UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

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

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

Commission file number: 1-1969

ARBITRON INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of		52-0278528
incorporation or organization)		(I.R.S. Employer Identification No.)

9705 Patuxent Woods Drive
Columbia, Maryland 21046
(Address of principal executive offices) (Zip Code)
(410) 312-8000
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant 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 þ No o

     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.

Large Accelerated Filer o		Accelerated Filer þ		Non-Accelerated Filer o		Smaller Reporting Company o
				(Do not check if a 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 o No þ

     The registrant had 27,218,829 shares of common stock, par value $0.50 per share, outstanding as of July 29, 2011.

 

 

ARBITRON INC.

INDEX

		Page No.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets — June 30, 2011, and December 31, 2010			4
Consolidated Statements of Income — Three Months Ended June 30, 2011, and 2010			5
Consolidated Statements of Income — Six Months Ended June 30, 2011, and 2010			6
Consolidated Statements of Cash Flows — Six Months Ended June 30, 2011, and 2010			7
Notes to Consolidated Financial Statements — June 30, 2011			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures About Market Risk			34
Item 4. Controls and Procedures			34
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 4. (Removed and Reserved)
Item 6. Exhibits			37
Signature			39
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

          Arbitron owns or has the rights to various trademarks, trade names or service marks used in its radio audience ratings business and subsidiaries, including the following: the Arbitron name and logo, Arbitrends^sm, RetailDirect^®, RADAR^®, TAPSCAN^tm, TAPSCAN WORLDWIDE^tm, LocalMotion^®, Maximi$er^®, Maximi$er^® Plus, Arbitron PD Advantage^®, SmartPlus^®, Arbitron Portable People Meter^tm, PPM^tm, Arbitron PPM^tm, Arbitron PPM^®, PPM 360^tm, Marketing Resources Plus^®, MRP^sm, PrintPlus^®, MapMAKER Direct^sm, Media Professional^sm, Media Professional Plus^sm, QUALITAP^sm, Get a Grip^tm and Schedule-It^sm.

          The trademarks Windows^®, Mscore^tm and Media Rating Council^® referred to in this Quarterly Report on Form 10-Q are the registered trademarks of others.

          We routinely post important information on our website at www.arbitron.com. Information contained on our website is not part of this quarterly report.

ARBITRON INC.
Consolidated Balance Sheets
(In thousands, except par value data)

		June 30,				December 31,
		2011				2010
		(Unaudited)				(Audited)
Assets
Current assets
Cash and cash equivalents		$	8,215			$	18,925
Trade accounts receivable, net of allowance for doubtful accounts of $4,568 as of June 30, 2011, and $4,708 as of December 31, 2010			58,551				59,808
Prepaid expenses and other current assets			8,739				11,332
Deferred tax assets			4,707				4,758
Total current assets			80,212				94,823
Equity and other investments			17,256				18,385
Property and equipment, net			68,854				70,332
Goodwill, net			38,895				38,895
Other intangibles, net			5,701				6,272
Other noncurrent assets			267				534
Total assets		$	211,185			$	229,241
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	9,808			$	10,007
Accrued expenses and other current liabilities			20,873				27,670
Current portion of debt			5,000				53,000
Deferred revenue			47,746				36,479
Total current liabilities			83,427				127,156
Noncurrent deferred tax liabilities			2,241				2,695
Other noncurrent liabilities			22,974				21,739
Total liabilities			108,642				151,590
Stockholders’ equity
Preferred stock, $100.00 par value, 750 shares authorized, no shares issued			—				—
Common stock, $0.50 par value, 500,000 shares authorized, 32,338 shares issued as of June 30, 2011, and December 31, 2010			16,169				16,169
Retained earnings			98,541				74,184
Common stock held in treasury, 5,139 shares as of June 30, 2011, and 5,285 shares as of December 31, 2010			(2,570	)			(2,642	)
Accumulated other comprehensive loss			(9,597	)			(10,060	)
Total stockholders’ equity			102,543				77,651
Total liabilities and stockholders’ equity		$	211,185			$	229,241

See accompanying notes to consolidated financial statements.

ARBITRON INC.
Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)

		Three Months Ended June 30,
		2011				2010
Revenue		$	95,737			$	88,339
Costs and expenses
Cost of revenue			61,025				59,504
Selling, general and administrative			18,656				19,149
Research and development			9,017				9,072
Total costs and expenses			88,698				87,725
Operating income			7,039				614
Equity in net income of affiliate			5,453				5,642
Income before interest and income tax expense			12,492				6,256
Interest income			8				4
Interest expense			104				254
Income before income tax expense			12,396				6,006
Income tax expense			4,812				2,207
Net income		$	7,584			$	3,799
Income per weighted-average common share
Basic		$	0.28			$	0.14
Diluted		$	0.27			$	0.14
Weighted-average common shares used in calculations
Basic			27,159				26,650
Potentially dilutive securities			449				424
Diluted			27,608				27,074
Dividends declared per common share outstanding		$	0.10			$	0.10

See accompanying notes to consolidated financial statements.

ARBITRON INC.
Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)

		Six Months Ended
		June 30,
		2011				2010
Revenue		$	196,606			$	184,235
Costs and expenses
Cost of revenue			106,704				102,657
Selling, general and administrative			35,765				36,790
Research and development			18,012				18,981
Total costs and expenses			160,481				158,428
Operating income			36,125				25,807
Equity in net income of affiliate			2,921				3,111
Income before interest and income tax expense			39,046				28,918
Interest income			14				6
Interest expense			268				519
Income before income tax expense			38,792				28,405
Income tax expense			14,961				10,858
Net income		$	23,831			$	17,547
Income per weighted-average common share
Basic		$	0.88			$	0.66
Diluted		$	0.86			$	0.65
Weighted-average common shares used in calculations
Basic			27,119				26,622
Potentially dilutive securities			483				377
Diluted			27,602				26,999
Dividends declared per common share outstanding		$	0.20			$	0.20

See accompanying notes to consolidated financial statements.

