Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction and Overview
Acxiom is a recognized leader in marketing technology and services 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 and the Asia-Pacific region.
During the quarter ended December 31, 2011, the Company announced the sale of its background screening unit, Acxiom Information Security Systems (AISS). The sale was completed in the quarter ended March 31, 2012. As a result, AISS results for the prior year are presented as discontinued operations in the condensed consolidated statement of operations. Revenue and expenses related to discontinued operations are netted and presented on one line, net of tax, in the statement of operations.
As we complete the second quarter of fiscal 2013, our Company has completed the transition to a new executive leadership team. During fiscal 2012 we named a new chief executive officer, a new chief financial officer, and a new chief revenue officer. During the first quarter of fiscal 2013 we named a new chief product and engineering officer. During fiscal 2012 we announced plans to significantly accelerate investment in product development in fiscal 2013, which management believes will help drive revenue growth in fiscal 2014 and beyond.
Highlights of the quarter ended September 30, 2012 are identified below.
·
|
Revenue of $277.5 million, a 3.1% decrease from $286.4 million in the same quarter a year ago.
|
·
|
Total operating expenses of $247.3 million, a 4.7% decrease from $259.4 million in the same quarter a year ago.
|
·
|
Income from operations of $30.2 million, representing a 10.9% operating margin, compared to $27.1 million, a 9.4% operating margin, in the same quarter a year ago.
|
·
|
Pre-tax earnings from continuing operations of $26.8 million, a 25.6% increase from $21.4 million in the same quarter a year ago.
|
·
|
Diluted earnings per share attributable to Acxiom stockholders of $0.21 compared to $0.15 in the same quarter a year ago.
|
·
|
Operating cash flow was $39.2 million compared to $57.7 million in the same quarter a year ago.
|
·
|
The Company paid $14.0 million to acquire common shares as part of a common stock repurchase program.
|
The highlights above are intended to identify to the reader an overview of the financial results, as well as some of the more significant events and transactions of the Company during the fiscal quarter ended September 30, 2012. However, these highlights are not intended to be a full discussion of the Company’s results for the quarter. 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.
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
September 30
|
|
|
For the six months ended
September 30
|
|
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
Revenues
|
|
$
|
277.5
|
|
|
$
|
286.4
|
|
|
|
(3
|
%)
|
|
$
|
549.1
|
|
|
$
|
562.5
|
|
|
|
(2
|
%)
|
Total operating costs and expenses
|
|
|
247.3
|
|
|
|
259.4
|
|
|
|
(5
|
%)
|
|
|
493.5
|
|
|
|
514.7
|
|
|
|
(4
|
%)
|
Income from operations
|
|
$
|
30.2
|
|
|
$
|
27.0
|
|
|
|
12
|
%
|
|
$
|
55.6
|
|
|
$
|
47.8
|
|
|
|
16
|
%
|
Diluted earnings per share attributable to Acxiom stockholders
|
|
$
|
0.21
|
|
|
$
|
0.15
|
|
|
|
40
|
%
|
|
$
|
0.38
|
|
|
$
|
0.28
|
|
|
|
36
|
%
|
Revenues
The following table presents the Company’s revenue for each of the periods reported (dollars in millions):
|
|
For the quarter ended
September 30
|
|
|
For the six months ended
September 30
|
|
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
Marketing and data services
|
|
$
|
194.4
|
|
|
$
|
195.8
|
|
|
|
(1
|
%)
|
|
$
|
380.1
|
|
|
$
|
380.8
|
|
|
|
(0
|
%)
|
IT Infrastructure management services
|
|
|
70.1
|
|
|
|
73.7
|
|
|
|
(5
|
%)
|
|
|
140.4
|
|
|
|
146.8
|
|
|
|
(4
|
%)
|
Other services
|
|
|
13.0
|
|
|
|
16.9
|
|
|
|
(23
|
%)
|
|
|
28.6
|
|
|
|
34.9
|
|
|
|
(18
|
%)
|
Total revenue
|
|
$
|
277.5
|
|
|
$
|
286.4
|
|
|
|
(3
|
%)
|
|
$
|
549.1
|
|
|
$
|
562.5
|
|
|
|
(2
|
%)
|
Total revenue decreased 3.1%, or $9.0 million, to $277.5 million in the quarter ended September 30, 2012 from $286.4 million in the same quarter a year ago. For the six months ended September 30, 2012 total revenue was $549.1 million, a $13.4 million, or 2.4%, decrease from $562.5 million during the same period a year ago. Revenue in the prior six-month period included $1.3 million related to the disposed MENA operations. Excluding the impact of the MENA revenue and the impact of unfavorable foreign currency translation, revenue decreased 1.5% between the two comparable six-month periods.
