequently if we experience significant changes in selling prices.

As allowed, the Company has elected to early-adopt the provisions of the guidance as of April 1, 2010 on a prospective basis for new arrangements entered into or materially modified on or after that date.  The impact of the new accounting standard is not expected to be material going forward, nor would it have had a material impact if it had been applied to the previous fiscal year.  There was also no material impact from implementation of the guidance in the quarter or the nine months ended December 31, 2010.

 
10

 
The FASB has also issued guidance which amended the scope of existing software revenue recognition guidance.  Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of software revenue guidance and are accounted for based on other applicable revenue recognition guidance.  In addition, the amendments require that hardware components of a tangible product containing software components are always excluded from the software revenue guidance.  This guidance must be adopted in the same period that the Company adopts the amended guidance for arrangements with multiple deliverables.  Therefore, the Company elected to early-adopt this guidance as of April 1, 2010 on a prospective basis for all new or materially modified arrangements entered into on or after that date.  The adoption of this guidance did not have a material impact on the consolidated financial statements.

The following paragraphs restate the Company’s revenue recognition accounting policy after implementation of the accounting change.

Revenue Recognition

The Company provides database management and IT management services under long-term arrangements.  These arrangements may require the Company to perform setup activities such as the design and build of a database for the customer under the database management contracts and migration of the customer’s IT environment under IT management contracts.  In the case of database management contracts, the customer does not acquire any ownership rights to the Company’s intellectual property used in the database and the database itself provides no benefit to the customer outside of the utilization of the system during the term of the database management arrangement.  In some cases, the arrangements also contain provisions requiring customer acceptance of the setup activities prior to commencement of the ongoing services arrangement.  Up-front fees billed during the setup phase for these arrangements are deferred and setup costs that are direct and incremental to the contract are capitalized and amortized on a straight-line basis over the service term of the contract.  Revenue recognition does not begin until after customer acceptance in cases where contracts contain acceptance provisions.  Once the setup phase is complete and customer acceptance occurs, the Company recognizes revenue over the remaining service term of the contract.  In situations where the arrangement does not require customer acceptance before the Company begins providing services, revenue is recognized over the contract period and no costs are deferred. The Company accounts for all elements under its database management and IT management arrangements as a single unit, since the initial setup activities performed under the arrangements do not have stand-alone value to the client.

Sales of third-party software, hardware and certain other equipment are recognized when delivered.  If such sales are part of a multiple-element arrangement, they are recognized as a separate element unless collection of the sales price is dependent upon delivery of other products or services.  Additionally, the Company evaluates revenue from the sale of data, software, hardware and equipment in accordance with accounting standards to determine whether such revenue should be recognized on a gross or a net basis.  All of the factors in the accounting standards are considered with the primary factor being whether the Company is the primary obligor in the arrangement.  “Out-of-pocket” expenses incurred by, and reimbursed to, the Company in connection with customer contracts are recorded as gross revenue.

The Company evaluates its database management and IT management arrangements to determine whether the arrangement contains a lease.  If the arrangement is determined to contain a lease, applicable accounting standards require the Company to account for the lease component separately from the remaining components of the arrangement.  In cases where database management or IT management arrangements are determined to include a lease, the lease is evaluated to determine whether it is a capital lease or operating lease and accounted for accordingly.  These lease revenues are not significant to the Company’s consolidated financial statements.

Revenues from the licensing of data are recognized upon delivery of the data to the customer in circumstances where no update or other obligations exist.  Revenue from the licensing of data in which the Company is obligated to provide future updates on a monthly, quarterly or annual basis is recognized on a straight-line basis over the license term.  Revenue from the licensing of data to the customer in circumstances where the license agreement contains a volume cap is recognized in proportion to the total records to be delivered under the arrangement.  Revenue from the sale of data on a per-record basis is recognized as the records are delivered.

All taxes assessed on revenue-producing transactions described above are presented on a net basis, or excluded from revenues.

 
11

 
The Company also performs services on a project basis outside of, or in addition to, the scope of long-term arrangements.  The Company recognizes revenue from these services as the services are performed.

The Company does not provide end-users with price-protection or rights of return.  The Company’s contracts provide a warranty that the services or products will meet the agreed-upon criteria or any necessary modifications will be made.  The Company ensures that services or products delivered meet the agreed-upon criteria prior to recognition of revenue.

2.           EARNINGS PER SHARE AND STOCKHOLDERS’ EQUITY:

Earnings Per Share

A reconciliation of the numerator and denominator of basic and diluted earnings per share is shown below (in thousands, except per share amounts):
 
   
For the quarter ended
December 31
   
For the nine months ended
December 31
 
   
2010
   
2009
   
2010
   
2009
 
Basic earnings per share:
                       
Numerator – net earnings
  $ 20,414     $ 14,158     $ 42,547     $ 27,797  
Denominator – weighted-average shares outstanding
    80,233       79,068       80,007       78,883  
Basic earnings per share
  $ 0.25     $ 0.18     $ 0.53     $ 0.35  
Diluted earnings per share:
                               
Numerator – net earnings
  $ 20,414     $ 14,158     $ 42,547     $ 27,797  
                                 
Denominator:
                               
Weighted-average shares outstanding
    80,233       79,068       80,007       78,883  
Dilutive effect of common stock options, warrants, and restricted stock as computed under the treasury stock method
    1,865       802       1,606       537  
      82,098       79,870       81,613       79,420  
Diluted earnings per share
  $ 0.25     $ 0.18     $ 0.52     $ 0.35  
                                 