ARBITRON INC.
Consolidated Statements of Cash Flows
(In thousands and unaudited)

		Six Months Ended June 30,
		2011				2010
Cash flows from operating activities
Net income		$	23,831			$	17,547
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization of property and equipment			13,983				12,931
Amortization of intangible assets			571				264
Loss on asset disposals and impairments			1,221				1,319
Loss due to retirement plan settlements			—				1,212
Reduced tax benefits on share-based awards			—				(25	)
Deferred income taxes			(706	)			(539	)
Equity in net income of affiliate			(2,921	)			(3,111	)
Distributions from affiliate			4,050				4,650
Bad debt expense			930				60
Non-cash share-based compensation			3,831				3,102
Changes in operating assets and liabilities
Trade accounts receivable			327				(4,141	)
Prepaid expenses and other assets			2,705				142
Accounts payable			250				(398	)
Accrued expenses and other current liabilities			(6,998	)			(6,457	)
Deferred revenue			11,267				6,582
Other noncurrent liabilities			2,010				1,600
Net cash provided by operating activities			54,351				34,738
Cash flows from investing activities
Additions to property and equipment			(14,182	)			(12,859	)
License of other intangible assets			—				(4,500	)
Purchases of equity and other investments			—				(1,780	)
Payments for business acquisitions			—				(2,500	)
Net cash used in investing activities			(14,182	)			(21,639	)
Cash flows from financing activities
Proceeds from stock option exercises and stock purchase plan			2,046				1,156
Dividends paid to stockholders			(5,408	)			(5,312	)
Tax benefits realized from share-based awards			484				—
Decrease in bank overdraft payables			—				(3,833	)
Borrowings under Credit Facility			5,000				10,000
Payments under Credit Facility			(53,000	)			(10,000	)
Net cash used in financing activities			(50,878	)			(7,989	)
Effect of exchange rate changes on cash and cash equivalents			(1	)			(1	)
Net change in cash and cash equivalents			(10,710	)			5,109
Cash and cash equivalents at beginning of period			18,925				8,217
Cash and cash equivalents at end of period		$	8,215			$	13,326

See accompanying notes to consolidated financial statements.

ARBITRON INC.

Notes to Consolidated Financial Statements
June 30, 2011
(unaudited)

1. Basis of Presentation and Consolidation

Presentation

     The accompanying unaudited consolidated financial statements of Arbitron Inc. (the “Company” or “Arbitron”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included and are of a normal recurring nature. The consolidated balance sheet as of December 31, 2010 was audited as of that date, but all of the information and notes as of December 31, 2010 required by U.S. generally accepted accounting principles have not been included in this Form 10-Q. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Consolidation

     The consolidated financial statements of the Company for the six-month period ended June 30, 2011, reflect the consolidated financial position, results of operations and cash flows of the Company and its subsidiaries: Arbitron Holdings Inc., Astro West LLC, Ceridian Infotech (India) Private Limited, Arbitron International, LLC, and Arbitron Technology Services India Private Limited. All significant intercompany balances have been eliminated in consolidation. Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current period’s presentation.

2. New Accounting Pronouncements

     In October 2009, the Financial Accounting Standards Board (i.e. “FASB”) issued Accounting Standards Update No. 2009-13 Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force (i.e. “ASU 2009-13”). This requires companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other third party evidence of value is not available. The new guidance is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. There was no impact to the Company’s consolidated financial statements of adopting this guidance.

3. Current Portion of Debt

     The Company has an agreement with a consortium of lenders to provide up to $150.0 million of financing to the Company through a five-year, unsecured revolving credit facility (the “Credit Facility”), expiring on December 20, 2011. The agreement contains an expansion feature for the Company to increase the total financing available under the Credit Facility by up to $50.0 million to an aggregate of $200.0 million. Such increased financing would be provided by one or more existing Credit Facility lending institutions, subject to the approval of the lenders, and/or in combination with one or more new lending institutions, subject to the approval of the Credit Facility’s administrative agent.

     The Company expects to renew or replace the Credit Facility prior to its expiration. As of June 30, 2011, and December 31, 2010, the outstanding borrowings under the Credit Facility were $5.0 million and $53.0 million, respectively.

     Interest paid during each of the six-month periods ended June 30, 2011, and 2010, was $0.3 million and $0.5 million, respectively.

4. Stockholders’ Equity

     Changes in stockholders’ equity for the six-month period ended June 30, 2011, were as follows (in thousands):

																		Accumulated
																		Other				Total
		Shares				Common				Treasury				Retained				Comprehensive				Stockholders’
		Outstanding				Stock				Stock				Earnings				Loss				Equity
Balance as of December 31, 2010			27,055			$	16,169			$	(2,642	)		$	74,184			$	(10,060	)		$	77,651
Net income			—				—				—				23,831				—				23,831
Common stock issued from treasury stock			144				—				72				1,640				—				1,712
Tax benefits from share-based awards			—				—				—				484				—				484
Non-cash share-based compensation			—				—				—				3,831				—				3,831
Dividends declared			—				—				—				(5,429	)			—				(5,429	)
Other comprehensive income			—				—				—				—				463				463
Balance as of June 30, 2011			27,199			$	16,169			$	(2,570	)		$	98,541			$	(9,597	)		$	102,543

     A quarterly cash dividend of $0.10 per common share was paid to stockholders on July 1, 2011.

5. Net Income per Weighted-Average Common Share

     The computations of basic and diluted net income per weighted-average common share for the three and six-month periods ended June 30, 2011, and 2010, are based on the Company’s weighted-average shares of common stock and potentially dilutive securities outstanding.

     Potentially dilutive securities are calculated in accordance with the treasury stock method, which assumes that the proceeds from the exercise of all stock options are used to repurchase the Company’s common stock at the average market price for the period. As of June 30, 2011, and 2010, there were stock options to purchase 2,038,787 and 2,486,862 shares, respectively, of the Company’s common stock outstanding, of which stock options to purchase 869,397 and 1,356,889 shares of the Company’s common stock, respectively, were excluded from the computation of diluted net income per weighted-average common share for the quarters ended June 30, 2011, and 2010, respectively, either because the stock options’ exercise prices were greater than the average market price of the Company’s common shares or assumed repurchases from proceeds from the stock options’ exercise were antidilutive.

