SOURCE: D & E Communications, Inc.

March 12, 2007 17:14 ET

D&E Communications Reports Fourth Quarter and Year End 2006 Results

EPHRATA, PA -- (MARKET WIRE) -- March 12, 2007 -- D&E Communications, Inc. ("D&E") (NASDAQ: DECC), a leading provider of integrated communications services in central and eastern Pennsylvania, today announced the results of its operations for the fourth quarter and year ended December 31, 2006.

For the fourth quarter of 2006 the company reported total operating revenue of $39.8 million, as compared to $41.9 million in the fourth quarter of 2005. Operating income for the fourth quarter of 2006 was $7.2 million compared to operating income of $7.1 million in the fourth quarter of 2005. Net income for the fourth quarter was $3.5 million, or $0.24 per share, compared to a net income of $7.1 million, or $0.49 per share, for the same period last year.

Included in the fourth quarter 2006 results was a gain on investment of $1.0 million ($0.7 million, or $0.05 per common share, after tax) as a result of a $1.0 million cash payment received in December related to advances to our international operations that had been written off in a previous year. Results for the fourth quarter of 2005 included income of $6.4 million ($6.0 million, or $0.42 per common share, after tax) from the sale of the company's direct and indirect investment in Pilicka Telefonia Sp. z o.o. ("Pilicka") on December 19, 2005. Net income before these items was $2.8 million, or $0.19 per share, for the fourth quarter of 2006, compared to $1.1 million, or $0.07 per share, for the fourth quarter of 2005.

Total operating revenue for the full year 2006 was $162.1 million, compared to $164.6 million for the previous year. Operating income for 2006 was $22.5 million compared to operating income of $22.8 million in 2005. Net income for the year was $6.7 million, or $0.47 per share, as compared to a net income of $13.7 million, or $0.96 per share, for 2005.

Results for 2006 included a gain on investment of $1.0 million ($0.7 million, or $0.05 per common share, after tax) as a result of a $1.0 million cash payment received in December related to advances to our international operations that had been written off in a previous year, a loss on early extinguishment of debt of $1.1 million ($0.6 million, or $0.04 per share after tax), a non-cash customer relationships intangible asset impairment loss of $1.9 million ($1.1 million, or $0.08 per share, after tax) and a loss on the sale of the Voice Systems Business of $1.0 million, net of tax, or $0.07 per share. Results for 2005 include income of $6.4 million ($6.0 million, or $0.42 per common share, after tax) from the sale of the company's direct and indirect investment in Pilicka, a gain on investment of $2.0 million ($1.3 million, or $0.09 per common share, after tax) from the sale of our interest in PenTeleData and a reduction of income tax expense of $0.4 million, or $0.02 per share, due to adjusting federal and state tax provisions for 2004 to the actual tax returns filed in 2005. Net income before these items was $8.7 million, or $0.61 per share, for the year ended December 31, 2006, compared to $6.0 million, or $0.43 per share, for the year ended December 31, 2005.

"D&E made solid progress in 2006," stated James Morozzi, D&E's President and Chief Executive Officer. "We placed corporate emphasis on broadband growth and have increased DSL/ High-speed Internet subscribers by 41% over last year. We have also realized success in our CLEC's "On-Net" initiative with an increase to 30% of our customers being served entirely on our own network at year-end as compared to 26% On-Net at year-end 2005. This focus on converting existing customers to our own facilities, as well as emphasizing customer acquisition on our network, is a key to the profitability of our CLEC. To that end, we expanded our network in January 2007 with the purchase of a 26-mile fiber optic network in the Harrisburg area and contracts with two central Pennsylvania school districts. In 2006, our CLEC crossed a milestone by generating operating income for the first time."

Morozzi also noted, "We certainly realize that 2007 is a critical year for our Systems Integration segment. We feel that we positioned ourselves for success in October with the sale of the assets of our commercial voice equipment and service operation to eCommunications Systems Corporation. This move away from a non-strategic business will allow us to put more focus on data, professional and managed services which provide recurring revenue for D&E."

