SOURCE: D & E Communications, Inc.

March 11, 2008 16:49 ET

D&E Communications Reports Fourth Quarter and Year End 2007 Results

Full Year 2007 Net Income of $10.6 Million and Earnings per Share of $0.74

EPHRATA, PA--(Marketwire - March 11, 2008) - 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 fourth quarter and year ended December 31, 2007.

For the fourth quarter of 2007, the Company reported total operating revenue of $38.8 million, compared to $39.8 million in the fourth quarter of 2006. Operating income for the fourth quarter of 2007 was $4.1 million, compared to operating income of $7.2 million in the fourth quarter of 2006. Net income for the fourth quarter of 2007 was $2.0 million, or $0.14 per share, compared to a net income of $3.5 million, or $0.24 per share, for the same period last year. Net income before certain one-time items described below was $2.8 million, or $0.19 per share, for the fourth quarter of 2007, compared to $2.7 million, or $0.18 per share, for the fourth quarter of 2006.

In the fourth quarter of 2007, the Company recognized a non-cash goodwill impairment charge of $5.2 million ($4.7 million, or $0.32 per common share, after tax) in the Systems Integration segment. Going forward, the Company expects the Systems Integration segment to focus on a more limited set of core customers. As a result of this strategic change, the Company compared the estimated future cash flows from this smaller business segment to the value of goodwill ascribed to the segment which resulted in the impairment. As a result of this non-cash goodwill impairment charge, the Systems Integration segment is left with no remaining goodwill or intangible asset value on the segment's balance sheet.

The revenue decrease of $1.0 million for the fourth quarter 2007 is primarily the result of a new directory contract which became effective in the fourth quarter of 2006. Under the new contract, the responsibility for publication and distribution of the directory and the related financial risks became the responsibility of the publisher. As new directories covered by this contract are published, directory revenue is only the annual fee paid to the Company for access to our customers. As a result, directory revenue decreased $1.2 million and directory expenses decreased $1.1 million from the fourth quarter of 2006 to the fourth quarter of 2007.

Also included in the fourth quarter 2007 results was income of $4.6 million ($2.7 million, or $0.19 per common share, after tax) from the collection of remaining outstanding principal on the note received from the sale of Conestoga Wireless assets, which was scheduled to be paid in monthly installments through June 1, 2009. These principal payments collected during the 2007 period compared to $0.7 million ($0.4 million, or $0.03 per common share, after tax) in principal payments collected in the fourth quarter of 2006. The note receivable was fully reserved on our balance sheet because the note was from a highly leveraged entity and the business sold had not generated positive cash flow prior to its sale. Thus, the Company recognized income upon collection of the principal and interest. The fourth quarter 2007 results were also 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 effective July 2007, in addition to certain fixed assets becoming fully depreciated in the first and second quarters of 2007. Results for the fourth quarter 2006 included a loss from discontinued operations of $0.3 million, or $0.02 per share, and 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.

Total operating revenue for the full year 2007 was $152.6 million, compared to $162.1 million for the previous year. The revenue decrease of $9.5 million for the year 2007 was primarily the result of a decline in directory revenue of $10.3 million, due to the terms of the new directory contract described above. Directory expenses decreased $9.6 million as a result of this contract. Operating income for 2007 was $24.6 million, compared to operating income of $22.5 million in 2006. Net income for the year was $10.6 million, or $0.74 per share, compared to a net income of $6.7 million, or $0.47 per share, for 2006. Net income before certain one-time items described below was $9.2 million, or $0.64 per share, for the year ended December 31, 2007, compared to $7.6 million, or $0.53 per share, for the year ended December 31, 2006.

Results for the year 2007 included a non-cash goodwill impairment charge of $5.2 million ($4.7 million, or $0.32 per common share, after tax) described above, a gain of $0.6 million ($0.6 million, or $0.04 per share, after tax) from life insurance proceeds, a decrease in depreciation expense in the Wireline segment of $3.6 million ($2.3 million, or $0.16 per share, after tax) described above and income of $5.5 million ($3.2 million, or $0.22 per common share, after tax) from the collection of the remaining outstanding principal on the note received from the sale of Conestoga Wireless assets as described above, which was scheduled to be paid in monthly installments through June 1, 2009. These principal payments collected during 2007 compare to $2.9 million ($1.6 million, or $0.11 per common share, after tax) in principal payments collected in 2006. 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 from discontinued operations of $1.5 million, net of tax, or $0.10 per share.

