SOURCE: D & E Communications, Inc.

November 07, 2006 17:17 ET

D&E Communications Reports Third Quarter 2006 Results

EPHRATA, PA -- (MARKET WIRE) -- November 7, 2006 -- 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 and nine months ended September 30, 2006.

For the third quarter of 2006, the Company reported total operating revenue of $40.6 million, as compared to $41.1 million in the third quarter of 2005. Net income for the third quarter was $0.7 million, or $0.05 per share, as compared to $2.4 million, or $0.17 per share, for the same period last year. The primary reasons for the decrease in net income were the loss on the early extinguishment of debt of $1.1 million ($0.6 million, or $0.04 per share, after tax) and the loss on the sale of assets of the commercial voice equipment and service operations of the Systems Integration segment ("Voice Systems Business") of $0.9 million, net of tax, or $0.06 per share incurred during the third quarter of 2006. Included in the third quarter 2005 results was 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 $2.2 million, or $0.15 per share, for the quarter ended September 30, 2006, compared to $2.0 million, or $0.15 per share, for the quarter ended September 30, 2005.

On September 19, 2006, D&E completed an amendment to its syndicated senior secured debt financing. The amendment reduces the interest rates on the indebtedness, provides greater flexibility in its financial covenants, extends the scheduled amortization of principal, eliminates the $10 million permanent reduction on the revolving line of credit previously scheduled for December 31, 2006 and eliminates the requirement to maintain interest rate protection. D&E anticipates that the reduction in interest rates will result in an average annual cash savings of approximately $0.6 million assuming the margin added to the U.S. prime or LIBOR rates in effect prior to the amendment would have been in effect throughout the term of the credit facilities using the amended loan amortization schedules. D&E incurred a loss on early extinguishment of debt of $1.1 million, consisting of a non-cash write-off of $1.05 million of unamortized debt issuance costs of the previous credit facility and the expensing of $0.05 million of debt issuance costs related to the amended credit facility. D&E capitalized approximately $0.3 million of debt issuance costs related to the amended credit facility, which will be amortized into interest expense over the life of the amended credit facility. In connection with the amendment, interest rate swap agreements with a notional amount of $75 million were terminated. D&E received cash termination payments of $1.1 million, which will be amortized as a reduction of interest expense over the remainder of the respective terms of the interest rate swap agreements. These agreements were due to mature between November 2008 and December 2009.

On September 29, 2006, D&E completed the sale of the Voice Systems Business to eCommunications Systems Corporation ("eComm"). The sale did not include the professional data and information technology services, security, design and network monitoring operations of D&E's Systems Integration segment. The fair value of the sale consideration was $3.0 million consisting of cash of $0.25 million, a promissory note for $2.4 million (face value $2.5 million) issued by eComm and a 10% equity interest in eComm of $0.35 million, with a related put right. The results of operations of the Voice Systems Business are reported as discontinued operations in the financial statements for the three and nine months ended September 30, 2006 and 2005.

For the nine months ended September 30, 2006, the Company reported total operating revenue of $122.3 million, as compared to $122.7 million in the same period last year. Net income for the nine months ended September 30, 2006 was $3.3 million, or $0.23 per share, as compared to $6.6 million, or $0.46 per share, for the same period last year. Included in the 2006 results were the loss on early extinguishment of debt of $1.1 million ($0.6 million, or $0.04 per share after tax), the customer relationships intangible asset impairment loss from continuing operations of $1.9 million ($1.1 million, or $0.08 per share, after tax) and the loss on the sale of the Voice Systems Business of $0.9 million, net of tax, or $0.06 per share. Included in the 2005 results was a gain on investment of $2.0 million ($1.3 million, or $0.09 per share, after tax) from the sale of our ownership 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 $5.9 million, or $0.41 per share, for the nine months ended September 30, 2006, compared to $4.9 million, or $0.35 per share, for the nine months ended September 30, 2005.

James W. Morozzi, D&E's President and CEO, stated, "From an operations standpoint, we continue to see strong growth in our broadband Internet Services and CLEC businesses, two of our main objectives for the year. Additionally, we have been able to mitigate some of the pressures facing our RLEC through successful marketing and customer service initiatives as well as continued expense management. With the sale of our Voice Systems Business now behind us, we are able to focus our Systems Integration segment on professional data and information technology services, security, design and network monitoring services, which provide recurring revenue. Systems Integration is poised for improvement in operating results."

