SOURCE: D & E Communications, Inc.

November 05, 2008 16:30 ET

D&E Communications Reports Third Quarter 2008 Results

Net Income of $3.7 Million and Earnings per Share of $0.25

EPHRATA, PA--(Marketwire - November 5, 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 third quarter ended September 30, 2008.

For the third quarter of 2008, the Company reported operating income of $8.6 million, compared to operating income of $8.5 million in the third quarter of 2007. Net income for the third quarter of 2008 was $3.7 million, or $0.25 per share, compared to net income of $3.8 million, or $0.26 per share, for the same period last year. The Company reported total operating revenue of $36.6 million for the third quarter of 2008, compared to $38.2 million in the third quarter of 2007. The revenue decrease of $1.6 million for the third quarter of 2008 was the result of decreases in Wireline segment revenue of $1.1 million and Systems Integration segment revenue of $0.5 million.

"During the third quarter, we continued our focus on adding broadband subscribers, CLEC growth, improving Systems Integration performance and managing our expenses," stated James W. Morozzi, D&E's President and Chief Executive Officer. "In this competitive marketplace, we had slight improvements in operating income and income before taxes for the quarter compared to the prior year. However, an approximate 1% increase in the effective tax rate caused net income for the quarter to be slightly lower compared to the prior year."

The third quarter 2008 results were positively affected by a decrease in depreciation expense in the Wireline segment of $0.8 million ($0.5 million, or $0.03 per share, after tax) primarily due to certain fixed assets becoming fully depreciated in June and July of 2008. Net income before this item described above was $3.2 million, or $0.22 per share, for the third quarter of 2008 compared to $3.8 million, or $0.26 per share for the third quarter of 2007.

For the nine months ended September 30, 2008, the Company reported a net loss of $3.1 million, or $0.22 per share, compared to net income of $8.7 million, or $0.60 per share, for the same period last year. Operating loss for the nine months ended September 30, 2008 was $1.3 million, compared to operating income of $20.6 million in the nine months ended September 30, 2007. The Company reported total operating revenue of $112.0 million for the nine months ended September 30, 2008, compared to $113.8 million for the same period last year.

Included in the 2008 nine-month results was the non-cash intangible asset impairment of $26.2 million ($15.3 million, or $1.06 per share, after tax) on the Wireline franchise intangible assets as a result of the completion of the Company's annual test for impairment of goodwill and intangible assets as of April 30, 2008. The 2008 nine-month results were also affected by income of $2.9 million ($1.7 million, or $0.12 per common share, after tax) from the termination of a lease guarantee and a decrease in depreciation expense in the Wireline segment of $3.8 million ($2.5 million, or $0.17 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 and June and July of 2008. Included in the 2007 results was a gain of $0.6 million ($0.6 million, or $0.04 per share, after tax) from life insurance proceeds. Net income before the items described above was $8.0 million, or $0.55 per share, for the nine months ended September 30, 2008, compared to $8.1 million, or $0.56 per share, for the nine months ended September 30, 2007.

The following table provides a reconciliation of reported and comparable net income (loss) and earnings (loss) per share:

(Dollar amounts
 in millions,       Three Months Ended            Nine Months Ended
 except per-          September 30,                 September 30,
share amounts)      2008           2007           2008           2007
                ------------- ------------- --------------- -------------
                        Per-          Per-           Per-           Per-
                       ------        ------         -------        ------
                Amount  share Amount  share Amount   share  Amount  share
                ------ ------ ------ ------ ------- ------- ------ ------
Reported net
 income (loss)  $  3.7 $ 0.25 $  3.8 $ 0.26 $  (3.1)$ (0.22)$  8.7 $ 0.60
Items impacting
 comparability:
  Decrease in
   depreciation
   net of tax,
   compared to
   2007           (0.5) (0.03)    --     --    (2.5)  (0.17)    --     --
  Intangible
   asset
   impairment,
   net of tax       --     --     --     --    15.3    1.06     --     --
  Lease
   guarantee
   termination,
   net of tax       --     --     --     --    (1.7)  (0.12)    --     --
  Life
   insurance
   gain, net of
   tax              --     --     --     --      --      --   (0.6) (0.04)
                ------ ------ ------ ------ ------- ------- ------ ------
Comparable net
 income         $  3.2 $ 0.22 $  3.8 $ 0.26 $   8.0 $  0.55 $  8.1 $ 0.56
                ====== ====== ====== ====== ======= ======= ====== ======

