SOURCE: D & E Communications, Inc.

November 05, 2007 16:48 ET

D&E Communications Reports Third Quarter 2007 Results

EPHRATA, PA--(Marketwire - November 5, 2007) - D&E Communications, Inc. ("D&E" or "Company") (NASDAQ: DECC), a leading provider of integrated communications services in central and eastern Pennsylvania, today announced the results of its operations for the third quarter ended September 30, 2007.

For the third quarter of 2007 the Company reported total operating revenues of $38.2 million, compared to $40.6 million in the third quarter of 2006. Operating income for the third quarter of 2007 was $8.5 million compared to operating income of $6.2 million in the third quarter of 2006. Net income for the third quarter of 2007 was $3.8 million, or $0.26 per share, compared to a net income of $0.7 million, or $0.05 per share, for the same period last year. The third quarter 2007 results were affected by a decrease in depreciation expense in the Wireline segment of $1.8 million ($1.2 million, or $0.08 per share, after tax) primarily due to 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 June 2007. The third quarter 2006 results were affected by the loss on early extinguishment of debt of $1.1 million ($0.6 million, or $0.04 per share, after tax) and a loss from discontinued operations of $0.9 million, or $0.06 per share. Net income before these items was $2.6 million, or $0.18 per share, for the third quarter of 2007, compared to $2.2 million, or $0.15 per share, for the third quarter of 2006.

The revenue decrease of $2.4 million was primarily the result of a decline in directory revenue of $3.2 million, due to the terms of a directory contract which became effective in the fourth quarter of 2006 and which covers three of the four directories that we publish. Directory expenses decreased $3.0 million as a result of this contract, under which the responsibility for publication and distribution of the directory and the related financial risks became the responsibility of the publisher. As a result, our directory revenue, as the new directories that are covered by this contract are published, will only be the annual fee paid to the Company for access to our customers.

For the nine months ended September 30, 2007, the Company reported total operating revenue of $113.8 million, compared to $122.3 million in the same period last year. Net income for the nine months ended September 30, 2007 was $8.7 million, or $0.60 per share, as compared to $3.3 million, or $0.23 per share, for the same period last year. Included in the 2007 results were a gain of $0.6 million ($0.6 million, or $0.04 per share, after tax) from life insurance proceeds and a decrease in depreciation expense in the Wireline segment of $1.8 million ($1.2 million, or $0.08 per share, after tax) described above. Included in the 2006 results were a loss on early extinguishment of debt of $1.1 million ($0.6 million, or $0.04 per share, after tax), a customer relationships intangible asset impairment loss recognized in continuing operations of $1.9 million ($1.1 million, or $0.08 per share, after tax) and a loss from discontinued operations of $1.2 million, or $0.08 per share. Net income before these items was $6.9 million, or $0.48 per share, for the nine months ended September 30, 2007, compared to $6.2 million, or $0.43 per share, for the nine months ended September 30, 2006.

"I am pleased with the progress that we are making in growing our broadband connections, the number of subscribers in our CLEC markets and in the improving financial performance of our Systems Integration segment," said James W. Morozzi, President and CEO of D&E Communications. "During the third quarter, we increased the number of DSL/High-speed Internet subscribers by 2,704. We also increased the percentage of CLEC customers that are serviced entirely on our own network to 33.2%. We were able to reduce the Systems Integration operating loss by 50% during this quarter compared to the third quarter of last year. By continuing to focus on these objectives and by controlling our operating expenses, we have been able to improve our financial performance."

Customer Connections
                                September 30, September 30,           %
                                    2007          2006      Change  Change
                                ------------- ------------- ------  ------
    RLEC access lines                 126,126       130,727 (4,601)   (3.5)
    CLEC access lines                  45,775        42,012  3,763     9.0
    DSL/High-speed Internet
     subscribers                       36,782        29,990  6,792    22.6
    Dial-up Internet
     subscribers                        3,790         5,905 (2,115)  (35.8)
    Video subscribers                   7,668         7,307    361     4.9
    Web-hosting customers               1,004           944     60     6.4
                                ------------- ------------- ------
    Total                             221,145       216,885  4,260     2.0
                                ============= ============= ======

Effective January 1, 2007, the Company reorganized its internal management reporting in order to better align it with the current management structure. Based on the similar nature of services and products, operating processes and service delivery methods, the rural local exchange carrier ("RLEC"), competitive local exchange carrier ("CLEC"), Internet services and video operations are managed as one reportable segment, "Wireline." The Systems Integration and Corporate and Other units continue as distinct, reportable business segments. Segment information reported for the prior year has been recast to conform to the current year presentation.

