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TNS Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: November 9, 2010 04:49PM
TNS Inc. (TNS) filed Quarterly Report for the period ended 2010-09-30.
Highlight of Business Operations:
On October 1, 2010, we completed the acquisition of Cequint, Inc. in accordance with the terms and conditions of the Agreement and Plan of Merger dated September 8, 2010. The purchase price, subject to working capital adjustments, included an initial payment of $49.3 million, consisting of $46.5 million in cash and $2.8 million in TNS common stock issued to certain Cequint executives, and may be adjusted in the future for a potential additional $62.5 million in cash based upon the achievement of four specified profit milestones not to extend past May 31, 2014, for a potential total purchase price of $111.8 million. As part of the $49.3 million purchase price, Cequint paid off approximately $6.8 million in debt and we assumed approximately $0.4 million in cash. We funded the transaction through a new $50 million term loan facility using a portion of the accordion feature as part of our November 2009 Credit Facility (see Note 2). Cequint provides carriergrade caller ID products and enhanced services to top US-based mobile operators. We will integrate Cequint into our telecommunication services division.
Telecommunication services division. Revenues from the telecommunication services division decreased $7.7 million, or 10.7%, to $64.7 million for the three months ended September 30, 2010, from $72.4 million for the three months ended September 30, 2009. Included in revenues were pass-through charges of $1.9 million and $2.3 million for the three months ended September 30, 2010 and 2009, respectively. Excluding the decrease in pass-through charges, revenues decreased $7.3 million to $62.8 million for the three months ended September 30, 2010. This was due to the following decreases: $7.0 million primarily due to volume reductions and to a lesser extent pricing concessions to legacy CSG customers which had been previously anticipated; $1.0 million related to the previously disclosed loss of a wireless customer who decided to consolidate their calling name access and storage services under an alternative provider; $0.8 million due to volume declines from a customer following the acquisition of CSG based on the expectation that we will compete with the customer; and $0.8 million due to a reduction in volumes in our payphone fraud and validation service. These decreases were partially offset by an increase of $2.3 million due primarily to the implementation of services for wireless customers and to a lesser extent continued growth from current wireline customers.
Financial services division. Revenues from the financial services division increased $0.1 million, or 0.9%, to $16.5 million for the three months ended September 30, 2010, from $16.4 million for the three months ended September 30, 2009. The negative effect of foreign exchange translation on a year-over-year basis was $0.1 million. Excluding the impact of foreign exchange rates, financial services revenue increased $0.2 million, or 1%, to $16.6 million for the three months ended September 30, 2010. This was due to increased revenue of $0.4 million in Europe and $0.5 million in Asia Pacific due to continued expansion of the number of customer endpoints in those regions and $0.2 million in North America due to higher sales of bandwidth based services to the foreign exchange community. These increases were partially offset by a decrease of $0.9 million due to the continued rationalization of market data access services by our customers in North America.
Selling, general and administrative expense. Selling, general and administrative expenses decreased $8.0 million, or 26.1%, to $22.9 million for the three months ended September 30, 2010, from $30.9 million for the three months ended September 30, 2009. On a constant dollar basis, selling, general and administrative expenses would have decreased $7.8 million, or 25.3%, to $23.1 million and represented 17.4% and 22.1% of revenues for the three months ended September 30, 2010, and 2009, respectively. This was due to the following decreases: $2.6 million in variable cash incentive compensation; $1.5 million in severance charges related to restructuring activities in Europe and the integration of CSG; and $1.4 million in stock compensation due primarily to a decrease in performance related stock compensation. These decreases were partially offset by an increase of $0.7 million due to acquisition costs related to the Cequint transaction (see note 7) that were expensed in accordance with the provisions of FASB ASC 805, Business Combinations. Excluding these items and the effects of foreign exchange, selling, general and administrative expenses decreased $3.0 million primarily due to cost reductions achieved through integration synergies.
Depreciation and amortization of property and equipment. Depreciation and amortization of property and equipment increased $2.5 million, or 27.2%, to $11.5 million for the three months ended September 30 2010, from $9.0 million for the three months ended September 30, 2009 and represented 8.7% and 6.4% of revenue for the three months ended September 30, 2010 and 2009, respectively. The increase in depreciation expense was primarily due to an accelerated depreciation charge of $1.1 million following the decision made in the second quarter to phase out surplus network assets and office equipment that will no longer be required following the integration of the legacy CSG and TNS operations. We estimate the total value of these assets to be $6.2 million and expect to recognize an additional $1.1 million accelerated depreciation charge in the three months ended December 31, 2010 and $0.8 million in the three months ended March 31, 2011 as these assets are removed from service. Excluding the accelerated charge related to surplus assets, depreciation and amortization of property and equipment increased $1.4 million due to capital expenditures made to support our revenue growth and integration efforts.
Interest expense. Interest expense decreased $6.3 million to $5.7 million for the three months ended September 30, 2010, from $12.0 million for the three months ended September 30, 2009. Amortization of deferred financing fees and original issue discount for the three months ended September 30, 2010 and 2009, was $0.4 million and $3.0 million, respectively. Excluding these charges, cash interest expense decreased $3.7 million from $9.0 million to $5.3 million for the three months ended September 30, 2010 and 2009, respectively, primarily due to a $3.0 million benefit from the November 2009 refinancing of our senior credit facilities, which lowered our effective borrowing rate and to a lesser extent from $0.7 million due to reduced borrowing levels resulting from our early prepayment of debt.
Stocks Discussed: TNS,