Marketing and data service (MDS) revenue for the quarter ended September 30, 2012 was $194.4 million, a decrease of less than 1% when compared to the same quarter a year ago. On a geographic basis, International MDS revenue decreased $4.8 million, or 14.2%, and U.S. MDS revenue increased $3.3 million, or 2.0%. Excluding the impact of unfavorable foreign currency translation, International MDS revenue decreased $3.5 million, primarily the result of lower transaction volume. The increase in U.S. MDS revenue was primarily attributable to increases from new business revenue and one-time projects in the Technology ($4.3 million) and Retail ($3.1 million) industries, offset by a decrease in the Healthcare industry of $5.1 million due to expiration of a large contract. By line of business, MDS revenue increases in Consumer Insights Products ($1.7 million, or 3.1%) and Consulting ($2.1 million, or 8.7%) were offset by declines in CDI Services ($3.6 million, or 9.6%) and Marketing Management ($1.7 million, or 2.1%). CDI Services and Marketing Management revenue decreases resulted from lower project activity in certain U.S. industries and in Brazil, and the expiration of a large Healthcare industry contract.
MDS revenue for the six months ended September 30, 2012 was $380.1 million, which was flat when compared to the same period a year ago. On a geographic basis, International MDS revenue decreased $7.9 million, or 12.6%, and U.S. MDS revenue increased $7.2 million, or 2.3%. Excluding the impact of unfavorable foreign currency translation, International MDS revenue decreased $4.9 million, primarily the result of lower transaction volume in Europe, Australia, and Brazil. The increase in U.S. MDS revenue was primarily attributable to increases from new business revenue and one-time projects in the Technology ($7.2 million), Financial Services ($3.5 million), and Retail ($8.1 million) industries, offset by a decrease in the Healthcare industry of $9.2 million due to expiration of a large contract. By line of business, MDS revenue increases in Marketing Management and Consulting ($5.0 million, or 2.4%) were offset by decreases in CDI Services ($6.2 million, or 8.2%). CDI Services revenue was impacted by the expiration of a large Healthcare industry contract.
IT Infrastructure management services (IM) revenue for the quarter ended September 30, 2012 was $70.1 million, a $3.6 million, or 5.0%, decrease compared to $73.7 million in the same quarter a year ago. IM revenue for the six months ended September 30, 2012 was $140.4 million, a $6.4 million, or 4.4%, decrease compared to $146.8 million in the same period a year ago. The IM revenue decrease for both periods was attributable to the loss of a large contract during the third quarter of fiscal 2012, partially offset by revenue increases with existing clients.
Other services revenue for the quarter ended September 30, 2012 was $13.0 million, a $3.9 million, or 22.9%, decrease compared to $16.9 million in the same quarter a year ago. Revenue from the U.K. fulfillment and U.S. e-mail fulfillment operations decreased $0.6 million and $1.8 million, respectively, in the quarter due to lower project revenue with existing customers as well as the wind-down of an e-mail contract. The Company has begun transitioning Risk customers to a third-party partner through a referral fee arrangement and plans to exit this business. As a result, revenue from the Risk business decreased $1.5 million in the quarter.
Other services revenue for the six months ended September 30, 2012 was $28.6 million, a $6.2 million, or 17.9%, decrease compared to $34.9 million in the same period a year ago. Excluding the impact of the MENA disposal, revenue decreased approximately $4.9 million in the quarter. Revenue from the U.K. fulfillment and U.S. e-mail fulfillment operations decreased $1.1 million and $1.5 million, respectively, in the period due to lower project revenue with existing customers as well as the wind-down of an e-mail contract. Revenue from the Risk business decreased $2.3 million in the period.