Basic earnings per share attributable to Acxiom stockholders:
                               
Numerator – net earnings
  $ 20,823     $ 14,262     $ 43,909     $ 27,901  
Denominator – weighted-average shares outstanding
    80,233       79,068       80,007       78,883  
Basic earnings per share attributable to Acxiom stockholders
  $ 0.26     $ 0.18     $ 0.55     $ 0.35  
Diluted earnings per share attributable to Acxiom stockholders:
                               
Numerator – net earnings
  $ 20,823     $ 14,262     $ 43,909     $ 27,901  
                                 
Denominator:
                               
Weighted-average shares outstanding
    80,233       79,068       80,007       78,883  
Dilutive effect of common stock options, warrants, and restricted stock as computed under the treasury stock method
    1,865       802       1,606       537  
      82,098       79,870       81,613       79,420  
Diluted earnings per share attributable to Acxiom stockholders
  $ 0.25     $ 0.18     $ 0.54     $ 0.35  
                                 

 
12 

 

As of December 31, 2010, the Company had options and warrants outstanding providing for the purchase of approximately 11.3 million shares of common stock together with restricted stock units relating to 2.2 million shares of stock.  Options, warrants and restricted stock units that were outstanding during the periods presented, but were not included in the computation of diluted earnings per share because the effect was antidilutive are shown below (in thousands, except per share amounts):

   
For the quarter ended
December 31
 
For the nine months ended
December 31
   
2010
 
2009
 
2010
 
2009
Number of shares outstanding under options, warrants and restricted stock units
 
5,647
 
10,336
 
5,969
 
11,247
Range of exercise prices for options and warrants
 
$17.76-$62.06
 
$11.87-$268.55
 
$16.71-$75.55
 
$11.50-$268.55
                 

3.           SHARE-BASED COMPENSATION:

Share-based Compensation Plans

Stock Option Activity
The Company has stock option and equity compensation plans for which a total of 37.7 million shares of the Company’s common stock have been reserved for issuance since inception of the plans.  These plans provide that the exercise prices of qualified options will be at or above the fair market value of the common stock at the time of the grant.  Board policy has required that nonqualified options be priced at or above the fair market value of the common stock at the time of grant.  At December 31, 2010, there were a total of 4.9 million shares available for future grants under the plans.

The Company granted 254,133 stock options in the nine months ended December 31, 2010.  The per-share weighted-average fair value of the stock options granted during the nine months ended December 31, 2010 was $7.54.  This valuation was determined using a customized binomial lattice approach with the following weighted-average assumptions: dividend yield of 0.0%; risk-free interest rate of 3.4%; expected option life of 5.6 years; expected volatility of 52% and a suboptimal exercise multiple of 1.9.

Option activity for the nine months ended December 31, 2010 was as follows:

   
Number
of shares
   
Weighted-average exercise price
per share
   
Weighted-average remaining contractual term (in years)
   
Aggregate intrinsic value
(in thousands)
 
Outstanding at March 31, 2010
    10,368,532     $ 20.33              
Granted
    254,133     $ 17.79              
Exercised
    (315,785 )   $ 13.63           $ 1,130  
Forfeited or cancelled
    (347,390 )   $ 23.40                
Outstanding at December 31, 2010
    9,959,490     $ 20.37       5.22     $ 17,000  
 
Exercisable at December 31, 2010
    8,624,408     $ 21.43       4.81     $ 11,239  

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Acxiom’s closing stock price on the last trading day of its third quarter of fiscal 2011 and the exercise price for each in-the-money option) that would have been received by the option holders had vested option holders exercised their options on December 31, 2010.  This amount changes based upon changes in the fair market value of Acxiom’s stock.


 
  13

 


Following is a summary of stock options outstanding and exercisable as of December 31, 2010:

     
Options outstanding
   
Options exercisable
 
Range of
exercise price
per share
   
Options
outstanding
 
Weighted- average remaining contractual life
 
Weighted-average
exercise price
per share
   
Options
exercisable
   
Weighted-average
exercise price
per share
 
                             
$ 3.69 - $ 9.62       570,495  
8.02 years
  $ 8.76       179,245     $ 8.43  
$ 10.22 - $ 15.00       2,134,461  
6.25 years
  $ 12.38       1,610,055     $ 12.32  
$ 15.10 - $ 19.82       2,500,275  
5.36 years
  $ 16.65       2,168,349     $ 16.57  
$ 20.12 - $ 25.00       2,343,651  
5.15 years
  $ 22.95       2,293,651     $ 22.90  
$ 25.98 - $ 29.30       1,370,845  
3.78 years
  $ 26.80       1,333,345     $ 26.78  
$ 30.93 - $ 39.12       780,889  
3.14 years
  $ 35.70       780,889     $ 35.70  
$ 40.50 - $ 62.06       258,874  
3.64 years
  $ 44.15       258,874     $ 44.15  
          9,959,490  
5.22 years
  $ 20.37       8,624,408     $ 21.43  

Total expense related to stock options for the nine months ended December 31, 2010 and 2009 was approximately $2.1 million and $1.8 million respectively.  Future expense for these options is expected to be approximately $4.5 million over the next four years.