Morozzi concluded, "Despite the competitive pressures our RLECs face, we experienced solid performance from this area as a result of cost containment initiatives and the continued emphasis on service to our customers. Our employees continue to strive to Deliver Excellence to every customer, every day."

Summary Statistics

                        December 31, December 31,
                            2006         2005       Change       % Change
                        ------------ ------------ -----------  -----------
   RLEC lines                129,848      134,698      (4,850)      (3.6%)
   CLEC lines                 43,720       40,796       2,924        7.2%
   DSL/High-speed
    Internet
    Subscribers               31,724       22,504       9,220       41.0%
   Dial-up Internet
    subscribers                5,337        7,959      (2,622)     (32.9%)
   Video subscribers           7,437        6,630         807       12.2%
   Web-hosting
    customers                    951          952          (1)      (0.1%)

On a segment-by-segment basis, the company reported the following information:

Rural Local Exchange Carrier (RLEC)

Fourth quarter 2006 revenues from the RLEC segment were $25.1 million, as compared to $28.4 million for fourth quarter 2005. The decrease was due in large part to lower NECA settlement revenues and decreased directory revenue of $1.7 million. Full-year 2006 revenue for the RLEC segment was approximately $107 million, as compared to $111 million for 2005. The decrease was due mainly to reductions in network access revenue of $2.8 million primarily from lower special access circuits and decreased minutes of use and lower rates.

RLEC operating expenses for the fourth quarter were $17.3 million, compared to $19.0 million during the same period last year, with the reduction caused primarily by a decrease in directory expense of $1.5 million. RLEC operating expenses for the year decreased $1.7 million, or 9.2%, to $76.2 million in 2006 due in large part to decreases in depreciation expense of $0.7 million, and corporate overhead expenses of $0.9 million. Operating income for the quarter was $7.8 million, down from $9.4 million in the fourth quarter 2005. Operating income for the full year 2006 decreased $2.1 million, or 6.6%, to $30.4 million.

Competitive Local Exchange Carrier (CLEC)

For the fourth quarter of 2006, CLEC segment revenues were $11.1 million, compared to $10.5 million for the same period of 2005. This increase was due to increased intrastate network access revenue and a larger number of access lines, offset by a reduction in long distance service revenues due to rate reductions and fewer minutes of use. CLEC segment revenues for 2006 increased $2.0 million, or 4.9%, to $42.8 million. The increase was primarily related to the addition of access lines for new customers, increased interstate access minutes of use and rates and growth in long distance circuits partially offset by a $1.4 million decrease in long distance revenues due to rate reductions and decreased minutes of use.

CLEC operating expenses for the fourth quarter of 2006 were $10.8 million, down from $10.9 million for the same period last year. Full year 2006 CLEC segment operating expenses increased $0.3 million, or 0.8%, to $42.6 million.

For the fourth quarter of 2006 operating income was $0.2 million compared to an operating loss of $0.3 million in the fourth quarter 2005. For the year, the CLEC segment reported an operating income of $0.2 million, up from an operating loss of $1.5 million during 2005.

Internet Services

Internet services revenues for the fourth quarter of 2006 were $4.2 million, as compared to $3.5 million in the fourth quarter of 2005, due to increased DSL revenues. For the year, the company's Internet Services segment revenues increased 19.5%, to $15.6 million, compared to $13.0 million for 2005, primarily due to increased DSL revenues.

Operating expenses for the fourth quarter of 2006 were $3.9 million, as compared to $3.4 million for the same period of 2005, due primarily to an increase in the costs of providing additional broadband capacity. Operating expenses for the year were $15.5 million, as compared to $13.7 million in 2005, also due to the factors cited above for the fourth quarter of 2006.