6. Comprehensive Income and Accumulated Other Comprehensive Loss

     The Company’s comprehensive income is comprised of net income, changes in foreign currency translation adjustments, and changes in retirement liabilities, net of tax. The components of comprehensive income were as follows (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net income		$	7,584			$	3,799			$	23,831			$	17,547
Other comprehensive income (loss):
Change in foreign currency translation adjustment			(23	)			(253	)			(9	)			(227	)
Change in retirement liabilities, net of tax expense of $151, and $117 for the three-month periods ended June 30, 2011, and 2010, respectively; and a tax expense of $303, and $559 for the six-month periods ended June 30, 2011, and 2010, respectively;			236				184				472				869
Other comprehensive income (loss)			213				(69	)			463				642
Comprehensive income		$	7,797			$	3,730			$	24,294			$	18,189

The components of accumulated other comprehensive loss were as follows (in thousands):

		June 30,				December 31,
		2011				2010
Foreign currency translation adjustment		$	(469	)		$	(460	)
Retirement plan liabilities, net of tax			(9,128	)			(9,600	)
Accumulated other comprehensive loss		$	(9,597	)		$	(10,060	)

7. Prepaid Expenses and Other Current Assets

     Prepaid expenses and other current assets as of June 30, 2011, and December 31, 2010, consist of the following (in thousands):

		June 30, 2011				December 31, 2010
Survey participant incentives and prepaid postage		$	1,324			$	2,441
Insurance recovery receivable			573				601
Prepaid income taxes			4,165				5,518
Other			2,677				2,772
Prepaid expenses and other current assets		$	8,739			$	11,332

     During 2008, the Company became involved in two securities-law civil actions and a governmental interaction primarily related to the commercialization of our PPM service, which the management of the Company believes are covered by the Company’s Directors and Officers insurance policy. As of June 30, 2011 and December 31, 2010, the Company incurred-to-date $10.3 million, and $9.7 million, respectively, in legal fees and costs in defense of its positions related thereto, and as of June 30, 2011, the Company had received $6.7 million in insurance reimbursements related to these legal actions. The Company reported approximately $0.6 million, and $0.3 million in related legal fees recorded during the six-month periods ended June 30, 2011, and 2010, respectively. These legal fees were offset by $0.8 million and $0.3 million in insurance recoveries as reductions to selling, general and administrative expense during the six-month periods ended June 30, 2011, and 2010, respectively.

8. Equity and Other Investments

     The Company’s equity and other investments as of June 30, 2011, and December 31, 2010, consist of the following (in thousands):

		June 30, 2011				December 31, 2010
Scarborough		$	12,076			$	13,205
TRA preferred stock			5,180				5,180
Equity and other investments		$	17,256			$	18,385

     The Company’s 49.5% investment in Scarborough Research (“Scarborough”), a Delaware general partnership, is accounted for using the equity method of accounting. The Company’s investment in TRA Global, Inc. (“TRA”) is accounted for using the cost method of accounting. See Note 15 Financial Instruments for further information regarding the Company’s investment in TRA as of June 30, 2011.

     The following table shows the investment activity and balances for each of the Company’s investments and in total for the three-and six-month periods ended June 30, 2011, and 2010 (in thousands):

		Three Months Ended												Three Months Ended
		June 30, 2011												June 30, 2010
		Scarborough				TRA				Total				Scarborough				TRA				Total
Beginning balance		$	8,023			$	5,180			$	13,203			$	8,057			$	3,400			$	11,457
Investment income			5,453				—				5,453				5,642				—				5,642
Distributions from investee			(1,400	)			—				(1,400	)			(1,700	)			—				(1,700	)
Cash investments			—				—				—				—				1,780				1,780
Ending balance at June 30		$	12,076			$	5,180			$	17,256			$	11,999			$	5,180			$	17,179

		Six Months Ended												Six Months Ended
		June 30, 2011												June 30, 2010
		Scarborough				TRA				Total				Scarborough				TRA				Total
Beginning balance		$	13,205			$	5,180			$	18,385			$	13,538			$	3,400			$	16,938
Investment income			2,921				—				2,921				3,111				—				3,111
Distributions from investee			(4,050	)			—				(4,050	)			(4,650	)			—				(4,650	)
Cash investments			—				—				—				—				1,780				1,780
Ending balance at June 30		$	12,076			$	5,180			$	17,256			$	11,999			$	5,180			$	17,179

9. Acquisitions

     On July 28, 2011, a wholly-owned subsidiary of the Company acquired Zokem Oy, a Finland-based mobile audience measurement and analytics firm. The Company paid approximately $11.7 million in cash for the acquisition with possible additional cash payments to be made through 2015 of up to $12.0 million, which is contingent upon Zokem reaching certain financial performance targets in the future.

     On June 15, 2010, a wholly-owned subsidiary of the Company, purchased the technology portfolio, trade name, and equipment of Integrated Media Measurement, Inc. The Company paid $2.5 million for these assets, which included $1.8 million of intangible assets, $0.3 million of computer equipment, and $0.4 million of goodwill. The intangible assets are being amortized over 5.0 years.

     On March 23, 2010, the Company entered into a licensing arrangement with Digimarc Corporation (“Digimarc”) to receive a non-exclusive, worldwide and irrevocable license to a substantial portion of Digimarc’s domestic and international patent portfolio. The Company paid $4.5 million for this other intangible asset, which is being amortized over 7.0 years.

10. Contingencies

     The Company is involved in a number of governmental interactions primarily related to the commercialization of our PPM service. A contingent loss in the amount of $0.4 million and $0.5 million for these claims was recorded in accrued expenses and other current liabilities on the Company’s consolidated balance sheet as of June 30, 2011, and December 31, 2010, respectively.

11. Retirement Plans

     Certain of the Company’s United States employees participate in a defined-benefit pension plan that closed to new participants effective January 1, 1995. The Company also subsidizes healthcare benefits for eligible retired employees who participate in the pension plan and were hired before January 1, 1992. The Company sponsored one nonqualified, unfunded supplemental retirement plan during the six-month period ended June 30, 2011. The Company sponsored two supplemental retirement plans during the six-month period ended June 30, 2010, prior to the termination of one of the supplemental plans in the third quarter of 2010.