Restricted Stock Unit Activity
Non-vested restricted stock unit activity for the period ending December 31, 2010 was as follows:

   
Number
of shares
   
Weighted average fair value per
share at grant date
(in thousands)
   
Weighted-average remaining contractual term (in years)
 
Outstanding at March 31, 2010
    2,495,641     $ 11.15       2.24  
Granted
    731,519     $ 19.32          
Vested
    (335,665 )   $ 9.45          
Forfeited or cancelled
    (703,460 )   $ 9.75          
Outstanding at December 31, 2010
    2,188,035     $ 14.04       1.86  

During the nine months ended December 31, 2010, the Company granted restricted stock units covering 731,519 shares of common stock with a value at the date of grant of $14.1 million.  Of the restricted stock units granted in the current period, 467,641 vest in equal annual increments over four years and 72,088 vest in one year.  The remaining 191,790 vest subject to attainment of performance criteria established by the compensation committee of the board of directors.  Each recipient of the performance units may vest in a number of shares from zero to 200% of their award, based on the total shareholder return of Acxiom stock compared to total shareholder return of a group of peer companies established by the committee for the period from April 1, 2010 to March 29, 2013.  The value of the performance units is determined using a Monte Carlo simulation model.  Valuation of all other restricted stock units is equal to the quoted market price for the shares on the date of grant.  The expense related to restricted stock in the nine months ended December 31, 2010 was $7.8 million.  The expense related to restricted stock in the nine months ended December 31, 2009 was $5.8 million.  Future expense for restricted stock units is expected to be approximately $21.3 million over the next four years.

4.           ACQUISITIONS:

On July 1, 2010, the Company completed the acquisition of a 70% interest in GoDigital Tecnologia E Participacoes, Ltda. (“GoDigital”), a Brazilian marketing services business.  The Company paid $10.9 million, net of cash acquired, and not including amounts, if any, to be paid under an earnout agreement in which the Company may pay up to an additional $9.3 million based on the results of the acquired business over approximately the next two years.  The acquired business has annual revenue of approximately $8 million.  The Company has omitted pro forma disclosures related to this acquisition as the pro forma effect of the acquisition is not material.  The results of operations for GoDigital are included in the Company’s consolidated results beginning July 1, 2010.

The value of the earnout was originally estimated at $3.6 million.  During the current fiscal period, the Company has estimated the value of the earnout to have decreased by $0.4 million and has recorded the adjustment in gains, losses and other items, net on the consolidated statement of operations.  The value of the earnout liability will continue to be adjusted to its estimated value until the completion of the earnout period.

 
14

 
On April 1, 2010, the Company acquired 100% of the outstanding shares of a digital marketing business (“XYZ”) operating in Australia and New Zealand.  The acquisition gives the Company additional market opportunities in this region.  The Company paid $1.8 million in cash, net of cash acquired, and not including amounts, if any, to be paid under an earnout agreement in which the Company may pay up to an additional $0.6 million if the acquired business achieves a revenue target over the next two years.  The value of the earnout is estimated at $0.5 million.  The acquired business has annual revenue of less than $2 million.  The Company has omitted pro forma disclosures related to this acquisition as the pro forma effect of this acquisition is not material.  The results of operation for the acquisition are included in the Company’s consolidated results beginning April 1, 2010.

The following table shows the allocation of the purchase price for the above acquisitions to assets acquired and liabilities assumed (dollars in thousands):
   
GoDigital
   
XYZ
 
Assets acquired:
           
Cash
  $ 776     $ 547  
Goodwill
    13,687       1,446  
Other intangible assets
    6,500       779  
Other current and noncurrent assets
    1,178       184  
      22,141       2,956  
Accounts payable, accrued expenses and capital leases assumed
    (232 )     (120 )
Net assets acquired
    21,909       2,836  
Less:
               
Cash acquired
    (776 )     (547 )
Earnout liability
    (3,611 )     (532 )
Non-controlling interest
    (6,573 )     -  
Net cash paid
  $ 10,949     $ 1,757  

The purchase price allocation for GoDigital is provisional, pending completion of an analysis to determine the tax basis of certain assets and liabilities.  The Company expects to complete the analysis during the current fiscal year.  Any adjustments required to establish deferred tax assets or liabilities will result in adjustment to goodwill.

5.           OTHER CURRENT AND NONCURRENT ASSETS:

Other current assets consist of the following (dollars in thousands):

   
December 31,
 2010
   
March 31,
 2010
 
Current portion of unbilled and notes receivable
  $ 738     $ 907  
Prepaid expenses
    40,448       40,420  
Non-trade receivables
    1,691       1,188  
Assets of non-qualified retirement plan
    12,474       11,564  
Other miscellaneous assets
    117       126  
Other current assets
  $ 55,468     $ 54,205  

Other noncurrent assets consist of the following (dollars in thousands):

   
December 31,
 2010
   
March 31,
 2010
 
Acquired intangible assets, net
  $ 9,427     $ 9,721  
Noncurrent portion of unbilled and notes receivable
    259       1,873  
Other miscellaneous noncurrent assets
    4,743       4,975  
Other assets
  $ 14,429     $ 16,569  

The acquired intangible assets noted above represent customer relationship intangibles acquired through purchase acquisitions, net of accumulated amortization.


 
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6.           GOODWILL:

Goodwill represents the excess of acquisition costs over the fair values of net assets acquired in business combinations.  Goodwill is reviewed at least annually for impairment under a two-part test.  Impairment exists to the extent that the reporting unit’s recorded goodwill exceeds the residual fair value assigned to goodwill.  Any impairment that results from the completion of the two-part test is recorded as a charge to operations during the period in which the impairment test is completed.  Completion of the Company’s most recent annual impairment test during the quarter ended June 30, 2010 indicated that no impairment of its goodwill balances existed as of April 1, 2010.