For the fourth quarter, Internet Services had operating income of $0.3 million, compared to $0.04 million during the same period in 2005. For the year, the operating income was $0.1 million, compared to an operating loss of $0.6 million in 2005.

Systems Integration

System Integration revenues for the quarter were $1.8 million, compared to $1.4 million for the same period last year. Communication services revenue increased $0.2 million and communication products sold increased $0.2 million. For the year, Systems Integration segment revenue was $6.7 million, compared to $8.6 million in 2005. The decrease was primarily due to the expiration of a government services contract as of June 30, 2005.

Fourth quarter 2006 operating expenses were $2.7 million, compared to $3.0 million in the previous year. The decrease was due primarily to lower labor and subcontractor costs. For the year, operating expenses were $13.1 million, compared to $14.2 million in the previous year. Decreased labor and subcontractor costs were the primary reasons for the lower operating expenses.

Systems integration operating losses for the quarter ended December 31, 2006 were $0.8 million, as compared to $1.6 million in the fourth quarter of 2005. Operating losses for the year increased $0.8 million, to $6.4 million, as compared to $5.6 million in 2005. In 2006, we recorded a $1.9 million non-cash customer relationships intangible asset impairment loss in this segment.

About D&E Communications

D&E is an integrated communications provider offering high-speed data, Internet access, local and long distance telephone, voice and data networking, network management and security, 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
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                 (In thousands, expect per share amounts)


                              Three Months Ended     Twelve Months  Ended
                                 December 31,            December 31,
                              --------------------  ----------------------
                                  (unaudited)
                              --------------------
                                2006       2005        2006        2005
                              ---------  ---------  ----------  ----------
OPERATING REVENUES
 Communication service
  revenues                    $  38,405  $  40,844  $  156,862  $  158,985
 Communication products sold        580        376       2,252       2,653
 Other                              812        662       2,954       2,924
                              ---------  ---------  ----------  ----------
     Total operating revenues    39,797     41,882     162,068     164,562
                              ---------  ---------  ----------  ----------

OPERATING EXPENSES
 Communication service
  expenses (exclusive of
  depreciation and
  amortization below)            13,513     15,748      60,314      63,087
 Cost of communication
  products sold                     477        351       1,905       2,236
 Depreciation and
  amortization                    9,752      9,400      38,241      38,123
 Marketing and customer
  services                        3,281      3,680      13,458      13,790
 General and administrative
  services                        5,605      5,599      23,746      24,496
   Intangible asset
    impairment                       --         --       1,892          --
                              ---------  ---------  ----------  ----------
     Total operating expenses    32,628     34,778     139,556     141,732
                              ---------  ---------  ----------  ----------
       Operating income           7,169      7,104      22,512      22,830
                              ---------  ---------  ----------  ----------

OTHER INCOME (EXPENSE)
 Equity in net income
  (losses) of affiliates             58      1,142        (180)      1,000
 Interest expense                (3,737)    (3,741)    (15,274)    (14,177)
 Gain (loss) on investments       1,035      4,852       1,035       6,895
 Loss on early
  extinguishment of debt             (9)        --      (1,103)         --
 Other, net                       1,235        747       4,790       3,205
                              ---------  ---------  ----------  ----------
     Total other income
      (expense)                  (1,418)     3,000     (10,732)     (3,077)
                              ---------  ---------  ----------  ----------
       Income from continuing
        operations before
        income taxes and
        dividends on utility
        preferred stock           5,751     10,104      11,780      19,753