     The components of periodic benefit costs for the defined-benefit pension, postretirement healthcare and supplemental retirement plan(s) were as follows (in thousands):

		Defined-Benefit								Postretirement Healthcare								Supplemental
		Pension Plan								Plan								Retirement Plan(s)
		Three Months								Three Months								Three Months
		Ended June 30,								Ended June 30,								Ended June 30,
		2011				2010				2011				2010				2011				2010
Service cost		$	193			$	182			$	9			$	9			$	5			$	4
Interest cost			455				471				21				23				40				50
Expected return on plan assets			(513	)			(534	)			—				—				—				—
Amortization of net loss			343				263				7				9				38				30
Net periodic benefit cost		$	478			$	382			$	37			$	41			$	83			$	84

		Defined-Benefit								Postretirement Healthcare								Supplemental
		Pension Plan								Plan								Retirement Plan(s)
		Six Months								Six Months								Six Months
		Ended June 30,								Ended June 30,								Ended June 30,
		2011				2010				2011				2010				2011				2010
Service cost		$	387			$	365			$	19			$	19			$	10			$	8
Interest cost			910				942				41				45				80				109
Expected return on plan assets			(1,026	)			(1,068	)			—				—				—				—
Amortization of net loss			685				526				14				18				76				72
Net periodic benefit cost		$	956			$	765			$	74			$	82			$	166			$	189
Settlement and curtailment loss		$	—			$	—			$	—			$	—			$	—			$	1,212

     During the six-month period ended June 30, 2010, the Company recognized a $1.2 million settlement loss as a result of a lump sum distribution paid to a supplemental retirement plan participant which exceeded the service and interest components incurred for that plan. No settlement charge was incurred during the six-month period ended June 30, 2011.

     The Company estimates that it will contribute $2.2 million to its defined benefit plans during 2011.

12. Taxes

     The effective tax rate increased to 38.6% for the six months ended June 30, 2011, from 38.2% for the six months ended June 30, 2010.

     During 2011, the Company’s net unrecognized tax benefits for certain tax contingencies decreased from $1.9 million as of December 31, 2010, to $1.3 million as of June 30, 2011. If recognized, the $1.3 million in unrecognized tax benefits would reduce the Company’s effective tax rate in future periods.

     Income taxes paid for the six-months ended June 30, 2011 and 2010, were $14.3 million and $15.1 million, respectively.

13. Share-Based Compensation

     The following table sets forth information with regard to the income statement recognition of share-based compensation (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Cost of revenue		$	115			$	90			$	243			$	180
Selling, general and administrative			1,634				1,886				3,429				2,808
Research and development			77				61				159				114
Share-based compensation		$	1,826			$	2,037			$	3,831			$	3,102

     There was no capitalized share-based compensation cost recorded during the six-month periods ended June 30, 2011, and 2010.

Stock Options

     Stock options awarded to employees under the 2001 Stock Incentive Plan and the 2008 Equity Compensation Plan (referred to herein collectively as the “SIPs”) generally vest annually over a three-year period, have a 10-year term and have an exercise price of not less than the fair market value of the Company’s common stock at the date of grant. For stock options granted prior to 2010, the Company’s stock option agreements generally provide for accelerated vesting if there is a change in control of the Company. Effective for stock options granted after 2009, the Company’s stock option agreements provide for accelerated vesting if (i) there is a change in control of the Company and (ii) the participant’s employment terminates during the 24-month period following the effective date of the change in control for one of the reasons specified in the stock option agreement.

     Compensation expense for stock options is recognized on a straight-line basis over the vesting period using the fair value of each stock option estimated as of the grant date. The Company uses historical data to estimate future option exercises and employee terminations in order to determine the expected term of the stock option, where the expected term of stock option granted represents the period of time that such stock option is expected to be outstanding. Identified groups of optionholders with similar historical exercise behavior are considered separately for valuation purposes. The expected term of stock options can vary for groups of optionholders exhibiting different behavior. The fair value of each stock option granted to employees and nonemployee directors during the six-month periods ended June 30, 2011, and 2010, was estimated on the date of grant using a Black-Scholes stock option valuation model, which uses a risk-free rate and volatility rate, among other things, to estimate fair value. The risk-free rate for periods within the contractual life of the stock option is based on the U.S. Treasury strip bond yield curve in effect at the time of grant. Expected volatilities are based on the historical volatility of the Company’s common stock.

     For the three-month periods ended June 30, 2011 and 2010, no stock options were granted, respectively.

     For the six-month periods ended June 30, 2011 and 2010, the number of stock options granted was 73,225 and 288,544, respectively, and the weighted-average exercise price for those stock options granted was $44.06 and $22.84, respectively.

     As of June 30, 2011, there was $2.6 million in total unrecognized compensation cost related to stock options granted under the SIPs. This aggregate unrecognized cost is expected to be recognized over a weighted-average remaining period of 1.8 years. The weighted-average exercise price and weighted-average remaining contractual term for outstanding stock options as of June 30, 2011, were $32.84 and 6.02 years, respectively, and as of June 30, 2010, $30.84 and 6.98 years, respectively.

Service and Performance Award Shares

     Service award shares. During the six-month period ended June 30, 2011, the Company granted service award shares under the SIPs. These service award shares (i) were issued at the fair market value of the Company’s common stock on the date of grant, (ii) vest in four equal annual installments beginning on the first anniversary date of the grant, and (iii) for any unvested shares, expire without vesting if the employee is no longer employed by the Company. For those service award shares granted prior to 2010, the service award shares generally provide for accelerated vesting if there is a change in control of the Company. Effective for service award shares granted after 2009, the service award shares provide for accelerated vesting if (i) there is a change in control of the Company and (ii) the participant’s employment terminates during the 24-month period following the effective date of the change in control for one of the reasons specified in the restricted stock unit agreement.

     Compensation expense for service award shares is recognized on a straight-line basis over the vesting period using the fair market value of the Company’s common stock on the date of grant.

     As of June 30, 2011, there was $2.8 million of total unrecognized compensation cost related to service award shares granted under the SIPs. This aggregate unrecognized cost for service award shares is expected to be recognized over a weighted-average period of 2.26 years. Additional information for the three-and six-month periods ended June 30, 2011, and 2010, is noted in the following table (dollars in thousands, except per share amounts):

		Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
		June 30, 2011				June 30, 2010				June 30, 2011				June 30, 2010
Number of service award shares granted			—				—				18,434				—
Weighted average grant-date fair value per share			—				—			$	42.72				—
Fair value of service award shares vested		$	1,531			$	1,467			$	2,214			$	2,190

     Performance award shares. During the six-month periods ended June 30, 2011 and 2010, the Company granted performance award shares under the SIPS. These performance award shares (i) were issued at the fair market value of the Company’s common stock on the date of grant, (ii) will expire without vesting if the Company’s return on invested capital (“ROIC”) for the annual performance period does not exceed 12 percent, which is an approximation of the Company’s weighted average cost of capital, (iii) will, if the Company’s ROIC exceeds 12 percent, vest in four equal annual installments beginning on the first anniversary date of the grant, and (iv) for any unvested shares, expire without vesting if the employee is no longer employed by the Company. The Company’s performance award shares provide for accelerated vesting if (i) there is a change in control of the Company and (ii) the participant’s employment terminates during the 24-month period following the effective date of the change in control for one of the reasons specified in the performance-based restricted stock unit agreement.