The carrying amount of goodwill, by business segment, for the nine months ended December 31, 2010 is presented in the following table.

(dollars in thousands)
 
 
Information
Services
   
Information
Products
   
Total
 
Balance at March 31, 2010
  $ 348,084     $ 122,177     $ 470,261  
Acquisitions
    15,133       -       15,133  
Purchase adjustments
    (10 )     -       (10 )
Change in foreign currency translation adjustment
    899       2,098       2,997  
Balance at December 31, 2010
  $ 364,106     $ 124,275     $ 488,381  

Goodwill is tested for impairment at the reporting unit level, which is defined as either an operating segment or one step below operating segment, known as a component.  Acxiom’s two segments as presented above are the Information Services segment and the Information Products segment.  Because each of these segments contains both a US component and an International component, and there are some differences in economic characteristics between the US and International components, management has tested a total of four components.  The goodwill amounts as of April 1, 2010 included in each component tested were US Information Services, $306.1 million; US Information Products, $51.2 million; International Information Services, $42.0 million; and International Information Products $71.0 million.

In order to estimate a valuation for each of the four components tested, management used an income approach based on a discounted cash flow model.  Additionally, the analysis was enhanced to include a public company market multiple and a similar transactions comparison.

The income approach involves projecting cash flows for each component into the future and discounting these cash flows at an appropriate discount rate.  Management used budget figures for the first year of the projection model, and then projected those figures out into the future years using management’s best estimates of future revenue growth, operating margins, and other cash flow assumptions.  The discount rates used for each component in order to arrive at an estimated fair value were estimated as a weighted-average cost of capital which a marketplace participant would use to value each unit.  These weighted-average costs of capital rates include a market risk, added to a risk-free rate of return, and a size premium that is specific to the components being tested.  The resulting cost of equity is then weighted-averaged with the after-tax cost of debt.

The public company market multiple method was used to estimate values for each of the components by looking at market value multiples to revenue and EBITDA for selected public companies that are believed to be representative of companies that marketplace participants would use to arrive at comparable multiples for the individual component being tested.  These multiples are then used to develop a market value for that component.

The similar transactions method compared multiples based on acquisition prices of other companies believed to be those that marketplace participants would use to compare to the individual components being tested.  Those multiples are then used to develop a market value for that component.

In order to arrive at an estimated value for each component, management used a weighted-average approach to combine the results of each analysis.  Management believes that using multiple valuation approaches and then weighting them appropriately is a technique that a marketplace participant would use.

As a final test of the valuation results, the total of the values of the components was reconciled to the actual market value of Acxiom Corporation stock as of the April 1, 2010 valuation date.  This reconciliation indicated an implied control premium.  Management believes this control premium is reasonable compared to historical control premiums observed in actual transactions.

 
16

 
Each of the components tested had fair values in excess of the carrying value of the unit, indicating no impairment.  All of the components had a significant excess fair value, except for the International Products component, for which the excess fair value was 12%.  Management believes that the valuations arrived at are reasonable and consistent with what other marketplace participants would use in valuing the Company’s components.  However, management cannot give any assurance that market values will not change in the future.  For example, an increase in discount rates demanded by the market could lead to a valuation reduction under the income approach.  If the Company’s projections are not achieved in the future, this could lead management to reassess their assumptions and lead to a reduction under the income approach.  If the market price of the Company’s stock decreases, this could cause the Company to reassess the reasonableness of the control premium, which might cause management to assume a higher discount rate under the income approach.  If future similar transactions exhibit lower multiples than those observed in the past, this could lead to a reduction under the similar transactions approach.  And finally, if there is a general decline in the stock market, and particularly in those companies selected as comparable to the Company’s components, this could lead to a reduction under the public company market multiple approach.  The Company’s annual impairment test is performed during the first quarter of each fiscal year, however if there are further triggering events, the Company may be required to perform additional testing at other dates.

7.           LONG-TERM DEBT:

Long-term debt consists of the following (dollars in thousands):

   
December 31,
2010
   
March 31,
2010
 
Term loan credit agreement
  $ 368,967     $ 427,000  
Capital leases and installment payment obligations on land, buildings and equipment payable in monthly payments of principal plus interest at rates ranging from approximately 3% to 8%; remaining terms up to twelve years
    47,115       41,788  
Software license liabilities payable over terms up to three years; effective interest rates ranging from approximately 4% to 7%
    8,824       10,001  
Other debt and long-term liabilities
    20,165       21,946  
Total long-term debt and capital leases
    445,071       500,735  
Less current installments
    30,764       42,106  
Long-term debt, excluding current installments
  $ 414,307     $ 458,629  

The Company’s amended and restated credit agreement provides for (1) term loans up to an aggregate principal amount of $600 million and (2) revolving credit facility borrowings consisting of revolving loans, letter of credit participations and swing-line loans up to an aggregate amount of $200 million.