INCOME TAXES AND DIVIDENDS ON
   UTILITY PREFERRED STOCK
 Income taxes                     1,969      3,124       3,465       5,887
 Dividends on utility
  preferred stock                    16         16          65          65
                              ---------  ---------  ----------  ----------
     Total income taxes and
      dividends on utility
      preferred stock             1,985      3,140       3,530       5,952
                              ---------  ---------  ----------  ----------
       Income from continuing
        operations                3,766      6,964       8,250      13,801
Discontinued operations:
 Income (loss) from
  operations of Voice
  Systems Business, net of
  income tax benefits              (133)       100        (488)        (90)
 Loss on sale of Voice
  Systems Business, net of
  income taxes                     (150)        --      (1,020)         --
                              ---------  ---------  ----------  ----------
     Income (loss) from
      discontinued operations      (283)       100      (1,508)        (90)
                              ---------  ---------  ----------  ----------

NET INCOME                    $   3,483  $   7,064  $    6,742  $   13,711
                              =========  =========  ==========  ==========

 Weighted average common
  shares outstanding (basic)     14,390     14,332      14,369      14,304
 Weighted average common
  shares outstanding
  (diluted)                      14,474     14,371      14,440      14,330

BASIC AND DILUTED EARNINGS
 (LOSS) PER COMMON SHARE
 Income from continuing
  operations - basic          $    0.26  $    0.49  $     0.57  $     0.96
 Income (loss) from
  discontinued operations -
  basic                           (0.02)        --       (0.10)         --
                              ---------  ---------  ----------  ----------
     Net income per common
      share - basic           $    0.24  $    0.49  $     0.47  $     0.96
                              =========  =========  ==========  ==========

 Income from continuing
  operations - diluted        $    0.26  $    0.48  $     0.57  $     0.96
 Income (loss) from
  discontinued operations -
  diluted                         (0.02)      0.01       (0.10)         --
                              ---------  ---------  ----------  ----------
     Net income per common
      share - diluted         $    0.24  $    0.49  $     0.47  $     0.96
                              =========  =========  ==========  ==========

 Dividends per common share   $    0.13  $    0.13  $     0.50  $     0.50
                              =========  =========  ==========  ==========


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

                                                          December 31,
                                                      --------------------
                                                        2006       2005
                                                      ---------  ---------

                                   ASSETS
CURRENT ASSETS
  Cash and cash equivalents                           $   3,101  $  10,325
  Short-term investments                                  7,746         --
  Accounts and notes receivable, net of reserves of
   $609 and $748                                         16,037     16,864
  Accounts receivable - affiliated company                   --        351
  Inventories, lower of cost or market, at average
   cost                                                   2,704      3,645
  Prepaid expenses                                        3,310      8,194
  Other                                                   1,150      1,243
                                                      ---------  ---------
    TOTAL CURRENT ASSETS                                 34,048     40,622
                                                      ---------  ---------

PROPERTY, PLANT AND EQUIPMENT
  In service                                            380,630    364,638
  Under construction                                      5,504      7,334
                                                      ---------  ---------
                                                        386,134    371,972
  Less accumulated depreciation                         214,722    192,259
                                                      ---------  ---------
                                                        171,412    179,713
                                                      ---------  ---------
OTHER ASSETS
  Goodwill                                              143,667    145,448
  Intangible assets, net of accumulated amortization    153,072    161,572
  Other                                                   8,375      8,317
                                                      ---------  ---------
                                                        305,114    315,337
                                                      ---------  ---------
  TOTAL ASSETS                                        $ 510,574  $ 535,672
                                                      =========  =========

                       LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Long-term debt maturing within one year             $   7,066  $  10,000
  Accounts payable and accrued liabilities               13,654     18,962
  Accrued taxes                                             195      2,890
  Accrued interest and dividends                          1,149      1,791
  Advance billings, customer deposits and other           4,880     11,087
                                                      ---------  ---------
    TOTAL CURRENT LIABILITIES                            26,944     44,730
                                                      ---------  ---------

LONG-TERM DEBT                                          199,950    205,500
                                                      ---------  ---------