"D&E continued to advance its corporate objectives in 2007," stated James W. Morozzi, D&E's President and Chief Executive Officer. "We continue to execute upon our broadband growth initiative as we ended the year with 38,333 DSL/ High-speed Internet subscribers, an increase of 21% over last year. We have also made progress in our CLEC's 'On-Net' initiative with an increase to 34% of our customers being served entirely on our own network at year-end, as compared to 30% On-Net at year-end 2006. At the same time, we increased the number of traditional access lines in our CLEC markets by almost 7% for business customers and more than 5% in total, which also reflects our strategy to reduce the number of residential customers that we serve on a low-margin resale basis. We are experiencing growth in the non-traditional data equivalent lines in our markets and were successful in completing network enhancements during this past year that allow us to provide new products like Metro Ethernet/MPLS."

Morozzi noted, "While not yet satisfied with the results of the Systems Integration segment, we have seen positive results in 2007 of the steps that we have taken to improve the financial performance of the segment. There was a $2.1 million reduction in the Systems Integration operating loss when comparing the results for 2007 and 2006 and excluding the effects of the 2007 non-cash goodwill impairment charge of $5.2 million and the 2006 non-cash intangible asset impairment charge of $1.9 million. We are making more changes in 2008 in an effort to eliminate the operating loss. We have incorporated the Systems Integration's sales team into our existing Wireline sales management structure, allowing us to reduce our employee count. We have assessed our sales results and modified our compensation plans to place more emphasis on developing additional business from our core customers. We have attained Microsoft Gold Certified Partner status, which provides us with additional support and training from Microsoft. We continue to enhance our Cisco qualifications and certifications around core network infrastructure, architecture and design skills that directly complement our Wireline products and services. We plan to further align the segment's core service of information technology solutions with the products and services that we offer to our Wireline segment customers. The intended result will initially be a smaller Systems Integration segment, focused on serving our core customers, and driving to eliminate the operating losses."

Morozzi added, "We continue to see the competitive pressures in our RLEC markets, demonstrated by the 4.0% reduction in traditional access lines in those areas. However, we continue to find ways to control costs in the business, evidenced in 2007 by our ability to maintain benefit costs without sacrificing our ability to attract and retain employees. These reductions in cost enable us to recognize increases in our operating income and cash flows, helping us to continue to pay down our long-term debt, which we were able to reduce by slightly more than $13 million in 2007."

Summary Statistics
                      December 31, 2007 December 31, 2006 Change % Change
                      ----------------- ----------------- ------ --------
  RLEC access lines             124,600           129,848 (5,248)    (4.0%)
  CLEC access lines              46,002            43,720  2,282      5.2%
  DSL/High-speed
   Internet
   Subscribers                   38,333            31,724  6,609     20.8%
  Dial-up Internet
   subscribers                    3,254             5,337 (2,083)   (39.0%)
  Video subscribers               7,986             7,437    549      7.4%
  Web-hosting customers           1,009               951     58      6.1%
                      ----------------- ----------------- ------
  Total customer
   connections                  221,184           219,017  2,167      1.0%
                      ================= ================= ======

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

Wireline

Fourth quarter 2007 revenues from the Wireline segment were $37.2 million, as compared to $37.6 million for the fourth quarter 2006. The decrease was due in large part to lower directory revenue of $1.2 million, partially offset by increased DSL/High-speed Internet revenue of $0.9 million because of subscriber growth. Full-year 2007 revenue for the Wireline segment was $145.7 million, as compared to $153.8 million for 2006. The decrease was caused mainly by reductions in directory revenue of $10.3 million and network access revenue of $2.3 million primarily due to lower NECA revenue. These decreases were partially offset by increased DSL/High-speed Internet revenue of $3.5 million because of subscriber growth and higher local telephone service revenue of $1.2 million primarily from increases in private network circuits and custom calling feature revenue.

