SWWC Southwest Water (MM)

SouthWest Water Company (NASDAQ:SWWC), a leading provider of water, wastewater and public works services, today reported unaudited financial results for the full year and fourth quarter ended December 31, 2007. Full Year 2007 Results Primarily as a result of two non-recurring, non-cash charges, the company reported a net loss of $8.0 million, or $0.33 per diluted share for the year ended December 31, 2007, as compared to net income in 2006 of $9.4 million, or $0.40 per diluted share. Included in the full year 2007 results are two non-cash charges totaling $20.6 million ($15.1 million, net of tax, or $0.63 per diluted share). The charges include $17.2 million related to goodwill impairments of the company�s Texas utilities and a $3.4 million write-down of assets to net realizable value for a business the company has decided to divest. Income from continuing operations in 2007 before the impairment charges (a non-GAAP financial measure; see below) was $8.2 million, or $0.34 per diluted share, as compared to income from continuing operations of $10.0 million, or $0.43 per diluted share, in 2006. The impairment charge was a result of testing under SFAS No.142. The company determined that revenue growth for its Texas utilities was likely to be slower than originally projected due to downturns in overall economic conditions and new housing construction as well as a slower rate of regulated rate increase. The company also determined that higher levels of capital expenditures than previously projected were necessary to bring the systems into regulatory compliance and to continue improving the quality of service for its customers. The business that the company intends to divest, a wholesale water and wastewater business, is reflected as discontinued operations in the financial statements. Included in the discontinued operations is the $3.4 million charge relating to the write-down of assets. �We are focused on building a platform that can sustain profitable growth and improve our customer service and system reliability,� said Mark A. Swatek, SouthWest Water chief executive officer and chairman. �By divesting underperforming assets, our company will be stronger and our future results will better reflect the underlying strength of our core business.� For the year, revenues were $217.3 million as compared to $218.8 million in 2006. Operating income, before the impairment charge (a non-GAAP measure) was $20.1 million compared with $22.4 million in 2006. SG&A expenses were $36.6 million, or 17% of revenues, versus $33.0 million, or 15% of revenues, in 2006. Included in 2007 SG&A are $1.9 million, or $0.05 per diluted share, in costs associated with Cornerstone, the company�s continuing initiative to consolidate, update and upgrade all underlying communications and information technology systems, scheduled to be completed by the end of 2009. Total company funded capital expenditures were $40.0 million, including $10.1 million related to the Cornerstone project, compared to $35.4 million in 2006. �Over the past year, we made major strides in restructuring the company and improving the efficiency of our operations,� commented Swatek. �We also addressed some legacy issues and dealt with two external factors; a nationwide housing slowdown and unusually heavy rains in Texas, our biggest market. In addition, we recently completed our new $150 million credit facility, which provides additional capacity to continue to grow by investing in sound utility acquisitions, like the Birmingham, Alabama wastewater system we purchased in January which added 12,000 customers.� Utility Group 2007 Results Revenues in the Utility Group were $93.4 million for the year, up from $86.3 million in 2006. This 8% increase was primarily due to increased consumption in California during a dry 2007, rate increases in California, Texas and Alabama, and acquisitions in Mississippi and Texas. These increases were partially offset by lower consumption in Texas due to the heavy rainfall. Operating income before the impairment (a non-GAAP measure) increased 8% to $32.6 million compared with $30.2 million in 2006, primarily due to the increased revenues. Services Group 2007 Results Services Group revenues were $150.7 million in 2007, down from $166.0 million in 2006, which include intersegment revenues of $31.5 million and $40.4 million, respectively. This 9% decrease was primarily due to reduced construction and maintenance work in Texas as a result of wet weather, a slow down in housing construction in Texas and New Mexico and a reduction in the company�s contract base in Georgia and Mississippi. Operating income decreased to $3.4 million from $5.6 million in 2006, primarily due to the reduction in revenues as described above as well as a non-recurring reserve of $650,000 for our share of potential fines imposed by a water quality control board and an $800,000 severance charge associated with the re-alignment of this division. Fourth Quarter 2007 Results The company reported a net loss of $13.0 million, or $0.53 per diluted share, as compared to net income in fourth quarter of 2006 of $3.1 million, or $0.13 per diluted share. Income from continuing operations in the quarter before the impairment charge (a non-GAAP measure) was $2.6 million, or $0.11 per diluted share, as compared to income from continuing operations of $3.3 million, or $0.14 per diluted share during the same period in 2006. Revenues increased to $57.4 million from $56.4 million in the fourth quarter of 2006. Operating income before the impairment charge (a non-GAAP measure) was $5.9 million versus $6.5 million in the same period of 2006. Non-GAAP Financial Measures In an effort to provide investors with additional information regarding results of operations as determined by accounting principles generally accepted in the United States of America (�GAAP�), the company has disclosed certain non-GAAP information, which it believes provides useful information to investors. A reconciliation of the non-GAAP financial measures to the comparable GAAP financial measure, which