OTHER LIABILITIES
  Deferred income taxes                                  74,849     79,063
  Other                                                  21,806     20,587
                                                      ---------  ---------
                                                         96,655     99,650
                                                      ---------  ---------
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 at December 31, 2006 and 2005
     Outstanding shares: 14,399 at December 31,
      2006 and 14,345 at December 31, 2005                2,563      2,554
  Additional paid-in capital                            162,010    160,924
  Accumulated other comprehensive income (loss)          (5,028)    (5,598)
  Retained earnings                                      44,651     45,083
  Treasury stock at cost, 1,640 shares at December
   31, 2006 and 2005                                    (18,617)   (18,617)
                                                      ---------  ---------
                                                        185,579    184,346
                                                      ---------  ---------
  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          $ 510,574  $ 535,672
                                                      =========  =========




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

                                                      2006         2005
                                                   ----------   ----------

  Net income                                       $    6,742   $   13,711
  Add: Loss from discontinued operations                1,508           90
                                                   ----------   ----------
  Income from continuing operations                     8,250       13,801
  Adjustments to reconcile net income from
   continuing operations to net cash provided by
   operating activities:
     Depreciation and amortization                     38,241       38,123
     Bad debt expense                                     592          485
     Deferred income taxes                             (3,870)      (3,587)
     Equity in net income (losses) of affiliates          180       (1,000)
     Gain on investments                               (1,035)      (6,895)
     Gain from cash recovery of note receivable        (2,875)      (1,500)
     Loss on retirement of property, plant and
      equipment                                           193           53
     Intangible asset impairment                        1,892           --
     Stock-based compensation expense                     367          175
     Loss on early extinguishment of debt               1,103           --
  Changes in operating assets and liabilities:
     Accounts receivable                                1,364       (1,130)
     Inventories                                          108         (122)
     Prepaid expenses                                   4,955          272
     Accounts payable and accrued liabilities          (5,382)       1,000
     Accrued taxes and accrued interest                (3,476)       1,747
     Advance billings, customer deposits and other     (5,555)        (497)
     Other, net                                         2,702          324
                                                   ----------   ----------
       Net Cash Provided by Operating Activities
        from Continuing Operations                     37,754       41,249
                                                   ----------   ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures, net of proceeds
   from sales                                         (24,214)     (30,541)
  Purchase of short-term investments                  (16,123)          --
  Proceeds from sale of short-term investments          8,377           --
  Collection of note receivable                         2,875        1,500
  Proceeds from sale of investments                        --        7,762
  Investments in and advances to affiliates              (390)        (315)
  Investment returns and repayments from
   affiliates                                           1,035        1,563
                                                   ----------   ----------
       Net Cash Used in Investing Activities from
        Continuing Operations                         (28,440)     (20,031)
                                                   ----------   ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Dividends on common stock                            (6,839)      (6,825)
  Proceeds from long-term debt financing              180,750           --
  Payment of debt issuance costs                         (400)          --
  Payments on long-term debt                         (190,807)     (13,000)
  Termination of interest rate swap agreements          1,064           --
  Proceeds from issuance of common stock                  224          364
                                                   ----------   ----------
       Net Cash Used in Financing Activities from
        Continuing Operations                         (16,008)     (19,461)
                                                   ----------   ----------
CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS       (6,694)       1,757

CASH PROVIDED BY (USED IN) DISCONTINUED
 OPERATIONS
  Cash provided by (used in) operating
   activities of discontinued operations                 (248)         364
  Cash used in investing activities of
   discontinued operations                               (282)        (313)
                                                   ----------   ----------
       Net Cash Provided by (Used in) Discontinued
        Operations                                       (530)          51
                                                   ----------   ----------
INCREASE IN CASH AND CASH EQUIVALENTS                  (7,224)       1,808

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR           10,325        8,517
                                                   ----------   ----------

CASH AND CASH EQUIVALENTS, END OF YEAR             $    3,101   $   10,325
                                                   ==========   ==========

Contact Information

  • CONTACT:
    W. Garth Sprecher
    Sr. Vice President and Corporate Secretary
    (717) 738-8304