Wireline operating expenses for the fourth quarter of 2007 were $27.3 million, compared to $29.6 million during the same period last year, with the reduction caused primarily by the decrease in directory expense of $1.1 million. Depreciation expense decreased approximately $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 $1.3 million because certain fixed assets became fully depreciated in the first and second quarters of 2007. Network access expense increased $0.6 million due to increased minutes of use and a higher rate per minute of use and a fourth quarter 2006 reduction of $0.2 million in estimated reciprocal compensation expense due to wireless carriers.

Wireline operating expenses for the full year 2007 were $112.8 million, compared to $124.6 million during the same period last year, with the reduction caused primarily by the decrease in directory expense of $9.6 million. Depreciation expense decreased approximately $3.6 million and network access expense increased $0.6 million due to the factors cited above for the fourth quarter of 2007.

Operating income was $9.9 million for fourth quarter of 2007 and $8.0 million for the fourth quarter of 2006. For the year, the Wireline segment reported operating income of $32.9 million, up from operating income of $29.2 million in 2006.

Systems Integration

System Integration revenues for the quarter were $1.2 million, compared to $1.8 million for the same period last year. Communication services revenue decreased $0.9 million primarily 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. For the year, Systems Integration segment revenue was $5.4 million, compared to $6.6 million in 2006. Communication services revenue decreased $1.9 million primarily due to the expiration of a contract with a large retail services customer on March 31, 2007 and computer products sold increased $0.7 million.

Fourth quarter 2007 operating expenses were $6.8 million, compared to $2.6 million in the fourth quarter of 2006. As a result of a change in strategic direction to focus on serving only core customers, an estimate of future cash flows based on the segment's business plan indicated that there was an impairment of goodwill in the Systems Integration segment. The Company therefore recognized a non-cash goodwill impairment charge of $5.2 million in the fourth quarter of 2007, which was the entire balance of goodwill of the Systems Integration segment. In addition, labor and benefits costs declined approximately $0.5 million.

For the year, operating expenses were $12.8 million, compared to $12.9 million in the previous year. Labor and benefits costs declined approximately $2.0 million. Depreciation and amortization expense decreased $0.4 million. In 2007, we recognized a non-cash goodwill impairment charge of $5.2 million and, in 2006, we recorded a $1.9 million non-cash customer relationships intangible asset impairment loss in this segment. As a result, there are no remaining intangible assets or goodwill in the segment.

The operating loss for the fourth quarter 2007 was $5.6 million compared to an operating loss of $0.8 million in the fourth quarter of 2006. Operating losses for the year increased $1.1 million, to $7.4 million, compared to $6.3 million in 2006 due to the goodwill impairment of $5.2 million.

About D&E Communications

D&E is a leading 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 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 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 INCOME
                 (In thousands, expect per share amounts)

                                 Three Months Ended   Twelve Months Ended
                                    December 31,          December 31,
                                --------------------  --------------------
                                    (unaudited)      (Unaudited)
                                --------------------  --------------------
                                   2007       2006       2007       2006
                                ---------  ---------  ---------  ---------
OPERATING REVENUES
  Communication service
   revenues                     $  37,261  $  38,405  $ 146,631  $ 156,862
  Communication products sold         801        580      3,046      2,252
  Other                               712        812      2,872      2,954
                                ---------  ---------  ---------  ---------
    Total operating revenues       38,774     39,797    152,549    162,068
                                ---------  ---------  ---------  ---------

OPERATING EXPENSES
  Communication service
   expenses (exclusive
   of depreciation and
   amortization below)             12,353     13,513     49,528     60,314
  Cost of communication
   products sold                      690        477      2,496      1,905
  Depreciation and amortization     7,812      9,752     34,208     38,241
  Marketing and customer
   services                         3,412      3,281     13,910     13,458
  General and administrative
   services                         5,288      5,605     22,610     23,746
  Goodwill and intangible asset
   impairments                      5,158         --      5,158      1,892
                                ---------  ---------  ---------  ---------
    Total operating expenses       34,713     32,628    127,910    139,556
                                ---------  ---------  ---------  ---------
      Operating income              4,061      7,169     24,639     22,512
                                ---------  ---------  ---------  ---------