Summary Statistics

                                September  September
                                30, 2008   30, 2007     Change   % Change
                                ---------- ---------- ---------  ---------
RLEC access lines                  121,083    126,126    (5,043)      (4.0)
CLEC access lines                   46,458     45,775       683        1.5
DSL/High-speed Internet
 subscribers                        41,983     36,782     5,201       14.1
Dial-up Internet subscribers         2,424      3,790    (1,366)     (36.0)
Video subscribers                    8,417      7,668       749        9.8
Web-hosting customers                  994      1,004       (10)      (1.0)
                                ---------- ---------- ---------  ---------
Total customer connections         221,359    221,145       214        0.1
                                ========== ========== =========  =========

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

Wireline

Third quarter 2008 revenues from the Wireline segment were $35.3 million, compared to $36.4 million for the third quarter 2007. Network access revenue decreased $1.5 million primarily due to lower National Exchange Carrier Association (NECA) settlements and a reduction in minutes of use and RLEC access lines. DSL/High-speed Internet revenue increased $0.4 million due to subscriber growth.

Wireline operating expenses for the third quarter of 2008 were $26.4 million, compared to $27.2 million during the same period last year. Depreciation expense decreased approximately $0.8 million due to certain fixed assets becoming fully depreciated in the June and July 2008, partially offset by the depreciation expense on fixed assets placed in service in the current year. Short-term incentive expenses decreased $0.5 million due to the relative performance of year-to-date financial results compared to the incentive targets. Employee benefits decreased $0.5 million primarily as a result of recognizing the cumulative effect of a defined benefit pension plan actuarial valuation error in the third quarter of 2007 with no similar expense recorded in the third quarter of 2008. Wages increased $0.3 million primarily due to additional sales commissions and one extra work day in the third quarter of 2008 compared to the same period of the prior year. All other Wireline expenses were up $0.7 million and included increases in rent, marketing, cost of goods sold, subcontractors, operating taxes and human resource expenses. Operating income was $8.9 million for the third quarter of 2008 and $9.2 million for the third quarter of 2007.

Systems Integration

Systems Integration revenues for the quarter were $0.9 million, compared to $1.4 million for the same period last year. The primary reason for the decrease was a reduction in computer product sales.

Third quarter 2008 operating expenses were $0.9 million, compared to $1.9 million in the third quarter of 2007. Labor and benefits declined $0.4 million mainly due to a reduction in the number of employees. Cost of products sold decreased $0.5 million due to the decline in product sales. Systems Integration recorded an operating loss of $17,000 for the third quarter of 2008, compared to an operating loss of $0.5 million in the third quarter of 2007.

Adjusted EBITDA

We present the non-GAAP (generally accepted accounting principles) measure Adjusted EBITDA (as defined herein) below and anticipate referring to this measure in the conference call referenced below. Presentation of Adjusted EBITDA is consistent with how we evaluate performance of our business segments and Adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry. Adjusted EBITDA is a non-GAAP operating measure under Regulation G of the Securities and Exchange Commission. We compute Adjusted EBITDA by adding depreciation, amortization and goodwill and intangible asset impairments to operating income. Each of these GAAP financial measures is a line item in our income statement and thus Adjusted EBITDA can be reconciled to net income, the most comparable GAAP financial measure to it. However, other companies in our industry may calculate Adjusted EBITDA differently than we do. Adjusted EBITDA is not a measurement of financial performance under GAAP and should not be considered as a substitute for cash flow from operating activities as a measure of liquidity or a substitute for net income as an indicator of operating performance or any other measure of performance derived in accordance with GAAP. Net income is reconciled to Adjusted EBITDA for the three and nine month periods ended September 30, 2008 and 2007, respectively, in the following table:

                                    Three months ended  Nine months ended
                                    ------------------  ------------------
(Dollar amounts in thousands)         September 30,       September 30,
                                    ------------------  ------------------
                                      2008      2007      2008      2007
                                    --------  --------  --------  --------
Wireline Adjusted EBITDA            $ 15,493  $ 16,642  $ 47,744  $ 48,609
Systems Integration Adjusted EBITDA       25      (412)      (41)   (1,593)
Corporate and Other Adjusted EBITDA      (16)       (6)     (352)      (42)
                                    --------  --------  --------  --------
Consolidated Adjusted EBITDA          15,502    16,224    47,351    46,974

Depreciation and amortization         (6,865)   (7,678)  (22,481)  (26,396)
Intangible asset impairment               --        --   (26,200)       --
Interest expense, net of interest
 capitalized                          (2,953)   (3,745)   (9,253)  (11,199)
Other income/(expense), net               92       962     3,625     3,078
Income taxes                          (2,069)   (1,992)    3,888    (3,757)
Dividends on utility preferred
 stock                                   (16)      (16)      (49)      (49)
                                    --------  --------  --------  --------

Net income (loss)                   $  3,691  $  3,755  $ (3,119) $  8,651
                                    ========  ========  ========  ========

Conference Call

The Company will host a conference call and live webcast Thursday, November 6, 2008 at 11:00 a.m. Eastern Time. Parties in the United States and Canada can call 877-719-9804 to access the conference call. Parties outside the United States and Canada can access the call at 719-325-4780. The live webcast of the conference call will be accessible from the "Investors" section of the Company's website (www.decommunications.com). The webcast will be archived for a period of 90 days.

