SOURCE: D & E Communications, Inc.

August 11, 2008 16:15 ET

D&E Communications Reports Second Quarter 2008 Results

EPHRATA, PA--(Marketwire - August 11, 2008) -


--  Second quarter net loss of $11.9 million; adjusted to $2.5 million in
    net income excluding impairment charge and other items impacting
    comparability.
--  Non-cash impairment charge of $26.2 million ($15.3 million after tax)
    recorded in the second quarter.
--  Systems Integration records operating income during the quarter.
    

D&E Communications, Inc. ("D&E" or the "Company") (NASDAQ: DECC), a leading provider of integrated communications services in central and eastern Pennsylvania, today announced the results of its operations for the second quarter ended June 30, 2008.

The Company reported total operating revenue of $37.5 million for the second quarter of 2008, compared to $37.2 million in the second quarter of 2007. The revenue increase of $0.3 million for the second quarter of 2008 was the result of an increase in Wireline segment revenue of $0.3 million.

As a result of the completion of the Company's annual test for impairment of goodwill and intangible assets as of April 30, 2008, the Company recognized a non-cash intangible asset impairment charge of $26.2 million ($15.3 million, or $1.06 per share, after tax) relating to its Wireline franchise intangible assets. The second quarter 2008 results were positively affected by a decrease in depreciation expense in the Wireline segment of $1.4 million ($0.9 million, or $0.07 per share, after tax) primarily due to revisions in the estimated useful lives of certain fixed assets effective July 2007, in addition to certain fixed assets becoming fully depreciated in the first and second quarters of 2007.

Primarily as a result of the items described above, the Company reported a net loss of $11.9 million, or $0.82 per share, compared to net income of $2.3 million, or $0.16 per share, for the same period last year and an operating loss for the second quarter of 2008 of $18.1 million, compared to operating income of $6.5 million in the second quarter of 2007. Net income before the items described above was $2.5 million, or $0.17 per share, for the second quarter of 2008 compared to $2.3 million, or $0.16 per share for second quarter of 2007.

For the six months ended June 30, 2008, the Company reported a net loss of $6.8 million, or $0.47 per share, compared to net income of $4.9 million, or $0.34 per share, for the same period last year. Operating loss for the six months ended June 30, 2008 was $10.0 million, compared to operating income of $12.0 million in the six months ended June 30, 2007. The Company reported total operating revenue of $75.3 million for the six months ended June 30, 2008, compared to $75.6 million for the same period last year.

Included in the 2008 six-month results was the non-cash intangible asset impairment on the Wireline franchise intangible assets described above. The 2008 six-month results were also affected by income of $2.9 million ($1.7 million, or $0.12 per common share, after tax) from the termination of a lease guarantee and a decrease in depreciation expense in the Wireline segment of $3.0 million ($2.0 million, or $0.13 per share, after tax) primarily due to revisions in the estimated useful lives of certain fixed assets effective July 2007, in addition to certain fixed assets becoming fully depreciated in the first and second quarters of 2007. Included in the 2007 results was a gain of $0.6 million ($0.6 million, or $0.04 per share, after tax) from life insurance proceeds. Net income before the items described above was $4.8 million, or $0.34 per share, for the six months ended June 30, 2008, compared to $4.3 million, or $0.30 per share, for the six months ended June 30, 2007.

"The non-cash intangible asset charge that we recognized this quarter stems from the 2002 acquisition of Conestoga Enterprises, Inc., including two of its rural local exchange carriers, Conestoga Telephone and Buffalo Valley Telephone," stated James W. Morozzi, D&E's President and Chief Executive Officer. "A portion of the purchase price was allocated at that time to the indefinite-lived franchise intangible asset. This asset reflects the value of estimated future cash flows from providing communication services to customers who move into these territories subsequent to the acquisition. Based on our most recent estimates of the regulated future cash flows from these customers, we have determined that the value of the franchise intangible asset needed to be reduced. This is a non-cash charge and has no impact on our cash flow generated from operations. Excluding the franchise intangible asset charge and the reduction to Wireline depreciation expense, net income for the quarter increased approximately 7% over the second quarter of 2007. D&E remains focused on broadband, On-Net CLEC business, and improvement in Systems Integration performance."

Morozzi also stated that "Systems Integration continues on its improvement path. Operating income for the quarter was $8,000 compared to an operating loss of approximately $0.4 million in the second quarter of 2007. The fact that Systems Integration posted a quarter of operating income, even though it was a modest amount, demonstrates that the steps we've taken and the focus on execution in this segment are having a positive impact. The $1.2 million improvement in operating income for the six months year-to-date in fiscal year 2008 compared to the same period in 2007 is further proof of their impact."