OTHER INCOME (EXPENSE)
  Equity in net income (losses)
   of affiliates                       --         58         (3)      (180)
  Interest expense                 (3,729)    (3,737)   (14,928)   (15,274)
  Loss on early extinguishment
   of debt                             --         (9)        --     (1,103)
  Gain on investments                  --      1,035         --      1,035
  Other, net                        5,164      1,235      8,245      4,790
                                ---------  ---------  ---------  ---------
    Total other income
     (expense)                      1,435     (1,418)    (6,686)   (10,732)
                                ---------  ---------  ---------  ---------
      Income from continuing
       operations before income
       taxes and dividends on
       utility preferred stock      5,496      5,751     17,953     11,780

INCOME TAXES AND DIVIDENDS
 ON UTILITY PREFERRED STOCK
  Income taxes                      3,492      1,969      7,249      3,465
  Dividends on utility
   preferred stock                     16         16         65         65
                                ---------  ---------  ---------  ---------
    Total income taxes and
     dividends on utility
     preferred stock                3,508      1,985      7,314      3,530
                                ---------  ---------  ---------  ---------

      Income from continuing
       operations                   1,988      3,766     10,639      8,250
Discontinued operations:
  Loss from operations of Voice
   Systems Business, net of
   income tax benefits                 --       (133)        --       (488)
  Loss on sale of Voice Systems
   Business, net of income
   taxes                               --       (150)        --     (1,020)
                                ---------  ---------  ---------  ---------
    Loss from discontinued
     operations                        --       (283)        --     (1,508)
                                ---------  ---------  ---------  ---------

NET INCOME                      $   1,988  $   3,483  $  10,639  $   6,742
                                =========  =========  =========  =========
  Weighted average common
   shares outstanding (basic)      14,420     14,367     14,399     14,346
  Weighted average common
   shares outstanding (diluted)    14,519     14,451     14,471     14,417
BASIC AND DILUTED EARNINGS
 (LOSS) PER COMMON
 SHARE
  Income from continuing
   operations - basic           $    0.14  $    0.26  $    0.74  $    0.58
  Loss from discontinued
   operations - basic                 --      (0.02)        --      (0.11)
                                ---------  ---------  ---------  ---------
    Net income per common share
     - basic                    $    0.14  $    0.24  $    0.74  $    0.47
                                =========  =========  =========  =========

  Income from continuing
   operations - diluted         $    0.14  $    0.26  $    0.74  $    0.57
  Loss from discontinued
   operations - diluted                --      (0.02)        --      (0.10)
                                ---------  ---------  ---------  ---------
    Net income per common share
     - diluted                  $    0.14  $    0.24  $    0.74  $    0.47
                                =========  =========  =========  =========

  Dividends per common share    $    0.12  $    0.12  $    0.50  $    0.50
                                =========  =========  =========  =========






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

                                                        December 31,
                                                  ------------------------
                                                     2007         2006
                                                  -----------  -----------
                                                  (Unaudited)
                      ASSETS
CURRENT ASSETS
  Cash and cash equivalents                       $    17,845  $     3,101
  Short-term investments                                   --        7,746
  Accounts and notes receivable, net of reserves
   of $500 and $609                                    14,688       16,037
  Inventories, lower of cost or market, at
   average cost                                         2,666        2,704
  Prepaid expenses                                      2,887        3,310
  Other                                                 2,520        1,150
                                                  -----------  -----------
    TOTAL CURRENT ASSETS                               40,606       34,048
                                                  -----------  -----------


PROPERTY, PLANT AND EQUIPMENT
  In service                                          396,659      380,630
  Under construction                                    6,648        5,504
                                                  -----------  -----------
                                                      403,307      386,134
  Less accumulated depreciation                       237,243      214,722
                                                  -----------  -----------
                                                      166,064      171,412
                                                  -----------  -----------
OTHER ASSETS
  Goodwill                                            137,623      143,667
  Intangible assets, net of accumulated
   amortization                                       148,376      153,072
  Other                                                 8,512        8,375
                                                  -----------  -----------
                                                      294,511      305,114
                                                  -----------  -----------
  TOTAL ASSETS                                    $   501,181  $   510,574
                                                  ===========  ===========

      LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Long-term debt maturing within one year         $     7,071  $     7,066
  Accounts payable and accrued liabilities             17,188       13,654
  Accrued taxes                                         1,093          195
  Accrued interest and dividends                          816        1,149
  Advance billings, customer deposits and other         4,709        4,880
                                                  -----------  -----------
    TOTAL CURRENT LIABILITIES                          30,877       26,944
                                                  -----------  -----------