About D&E Communications

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

This press release contains forward-looking statements. These forward-looking statements are found in various places throughout this press release and include, without limitation, statements regarding financial and other information. These statements are based upon the current beliefs and expectations of D&E's management concerning the development of our business, are not guarantees of future performance and involve a number of risks, uncertainties, and other important factors that could cause actual developments and results to differ materially from our expectations. Those factors include, but are not limited to: the current review of proposals for intercarrier compensation reform by the Federal Communications Commission; the current conditions in the financial and credit markets; 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 complex and uncertain regulatory environment faced by communications companies such as D&E; the significant indebtedness of the company; and the historical losses of the Systems Integration segment and other key factors that we have indicated could adversely affect our business and financial performance contained in our past and future filings and reports, including those filed with the United States Securities and Exchange Commission. D&E undertakes no obligation to revise or update its forward-looking statements whether as a result of new information, future events, or otherwise.

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


                                 Three Months Ended     Nine Months Ended
                                --------------------  --------------------
                                    September 30,         September 30,
                                --------------------  --------------------
OPERATING REVENUES                2008       2007       2008       2007
                                ---------  ---------  ---------  ---------
   Communication service
    revenues                    $  35,271  $  36,503  $ 107,954  $ 109,370
   Communication products sold        636      1,085      1,837      2,245
   Other                              718        622      2,180      2,160
                                ---------  ---------  ---------  ---------
    Total operating revenues       36,625     38,210    111,971    113,775
                                ---------  ---------  ---------  ---------
OPERATING EXPENSES
  Communication service
   expenses (exclusive of
   depreciation and
   amortization below)             11,534     12,037     36,086     37,175
  Cost of communication
   products sold                      517        866      1,494      1,806
  Depreciation and amortization     6,865      7,678     22,481     26,396
  Marketing and customer
   services                         3,677      3,614     10,711     10,498
  General and administrative
   services                         5,395      5,469     16,329     17,322
  Intangible asset impairment          --         --     26,200         --
                                ---------  ---------  ---------  ---------
    Total operating expenses       27,988     29,664    113,301     93,197
                                ---------  ---------  ---------  ---------
      Operating income (loss)       8,637      8,546     (1,330)    20,578
                                ---------  ---------  ---------  ---------

OTHER INCOME (EXPENSE)
  Interest expense, net of
   interest capitalized            (2,953)    (3,745)    (9,253)   (11,199)
  Other, net                           92        962      3,625      3,078
                                ---------  ---------  ---------  ---------
    Total other income
     (expense)                     (2,861)    (2,783)    (5,628)    (8,121)
                                ---------  ---------  ---------  ---------
      Income (loss) before
       income taxes and
       dividends on utility
       preferred stock              5,776      5,763     (6,958)    12,457

INCOME TAXES AND DIVIDENDS ON
 UTILITY PREFERRED STOCK
  Income taxes (benefit)            2,069      1,992     (3,888)     3,757
  Dividends on utility
   preferred stock                     16         16         49         49
                                ---------  ---------  ---------  ---------
    Total income taxes and
     dividends on utility
     preferred stock                2,085      2,008     (3,839)     3,806
                                ---------  ---------  ---------  ---------
NET INCOME (LOSS)               $   3,691  $   3,755  $  (3,119) $   8,651
                                =========  =========  =========  =========
Weighted average common shares
 outstanding (basic)               14,497     14,434     14,480     14,416
Weighted average common shares
 outstanding (diluted)             14,545     14,509     14,480     14,486

BASIC AND DILUTED EARNINGS
 (LOSS) PER COMMON SHARE

  Earnings (loss) per common
   share                        $    0.25  $    0.26  $   (0.22) $    0.60
                                =========  =========  =========  =========
  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                           2008          2007
                                                ------------  ------------
CURRENT ASSETS
  Cash and cash equivalents                     $     15,009  $     17,845
  Accounts and notes receivable, net of
   reserves of $433 and $500                          13,389        14,688
  Inventories                                          2,546         2,666
  Prepaid expenses                                     5,605         2,887
  Other                                                2,083         2,520
                                                ------------  ------------
    TOTAL CURRENT ASSETS                              38,632        40,606
                                                ------------  ------------