Summary Statistics
                               June 30,    June 30,
                                 2008        2007     Change    % Change
                               ---------- ---------- ---------  ---------
RLEC access lines                 122,461    127,278    (4,817)      (3.8%)
CLEC access lines                  46,462     44,891     1,571        3.5%
DSL/High-speed Internet
 Subscribers                       39,888     34,078     5,810       17.0%
Dial-up Internet subscribers        2,683      4,425    (1,742)     (39.4%)
Video subscribers                   7,425      6,765       660        9.8%
Web-hosting customers               1,002        989        13        1.3%
                               ---------- ---------- ---------
Total customer connections        219,921    218,426     1,495        0.7%
                               ========== ========== =========

On a segment by segment basis, the Company reported the following information:

Wireline

Second quarter 2008 revenues from the Wireline segment were $36.2 million, compared to $35.9 million for the second quarter 2007. The increase was due in large part to additional DSL/High-speed Internet revenue of $0.6 million because of subscriber growth and a $0.3 million increase in cabling installation revenue, partially offset by a $0.5 million reduction in network access primarily due to lower National Exchange Carrier Association (NECA) settlements.

Wireline operating expenses for the second quarter of 2008 were $53.9 million, compared to $28.7 million during the same period last year, with the increase caused primarily by the non-cash intangible asset impairment charge of $26.2 million described above. Network access expense increased $0.2 million due to a higher rate per minute of use and increased minutes of use. Depreciation expense decreased approximately $1.4 million due to July 2007 revisions in the estimated useful lives of certain fixed assets to update composite depreciation rates for regulated telephone property and certain fixed assets becoming fully depreciated in the first and second quarters of 2007, partially offset by the depreciation expense on fixed assets placed in service in the current year. Operating income (loss) was a loss of $17.7 million for the second quarter of 2008 and income of $7.1 million for the second quarter of 2007.

The Company completed its annual impairment evaluation of goodwill and intangible assets as of April 30, 2008. In evaluating impairment, we estimate the sum of the expected future cash flows derived from such goodwill and intangible assets. A decline in the estimated future regulated cash flows of the Company's Conestoga and Buffalo Valley RLECs indicated that the estimated fair value of the franchise intangible assets described below was less than their carrying amount. We therefore recognized a non-cash impairment charge of $26.2 million to reduce the carrying amount of these assets to their estimated fair value. The reduction in the estimated future regulated cash flows is the result of management's most recent estimates of reductions in access lines, and corresponding reductions in minutes of use, long distance revenues and network access revenues that are associated with access lines. The annual impairment evaluation did not indicate an impairment of goodwill.

Systems Integration

System Integration revenues for the quarter were $0.9 million, compared to $1.0 million for the same period last year. The primary reason for the decrease was a decline in product sales.

Second quarter 2008 operating expenses were $0.9 million, compared to $1.4 million in the second quarter of 2007. Labor and benefits declined $0.4 million mainly due to a reduction in the number of employees and cost of products sold decreased $0.1 million due to the decline in product sales. Systems Integration recorded operating income of $8,000 for the second quarter of 2008, eliminating the $0.4 million operating loss in the second quarter of 2007.

Conference Call

The Company will host a conference call and live webcast Tuesday, August 12, 2008 at 11:00 a.m. Eastern Time. Parties in the United States and Canada can call 877-440-5784 to access the conference call. Parties outside the United States and Canada can access the call at 719-325-4883. The live webcast of the conference call will be accessible from the "Investors" section of the Company's website (www.decommunications.com). The webcast will be archived for a period of 90 days.

About D&E Communications

D&E is a leading integrated communications provider offering high-speed data, Internet access, local and long distance telephone, business continuity services, co-location facilities, data and professional IT services, network monitoring, security solutions and video services. Based in Lancaster County, D&E has been serving communities in central and eastern Pennsylvania for more than 100 years. For more information, visit www.decommunications.com.

This press release contains forward-looking statements. These forward-looking statements are found in various places throughout this press release and include, without limitation, statements regarding financial and other information. These statements are based upon the current beliefs and expectations of D&E's management concerning the development of our business, are not guarantees of future performance and involve a number of risks, uncertainties, and other important factors that could cause actual developments and results to differ materially from our expectations. Those factors include, but are not limited to, the effect of the convergence of voice, data, and video technologies on our historical competitive advantages; the increasingly competitive nature of the communications industry; the significant indebtedness of the company; and the historical losses of the Systems Integration segment and other key factors that we have indicated could adversely affect our business and financial performance contained in our past and future filings and reports, including those filed with the United States Securities and Exchange Commission. D&E undertakes no obligation to revise or update its forward-looking statements whether as a result of new information, future events, or otherwise.