     Compensation expense for performance award shares is recognized using the fair market value of the Company’s common stock on the date of grant and on an accelerated basis. The Company recognizes expense for these performance award shares under the assumption that the performance ROIC target will be achieved. If it appears such performance ROIC target will not be met, the Company would stop recognizing any further compensation cost and any previously recognized compensation cost would be reversed.

     Additional information for the three- and six-month periods ended June 30, 2011, and 2010, is noted in the following table (dollars in thousands, except per share amounts):

		Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
		June 30, 2011				June 30, 2010				June 30, 2011				June 30, 2010
Number of performance award shares granted			—				39,630				22,511				91,553
Weighted average grant-date fair value per share			—			$	30.46			$	44.44			$	25.76
Fair value of performance award shares vested		$	415				—			$	804				—

     As of June 30, 2011, there was $1.6 million of total unrecognized compensation cost related to performance award shares granted under the SIPs. This aggregate unrecognized cost is expected to be recognized over a weighted-average period of 3.10 years.

Deferred Stock Units

     Service award grant to CEO. During the six month periods ended June 30, 2011 and 2010, the Company granted deferred stock unit service awards (“Service DSUs”) under the SIPs to its CEO. Service DSUs are issued under the SIPs at the fair market value of the Company’s stock on the date of grant, and generally vest annually over a four-year period on each anniversary date of the grant. The Service DSUs, if vested, will be convertible into shares of the Company’s common stock following the holder’s termination of employment. The Service DSUs provide for accelerated vesting upon termination without cause or retirement as defined in the CEO’s employment agreement. No Service DSUs were converted into the Company’s common stock shares during the six-month periods ended June 30, 2011, and 2010. Additional information for the three- and six-month periods ended June 30, 2011, and 2010, is noted in the following table (dollars in thousands, except per share amounts):

		Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
Service DSUs Awarded to CEO		June 30, 2011				June 30, 2010				June 30, 2011				June 30, 2010
Number of shares granted			—				—				900				60,144
Weighted-average grant date fair value per share			—				—			$	44.44			$	24.94
Fair value of shares vested			—				—			$	704				—

     Compensation expense for Service DSUs is recognized on a straight-line basis over the vesting period using the fair market value of the Company’s common stock on the date of grant. As of June 30, 2011, there was $0.4 million of total unrecognized compensation cost related to Service DSUs. This aggregate unrecognized cost is expected to be recognized over the weighted-average period of 0.53 years.

     Performance award grant to CEO. During the six-month periods ended June 30, 2011 and 2010, the Company granted deferred stock unit performance awards (“Performance DSUs”) under the SIPs to its CEO. These Performance DSUs (i) were issued at the fair market value of the Company’s common stock on the date of grant, (ii)

will expire without vesting if the Company’s return on invested capital (“ROIC”) for the annual performance period does not exceed 12 percent, which is an approximation of the Company’s weighted average cost of capital, (iii) will, if the Company’s ROIC exceeds 12 percent, vest in four equal annual installments beginning on the first anniversary date of the grant, and (iv) provide for accelerated vesting upon termination without cause or retirement as defined in the CEO’s employment agreement. These Performance DSUs, if vested, will be convertible into shares of the Company’s common stock, subsequent to termination of employment. Additional information for the three- and six-month periods ended June 30, 2011, and 2010, is noted in the following table (dollars in thousands, except per share amounts):

		Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
Performance DSUs Awarded to CEO		June 30, 2011				June 30, 2010				June 30, 2011				June 30, 2010
Number of shares granted			—				—				24,122				23,004
Weighted-average grant date fair value per share			—				—			$	44.44			$	22.17
Fair value of shares vested			—				—			$	227				—

     Compensation expense for Performance DSUs is recognized using the fair market value of the Company’s common stock on the date of grant and on an accelerated basis. The Company recognizes expense for these Performance DSUs under the assumption that the performance ROIC target will be achieved. If it appears such performance ROIC target will not be met, the Company would stop recognizing any further compensation cost and any previously recognized compensation cost would be reversed. As of June 30, 2011, there was $0.9 million of total unrecognized compensation cost related to Performance DSUs. This aggregate unrecognized cost is expected to be recognized over the weighted-average period of 1.41 years.

     Awards for service on Board of Directors (“Board”). The Company issues deferred stock units to its Board of Directors (“Board DSUs”) under the SIPs. These Board DSUs (i) were issued at the fair market value of the Company’s common stock on the date of grant and (ii) if vested, will be convertible to shares of the Company’s common stock subsequent to termination of service as a director. Annual grants of Board DSUs vest annually in three equal installments over a three-year period.

     In addition to receiving Board DSU grants annually, the Board members have the right to elect to receive all or a portion of their retainer and meeting attendance fees as cash and/or deferred stock units, which vest immediately. Only nonemployee directors are eligible for director compensation and therefore Board DSUs are only granted to nonemployee Directors.

     Additional information for the three- and six-month periods ended June 30, 2011, and 2010, is noted in the following table (dollars in thousands, except per share amounts):

Board DSUs and Dividend		Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
Equivalents Awarded to Board		June 30, 2011				June 30, 2010				June 30, 2011				June 30, 2010
Number of shares granted			21,061				25,517				22,481				31,676
Weighted-average grant date fair value per share		$	40.67			$	29.03			$	40.60			$	28.38
Fair value of shares vested		$	57			$	41			$	173			$	84

     Compensation expense for Board DSUs is recognized on a straight-line basis over the vesting period using the fair market value of the Company’s common stock on the date of grant. As of June 30, 2011, there was $1.4 million of total unrecognized compensation cost related to Board DSUs granted to nonemployee directors. This aggregate unrecognized cost is expected to be recognized over the weighted-average period of 2.47 years.

14. Concentration Risk

     Arbitron is a leading media and marketing information services firm primarily serving radio, advertising agencies, cable and broadcast television, advertisers, retailers, out-of-home media, online media and print media.