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

Wireline

Third quarter 2007 revenues from the Wireline segment were $36.4 million, as compared to $38.5 million for the third quarter 2006. The decrease was due in large part to lower directory revenue of $3.2 million, partially offset by increased DSL/High-speed Internet revenue of $0.9 million due to subscriber growth.

Wireline operating expenses for the third quarter of 2007 were $27.2 million, compared to $31.2 million during the same period last year, with the reduction caused primarily by the decrease in directory expense of $3.0 million. Depreciation expense decreased approximately of $1.0 million due to revisions in the estimated useful lives of certain fixed assets to update composite depreciation rates for regulated telephone property and $0.8 million due to certain fixed assets becoming fully depreciated in June 2007. Employee benefits expense increased $0.4 million as a result of recognizing the cumulative effect of a defined benefit pension plan actuarial valuation error. The Company concluded that the amount of the error was not material to the financial statements of any previous period, the estimated net income for the year ended December 31, 2007 or the trend of earnings. Uncollectible expense increased $0.3 million primarily due to an increase in the accounts receivable reserve in the third quarter of this year compared to a decrease in the reserve in the same period last year. Operating income was $9.2 million for third quarter of 2007 and $7.3 million for the third quarter of 2006.

Systems Integration

System Integration revenues for the quarter were $1.4 million, compared to $1.8 million for the same period last year. Communication services revenue decreased $0.7 million due to the expiration of a contract with a large retail services customer on March 31, 2007. The Company estimates that the loss of this contract will not have a negative impact on operating income (loss). Computer products sold increased by $0.3 million.

Third quarter 2007 operating expenses were $1.9 million, compared to $2.8 million in the third quarter of 2006. Labor and benefits costs declined approximately $0.6 million. The operating loss for the third quarter 2007 was $0.5 million compared to an operating loss of $1.0 million in the third quarter of 2006.

About D&E Communications

D&E is an integrated communications provider offering high-speed data, Internet access, local and long distance telephone, data, professional IT services, network monitoring, security solutions and video services. Based in Lancaster County, D&E has been serving communities in central 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 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
             CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (In thousands, expect per share amounts)
                                (Unaudited)



                                    Three Months Ended  Nine Months Ended
                                       September 30,       September 30,
                                    ------------------  ------------------
OPERATING REVENUES                    2007      2006      2007      2006
                                    --------  --------  --------  --------
  Communication services            $ 36,503  $ 39,221  $109,370  $118,457
  Communication products               1,085       711     2,245     1,672
  Other                                  622       692     2,160     2,142
                                    --------  --------  --------  --------

     Total operating revenues         38,210    40,624   113,775   122,271
                                    --------  --------  --------  --------

OPERATING EXPENSES
  Communication services (exclusive
   of depreciation and amortization
   below)                             12,037    15,671    37,175    46,801
  Cost of communication products         866       625     1,806     1,428
  Depreciation and amortization        7,678     9,536    26,396    28,489
  Marketing and customer services      3,614     3,528    10,498    10,177
  General and administrative
   services                            5,469     5,093    17,322    18,141
  Intangible asset impairment             --        --        --     1,892
                                    --------  --------  --------  --------

    Total operating expenses          29,664    34,453    93,197   106,928
                                    --------  --------  --------  --------

      Operating income                 8,546     6,171    20,578    15,343
                                    --------  --------  --------  --------

OTHER INCOME (EXPENSE)
  Equity in net losses of
   affiliates                             --       (21)       (3)     (238)
  Interest expense, net of interest
   capitalized                        (3,745)   (3,832)  (11,199)  (11,537)
  Loss on early extinguishment of
   debt                                   --    (1,094)       --    (1,094)
  Other, net                             962     1,038     3,081     3,555
                                    --------  --------  --------  --------