PROPERTY, PLANT AND EQUIPMENT
  In service                                         409,823       396,659
  Under construction                                   8,816         6,648
                                                ------------  ------------
                                                     418,639       403,307
  Less accumulated depreciation                      254,013       237,243
                                                ------------  ------------
                                                     164,626       166,064
                                                ------------  ------------
OTHER ASSETS
  Goodwill                                           137,597       137,623
  Intangible assets, net of accumulated
   amortization                                      118,199       148,376
  Other                                                8,226         8,512
                                                ------------  ------------
                                                     264,022       294,511
                                                ------------  ------------
  TOTAL ASSETS                                  $    467,280  $    501,181
                                                ============  ============

      LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Long-term debt maturing within one year       $      7,075  $      7,071
  Accounts payable and accrued liabilities            13,438        17,188
  Accrued taxes                                          312         1,093
  Accrued interest and dividends                       1,029           816
  Advance billings, customer deposits and other        4,982         4,709
                                                ------------  ------------
    TOTAL CURRENT LIABILITIES                         26,836        30,877
                                                ------------  ------------

LONG-TERM DEBT                                       180,823       186,879
                                                ------------  ------------

OTHER LIABILITIES
  Deferred income taxes                               61,979        70,977
  Defined benefit plans                               10,488        15,465
  Other                                                5,086         7,663
                                                ------------  ------------
                                                      77,553        94,105
                                                ------------  ------------
PREFERRED STOCK OF UTILITY SUBSIDIARY, Series A
 4 1/2%, par value $100, cumulative, callable
 at par at the option of the Company,
 authorized 20,000 shares, outstanding 14
 shares                                                1,446         1,446
                                                ------------  ------------
COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY
  Common stock, par value
   $0.16, authorized shares-100,000; issued
   shares-16,172 at September 30, 2008 and
   16,092 at December 31,
   2007; outstanding shares-14,489 at
   September 30, 2008 and 14,425
   at December 31, 2007                                2,588         2,575
  Additional paid-in capital                         164,303       163,560
  Accumulated other comprehensive loss                (6,510)       (7,216)
  Retained earnings                                   39,568        48,147
  Treasury stock at cost, 1,683 shares at
   September 30, 2008 and 1,667 shares at
   December 31, 2007                                 (19,327)      (19,192)
                                                ------------  ------------
                                                     180,622       187,874
                                                ------------  ------------
  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $    467,280  $    501,181
                                                ============  ============





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

                                                        Nine Months Ended
                                                          September 30,
                                                        2008       2007
                                                      ---------  ---------
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income (loss)                                   $  (3,119) $   8,651
  Adjustments to reconcile net income (loss) to net
   cash provided by operating activities:
    Depreciation and amortization                        22,481     26,396
    Bad debt expense                                        457        640
    Deferred income taxes                                (9,333)    (3,322)
    Gain from cash recovery of note receivable               --       (900)
    Gain from life insurance proceeds                        --       (588)
    Stock-based compensation expense                        367        259
    Gain on retirement of property, plant and
     equipment                                              (81)      (115)
    Intangible asset impairment                          26,200         --
    Termination of lease guarantee                       (2,904)        --
    Note receivable reserve                                 200         --
  Changes in operating assets and liabilities:
    Accounts receivable                                     841       (599)
    Inventories                                             119        234
    Prepaid expenses                                     (2,704)    (1,283)
    Accounts payable and accrued liabilities             (1,531)       950
    Accrued taxes and accrued interest                     (567)      (333)
    Advance billings, customer deposits and other           274        280
    Defined benefit plans                                (4,210)    (1,794)
    Other, net                                              150        210
                                                      ---------  ---------
    Net Cash Provided by Operating Activities            26,640     28,686
                                                      ---------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of property, plant and equipment            (18,921)   (17,372)
  Proceeds from sales of property, plant and
   equipment                                                626        550
  Collection of note receivable                              95      1,279
  Proceeds from sale of short-term investments               --     10,933
  Purchase of short-term investments                         --     (3,187)
  Life insurance proceeds                                    --      1,000
  Acquisition of customer list intangible asset              --       (606)
                                                      ---------  ---------
    Net Cash Used In Investing Activities               (18,200)    (7,403)
                                                      ---------  ---------
CASH FLOWS FROM FINANCING ACTIVITIES
  Dividends on common stock                              (5,214)    (5,155)
  Payments on long-term debt                             (6,052)    (8,549)
  Proceeds from issuance of common stock and stock
   options exercised                                         88        183
  Excess tax benefits from stock compensation plans          37         51
  Purchase of treasury stock                               (135)       (48)
                                                      ---------  ---------
    Net Cash Used In Financing Activities               (11,276)   (13,518)
                                                      ---------  ---------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         (2,836)     7,765

CASH AND CASH EQUIVALENTS
  BEGINNING OF PERIOD                                    17,845      3,101
                                                      ---------  ---------
  END OF PERIOD                                       $  15,009  $  10,866
                                                      =========  =========

Contact Information

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