     The Company’s quantitative radio audience ratings service and related software licensing revenue accounted for the following percentages, in the aggregate, of total Company revenue:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Quantitative radio audience ratings service and related software licensing revenue			81	%			81	%			89	%			89	%

     The Company had one customer that individually represented 20% of its annual revenue for the year ended December 31, 2010. The Company had two customers that individually represented 17% and 12% of its total accounts receivable as of June 30, 2011, and two customers that individually represented 24% and 11% of its total accounts receivable as of December 31, 2010. The Company has historically experienced a high level of contract renewals.

15. Financial Instruments

     The fair values of accounts receivable and accounts payable approximate their carrying values due to their short-term nature. The Company accounts for its $5.2 million investment in TRA’s preferred stock using the cost method of accounting. TRA is closely held and there is not an efficient market in which buyers and sellers determine the fair value of these shares. The Company periodically assesses the fair value of its investment in TRA through comparative analysis and analysis of TRA’s actual and projected financial results. As of June 30, 2011, the Company believes that the fair value of the TRA investment approximates the carrying value of $5.2 million. In the event the fair value of the investment in TRA were to fall below its carrying value in the future, the Company would be required to recognize an impairment loss.

     Due to the floating rate nature of the Company’s revolving obligation under its Credit Facility, the carrying amounts of $5.0 million and $53.0 million in outstanding borrowings as of June 30, 2011, and December 31, 2010, respectively, approximate their fair values.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

	•		successfully maintain and promote industry usage of our services, a critical mass of broadcaster encoding, and the proper understanding of our audience ratings services and methodology in light of governmental actions, including investigation, regulation, legislation or litigation, customer or industry group activism, or adverse community or public relations efforts;
	•		successfully obtain and/or maintain Media Rating Council, Inc. (“MRC”) accreditation for our audience ratings services;
	•		successfully launch our cross-platform initiatives;
	•		support our current and future services by designing, recruiting and maintaining research samples that appropriately balance quality, size and operational cost;
	•		successfully develop, implement and fund initiatives designed to increase sample quality;
	•		successfully manage costs associated with cell phone household recruitment and targeted in-person recruitment;
	•		successfully manage the impact on our business of the economic environment generally, and in the advertising market, in particular, including, without limitation, the insolvency of any of our customers or the impact of a downturn on our customers’ ability to fulfill their payment obligations to us;
	•		successfully integrate acquired operations, including differing levels of management and internal control effectiveness at the acquired entity;
	•		compete with companies that may have financial, marketing, sales, technical or other advantages over us;
	•		effectively respond to rapidly changing technologies by creating proprietary systems to support our research initiatives and by developing new services that meet marketplace demands in a timely manner;
	•		successfully execute our business strategies, including evaluating and, where appropriate, entering into potential acquisition, joint-venture or other material third-party agreements;
	•		manage and process the information we collect in compliance with data protection and privacy requirements;

	•		successfully develop and implement technology solutions to encode and/or measure new forms of media content and delivery, and advertising in an increasingly competitive environment; and
	•		renew contracts with key customers.

     There are a number of additional important factors that could cause actual events or our actual results to differ materially from those indicated by such forward-looking statements, including, without limitation, the factors set forth in “ITEM 1A. RISK FACTORS” in our Annual Report on Form 10-K for the year ended December 31, 2010, and elsewhere, and any subsequent periodic or current reports filed by us with the Securities and Exchange Commission (the “SEC”).

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

Overview

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

•

measuring and estimating radio audiences in local markets in the United States;

•

measuring and estimating radio audiences of network radio programs and commercials;

•

providing software used for accessing and analyzing our media audience and marketing information data; and

•

providing consumer, shopping, and media usage information services.

     Historically, our quantitative radio ratings services and related software have accounted for a substantial majority of our revenue. For each of the six-month periods ended June 30, 2011, and 2010, our quantitative radio ratings services and related software accounted for approximately 89 percent of our revenue. We expect that for the year ending December 31, 2011, our quantitative radio ratings services and related software licensing will account for approximately 89 percent of our revenue.

     Quarterly fluctuations in these percentages are reflective of the seasonal delivery schedule of our quantitative radio ratings service and our Scarborough revenues. For further information regarding seasonality trends, see “Seasonality.”

     While we expect that our quantitative radio ratings services and related software licensing will continue to account for the majority of our revenue for the foreseeable future, we are actively seeking opportunities to diversify our revenue base by, among other things, leveraging the investment we have made in our Portable People Meter^TM (“PPM^TM”) Platform, (which we define as our PPM technology and our PPM panel combined), and exploring applications of the PPM Platform to both enhance and extend beyond our domestic radio ratings business.

     As of December 31, 2010, we completed the commercialization of our PPM radio ratings service in 48 of the largest United States radio markets (“PPM Markets”). We believe those broadcasters with whom we have entered into multi-year PPM agreements account for most of the total radio advertising dollars in the PPM Markets. These agreements provide for a higher fee for PPM-based ratings than we charged for our Diary-based ratings. As a result, absent new initiatives, we expect the percentage of our revenues derived from our quantitative radio ratings services and related software is likely to increase as a result of the commercialization of the PPM service in the PPM Markets.

     We expect growth in revenue for 2011 due to the full year impact of revenue recognized for the PPM Markets. However, we do not expect the full revenue impact of the launch of each PPM Market to occur within the first year after commercialization because our customer contracts are typically structured to phase in higher PPM service rates over a period of time.

     As we commercialized the PPM ratings service, we incurred expenses to build the PPM panel in each PPM Market in the months before commercializing the service in that market. These costs were incremental to the costs associated with our Diary-based ratings service during those periods. With the commercialization of our PPM ratings service complete, our future performance will be impacted by our ability to address a variety of challenges and opportunities in the markets and industries we serve, including our ability to continue to maintain and improve the quality of our PPM ratings service, and manage increased costs for data collection, arising among other ways, from targeted in-person recruiting and increased numbers of cell phone households, which are more expensive for us to recruit than households with landline phones.

     Protecting and supporting our existing customer base, and ensuring our services are competitive from a price, quality, and service perspective are critical components to these overall goals, although there can be no guarantee that we will be successful in our efforts.