include income from continuing operations and operating income before the impairment charges, can be found at the end of this release. In addition, management is in the process of completing its internal review of the financial information presented here; the amounts are unaudited and subject to change. Conference Call The company will provide more detail regarding its fourth quarter and full year 2007 results in a conference call and web cast to be held today, March 17, 2008, at 4:30 p.m. Eastern time (1:30 p.m. Pacific). The conference call can be accessed on the company�s website at www.swwc.com. For those unable to participate in the live web cast, a replay will be available shortly after the call on the company�s website. A telephonic replay will also be available beginning at 6:30 p.m. Eastern (3:30 p.m. Pacific) until midnight March 24, 2008 at 888-286-8010 (international callers 617-801-6888), passcode 90008539. SouthWest Water Company provides a broad range of services, including water production, treatment and distribution; wastewater collection and treatment; utility billing and collection; utility infrastructure construction management; and public works services. The company owns regulated public utilities and also serves cities, utility districts and private companies under contract. More than two million people from coast to coast depend on SouthWest Water for high-quality, reliable service. Additional information may be found on the company�s website: www.swwc.com. This document contains �forward-looking statements� within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, including expectations relating to future revenues and income, the company�s ability to gain new business and control costs, involve risks and uncertainties, as well as assumptions that, if they prove incorrect or never materialize, could cause the results of the company to differ materially from those expressed or implied by such forward-looking statements. Actual results may differ materially from these expectations due to changes in regulatory, political, weather, economic, business, competitive, market, environmental and other factors. More detailed information about these factors is contained in the company�s filings with the Securities and Exchange Commission, including under the caption �Risk Factors� in the company�s 2006 Annual Report on Form 10-K and 2007 Annual Report on Form 10-K, which the company anticipates filing shortly. The company assumes no obligation to update these forward-looking statements to reflect any change in future events. Condensed Consolidated Statements of Income (unaudited and in thousands, except per share amounts) � Three Months Ended � Year Ended December 31, December 31, 2007 � 2006 2007 � 2006 Operating Revenues: Utility Group $23,741 $21,719 $93,370 $86,321 Services Group 39,767 46,426 150,721 165,982 Less intersegment eliminations (6,099 ) � (11,733 ) (26,744 ) � (33,501 ) Total revenues 57,409 � � 56,412 � 217,347 � � 218,802 � � Expenses: Utility Group operating expenses 13,811 13,565 52,765 48,540 Services Group operating expenses 27,323 28,012 107,884 113,916 Selling, general and administrative 10,349 8,328 36,624 32,998 Impairment of goodwill 17,215 � � -- � 17,215 � � 929 � Total expenses 68,698 � � 49,905 � 214,488 � � 196,383 � � Operating income (11,289 ) 6,507 2,859 22,419 � Other income (expense) Interest expense (1,973 ) (1,830 ) (7,696 ) (7,536 ) Interest income 128 112 618 456 Other, net 96 � � 58 � (6 ) � 58 � � Income (loss) from continuing operations before taxes (13,038 ) 4,847 (4,225 ) 15,397 Provision (benefit) for income taxes (2,466 ) � 1,538 � 795 � � 5,388 � � Income (loss) from continuing operations (10,572 ) 3,309 (5,020 ) 10,009 � Loss from discontinued operations, net of tax (2,386 ) (170 ) (3,026 ) (681 ) Cumulative effect of change in accounting principle, net of tax -- � � -- � -- � � 71 � � Net income (loss) (12,958 ) 3,139 (8,046 ) 9,399 Preferred stock dividends (6 ) � (6 ) (24 ) � (24 ) Net income (loss) applicable to common holders (12,964 ) � 3,133 � (8,070 ) � 9,375 � � Earnings per common share (Diluted): Income (loss) from continuing operations $(0.44 ) $0.14 $(0.21 ) $0.43 Loss from discontinued operations (0.09 ) (0.01 ) (0.12 ) (0.03 ) Cumulative effect of change in accounting principle -- -- Net income (loss) applicable to common holders $(0.53 ) $0.13 $(0.33 ) $0.40 � Weighted average outstanding common shares (diluted) 24,240 23,985 24,101 23,363 � Condensed Balance Sheet Information � � (unaudited and in thousands) December 31, December 31, 2007 � 2006 Current assets $ 45,820 $ 48,257 Property, plant and equipment, net 417,903 389,625 Total assets $516,409 $491,693 � Current liabilities $ 41,918 $ 35,830 Long-term debt 145,353 128,624 Contributions in aid of construction 115,442 110,024 Stockholders� equity 159,194 166,527 Total liabilities and stockholders� equity $516,409 $491,693 � Reconciliation of Non-GAAP Income from Continuing Operations (unaudited and in thousands except per share) � Three Months Ended � Year Ended December 31, 2007 December 31, 2007 Pre-tax loss from continuing operations (GAAP) (13,038 ) (4,225 ) Add Back: Impairment charges � 17,215 � 17,215 Pre-tax income from continuing operations (adjusted) 4,177 12,990 Provision for income taxes (37%) � 1,545 � 4,806 Net income from continuing operations (adjusted) $ 2,632 $ 8,184 Earnings per diluted share $ 0.11 $ 0.34 � Reconciliation of Non-GAAP Operating Income (unaudited and in thousands) � Three Months Ended � Year Ended December 31, 2007 December 31, 2007 Utility business operating (loss) income (7,789 ) 15,339 Services business operating income 1,567 3,415 Corporate � (5,067 ) � (15,895 ) Operating (loss) income (GAAP) (11,289 ) 2,859 Add Back: Impairment charges � 17,215 � � 17,215 � Operating income (adjusted) $ 5,926 $ 20,074 � Reconciliation of Non-GAAP Utility Business Operating Income (unaudited and in thousands) � Year Ended December 31, 2007 Operating Income (from above table) 15,339 � Add Back: Impairment charges � 17,215 � Operating income (adjusted) $ 32,554