Operating Costs and Expenses
The following table presents the Company’s operating costs and expenses for each of the periods presented (dollars in millions):
|
|
For the quarter ended
September 30
|
|
|
For the six months ended
September 30
|
|
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
Cost of revenue
|
|
$
|
209.9
|
|
|
$
|
217.5
|
|
|
|
(3
|
%)
|
|
$
|
419.2
|
|
|
$
|
435.8
|
|
|
|
(4
|
%)
|
Selling, general and administrative
|
|
|
37.4
|
|
|
|
39.4
|
|
|
|
(5
|
%)
|
|
|
74.1
|
|
|
|
76.2
|
|
|
|
(3
|
%)
|
Gains, losses and other items, net,
|
|
|
-
|
|
|
|
2.5
|
|
|
|
(99
|
%)
|
|
|
0.2
|
|
|
|
2.7
|
|
|
|
(93
|
%)
|
Total operations costs and expenses
|
|
$
|
247.3
|
|
|
$
|
259.4
|
|
|
|
(5
|
%)
|
|
$
|
493.5
|
|
|
$
|
514.7
|
|
|
|
(4
|
%)
|
Cost of revenue for the quarter ended September 30, 2012 was $209.9 million, a $7.6 million, or 3.5%, decrease from $217.5 million in the same quarter a year ago. Gross margins increased from 24.1% to 24.4% in the two comparable periods. Margins in the fiscal 2013 quarter benefited from improving IM margins and international cost reduction actions taken during the fourth quarter of fiscal 2012. These benefits were offset by higher costs of delivery and investments in data in the U.S. MDS business. U.S. gross margins increased from 25.2% to 25.4%. International gross margins were flat at 17.8% on declining revenue due to the cost reduction actions in International markets.
Cost of revenue for the six months ended September 30, 2012 was $419.2 million, a $16.6 million, or 3.8%, decrease from $435.8 million in the same period a year ago. Gross margins increased from 22.5% to 23.7% in the two comparable periods. Margins in the fiscal 2013 period benefited from improving IM margins and international cost reduction actions taken during the fourth quarter of fiscal 2012. These benefits were offset by higher costs of delivery and investments in data in the U.S. MDS business. U.S. gross margins increased from 24.5% to 24.9% due to IM margin improvements, and international gross margins improved to 15.0% from 10.6% on declining revenue due to the cost reduction actions in international markets.
Selling, general and administrative expense for the quarter ended September 30, 2012 was $37.4 million, a $2.1 million, or 5.3%, decrease from the same quarter a year ago. As a percent of total revenue, these expenses were 13.5% this year compared to 13.8% in the prior period. Selling, general and administrative expense for the six months ended September 30, 2012 was $74.1 million, a $2.1 million, or 2.8%, decrease from $76.2 million in the same period a year ago. As a percent of total revenue, these expenses were 13.5% this year compared to 13.6% in the prior period. Lower sales expense in the U.S. from cost reductions and lower commissions, as well as international cost reductions, contributed to the lower selling, general and administrative expense. These reductions were offset by higher levels of incentive and non-cash stock compensation expense and higher benefits costs.
Gains, losses and other items, net was $2.5 million for the quarter ended September 30, 2011. Gains, losses and other items, net was $0.2 million and $2.7 million for the six months ended September 30, 2012 and 2011, respectively. The prior year amounts primarily represent the net loss related to the disposal of the MENA operations.
Operating Profit and Profit Margins
The following table presents the Company’s operating profit (income from operations) and profit margin by segment for each of the periods presented (dollars in thousands):
|
|
For the quarter ended
September 30
|
|
|
For the six months ended
September 30
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Operating profit and profit margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and data services
|
|
$
|
23,331
|
|
|
$
|
27,078
|
|
|
$
|
41,306
|
|
|
$
|
44,338
|
|
|
|
|
12.0
|
%
|
|
|
13.8
|
%
|
|
|
10.9
|
%
|
|
|
11.6
|
%
|
IT Infrastructure management services
|
|
$
|
8,520
|
|
|
$
|
5,091
|
|
|
$
|
17,351
|
|
|
$
|
9,338
|
|
|
|
|
12.2
|
%
|
|
|
6.9
|
%
|
|
|
12.4
|
%
|
|
|
6.4
|
%
|
Other services
|
|
$
|
(1,611
|
)
|
|
$
|
(2,653
|
)
|
|
$
|
(2,833
|
)
|
|
$
|
(3,212
|
)
|
|
|
|
(12.4
|
%)
|
|
|
(15.7
|
%)
|
|
|
(9.9
|
%)
|
|
|
(9.2
|
%)
|
Corporate
|
|
$
|
(32
|
)
|
|
$
|
(2,465
|
)
|
|
$
|
(192
|
)
|
|
$
|
(2,709
|
)
|
Total operating profit
|
|
$
|
30,208
|
|
|
$
|
27,051
|
|
|
$
|
55,632
|
|
|
$
|
47,755
|
|
Total operating profit margin
|
|
|
10.9
|
%
|
|
|
9.4
|
%
|
|
|
10.1
|
%
|
|
|
8.5
|
%
|
MDS operating profit for the quarter ended September 30, 2012 was $23.3 million, a 12.0% margin, compared to $27.1 million, a 13.8% margin, in the same quarter a year ago. Margins in the U.S. declined from 18.1% in fiscal 2012 to 14.5% in fiscal 2013 while international losses decreased from $2.4 million in fiscal 2012 to $0.6 million in fiscal 2013. MDS operating profit for the six months ended September 30, 2012 was $41.3 million, a 10.9% margin, compared to $44.3 million, an 11.6% margin, in the same period a year ago. Margins in the U.S. declined from 16.5% in fiscal 2012 to 13.8% in fiscal 2013 while international losses decreased from $8.2 million in fiscal 2012 to $3.5 million in fiscal 2013. The U.S. margin decreases were primarily due to additional personnel and data costs required to support new business implementations and investment initiatives as well as increased incentive compensation in fiscal 2013. International margins benefited from the cost reduction actions in all operations.