    Total other income (expense)      (2,783)   (3,909)   (8,121)   (9,314)
                                    --------  --------  --------  --------
      Income from continuing
       operations before income
       taxes and dividends on
       utility preferred stock         5,763     2,262    12,457     6,029

INCOME TAXES AND DIVIDENDS ON
 UTILITY PREFERRED STOCK
  Income taxes                         1,992       594     3,757     1,496
  Dividends on utility preferred
   stock                                  16        16        49        49
                                    --------  --------  --------  --------
    Total income taxes and
     dividends on utility
     preferred stock                   2,008       610     3,806     1,545
                                    --------  --------  --------  --------

      Income from continuing
       operations                      3,755     1,652     8,651     4,484

DISCONTINUED OPERATIONS:
  Loss from operations of Voice
   Systems Business, net of
   income tax benefit of ($32)
   and ($271)                             --       (51)       --      (355)
  Loss on sale of Voice Systems
   Business, net of income
   taxes of $85 and $85                   --      (870)       --      (870)
                                    --------  --------  --------  --------

      Loss from discontinued
       operations                         --      (921)       --    (1,225)
                                    --------  --------  --------  --------

NET INCOME                          $  3,755  $    731  $  8,651  $  3,259
                                    ========  ========  ========  ========

Weighted average common shares
 outstanding (basic)                  14,434    14,377    14,416    14,362
Weighted average common shares
 outstanding (diluted)                14,509    14,444    14,486    14,425

BASIC AND DILUTED EARNINGS PER
 COMMON SHARE

  Earnings per common
   share-continuing operations      $   0.26  $   0.11  $   0.60  $   0.31
  Earnings per common
   share-discontinued operations          --     (0.06)       --     (0.08)
                                    --------  --------  --------  --------
                                    $   0.26  $   0.05  $   0.60  $   0.23
                                    ========  ========  ========  ========

  Dividends per common share        $   0.13  $   0.13  $   0.38  $   0.38
                                    ========  ========  ========  ========





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



                                              September 30,  December 31,
                   ASSETS                         2007           2006
                                              -------------  -------------
CURRENT ASSETS
  Cash and cash equivalents                   $      10,866  $       3,101
  Short-term investments                                 --          7,746
  Accounts and notes receivable, net of
   reserves of $615 and $609                         15,996         16,037
  Inventories, lower of cost or market, at
   average cost                                       2,470          2,704
  Prepaid expenses                                    4,662          3,310
  Other                                               2,372          1,150
                                              -------------  -------------
    TOTAL CURRENT ASSETS                             36,366         34,048
                                              -------------  -------------

PROPERTY, PLANT AND EQUIPMENT
  In service                                        392,530        380,630
  Under construction                                  6,340          5,504
                                              -------------  -------------
                                                    398,870        386,134
  Less accumulated depreciation                     232,855        214,722
                                              -------------  -------------
                                                    166,015        171,412
                                              -------------  -------------
OTHER ASSETS
  Goodwill                                          142,802        143,667
  Intangible assets, net of accumulated
   amortization                                     149,702        153,072
  Other                                               7,743          8,375
                                              -------------  -------------
                                                    300,247        305,114
                                              -------------  -------------
  TOTAL ASSETS                                $     502,628  $     510,574
                                              =============  =============

    LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
  Long-term debt maturing within one year     $       7,069  $       7,066
  Accounts payable and accrued liabilities           14,684         13,654
  Accrued taxes                                         179            195
  Accrued interest and dividends                        826          1,149
  Advance billings, customer deposits and
   other                                              5,159          4,880
                                              -------------  -------------
    TOTAL CURRENT LIABILITIES                        27,917         26,944
                                              -------------  -------------

LONG-TERM DEBT                                      191,398        199,950
                                              -------------  -------------