              D&E COMMUNICATIONS, INC. AND SUBSIDIARIES
          CONDENDSED CONSOLIDATED STATEMENTS OF OPERATIONS
               (In thousands, except per share amounts)
                             (Unaudited)


                                 Three Months Ended     Six Months Ended
                                --------------------  --------------------
                                      June 30,              June 30,
                                --------------------  --------------------
OPERATING REVENUES                2008       2007       2008       2007
                                ---------  ---------  ---------  ---------
  Communication service
   revenues                     $  36,070  $  35,913  $  72,683  $  72,867
  Communication products sold         742        536      1,201      1,160
  Other                               737        752      1,462      1,538
                                ---------  ---------  ---------  ---------
     Total operating revenues      37,549     37,201     75,346     75,565
                                ---------  ---------  ---------  ---------

OPERATING EXPENSES
  Communication service
   expenses (exclusive of
   depreciation and
   amortization below)             12,296     12,045     24,552     25,138
  Cost of communication
   products sold                      605        426        977        940
  Depreciation and amortization     7,768      9,210     15,616     18,718
  Marketing and customer
   services                         3,494      3,517      7,034      6,884
  General and administrative
   services                         5,275      5,477     10,934     11,853
  Intangible asset impairment      26,200         --     26,200         --
                                ---------  ---------  ---------  ---------
    Total operating expenses       55,638     30,675     85,313     63,533
                                ---------  ---------  ---------  ---------
      Operating income (loss)     (18,089)     6,526     (9,967)    12,032
                                ---------  ---------  ---------  ---------

OTHER INCOME (EXPENSE)
  Interest expense, net of
   interest capitalized            (2,951)    (3,718)    (6,300)    (7,454)
  Other, net                          115        400      3,533      2,116
                                ---------  ---------  ---------  ---------
    Total other income
     (expense)                     (2,836)    (3,318)    (2,767)    (5,338)
                                ---------  ---------  ---------  ---------
      Income (loss) before
       income taxes and
       dividends on utility
       preferred stock            (20,925)     3,208    (12,734)     6,694

INCOME TAXES AND DIVIDENDS ON
 UTILITY PREFERRED STOCK
  Income taxes (benefit)           (9,000)       905     (5,957)     1,765
  Dividends on utility
   preferred stock                     17         17         33         33
                                ---------  ---------  ---------  ---------
    Total income taxes and
     dividends on utility
     preferred stock               (8,983)       922     (5,924)     1,798
                                ---------  ---------  ---------  ---------
NET INCOME (LOSS)               $ (11,942) $   2,286  $  (6,810) $   4,896
                                =========  =========  =========  =========
Weighted average common shares
 outstanding (basic)               14,481     14,413     14,472     14,406
Weighted average common shares
 outstanding (diluted)             14,481     14,534     14,472     14,511

BASIC AND DILUTED EARNINGS
 (LOSS) PER COMMON SHARE
  Earnings (loss) per common
   share                        $   (0.82) $    0.16  $   (0.47) $    0.34
                                =========  =========  =========  =========
  Dividends per common share    $    0.12  $    0.12  $    0.25  $    0.25
                                =========  =========  =========  =========




                D&E COMMUNICATIONS, INC. AND SUBSIDIARIES
                  CONDENSED CONSOLIDATED BALANCE SHEETS
                              (In Thousands)
                                (Unaudited)


                                                 June 30,     December 31,
                     ASSETS                        2008          2007
                                                ------------  ------------
CURRENT ASSETS
  Cash and cash equivalents                     $     10,807  $     17,845
  Accounts and notes receivable, net of
   reserves of $367 and $500                          14,105        14,688
  Inventories                                          2,627         2,666
  Prepaid expenses                                     7,353         2,887
  Other                                                2,025         2,520
                                                ------------  ------------
    TOTAL CURRENT ASSETS                              36,917        40,606
                                                ------------  ------------

PROPERTY, PLANT AND EQUIPMENT
  In service                                         404,769       396,659
  Under construction                                   8,747         6,648
                                                ------------  ------------
                                                     413,516       403,307
  Less accumulated depreciation                      249,129       237,243
                                                ------------  ------------
                                                     164,387       166,064
                                                ------------  ------------
OTHER ASSETS
  Goodwill                                           137,609       137,623
  Intangible assets, net of accumulated
   amortization                                      119,525       148,376
  Other                                                8,615         8,512
                                                ------------  ------------
                                                     265,749       294,511
                                                ------------  ------------
  TOTAL ASSETS                                  $    467,053  $    501,181
                                                ============  ============

      LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Long-term debt maturing within one year       $      7,073  $      7,071
  Accounts payable and accrued liabilities            11,311        17,188
  Accrued taxes                                          219         1,093
  Accrued interest and dividends                       1,002           816
  Advance billings, customer deposits and other        5,081         4,709
                                                ------------  ------------
    TOTAL CURRENT LIABILITIES                         24,686        30,877
                                                ------------  ------------

LONG-TERM DEBT                                       182,592       186,879
                                                ------------  ------------

OTHER LIABILITIES
  Deferred income taxes                               60,961        70,977
  Defined benefit plans                               13,503        15,465
  Other                                                5,661         7,663
                                                ------------  ------------
                                                      80,125        94,105
                                                ------------  ------------
PREFERRED STOCK OF UTILITY SUBSIDIARY, Series A
 4 1/2%, par value $100, cumulative, callable
 at par at the option of the Company, authorized
 20,000 shares, outstanding 14 shares                  1,446         1,446
                                                ------------  ------------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
  Common stock, par value $0.16, authorized
   shares-100,000; issued shares-16,161 at
   June 30, 2008 and 16,092 at December 31,
   2007; outstanding shares-14,494 at June 30,
   2008 and 14,425 at December 31, 2007                2,586         2,575
  Additional paid-in capital                         164,088       163,560
  Accumulated other comprehensive loss                (6,977)       (7,216)
  Retained earnings                                   37,699        48,147
  Treasury stock at cost, 1,667 shares at June
   30, 2008 and December 31, 2007                    (19,192)      (19,192)
                                                ------------  ------------
                                                     178,204       187,874
                                                ------------  ------------
  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $    467,053  $    501,181
                                                ============  ============




                 D&E COMMUNICATIONS, INC. AND SUBSIDIARIES
              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (In Thousands)
                                 (Unaudited)

                                                        Six Months Ended
                                                            June 30,
                                                        2008       2007
                                                      ---------  ---------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                   $  (6,810) $   4,896
  Adjustments to reconcile net income (loss) to net
   cash provided by operating  activities:
    Depreciation and amortization                        15,616     18,718
    Bad debt expense                                        203        318
    Deferred income taxes                                (9,852)    (3,005)
    Gain from cash recovery of note receivable               --       (300)
    Gain from life insurance proceeds                        --       (588)
    Stock-based compensation expense                        245        199
    Gain on retirement of property, plant and
     equipment                                              (41)       (86)
    Intangible asset impairment                          26,200         --
    Termination of lease guarantee                       (2,904)        --
    Note receivable reserve                                 200         --
  Changes in operating assets and liabilities:
    Accounts receivable                                     380        466
    Inventories                                              39         15
    Prepaid expenses                                     (4,435)    (3,287)
    Accounts payable and accrued liabilities             (3,048)       319
    Accrued taxes and accrued interest                     (688)      (209)
    Advance billings, customer deposits and other           373        419
    Defined benefit plans                                (1,454)    (1,279)
    Other, net                                             (281)       307
                                                      ---------  ---------
    Net Cash Provided by Operating Activities            13,743     16,903
                                                      ---------  ---------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property, plant and equipment            (13,576)   (12,313)
  Proceeds from sales of property, plant and
   equipment                                                409        357
  Collection of note receivable                              49        679
  Proceeds from sale of short-term investments               --      9,946
  Purchase of short-term investments                         --     (3,187)
  Life insurance proceeds                                    --      1,000
  Acquisition of customer list intangible asset              --       (606)
                                                      ---------  ---------
    Net Cash Used In Investing Activities               (13,118)    (4,124)
                                                      ---------  ---------

CASH FLOWS FROM FINANCING ACTIVITIES
  Dividends on common stock                              (3,475)    (3,426)
  Payments on long-term debt                             (4,285)    (6,033)
  Proceeds from issuance of common stock and stock
   options exercised                                         60        159
  Excess tax benefits from stock compensation plans          37         15
  Purchase of treasury stock                                 --        (48)
                                                      ---------  ---------
    Net Cash Used In Financing Activities                (7,663)    (9,333)
                                                      ---------  ---------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         (7,038)     3,446

CASH AND CASH EQUIVALENTS
  BEGINNING OF PERIOD                                    17,845      3,101
                                                      ---------  ---------
  END OF PERIOD                                       $  10,807  $   6,547
                                                      =========  =========

Contact Information

  • CONTACT:
    Thomas E. Morell
    Sr. Vice President, Chief Financial Officer,
    Secretary and Treasurer
    (717) 738-8315