IM operating profit for the quarter ended September 30, 2012 was $8.5 million, a 12.2% margin, compared to $5.1 million, a 6.9% margin, in the same period a year ago. IM operating profit for the six months ended September 30, 2012 was $17.4 million, a 12.4% margin, compared to $9.3 million, a 6.4% margin, in the same period a year ago. IM margins benefitted primarily from ongoing efficiency improvements.
Other services operating loss for the quarter ended September 30, 2012 was $1.6 million, a negative 12.4% margin, compared to $2.7 million, a negative 15.7% margin, in the same period a year ago. The improvement was primarily due to cost efficiencies realized by the U.S. e-mail fulfillment business. Other services operating loss for the six months ended September 30, 2012 was $2.8 million, a negative 9.9% margin, compared to $3.2 million, a negative 9.2% margin, in the same period a year ago. A $1.0 million improvement in operations from the disposition of the MENA operation was partially offset by a decline in the U.S. risk business related to revenue decreases.
Other Expense, Income Taxes and Other Items
Interest expense was $3.3 million for the quarter ended September 30, 2012 compared to $4.7 million in the same period a year ago. The decrease primarily relates to a reduction in outstanding borrowing under the Company’s term loan. The average term loan balance declined approximately $35 million between the two periods presented. The average interest rate decreased approximately 15 basis points. Interest on other debt, such as capital leases, also decreased.
Interest expense was $6.6 million for the six months ended September 30, 2012 compared to $10.2 million in the same period a year ago. The decrease primarily relates to a reduction in outstanding borrowing under the Company’s term loan. The average term loan balance declined approximately $80 million between the two periods presented. The average interest rate decreased approximately 20 basis points. Interest on other debt, such as capital leases, also decreased.
Other expense was $0.1 million for the quarter ended September 30, 2012 compared to $1.0 million in the same period a year ago. Other expense was $0.6 million for the six months ended September 30, 2012 compared to $1.1 million in the same period a year ago. Other expense is primarily due to foreign currency losses.
The effective tax rate for the quarter ended September 30, 2012 was 39% compared to 45% for the same period a year ago. The effective tax rate for the six months ended September 30, 2012 was 39% compared to 43% for the same period a year ago. Excluding the impact of the loss on disposal of the MENA operations, both prior period rates were 40%. Each fiscal period tax rate was impacted by losses in foreign jurisdictions. The Company does not record the tax benefit of those losses due to uncertainty of future benefit.
Discontinued operations in the quarter and six months ended September 30, 2011 are the results of operations of AISS, net of tax. The AISS disposal was completed in the quarter ended March 31, 2012.
Gains and losses attributable to noncontrolling interest include the noncontrolling interest in the Company’s Brazilian subsidiary for each period presented, and the noncontrolling interest in the MENA operation during the prior year.
Capital Resources and Liquidity
Working Capital and Cash Flow
Working capital at September 30, 2012 totaled $218.2 million compared to $206.4 million at March 31, 2012. Total current assets decreased $43.1 million. The decrease primarily resulted from decreases in cash and cash equivalents of $41.2 million related to increases in incentive compensation payments, income tax payments, payments of debt and the acquisition of Company stock pursuant to the board of directors’ approved stock repurchase plan. Current liabilities decreased $55.0 million due primarily to decreases in trade accounts payable of $13.2 million, accrued payroll and related expenses of $15.5 million, deferred revenue of $12.5 million, and income taxes of $13.9 million.