Morozzi concluded, "Because of the efforts of our highly skilled and dedicated workforce, we continue to see improvement over our 2005 operating results, while Delivering Excellence to our customers and shareholders."

Summary Statistics
------------------
                                      Sept 30,  Sept 30,
                                        2006      2005    Change  % Change
                                      --------  -------- -------  -------
RLEC lines                             130,727   135,457  (4,730)    (3.5%)
CLEC lines                              42,012    40,703   1,309      3.2%
DSL/High-Speed Internet subscribers     26,749    17,375   9,374     54.0%
Dial-up Internet subscribers             5,905     8,957  (3,052)   (34.1%)
Video subscribers                        7,307     6,469     838     13.0%
Web-hosting customers                      944       946      (2)    (0.2%)

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

Rural Local Exchange Carrier (RLEC)

Third quarter 2006 revenues from the RLEC segment were $27.0 million, as compared to $27.3 million for third quarter 2005. The decrease was due to lower network access revenues primarily from decreased minutes of use and lower local service revenue due to declining access lines, partially offset by increases in basic service rates.

RLEC operating expenses for the third quarter 2006 and 2005 were $19.4 million. Depreciation expense decreased $0.2 million while all other operating expenses increased $0.2 million. Operating income for the quarter was $7.6 million, down from $7.9 million in the third quarter 2005.

Competitive Local Exchange Carrier (CLEC)

For the third quarter of 2006, CLEC segment revenues were $10.5 million, compared to $10.4 million for the same period of 2005. This increase was due to a larger number of access lines, increases in interstate access rates and minutes of use and increased long distance circuit revenue, offset by a reduction in long distance toll revenues due to rate reductions and fewer minutes of use.

CLEC operating expenses for the third quarter of 2006 were $10.3 million, down from $10.4 million for the same period last year. The decrease was due primarily to lower wages and uncollectible expenses, offset by an increase in depreciation expense. For the third quarter of 2006, operating income was $0.2 million, compared to a break-even operating income in the third quarter 2005.

Internet Services Segment

Internet Services revenues for the third quarter of 2006 were $3.9 million, as compared to $3.3 million in the third quarter of 2005, due to increased DSL revenues.

Operating expenses for the third quarter of 2006 were $4.0 million, compared to $3.4 million for the same period of 2005, as a result of DSL subscriber growth, offset by a reduction in VoIP service costs. For the third quarter of 2006 and 2005, the operating loss was $0.1 million.

Systems Integration

Systems Integration revenues from continuing operations for the quarter were $1.8 million, as compared to $2.2 million for the same period last year. This decrease was due mainly to a reduction in computer equipment sales.

Third quarter 2006 operating expenses from continuing operations were $2.8 million, compared to $3.5 million in the previous year. The decrease was due to lower labor and subcontractor costs, employee benefits and cost of goods sold. The operating loss for the quarter ended September 30, 2006 was $1.0 million, compared to $1.3 million in the third quarter of 2005.

About D&E Communications

D&E is an integrated communications provider offering high-speed data, Internet access, local and long distance telephone, 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
              Condensed Consolidated Statements of Operations
                 (in thousands, except per-share amounts)
                                (Unaudited)


                                 Three Months Ended     Nine Months Ended
                                --------------------  --------------------
                                    September 30,         September 30,
                                --------------------  --------------------
OPERATING REVENUES                2006       2005       2006       2005
                                ---------  ---------  ---------  ---------
  Communication service
   revenues                     $  39,221  $  39,198  $ 118,457  $ 118,141
  Communication products sold         711      1,083      1,672      2,277
  Other                               693        796      2,142      2,262
                                ---------  ---------  ---------  ---------
     Total operating revenues      40,625     41,077    122,271    122,680
                                ---------  ---------  ---------  ---------
OPERATING EXPENSES
  Communication service
   expenses (exclusive of
   depreciation and
   amortization below)             15,672     15,330     46,801     47,339
  Cost of communication
   products sold                      626        867      1,428      1,885
  Depreciation and amortization     9,536      9,663     28,489     28,723
  Marketing and customer
   services                         3,528      3,479     10,177     10,110
  General and administrative
   services                         5,092      5,723     18,141     18,897
  Intangible asset impairment          --         --      1,892         --
                                ---------  ---------  ---------  ---------
    Total operating expenses       34,454     35,062    106,928    106,954
                                ---------  ---------  ---------  ---------
      Operating income              6,171      6,015     15,343     15,726
                                ---------  ---------  ---------  ---------