Ratings Trends and Initiatives

Challenges in Our Radio Audience Ratings Service

     We face a number of challenges in our radio audience ratings services. Overall response rates for survey research, in general, have declined over the past several decades, and it has become increasingly difficult and more costly for us to obtain consent from persons to participate in our surveys and panels. We have been adversely impacted by these industry trends. Another measure often employed by users of our data to assess quality in our ratings is sample proportionality, which refers to how well the distribution of the sample for any individual survey compares to the distribution of the population in the local market. We strive to achieve a level of both response rates and sample proportionality in our surveys sufficient to maintain confidence in our ratings and acceptance by the industry, and to support accreditation by the MRC. Response rates are one measure of our effectiveness in obtaining consent from persons to participate in our surveys and panels.

     If response rates continue to decline or we are unable to maintain sample proportionality in our surveys or the costs of recruitment initiatives significantly increase, our radio audience ratings business could be adversely affected. In an effort to address these challenges, we established internal benchmarks we strive to achieve for response rates and sample proportionality and have instituted a number of methodological enhancements, including cell phone household and targeted in-person recruiting. It is more expensive for us to recruit cell phone households and to conduct targeted in-person recruiting. Because we intend to continue to increase both the number of cell phone households in our samples and the level of targeted in-person recruiting, we expect the expenditures required to support these methods will be material. We currently anticipate that the aggregate cost of cell phone household recruitment for the PPM and Diary services and targeted in-person recruitment for the PPM service will be approximately $16.0 million in 2011, as compared to $15.0 million in 2010.

MRC Accreditation

     In March 2011, we announced the MRC had accredited the monthly average-quarter-hour radio ratings data produced by our PPM service in 11 additional PPM Markets: Atlanta; Cincinnati; Cleveland; Kansas City; Milwaukee-Racine; Philadelphia; Phoenix; Portland, OR; Salt Lake City-Ogden-Provo; St. Louis, and Tampa-St. Petersburg-Clearwater. These 11 markets join Houston-Galveston; Minneapolis-St. Paul and Riverside-San Bernardino as accredited markets for our PPM service, bringing the total number of MRC-accredited PPM Markets to 14. The MRC has denied accreditation in our other 34 PPM Markets based on findings of audits it conducted in 2010. These 34 unaccredited markets, along with the 14 accredited markets, are expected to be audited again in 2011. We continue to seek accreditation in all of our unaccredited PPM Markets.

     In April 2011, we also announced the MRC had accredited our TAPSCAN Web software, a Web-based sales proposal and analysis software system for radio. Reports created using the software and MRC accredited data will now indicate the software is accredited by the MRC. However, reports created using data from the 34 unaccredited PPM markets will not be MRC-accredited.

     For additional information regarding the status of MRC accreditation of our ratings services, see “Item 1. Business— Media Rating Council Accreditation” in our Annual Report on Form 10-K for the year ended December 31, 2010.

Quality Improvement Initiatives

     Portable People Meter Service. In operating our PPM ratings service, we experienced and expect to continue to experience challenges, including those related to response rates and sample proportionality as described above in “Challenges in Our Radio Audience Ratings Services.” We expect to continue to implement additional measures to address these challenges. Since launching our PPM ratings service, we have implemented a number of initiatives and announced additional forthcoming initiatives. We believe these steps reflect our commitment to ongoing improvement and our responsiveness to feedback from customers and governmental entities. We believe these commitments and enhancements, which we refer to, collectively, as our continuous improvement initiatives, are consistent with our ongoing efforts to obtain and maintain MRC accreditation and to continuously improve our radio ratings services. We expect our continuous improvement initiatives will require expenditures which will be material in the aggregate.

     Diary Service. We strive to achieve representative samples. We believe that additional expenditures will be required in the future to research and test new measures associated with improving response rates and sample proportionality as described above in “Challenges in Our Radio Audience Ratings Services.” We continue to research and test new measures to address these sample quality challenges.

Privacy and Data Security

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

Credit Facility

     Our revolving credit facility agreement (“Credit Facility”) is scheduled to expire on December 20, 2011. We expect to renew or replace our Credit Facility prior to its expiration. See Liquidity and Capital Resources — Credit Facility below for further information regarding the terms of our Credit Facility.

General Economic Conditions

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

     We depend on a limited number of key customers for our ratings services and related software. For example, in 2010, Clear Channel represented 20 percent of our total revenue. Additionally, although fewer customer contracts expire in 2011 as compared to historical standards, if one or more key customers do not renew all or part of their contracts as they expire, we could experience a significant decrease in our operating results.

Critical Accounting Policies and Estimates

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

     Software development costs. We capitalize software development costs with respect to significant internal use software initiatives or enhancements from the time the preliminary project stage is completed and management considers it probable the software will be used to perform the function intended, until the time the software is placed in service for its intended use. Once the software is placed in service, the capitalized costs are amortized over periods of three to five years. We perform an assessment quarterly to determine if it is probable all capitalized software will be used to perform its intended function. If an impairment exists, the software cost is written down to estimated fair value. As of June 30, 2011, and December 31, 2010, our capitalized software developed for internal use had carrying amounts of $26.9 million and $24.4 million, respectively, including $11.3 million and $12.4 million, respectively, of software related to the PPM service.

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

     We include, in our tax calculation methodology, an assessment of the uncertainty in income taxes by establishing recognition thresholds for our tax positions. Inherent in our calculation are critical judgments by management related to the determination of the basis for our tax positions. For further information regarding our unrecognized tax benefits, see Note 12 in the Notes to Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q.

     Insurance Receivables. During 2008, we became involved in two securities-law civil actions and a governmental interaction primarily related to the commercialization of our PPM service. Since 2008, we have incurred a combined total of $10.3 million in legal fees and expenses in connection with these matters. As of June 30, 2011, $6.7 million in insurance reimbursements related to these legal actions were received. As of June 30, 2011, and December 31, 2010, our insurance claims receivable related to these legal actions was $0.6 million and $0.6 million, respectively, and these amounts are included in our prepaid expenses and other current assets on our balance sheet. See Note 7 in our Notes to Consolidated Financial Statements for additional information concerning our insurance recovery receivables.