The Company’s cash is primarily located in the United States. Approximately $10.5 million of the total cash balance of $188.4 million, or approximately 6%, is located outside the United States. The Company has no current plans to repatriate this cash to the United States.
Accounts receivable days sales outstanding was 55 days at September 30, 2012 compared to 54 days at March 31, 2012, and is calculated as follows (dollars in thousands):
|
|
September 30,
2012
|
|
|
March 31,
2012
|
|
Numerator – trade accounts receivable, net
|
|
$
|
166,675
|
|
|
$
|
169,446
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Quarter revenue
|
|
|
277,467
|
|
|
|
287,255
|
|
Number of days in quarter
|
|
|
92
|
|
|
|
91
|
|
Average daily revenue
|
|
$
|
3,016
|
|
|
$
|
3,157
|
|
Days sales outstanding
|
|
|
55
|
|
|
|
54
|
|
Net cash provided by operating activities was $37.4 million in the six months ended September 30, 2012 compared to $90.5 million in the same period a year ago. The change is primarily related to changes in working capital. In the current year period, incentive compensation and payments were approximately $16 million greater than in the prior year period, and income tax payments were $31 million greater than in the prior year period.
Investing activities used $23.2 million in cash during the six months ended September 30, 2012 compared to $32.1 million in the prior year. This results from capital expenditures of $11.7 million, capitalization of data acquisition costs of $3.7 million, and capitalization of software development costs of $7.7 million.
Financing activities used $55.2 million in cash during the six months ended September 30, 2012 compared to $145.4 million in the prior year. Financing activities include payments of debt and sales of stock under options. Payments of debt of $13.5 million include capital lease and installment credit payments of $8.9 million and other debt payments of $4.6 million. The current period also includes payments of $47.1 million for acquisition of the Company’s stock pursuant to the board of directors’ approved stock repurchase plan. The Company purchased 3.2 million shares at a cost of $47.2 million, of which $44.5 million was paid during the current period. The remaining $2.7 million is included in other accrued expenses as of September 30, 2012 and was paid when the trades settled in October 2012. In addition, $2.6 million was paid during the current period which was included in other accrued expenses as of March 31, 2012. Prior year financing activities included term loan prepayments of $100.0 million.
Non-cash investing and financing activities included acquisition of property and equipment under capital leases and installment payment arrangements of $2.2 million in the six months ended September 30, 2012, compared to $4.7 million in the same period last year. Future payments under these arrangements will be reflected as debt payments.
Credit and Debt Facilities
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 $120 million.
The term loan is payable in quarterly installments of approximately $1.5 million each, through December 31, 2014, with a final payment of approximately $207.5 million due March 15, 2015. The revolving loan commitment expires March 15, 2014.
Revolving credit facility borrowings currently 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 2.75%. There were no revolving credit borrowings outstanding at September 30, 2012 or March 31, 2012. Term loan borrowings bear interest at LIBOR plus a credit spread of 3.00%. The weighted-average interest rate on term loan borrowings at September 30, 2012 was 3.7%. Outstanding letters of credit at September 30, 2012 were $2.2 million.
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 the term loan, the Company is required to maintain certain debt-to-cash flow and debt service coverage ratios, among other restrictions. At September 30, 2012, 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).
On July 25, 2011, the Company entered into an interest rate swap agreement. The agreement provides for the Company to pay interest through January 27, 2014 at a fixed rate of 0.94% plus the applicable credit spread on $150.0 million notional amount, while receiving interest for the same period at the LIBOR rate on the same notional amount. The LIBOR rate as of September 30, 2012 was 0.45%. The swap was entered into as a cash flow hedge against LIBOR interest rate movements on the term loan. As of September 30, 2012, 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 $1.2 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 September 30, 2012.
Based on our current expectations, we believe our liquidity and capital resources will be sufficient to operate our business. However, we may take advantage of opportunities to generate additional liquidity or refinance existing debt through capital market transactions. The amount, nature and timing of any capital market transactions will depend on: our operating performance and other circumstances; our then-current commitments and obligations; the amount, nature and timing of our capital requirements; any limitations imposed by our current credit arrangements; and overall market conditions.
Off-Balance Sheet Items and Commitments
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 a lease for the buyer 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, the Company would be required to perform under these guarantees. A portion of the guaranteed amount is collateralized by real property. At September 30, 2012 the Company’s maximum potential future payments under these guarantees were $3.4 million.