In November 2009, the Company entered into an amendment to its term loan credit facility (the “Amendment”).  Under the terms of the Amendment, certain of the lenders agreed to extend the maturity date of the existing term loan, becoming Tranche 2 Term Lenders.  Lenders who did not agree to extend the maturity date became Tranche 1 Term Lenders.  Certain lenders also agreed to extend the maturity date of the existing revolving loan commitment, becoming Tranche 2 Revolving Lenders.  Lenders who did not agree to extend the maturity date of the revolving loan commitment became Tranche 1 Revolving Lenders.  Of the $369 million balance of the term loan as of December 31, 2010, all of the balance is held by Tranche 2 Term Lenders.  The remaining Tranche 1 term loan balance was prepaid in full during the current quarter.  Of the $200 million revolving loan commitment, $80 million is held by Tranche 1 Revolving Lenders and $120 million is held by Tranche 2 Revolving Lenders.

Tranche 2 of the term loan is payable in quarterly installments of approximately $1.5 million each, through December 31, 2014, with a final payment of approximately $345.0 million due March 15, 2015.  The Tranche 1 revolving loan commitment expires September 15, 2011 and the Tranche 2 revolving loan commitment expires March 15, 2014.

Revolving credit facility borrowings bear interest at LIBOR plus a credit spread, or at an alternative base rate or at the Federal Funds rate plus a credit spread, depending on the type of borrowing.  The LIBOR credit spread is 1.5% for Tranche 1 and 2.75% for Tranche 2.  There were no revolving credit borrowings outstanding at December 31, 2010 or March 31, 2010.  In addition, there have been no revolving credit borrowings during any of the periods being reported.  Term loan borrowings bear interest at LIBOR plus a credit spread which is 1.75% for Tranche 1, and 3.00% for Tranche 2.  The weighted-average interest rate on term loan borrowings at December 31, 2010 was 4.1%.  Outstanding letters of credit at December 31, 2010 were $0.5 million.

 
17

 
The term loan allows prepayments before maturity.  The credit agreement is secured by the accounts receivable of Acxiom and its domestic subsidiaries, as well as by the outstanding stock of certain Acxiom subsidiaries.

Under the terms of certain of the above borrowings, the Company is required to maintain certain debt-to-cash flow and debt service coverage ratios, among other restrictions.  At December 31, 2010, the Company was in compliance with these covenants and restrictions.  In addition, if certain financial ratios and other conditions are not satisfied, the revolving credit facility limits the Company’s ability to pay dividends in excess of $30 million in any fiscal year (plus additional amounts in certain circumstances).

In fiscal 2009, the Company entered into an interest rate swap agreement.  The agreement provides for the Company to pay interest through July 25, 2011 at a fixed rate of 3.25% plus the applicable credit spread on $95.0 million notional amount while receiving interest for the same period at the LIBOR rate on the same notional amount.  The LIBOR rate as of December 31, 2010 was 0.3%.  The swap was entered into as a cash flow hedge against LIBOR interest rate movements on the term loan.  The Company assesses the effectiveness of the hedge based on the hypothetical derivative method.  There was no ineffectiveness for the period ended December 31, 2010.  Under the hypothetical derivative method, the cumulative change in fair value of the actual swap is compared to the cumulative change in fair value of the hypothetical swap, which has terms that identically match the critical terms of the hedged transaction.  Thus, the hypothetical swap is presumed to perfectly offset the hedged cash flows.  The change in the fair value of the hypothetical swap will then be regarded as a proxy for the present value of the cumulative change in the expected future cash flows from the hedged transactions.  All of the fair values are derived from an interest-rate futures model.  As of December 31, 2010, the hedge relationship qualified as an effective hedge under applicable accounting standards.  Consequently, all changes in fair value of the derivative are deferred and recorded in other comprehensive income (loss) until the related forecasted transaction is recognized in the consolidated statement of operations.  The fair market value of the derivative was zero at inception and an unrealized loss of $1.6 million since inception is recorded in other comprehensive income (loss) with the offset recorded to other noncurrent liabilities.  The fair value of the interest rate swap agreement recorded in accumulated other comprehensive income (loss) may be recognized in the statement of operations if certain terms of the floating-rate debt change, if the floating-rate debt is extinguished or if the interest rate swap agreement is terminated prior to maturity.  The Company has assessed the creditworthiness of the counterparty of the swap and concludes that no substantial risk of default exists as of December 31, 2010.

8.           ALLOWANCE FOR DOUBTFUL ACCOUNTS:

Trade accounts receivable are presented net of allowances for doubtful accounts, returns and credits of $6.1 million at December 31, 2010 and $6.3 million at March 31, 2010.

9.           SEGMENT INFORMATION:

The Company reports segment information consistent with the way management internally disaggregates its operations to assess performance and to allocate resources.  The Information Services segment includes the Company’s global lines of business for Customer Data Integration (CDI), Multichannel Marketing Services, Infrastructure Management Services and Consulting Services.  The Information Products segment is comprised of the Company’s global Consumer Insights and Risk Mitigation Products lines of business and the U.S. Background Screening Products line of business.  The Company’s calculation of segment operating income allocates all corporate expenses, excluding those reported as gains, losses and other items, to the segments.