OTHER INCOME (EXPENSE)
  Equity in net losses of
   affiliates                         (21)       (29)      (238)      (142)
  Interest expense, net of
   interest capitalized            (3,832)    (3,615)   (11,537)   (10,436)
  Loss on early extinguishment
   of debt                         (1,094)        --     (1,094)        --
  Gain on investment                   --         --         --      2,043
  Other, net                        1,038        762      3,555      2,458
                                ---------  ---------  ---------  ---------
    Total other income
     (expense)                     (3,909)    (2,882)    (9,314)    (6,077)
                                ---------  ---------  ---------  ---------
       Income from continuing
        operations before
        income taxes and
        dividends on utility
        preferred stock             2,262      3,133      6,029      9,649
INCOME TAXES AND DIVIDENDS ON
  UTILITY PREFERRED STOCK
  Income taxes                        594        714      1,496      2,763
  Dividends on utility
   preferred stock                     16         16         49         49
                                ---------  ---------  ---------  ---------
    Total income taxes and
     dividends on utility
     preferred stock                  610        730      1,545      2,812
                                ---------  ---------  ---------  ---------
       Income from continuing
        operations                  1,652      2,403      4,484      6,837
DISCONTINUED OPERATIONS:
    Loss from operations of
     Voice Systems Business,
     net of income tax benefits
     of ($32), ($6), ($271) and
     ($98)                            (51)       (11)      (355)      (190)
    Loss on sale of Voice Systems
     Business, net of income
     taxes of $85 and $85            (870)        --       (870)        --
                                ---------  ---------  ---------  ---------
       Loss from discontinued
        operations                   (921)       (11)    (1,225)      (190)
                                ---------  ---------  ---------  ---------
NET INCOME                      $     731  $   2,392  $   3,259  $   6,647
                                =========  =========  =========  =========
Weighted average common shares
 outstanding (basic)               14,377     14,316     14,362     14,295
Weighted average common shares
 outstanding (diluted)             14,444     14,342     14,425     14,316

BASIC AND DILUTED EARNINGS PER
 COMMON SHARE
  Basic earnings per common
   share-continuing operations  $    0.11  $    0.17  $    0.31  $    0.48
  Basic earnings per common
   share-discontinued
   operations                       (0.06)      0.00      (0.08)     (0.02)
                                ---------  ---------  ---------  ---------
                                $    0.05  $    0.17  $    0.23  $    0.46
                                =========  =========  =========  =========
  Diluted earnings per common
   share-continuing operations  $    0.11  $    0.17  $    0.31  $    0.48
  Diluted earnings per common
   share-discontinued
   operations                       (0.06)      0.00      (0.08)     (0.02)
                                ---------  ---------  ---------  ---------
                                $    0.05  $    0.17  $    0.23  $    0.46
                                =========  =========  =========  =========
  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)


                                                     Sept 30,     Dec 31,
                      ASSETS                           2006        2005
                                                    ----------  ----------
CURRENT ASSETS
  Cash and cash equivalents                         $    4,964  $   10,325
  Accounts and notes receivable, net of reserves of
   $617 and $748                                        16,343      16,864
  Accounts receivable-affiliated company                    --         351
  Inventories, lower of cost or market, at average
   cost                                                  2,845       3,645
  Prepaid expenses                                       6,795       8,194
  Other                                                  1,311       1,243
                                                    ----------  ----------
    TOTAL CURRENT ASSETS                                32,258      40,622
                                                    ----------  ----------