Contractual Commitments
The following table presents Acxiom’s contractual cash obligations, exclusive of interest, and purchase commitments at September 30, 2012. The table does not include the future payment of gross unrealized tax benefit liabilities of $3.2 million or the future payment, if any, against the Company’s non-current interest rate swap liability of $1.2 million as the Company is not able to predict the periods in which these payments will be made. The column for 2013 represents the six months ending March 31, 2013. All other columns represent fiscal years ending March 31 (dollars in thousands).
|
|
For the years ending March 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
Thereafter
|
|
|
Total
|
|
Term loan
|
|
$
|
3,000
|
|
|
$
|
6,000
|
|
|
$
|
212,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
221,000
|
|
Capital lease and installment payment obligations
|
|
|
7,567
|
|
|
|
8,407
|
|
|
|
3,944
|
|
|
|
926
|
|
|
|
1,001
|
|
|
|
7,092
|
|
|
|
28,937
|
|
Other long-term debt
|
|
|
2,860
|
|
|
|
1,608
|
|
|
|
1,663
|
|
|
|
7,321
|
|
|
|
582
|
|
|
|
2,868
|
|
|
|
16,902
|
|
Total long-term obligations
|
|
|
13,427
|
|
|
|
16,015
|
|
|
|
217,607
|
|
|
|
8,247
|
|
|
|
1,583
|
|
|
|
9,960
|
|
|
|
266,839
|
|
Operating lease payments
|
|
|
11,456
|
|
|
|
22,396
|
|
|
|
17,050
|
|
|
|
13,879
|
|
|
|
13,038
|
|
|
|
44,196
|
|
|
|
122,015
|
|
Total contractual cash obligations
|
|
$
|
24,883
|
|
|
$
|
38,411
|
|
|
$
|
234,657
|
|
|
$
|
22,126
|
|
|
$
|
14,621
|
|
|
$
|
54,156
|
|
|
$
|
388,854
|
|
|
|
For the years ending March 31
|
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
Thereafter
|
|
|
Total
|
|
Total purchase commitments
|
|
$
|
45,730
|
|
|
$
|
50,595
|
|
|
$
|
41,639
|
|
|
$
|
25,356
|
|
|
$
|
15,761
|
|
|
$
|
2,314
|
|
|
$
|
181,395
|
|
Purchase commitments include contractual commitments for the purchase of data and open purchase orders for equipment, paper, office supplies, construction and other items. Purchase commitments in some cases will be satisfied by entering into future operating leases, capital leases, or other financing arrangements, rather than payment of cash. The above commitments relating to long-term obligations do not include future payments of interest. The Company estimates future interest payments on debt and capital leases for the remainder of fiscal 2013 of $6.5 million.
The following are contingencies or guarantees under which the Company could be required, in certain circumstances, to make cash payments as of September 30, 2012 (dollars in thousands):
Loan guarantee
|
|
$
|
1,125
|
|
Lease guarantee
|
|
|
2,254
|
|
Outstanding letters of credit
|
|
|
2,238
|
|
Surety bonds
|
|
|
388
|
|
While the Company does not have any other material contractual commitments for capital expenditures, certain levels of investments in facilities and computer equipment continue to be necessary to support the growth of the business. In some cases, the Company also sells software and hardware to clients. In addition, new IT Infrastructure management contracts frequently require substantial up-front capital expenditures to acquire or replace existing assets. Management believes that the Company’s existing available debt and cash flow from operations will be sufficient to meet the Company’s working capital and capital expenditure requirements for the foreseeable future. The Company also evaluates acquisitions from time to time, which may require up-front payments of cash.
To help accelerate the pace of product development, the Company plans to significantly increase the level of product investment over the current and following fiscal years. The incremental investment for fiscal 2013 could be as much as $30 million with most of that amount being research and development. This investment is expected to ramp up during the remainder of the fiscal year.
For a description of certain risks that could have an impact on results of operations or financial condition, including liquidity and capital resources, see “Risk Factors” contained in Part I, Item 1A, of the Company’s 2012 Annual Report.