LONG-TERM DEBT                                        186,879      199,950
                                                  -----------  -----------

OTHER LIABILITIES
  Deferred income taxes                                70,977       74,849
  Other                                                23,128       21,806
                                                  -----------  -----------
                                                       94,105       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
 20,000 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, 2007 and 2006
        Outstanding shares: 14,425 at December
         31, 2007 and 14,376 at December 31, 2006       2,571        2,563
    Additional paid-in capital                        163,037      162,010
    Accumulated other comprehensive income (loss)      (7,216)      (5,028)
    Retained earnings                                  48,147       44,651
    Treasury stock at cost, 1,644 shares at
     December 31, 2007 and 1,640 shares at
     December 31, 2006                                (18,665)     (18,617)
                                                  -----------  -----------
                                                      187,874      185,579
                                                  -----------  -----------
  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY      $   501,181  $   510,574
                                                  ===========  ===========





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

                                                        2007       2006
                                                      ---------  ---------
                                                     (Unaudited)
Net income                                            $  10,639  $   6,742
Add: Loss from discontinued operations                       --      1,508
                                                      ---------  ---------
Income from continuing operations                        10,639      8,250
Adjustments to reconcile net income from continuing
 operations to net cash provided by operating
 activities:
    Depreciation and amortization                        34,208     38,241
    Bad debt expense                                        693        592
    Deferred income taxes                                (3,500)    (3,870)
    Equity in net income of affiliates                        3        180
    Gain on investments                                      --     (1,035)
    Gain from cash recovery of note receivable           (5,500)    (2,875)
    Gain from life insurance proceeds                      (588)        --
    (Gain) loss on retirement of property, plant and
     equipment                                             (134)       193
    Goodwill and intangible asset impairments             5,158      1,892
    Stock-based compensation expense                        355        367
    Loss on early extinguishment of debt                     --      1,103
Changes in operating assets and liabilities:
    Accounts receivable                                     787      1,364
    Inventories                                              38        108
    Prepaid expenses                                        492      4,955
    Accounts payable and accrued liabilities              1,795     (5,382)
    Accrued taxes and accrued interest                      571     (3,476)
    Advance billings, customer deposits and other          (170)    (5,555)
    Other, net                                           (2,699)     2,702
                                                      ---------  ---------
      Net Cash Provided by Operating Activities from
       Continuing Operations                             42,148     37,754
                                                      ---------  ---------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property, plant and equipment            (22,457)   (24,778)
  Proceeds from sale of property, plant and equipment       777        564
  Purchase of short-term investments                     (3,187)   (16,123)
  Proceeds from sale of short-term investments           10,933      8,377
  Collection of note receivable                           5,879      2,875
  Life insurance proceeds                                 1,000         --
  Acquisition of customer list intangible asset            (606)        --
  Investments in and advances to affiliates                  --       (390)
  Investment returns and repayments from affiliates          --      1,035
                                                      ---------  ---------
      Net Cash Used in Investing Activities from
       Continuing Operations                             (7,661)   (28,440)
                                                      ---------  ---------

CASH FLOWS FROM FINANCING ACTIVITIES
  Dividends on common stock                              (6,885)    (6,839)
  Proceeds from long-term debt financing                     --    180,750
  Payment of debt issuance costs                             --       (400)
  Payments on long-term debt                            (13,066)  (190,807)
  Termination of interest rate swap agreements               --      1,064
  Proceeds from issuance of common stock                    205        224
  Excess tax benefits from stock compensation plans          51         --
  Purchase of treasury stock                                (48)        --
                                                      ---------  ---------
      Net Cash Used in Financing Activities from
       Continuing Operations                            (19,743)   (16,008)
                                                      ---------  ---------

CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS         14,744     (6,694)

CASH USED IN DISCONTINUED OPERATIONS
  Cash used in operating activities of discontinued
   operations                                                --       (248)
  Cash used in investing activities of discontinued
   operations                                                --       (282)
                                                      ---------  ---------
      Net Cash Used in Discontinued Operations               --       (530)
                                                      ---------  ---------
INCREASE IN CASH AND CASH EQUIVALENTS                    14,744     (7,224)

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

CASH AND CASH EQUIVALENTS, END OF YEAR                $  17,845  $   3,101
                                                      =========  =========

Contact Information

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