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ACXM > SEC Filings for ACXM > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for ACXIOM CORP


8-Nov-2012

Quarterly Report


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                         For the six months ended
                                      September 30                                   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                       For the six months ended
                                     September 30                                  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                       For the six months ended
                                     September 30                                  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            For the six months ended
                                                  September 30                       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,      March 31,
                                                  2012              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 . . .

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