Non-U.S. Operations
The Company has a presence in the United Kingdom, France, Germany, Poland, Australia, China and Brazil. Most of the Company’s exposure to exchange rate fluctuation is due to translation gains and losses as there are no material transactions that cause exchange rate impact. In general, each of the foreign locations is expected to fund its own operations and cash flows, although funds may be loaned or invested from the U.S. to the foreign subsidiaries subject to limitations in the Company’s revolving credit facility. These advances are considered to be long-term investments, and any gain or loss resulting from changes in exchange rates as well as gains or losses resulting from translating the foreign financial statements into U.S. dollars are included in accumulated other comprehensive income (loss). Exchange rate movements of foreign currencies may have an impact on the Company’s future costs or on future cash flows from foreign investments. The Company has not entered into any foreign currency forward exchange contracts or other derivative instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
Critical Accounting Policies
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These accounting principles require management to make certain judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The consolidated financial statements in the Company’s 2012 Annual Report include a summary of significant accounting policies used in the preparation of Acxiom’s consolidated financial statements. In addition, the Management’s Discussion and Analysis filed as part of the 2012 Annual Report contains a discussion of the policies which management has identified as the most critical because they require management’s use of complex and/or significant judgments. None of the Company’s critical accounting policies have materially changed since the date of the last annual report.
Valuation of Goodwill
Goodwill is measured and tested for impairment on an annual basis in the first quarter of the Company’s fiscal year in accordance with applicable accounting standards, or more frequently if indicators of impairment exist. Triggering events for interim impairment testing include indicators such as adverse industry or economic trends, restructuring actions, downward revisions to projections of financial performance, or a sustained decline in market capitalization. The performance of the impairment test involves a two-step process. The first step requires comparing the estimated fair value of a reporting unit to its net book value, including goodwill. A potential impairment exists if the estimated fair value of the reporting unit is lower than its net book value. The second step of the impairment test involves assigning the estimated fair value of the reporting unit to its identifiable assets, with any residual fair value being assigned to goodwill. If the carrying value of an individual indefinite-lived intangible asset (including goodwill) exceeds its estimated fair value, such asset is written down by an amount equal to such excess, and a corresponding amount is recorded as a charge to operations for the period in which the impairment test is completed. Completion of the Company’s annual impairment test during the quarter ended June 30, 2012 indicated no potential impairment of its goodwill balances.
In order to estimate a valuation for each of the tested components, management used an income approach based on a discounted cash flow model (income approach) together with valuations based on an analysis of public company market multiples and a similar transactions analysis.
The key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, cash flow projections and terminal value rates. Discount rates, growth rates and cash flow projections are the most sensitive and susceptible to change as they require significant management judgment. Discount rates are determined by using a weighted average cost of capital (“WACC”). The WACC considers market and industry data as well as company-specific risk factors for each reporting unit in determining the appropriate discount rate to be used. The discount rate utilized for each reporting unit is indicative of the return an investor would expect to receive for investing in such a business. Management, considering industry and company-specific historical and projected data, develops growth rates and cash flow projections for each reporting unit. Terminal value rate determination follows common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and low long-term growth rates.
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 (earnings before interest, taxes, depreciation and amortization) for selected public companies that were believed to be representative of companies that marketplace participants would use to arrive at comparable multiples for the individual component being tested. These multiples were then used to develop an estimated value for each respective 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 component being tested. Those multiples were then used to develop an estimated 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 common stock as of the 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.
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 segments are the Marketing and data services segment, the IT Infrastructure management segment, and the Other services segment. Because the Marketing and data services segment and the Other services segment contained both U.S. and
International
components, and there were differences in economic characteristics
between
the components in the different geographic regions, management tested a total of eight components at the beginning of the year. The goodwill amounts as of April 1, 2012 included in
each component
tested
were
: U.S. Marketing and data services, $264.6 million; Europe Marketing and data services, $19.5 million; Australia Marketing and data services, $14.9 million; China Marketing and data services, $6.0 million; Brazil Marketing and data services, $1.1 million; U.S. Infrastructure management, $71.5 million; U.S. Other services, $1.8 million; and Europe Other services, $2.9 million.
As of
April
1, 2012,
each
of the components had an estimated fair
value
in excess of its carrying value, indicating no impairment. All of the components had a substantial excess carrying value, except for the Brazil component, for which the excess was 11%.
Management believes that the estimated
valuations
it 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 these market values will not change in the future. For example, if discount rates demanded by the market increase, this could lead to reduced valuations 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 reduced valuations 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 implied control premium, which
might
cause management to assume a higher discount rate under the income approach which could lead to reduced valuations. If future similar transactions exhibit lower multiples than those observed in the past, this could lead to reduced valuations 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 reduced valuations under the public company market multiple approach. The Company’s next annual impairment test will be performed during the first quarter of fiscal 2014. The fair value of the Company’s components could deteriorate which could result in the need to record impairment charges in future periods. The Company continues to monitor potential triggering events including changes in the business climate in which it operates, attrition of key personnel, the volatility in the capital markets, the Company’s market capitalization compared to its book value, the Company’s recent operating performance, and the Company’s financial projections. The occurrence of one or more triggering events could require additional impairment testing, which could result in impairment charges.