PROPERTY, PLANT AND EQUIPMENT
  In service                                           373,703     364,638
  Under construction                                    11,979       7,334
                                                    ----------  ----------
                                                       385,682     371,972
  Less accumulated depreciation                        209,379     192,259
                                                    ----------  ----------
                                                       176,303     179,713
                                                    ----------  ----------
OTHER ASSETS
  Goodwill                                             143,727     145,448
  Intangible assets, net of accumulated
   amortization                                        154,379     161,572
  Other                                                  8,802       8,317
                                                    ----------  ----------
                                                       306,908     315,337
                                                    ----------  ----------
  TOTAL ASSETS                                      $  515,469  $  535,672
                                                    ==========  ==========
        LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
  Long-term debt maturing within one year           $    7,065  $   10,000
  Accounts payable and accrued liabilities              19,096      18,962
  Accrued taxes                                          2,867       2,890
  Accrued interest and dividends                           971       1,791
  Advance billings, customer deposits and other          6,050      11,087
                                                    ----------  ----------
    TOTAL CURRENT LIABILITIES                           36,049      44,730
                                                    ----------  ----------
LONG-TERM DEBT                                         202,467     205,500
                                                    ----------  ----------
OTHER LIABILITIES
  Equity in net losses of affiliates in excess of
   investments and advances                                 44         196
  Deferred income taxes                                 74,814      79,063
  Other                                                 15,703      20,391
                                                    ----------  ----------
                                                        90,561      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
    Outstanding shares: 14,385 at September 30,
     2006 and 14,345 at December 31, 2005                2,560       2,554
  Additional paid-in capital                           161,748     160,924
  Accumulated other comprehensive income (loss)         (3,710)     (5,598)
  Retained earnings                                     42,965      45,083
  Treasury stock at cost, 1,640 shares at September
   30, 2006 and December 31, 2005                      (18,617)    (18,617)
                                                    ----------  ----------
                                                       184,946     184,346
                                                    ----------  ----------
  TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY        $  515,469  $  535,672
                                                    ==========  ==========





                D&E Communications, Inc. and Subsidiaries
             Condensed Consolidated Statements of Cash Flows
                             (in thousands)
                               (Unaudited)


                                                      Nine Months Ended
                                                        September 30,
                                                       2006        2005
                                                    ----------  ----------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                        $    3,259  $    6,647
  Loss from discontinued operations                      1,225         190
                                                    ----------  ----------
    Income from continuing operations                    4,484       6,837

  Adjustments to reconcile net income from
   continuing operations to net cash provided by
   operating activities:
    Depreciation and amortization                       28,489      28,723
    Bad debt expense                                       434         231
    Deferred income taxes                               (4,886)     (1,771)
    Equity in net losses of affiliates                     238         142
    Gain on investment                                      --      (2,043)
    Gain from cash recovery of note receivable          (2,125)     (1,000)
    Intangible asset impairment                          1,892          --
    Stock-based compensation expense                       230         145
    Loss on retirement of property, plant and
     equipment                                             166          30
    Loss on early extinguishment of debt                 1,094          --
  Changes in operating assets and liabilities:
    Accounts receivable                                  1,002         151
    Inventories                                            (32)       (244)
    Prepaid expenses                                     1,465       3,608
    Accounts payable and accrued liabilities              (741)        512
    Accrued taxes and accrued interest                  (1,383)       (978)
    Advance billings, customer deposits and other       (4,369)     (4,483)
    Other, net                                          (1,399)       (818)
                                                    ----------  ----------
    Net Cash Provided by Operating Activities from
     Continuing Operations                              24,559      29,042
                                                    ----------  ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures, net of proceeds from sales     (19,783)    (22,425)
  Collection of note receivable                          2,125       1,000
  Proceeds from sale of investment                          --       2,900
  Increase in investments and advances to
   affiliates                                             (390)       (115)
                                                    ----------  ----------

    Net Cash Used In Investing Activities of
     Continuing Operations                             (18,048)    (18,640)
                                                    ----------  ----------
CASH FLOWS FROM FINANCING ACTIVITIES
  Dividends on common stock                             (5,129)     (5,116)
  Payments on long-term debt                          (188,291)    (10,500)
  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                   135         300
                                                    ----------  ----------

    Net Cash Used In Financing Activities of
     Continuing Operations                             (11,855)    (15,316)
                                                    ----------  ----------

CASH USED IN CONTINUING OPERATIONS                      (5,344)     (4,914)

CASH PROVIDED BY (USED IN) DISCONTINUED
 OPERATIONS
  Cash provided by operating activities of
   discontinued operations                                 195         281
  Cash used in investing activities of discontinued
   operations                                             (212)       (194)
                                                    ----------  ----------

    Net Cash Provided by (Used In) Discontinued
     Operations                                            (17)         87
                                                    ----------  ----------

DECREASE IN CASH AND CASH EQUIVALENTS                   (5,361)     (4,827)

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

    END OF PERIOD                                   $    4,964  $    3,690
                                                    ==========  ==========

Contact Information

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