 
18 

 


The following tables present information by business segment (dollars in thousands):

   
For the quarter ended
December 31
   
For the nine months ended
December 31
 
   
2010
   
2009
   
2010
   
2009
 
Revenue:
                       
Information services
  $ 232,798     $ 218,340     $ 669,038     $ 627,879  
Information products
    66,312       65,467       192,136       183,014  
Total revenue
  $ 299,110     $ 283,807     $ 861,174     $ 810,893  
                                 
Income (loss) from operations:
                               
Information services
  $ 26,390     $ 27,565     $ 70,221     $ 63,374  
Information products
    4,545       2,832       10,121       1,086  
Other
    3,640       (538 )     3,619       (858 )
Income from operations
  $ 34,575     $ 29,859     $ 83,961     $ 63,602  
                                 

10.           RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES:

The Company records costs associated with employee terminations and other exit activity in accordance with applicable accounting standards when those costs become probable and are reasonably estimable.  The following table summarizes the restructuring activity for the nine months ended December 31, 2010 (dollars in thousands):

   
Associate-related reserves
   
Ongoing
contract costs
   
Total
 
Balance at March 31, 2010
  $ 2,870     $ 12,904     $ 15,774  
Payments
    (2,194 )     (1,754 )     (3,948 )
Charges and adjustments
    165       (1,402 )     (1,237 )
Balance at December 31, 2010
  $ 841     $ 9,748     $ 10,589  
                         
The above balances are included in accrued expense on the consolidated balance sheet.

Restructuring Plans

In fiscal 2009, the Company recorded a total of $42.3 million in restructuring charges and adjustments included in gains, losses and other items in the consolidated statement of operations.  The expense includes severance and other associate-related payments of $12.4 million, lease accruals of $3.2 million, asset disposal and write-offs of $26.5 million and adjustments to the fiscal 2008 restructuring plan of $0.2 million.  Included in the asset disposal was a $24.6 million loss incurred as a result of the Company terminating a software contract.

The associate-related payments of $12.4 million relate to the termination of associates in the United States and Europe.  Of the amount accrued, $0.1 million remained accrued as of December 31, 2010.  These costs are expected to be paid out in fiscal 2011.

The lease accruals of $3.2 million were evaluated under the accounting standards which govern exit costs.  These accounting standards require the Company to make an accrual for the liability for lease costs that will continue to be incurred without economic benefit to the Company upon the date that the Company ceases using the leased property.  On or before March 31, 2009, the Company ceased using certain leased office facilities.  The Company attempts to sublease those facilities to the extent possible.  The Company established a liability for the fair value of the remaining lease payments, partially offset by the estimated sublease payments to be received over the course of those leases.  The fair value of these liabilities is based on a net present value model using a credit-adjusted risk-free rate.  These liabilities will be paid out over the remainder of the leased properties’ terms, of which the longest continues through November 2012.  Actual sublease terms may differ from the estimates originally made by the Company.  Any future changes in the estimates or in the actual sublease income could require future adjustments to the liability for these leases, which would impact net income in the period the adjustment is recorded.  The remaining amount accrued at December 31, 2010 is $1.3 million.


 
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In fiscal 2008, the Company recorded a total of $75.1 million in restructuring charges and adjustments included in gains, losses and other items in the consolidated statement of operations.  The expense includes severance and other associate-related payments of $19.3 million, lease accruals of $19.0 million, contract accruals of $6.7 million, asset disposal and write-offs of $29.6 million, and other related costs of $0.5 million.

The associate-related payments of $19.3 million relate to associates in the United States and Europe who either have been terminated or are to be terminated.  Of the $19.3 million accrued, $0.2 million remained accrued as of December 31, 2010.  These costs are expected to be paid out in fiscal 2011.

The lease accruals of $19.0 million were evaluated under the accounting standard which governs exit costs.  The remaining amount accrued at December 31, 2010 is $8.4 million.  These liabilities will be paid out over the remainder of the leased properties’ terms, of which the longest continues through November 2021.  Due to a recently entered sublease, the lease accrual was reduced $1.3 million in the current fiscal year.

The contract accruals of $6.7 million were evaluated under accounting standards which govern exit costs, which require that a liability to terminate a contract before the end of its term be recognized when the contract is terminated in accordance with its terms.  Prior to March 31, 2008, the Company gave notice under certain service contracts to the other parties which caused the Company to incur termination payments under those contracts.  All of these amounts have been paid.

Gains, Losses and Other Items

Gains, losses and other items for each of the periods presented are as follows (dollars in thousands):

   
For the quarter ended
December 31
   
For the nine months ended
December 31
 
   
2010
   
2009
   
2010
   
2009
 
Gain on disposition of operations in France
    -       (442 )     -       (442 )
Legal contingency
    (2,125 )     -       (2,125 )     -  
Restructuring plan charges and adjustments
    (1,081 )     (5 )     (1,069 )     230  
Earnout liability adjustment
    (434 )     -       (434 )     -  
Other
    -       985       9       1,070  
    $ (3,640 )   $ 538     $ (3,619 )   $ 858  

11.           COMMITMENTS AND CONTINGENCIES:

Legal Matters

Richard Fresco, et al. v. R.L. Polk and Company and Acxiom Corporation, (U.S. Dist. Court, S.D. Florida, 07-60695) formerly, Linda Brooks and Richard Fresco v. Auto Data Direct, Inc., et al., (U.S. Dist. Court, S.D. Florida, 03-61063) is a putative class action lawsuit, removed to federal court in May 2003, filed against Acxiom and several other information providers.  The plaintiffs allege that the defendants obtained and used drivers’ license data in violation of the federal Drivers Privacy Protection Act.  Among other things, the plaintiffs sought injunctive relief, statutory damages, and attorneys’ fees.  Acxiom has agreed to settle the case and the court approved the settlement on July 27, 2010.  The settlement became effective January 18, 2011. Acxiom accrued $5.0 million for the settlement and ancillary costs to obtain final approval and previously paid $2.5 million of this amount into an escrow fund established for the settlement, and paid approximately $0.4 million in ancillary costs.  The remaining accrual of $2.1 million was reversed in the quarter ended December 31, 2010, in gains, losses and other items, net.  Two companion cases, Sharon Taylor, et al., v. Acxiom, et al., (U.S. District Court, E.D. Texas, 207CV001) and Sharon Taylor, et al. v. Biometric Access Company, et al., (U.S. District Court, E.D. Texas, 2:07-CV-00018), were filed in January 2007.  Both Taylor cases were dismissed by the District Court and the dismissal was upheld on appeal on July 14, 2010.  The Plaintiffs sought review by the U.S. Supreme Court, which declined to consider the matter on January 10, 2011, bringing both to final resolution.