Recent Accounting Pronouncements
In June 2011, the FASB issued a new accounting standard, which eliminates the option to report other comprehensive income and its components in the statement of stockholders’ equity. Instead, an entity is required to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The standard is effective for fiscal years beginning after December 15, 2011. We adopted this standard in the first quarter of fiscal 2013.
Forward-looking Statements
This document contains forward-looking statements. These statements, which are not statements of historical fact, may contain estimates, assumptions, projections and/or expectations regarding the Company’s financial position,
results of operations, market position, product development, growth opportunities, economic conditions, and other similar forecasts and statements of expectation. Forward-looking statements are often identified by words or phrases such as “anticipate,” “estimate,” “plan,” “expect,” “believe,” “intend,” “foresee,” and similar words or phrases. These forward-looking statements are not guarantees of future performance and are subject to a number of factors and uncertainties that could cause the Company’s actual results and experiences to differ materially from the anticipated results and expectations expressed in the forward-looking statements.
Forward-looking statements may include but are not limited to the following:
·
|
management’s expectations about the macro economy;
|
·
|
statements of the plans and objectives of management for future operations;
|
·
|
statements of future economic performance, including, but not limited to, those statements contained in Managements’ Discussion and Analysis of Financial Condition and Results of Operations;
|
·
|
statements containing any assumptions underlying or relating to any of the above statements; and
|
·
|
statements containing a projection or estimate.
|
Among the factors that may cause actual results and expectations to differ from anticipated results and expectations expressed in such forward-looking statements are the following:
·
|
the risk factors described in Part I, “Item 1A. Risk Factors” included in the Company’s 2012 Annual Report and elsewhere in this report and those described from time to time in our future reports filed with the SEC;
|
·
|
the possibility that certain contracts may not generate the anticipated revenue or profitability or may not be closed within the anticipated time frames;
|
·
|
the possibility that significant customers may experience extreme, severe economic difficulty or otherwise reduce the amount of business they do with us;
|
·
|
the possibility that we will not successfully complete customer contract requirements on time or meet the service levels specified in the contracts, which may result in contract penalties or lost revenue;
|
·
|
the possibility that data suppliers might withdraw data from us, leading to our inability to provide certain products and services to our clients, which could lead to decreases in our operating results;
|
·
|
the possibility that we may not be able to attract, retain or motivate qualified technical, sales and leadership associates, or that we may lose key associates;
|
·
|
the possibility that we may not be able to adequately adapt to rapidly changing computing environments, technologies and marketing practices;
|
·
|
the possibility that we will not be able to continue to receive credit upon satisfactory terms and conditions;
|
·
|
the possibility that negative changes in economic conditions in general or other conditions might lead to a reduction in demand for our products and services;
|
·
|
the possibility that there will be changes in consumer or business information industries and markets that negatively impact the company;
|
·
|
the possibility that the historical seasonality of our business may change;
|
·
|
the possibility that we will not be able to achieve cost reductions and avoid unanticipated costs;
|
·
|
the possibility that the fair value of certain of our assets may not be equal to the carrying value of those assets now or in future time periods;
|
·
|
the possibility that changes in accounting pronouncements may occur and may impact these forward-looking statements;
|
·
|
the possibility that we may encounter difficulties when entering new markets or industries;
|
·
|
the possibility that we could experience loss of data center capacity or interruption of telecommunication links;
|
·
|
the possibility that new laws may be enacted which will limit our ability to provide services to our clients and/or which limit the use of data; and
|
·
|
general and global negative economic conditions.
|
With respect to the provision of products or services outside our primary base of operations in the United States, all of the above factors apply, along with the difficulty of doing business in numerous sovereign jurisdictions due to differences in scale, competition, culture, laws and regulations.
Other factors are detailed from time to time in periodic reports and registration statements filed with the SEC. The Company believes that we have the product and technology offerings, facilities, associates and competitive and financial resources for continued business success, but future revenues, costs, margins and profits are all influenced by a number of factors, including those discussed above, all of which are inherently difficult to forecast.
In light of these risks, uncertainties and assumptions, the Company cautions readers not to place undue reliance on any forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information or otherwise.