OTHER LIABILITIES
  Deferred income taxes                              71,698         74,849
  Other                                              21,725         21,806
                                              -------------  -------------
                                                     93,423         96,655
                                              -------------  -------------
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 shares, outstanding
 14 shares                                            1,446          1,446
                                              -------------  -------------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY
  Common stock, par value $0.16, authorized
   shares 100,000
    Outstanding shares: 14,441 at September
     30, 2007 and 14,399 at December 31,
     2006                                             2,570          2,563
  Additional paid-in capital                        162,838        162,010
  Accumulated other comprehensive income
   (loss)                                            (6,351)        (5,028)
  Retained earnings                                  48,052         44,651
  Treasury stock at cost, 1,644 shares at
   September 30, 2007 and 1,640 shares at
   December 31, 2006                                (18,665)       (18,617)
                                              -------------  -------------
                                                    188,444        185,579
                                              -------------  -------------
  TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $     502,628  $     510,574
                                              =============  =============





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

                                                        Nine Months Ended
                                                          September 30,
                                                        2007       2006
                                                      ---------  ---------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                          $   8,651  $   3,259
  Loss from discontinued operations                          --      1,225
                                                      ---------  ---------
    Income from continuing operations                     8,651      4,484

  Adjustments to reconcile income from continuing
   operations to net cash provided by operating
   activities:
    Depreciation and amortization                        26,396     28,489
    Bad debt expense                                        640        434
    Deferred income taxes                                (3,322)    (4,886)
    Equity in net losses of affiliates                        3        238
    Gain from cash recovery of note receivable             (900)    (2,125)
    Gain from life insurance proceeds                      (588)        --
    Intangible asset impairment                              --      1,892
    Stock-based compensation expense                        259        230
    (Gain) loss on retirement of property, plant and
     equipment                                             (115)       166
    Loss on early extinguishment of debt                     --      1,094
  Changes in operating assets and liabilities:
    Accounts receivable                                    (599)     1,002
    Inventories                                             234        (32)
    Prepaid expenses                                     (1,283)     1,465
    Accounts payable and accrued liabilities                950       (741)
    Accrued taxes and accrued interest                     (333)    (1,383)
    Advance billings, customer deposits and other           280     (4,369)
    Other, net                                           (1,587)    (1,399)
                                                      ---------  ---------
    Net Cash Provided by Operating Activities from
     Continuing Operations                               28,686     24,559
                                                      ---------  ---------

CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures, net of proceeds from sales      (16,822)   (19,783)
  Collection of note receivable                           1,279      2,125
  Proceeds from sale of investment                       10,933         --
  Purchase of short-term investments                     (3,187)        --
  Life insurance proceeds                                 1,000         --
  Increase in investments and advances to affiliates         --       (390)
  Acquisition of customer list intangible asset            (606)        --
                                                      ---------  ---------
    Net Cash Used In Investing Activities of
     Continuing Operations                               (7,403)   (18,048)
                                                      ---------  ---------

CASH FLOWS FROM FINANCING ACTIVITIES
  Dividends on common stock                              (5,155)    (5,129)
  Payments on long-term debt                             (8,549)  (188,291)
  Proceeds from long-term debt financing                     --    180,750
  Payment of debt issuance costs                             --       (384)
  Proceeds from interest rate swap terminations              --      1,064
  Proceeds from issuance of common stock and stock
   options exercised                                        183        135
  Excess tax benefits from stock compensation plans          51         --
  Purchase of treasury stock                                (48)        --
                                                      ---------  ---------
    Net Cash Used In Financing Activities of
     Continuing Operations                              (13,518)   (11,855)
                                                      ---------  ---------

CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS          7,765     (5,344)

CASH USED IN DISCONTINUED OPERATIONS
  Cash provided by operating activities of
   discontinued operations                                   --        195
  Cash used in investing activities of discontinued
   operations                                                --       (212)
                                                      ---------  ---------
    Net Cash Used In Discontinued Operations                 --        (17)
                                                      ---------  ---------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS          7,765     (5,361)

CASH AND CASH EQUIVALENTS
    BEGINNING OF PERIOD                                   3,101     10,325
                                                      ---------  ---------

    END OF PERIOD                                     $  10,866  $   4,964
                                                      =========  =========

Contact Information

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