The Company is involved in a number of actions with the Data Protection Authority of Spain, involving alleged improper usage of individuals’ data.  The Company maintains that the Company’s usage of data has been in compliance with the applicable law.  However, upon advice of counsel and after review of the pending claims, the Company accrued $3.9 million as part of the cost of closure of the Spain office.  During the year ended March 31, 2008, the Company reversed $2.4 million of the accrual as some of the claims had been settled for less than the Company originally accrued.  As of December 31, 2010 the Company has a remaining accrual for this matter of $0.5 million.

 
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The Company is involved in various other claims and legal actions in the ordinary course of business.  In the opinion of management, the ultimate disposition of all of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Commitments

The Company leases or licenses data processing equipment, software, office furniture and equipment, land and office space under noncancellable operating leases or licenses.  The Company has a future commitment for lease or license payments over the next 30 years of $145.4 million.

In connection with a certain building, the Company has entered into a 50/50 joint venture with a local real estate developer.  The Company is guaranteeing a portion of the loan for the building.  In addition, in connection with the disposal of certain assets, the Company has guaranteed loans for the buyers of the assets.  These guarantees were made by the Company primarily to facilitate favorable financing terms for those third parties.  Should the third parties default on this indebtedness, the Company would be required to perform under these guarantees.  Substantially all of the third-party indebtedness is collateralized by various pieces of real property.  At December 31, 2010 the Company’s maximum potential future payments under these guarantees of third-party indebtedness were $1.4 million.

12.           INCOME TAX

In determining the quarterly provision for income taxes, the Company makes its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The anticipated effective tax rate for fiscal 2011 is approximately 40% to 41%, before consideration of the adjustment noted below.
 
At December 31, 2010, the Company had $2.9 million in gross unrecognized tax benefits, which is included in other liabilities on the balance sheet. This entire amount, if recognized, would impact the effective tax rate. The total amount of accrued interest and penalties for such unrecognized tax benefits, and included in the amount above, is $0.4 million. During the quarter ended December 31, 2010, the Company recognized approximately $3.5 million of previously unrecognized tax benefits related to certain tax credits due to the expiration of the related statute of limitations.  The effect was to reduce tax expense for both the quarter and nine months ended December 31, 2010.

13.           FINANCIAL INSTRUMENTS:

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Cash and cash equivalents, trade receivables, unbilled and notes receivable, short-term borrowings and trade payables - The carrying amount approximates fair value because of the short maturity of these instruments.

Long-term debt - The interest rate on the term loan and revolving credit agreement is adjusted for changes in market rates and therefore the carrying value of these loans approximates fair value.  The estimated fair value of other long-term debt was determined based upon the present value of the expected cash flows considering expected maturities and using interest rates currently available to the Company for long-term borrowings with similar terms.  At December 31, 2010, the estimated fair value of long-term debt approximates its carrying value.

Derivative instruments included in other liabilities - The carrying value is adjusted to fair value through other comprehensive income (loss) at each balance sheet date.  The fair value is determined from an interest-rate futures model.

Under applicable accounting standards financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company assigned assets and liabilities to the hierarchy in the accounting standards, which is Level 1 - quoted prices in active markets for identical assets or liabilities, Level 2 - significant other observable inputs and Level 3 - significant unobservable inputs.

 
  21

 


 
The following table presents the balances of assets and liabilities measured at fair value as of December 31, 2010 (dollars in thousands):

   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Other current assets
  $ 12,474     $ -     $ -     $ 12,474  
Total assets
  $ 12,474     $ -     $ -     $ 12,474  
                                 
Liabilities:
                               
Other current liabilities
  $ 12,474     $ -     $ -     $ 12,474  
Other liabilities
    -       1,552       -       1,552  
Total liabilities
  $ 12,474     $ 1,552     $ -     $ 14,026  



 
22 

 


PART I.  FINANCIAL INFORMATION
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction and Overview

Acxiom is a recognized leader in marketing services and technology that enable marketers to successfully manage audiences, personalize consumer experiences and create profitable customer relationships.  Our superior industry-focused, consultative approach combines consumer data and analytics, databases, data integration and consulting solutions for personalized, multichannel marketing strategies.  Acxiom leverages over 40 years of experience of data management to deliver high-performance, highly secure, reliable information management services.  Founded in 1969, Acxiom is headquartered in Little Rock, Arkansas, USA and serves clients around the world from locations in the United States, Europe, South America, Asia-Pacific and the Middle East.