     Cost Method Investment. We account for our $5.2 million investment in TRA’s preferred stock using the cost method of accounting. TRA is closely held and there is not an efficient market in which buyers and sellers

determine the fair value of these securities. We periodically assess the fair value of our investment in TRA through comparative analysis and analysis of TRA’s actual and projected financial results. Our assessment of the fair value of TRA requires the use of estimates and judgment. TRA is currently engaged in raising additional capital, which it has indicated to us it expects to complete in the second half of 2011. In the event the fair value of our investment in TRA were to fall below its carrying value, we would be required to recognize an impairment loss.

Results of Operations

Comparison of the Three Months Ended June 30, 2011 to the Three Months Ended June 30, 2010

     The following table sets forth information with respect to our consolidated statements of income:

		Three Months Ended								Increase								Percentage of
		June 30,								(Decrease)								Revenue
		2011				2010				Dollars				Percent				2011				2010
Revenue		$	95,737			$	88,339			$	7,398				8.4	%			100.0	%			100.0	%
Costs and expenses
Cost of revenue			61,025				59,504				1,521				2.6	%			63.7	%			67.4	%
Selling, general and administrative			18,656				19,149				(493	)			(2.6	%)			19.5	%			21.7	%
Research and development			9,017				9,072				(55	)			(0.6	%)			9.4	%			10.3	%
Total costs and expenses			88,698				87,725				973				1.1	%			92.6	%			99.3	%
Operating income			7,039				614				6,425				1046.4	%			7.4	%			0.7	%
Equity in net income of affiliate			5,453				5,642				(189	)			(3.3	%)			5.7	%			6.4	%
Income before interest and tax expense			12,492				6,256				6,236				99.7	%			13.0	%			7.1	%
Interest income			8				4				4				100.0	%			0.0	%			0.0	%
Interest expense			104				254				(150	)			(59.1	%)			0.1	%			0.3	%
Income before income tax expense			12,396				6,006				6,390				106.4	%			12.9	%			6.8	%
Income tax expense			4,812				2,207				2,605				118.0	%			5.0	%			2.5	%
Net income		$	7,584			$	3,799			$	3,785				99.6	%			7.9	%			4.3	%
Income per weighted average common share
Basic		$	0.28			$	0.14			$	0.14				100.0	%
Diluted		$	0.27			$	0.14			$	0.13				92.9	%
Cash dividends declared per common share		$	0.10			$	0.10			$	—				—

Certain percentage amounts may not total due to rounding.

Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)

		Three Months Ended								Increase
		June 30,								(Decrease)
		2011				2010				Dollars				Percent
Other data:
EBIT (1)		$	12,492			$	6,256			$	6,236				99.7	%
EBITDA (1)		$	19,731			$	12,935			$	6,796				52.5	%
EBIT Margin (1)			13.0	%			7.1	%
EBITDA Margin (1)			20.6	%			14.6	%
EBIT and EBITDA Reconciliation (1)
Net income		$	7,584			$	3,799			$	3,785				99.6	%
Income tax expense			4,812				2,207				2,605				118.0	%
Interest (income)			(8	)			(4	)			(4	)			100.0	%
Interest expense			104				254				(150	)			(59.1	%)
EBIT (1)			12,492				6,256				6,236				99.7	%
Depreciation and amortization			7,239				6,679				560				8.4	%
EBITDA (1)		$	19,731			$	12,935			$	6,796				52.5	%

     Revenue. Revenue increased by 8.4% or $7.4 million for the three-month period ended June 30, 2011, as compared to the same period in 2010 primarily due to more PPM Markets and higher prices charged for PPM-based ratings than for Diary-based ratings. PPM-based ratings service revenue increased by $14.9 million primarily due to the impact of the 15 PPM Markets commercialized during the last half of 2010, as well as price escalators in all PPM commercialized markets. This increase in PPM revenue was partially offset by an $8.7 million decrease in revenue related to the transition from our Diary-based ratings service.

     Cost of Revenue. Cost of revenue increased by 2.6% or $1.5 million for the three-month period ended June 30, 2011, as compared to the same period in 2010. Cost of revenue increased primarily due to $0.6 million of increased PPM service-related costs incurred to manage PPM panels for the 48 PPM Markets commercialized as of June 30, 2011, as compared to the 33 PPM Markets commercialized as of June 30, 2010. Cost of revenue was also impacted by a $0.5 million increase in costs related to our computer center operations.

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

     EBIT increased by 99.7% or $6.2 million for the three-month period ended June 30, 2011, as compared to the same period in 2010, primarily due to an increase in revenue associated with the PPM service transition. However, EBITDA increased by 52.5% or $6.8 million because this non-GAAP financial measure adds back depreciation and amortization, which increased to $7.2 million for the three-month period ended June 30, 2011, from $6.7 million for the same period in 2010.

Comparison of the Six Months Ended June 30, 2011 to the Six Months Ended June 30, 2010

     The following table sets forth information with respect to our consolidated statements of income:

Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)

		Six Months Ended								Increase								Percentage of
		June 30,								(Decrease)								Revenue
		2011				2010				Dollars				Percent				2011				2010
Revenue		$	196,606			$	184,235			$	12,371				6.7	%			100.0	%			100.0	%
Costs and expenses
Cost of revenue			106,704				102,657				4,047				3.9	%			54.3	%			55.7	%
Selling, general and administrative			35,765				36,790				(1,025	)			(2.8	%)			18.2	%			20.0	%
Research and development			18,012				18,981				(969	)			(5.1	%)			9.2	%			10.3	%
Total costs and expenses			160,481				158,428				2,053				1.3	%			81.6	%			86.0	%
Operating income			36,125				25,807				10,318				40.0	%			18.4	%			14.0	%
Equity in net income of affiliate			2,921				3,111				(190	)			(6.1	%)			1.5	%			1.7	%
Income before interest and tax expense			39,046				28,918				10,128				35.0	%			19.9	%			15.7	%
Interest income			14				6				8				133.3	%			0.0	%			0.0	%
Interest expense			268				519				(251	)			(48.4	%)			0.1	%			0.3	%
Income before income tax expense			38,792				28,405				10,387				36.6	%			19.7	%			15.4	%
Income tax expense			14,961				10,858				4,103				37.8	%			7.6	%			5.9	%
Net income		$	23,831			$	17,547			$	6,284				35.8	%			12.1	%			9.5	%
Income per weighted average common share
Basic		$	0.88			$	0.66			$	0.22				33.3	%
Diluted		$	0.86			$	0.65			$	0.21				32.3	%
Cash dividends declared per common share		$	0.20			$	0.20			$	—				—