As the Company completes the third quarter of fiscal 2011 the macro economic situation continues to be a challenge for management although there are signs of improvement.  The Company has experienced revenue growth since the low point in the first quarter of fiscal 2010 and expects continued revenue recovery in the near term.  During fiscal 2010, the Company focused on several initiatives to drive operating efficiency in information technology and client delivery functions.  Management expects these efficiencies to continue to provide opportunity for margin expansion as revenue recovers.

Highlights of the quarter ended December 31, 2010 are identified below.

 
·  
Revenue increased by 5.4% to $299.1 million compared to $283.8 million for the quarter ended December 31, 2009.
 
·  
Income from operations of $34.6 million compared to $29.9 million in the third quarter of the prior year. The quarter included $3.6 million of unusual gain items, described below.
 
·  
Pre-tax earnings were $28.3 million, compared to $24.4 million in the same quarter of fiscal 2010.
 
·  
Earnings per diluted share attributable to Acxiom stockholders of $0.25 compared to $0.18 in the third quarter of fiscal 2010.
 
·  
The Company recorded adjustments primarily to restructuring and legal accruals totaling $3.6 million recorded in gains, losses and other items, net. In addition, the Company reduced a reserve for unrecognized tax benefits by approximately $3.5 million due to the expiration of the related statute of limitations. These two items combined increased earnings per share attributable to Acxiom shareholders by 6 cents.
 
·  
Operating cash flow of $64.2 million, compared to $74.5 million in the third quarter a year ago.
 
·  
The Company made term loan prepayments of $33.5 million.


The highlights above are intended to identify to the reader some of the more significant events and transactions of the Company during the quarter ended December 31, 2010.  However, these highlights are not intended to be a full discussion of the Company’s results for the quarter or for the nine-month period.  These highlights should be read in conjunction with the following discussion of Results of Operations and Capital Resources and Liquidity and with the Company’s consolidated financial statements and footnotes accompanying this report.


 
23 

 


Results of Operations

A summary of selected financial information for each of the periods reported is presented below (dollars in millions, except per share amounts):
   
For the quarter ended
December 31
   
For the nine months ended
December 31
 
   
2010
   
2009
   
% Change
   
2010
   
2009
   
% Change
 
Revenue
                                   
Services
  $ 232.8     $ 218.3       7 %   $ 669.0     $ 627.9       7 %
Products
    66.3       65.5       1 %     192.2       183.0       5 %
    $ 299.1     $ 283.8       5 %   $ 861.2     $ 810.9       6 %
Total operating costs and expenses
    264.5       253.9       (4 )%     777.2       747.3       (4 )%
Income from operations
  $ 34.6     $ 29.9       16 %   $ 84.0     $ 63.6       32 %
Diluted earnings per share attributable to Acxiom stockholders
  $ 0.25     $ 0.18       39 %   $ 0.54     $ 0.35       54 %


Revenue
Total revenue increased $15.3 million, or 5.4% to $299.1 million for the three months ended December 31, 2010 from $283.8 million for the comparable period in fiscal year 2010.  For the nine months ended December 31, 2010, total revenue was $861.2 million which was a $50.3 million, or 6.2% increase from the same period last year.

Services
Services revenue for the quarter ended December 31, 2010 was $232.8 million, representing a $14.5 million increase or 6.6% increase from the same quarter a year ago.  Excluding unfavorable exchange rate movements and acquisition-related revenue, Services revenue increased 4.6%.  On a geographic basis, International services increased $6.5 million, or 30.0%, while US services increased $8.0 million, or 4.1%.  International services included $4.0 million of incremental revenue related to the MENA and Acxiom Brazil acquisitions.  Excluding unfavorable exchange rate movements and acquisition-related revenue, International services increased approximately $2.8 million in the quarter which represents greater than 10% growth.  Australia and China services volume growth accounted for most of this growth.  Europe services were negatively impacted by the loss of a couple of large services contracts in Europe during the last fiscal year, however growth from the UK 2Touch operation mitigated these reductions.  US growth reflects new IT Services contracts signed over the last year.  By line of business, growth was most notable in Consulting of $1.6 million or 16.9%, Multi-channel Marketing Services of $7.2 million or 8.3%, and Infrastructure Management of $4.7 million or 6.2%.  CDI Services were negatively impacted by contract losses in Europe and the US, and declined $5.4 million or 13.9%.

Services revenue for the nine months ended December 31, 2010 was $669.0 million.  This represents a $41.2 million increase, or 6.6% over the prior year same period.  On a geographic basis, International services increased $5.6 million, or 8.7%, while US services increased $35.6 million, or 6.3%.  International services growth included $8.1 million of incremental revenue related to the MENA and Acxiom Brazil acquisitions.  Excluding unfavorable exchange rate movements and acquisition-related revenue, International services decreased approximately $1.0 million.  International services were negatively impacted by the loss of a couple of large services contracts in Europe during the last fiscal year.  Strong results in Australia and China mitigated the declines in Europe.  New IT Services contracts signed over the last year contributed to the US growth.  Of the $33.1 million of organic Services growth, $25.3 million was related to Infrastructure Management.  By line of business, revenue increases in Multi-channel Marketing Services of $7.0 million or 2.7%, Consulting of $5.6 million or 21.7%, and Infrastructure Management of $25.3 million or 12.4% were offset by a decrease in CDI Services of $7.8 million or 6.7%.  CDI Services were negatively impacted by the contract losses in Europe and the US.

Products
Products revenue for the quarter ended December 31, 2010 was $66.3 million, representing a $0.8 million or 1.3% increase from the same quarter a yea