North Pittsburgh Systems, Inc. Reports Fourth Quarter and Full Year 2006 Earnings

  
    
  
  
    
      North Pittsburgh Systems, Inc. [NASDAQ:NPSI] 
      today announced earnings for the fourth quarter and full year 2006. NPSI’s 
      President, Harry R. Brown, stated that net income was $5,176,000, or 
      $.34 per share, for the fourth quarter of 2006 as compared to net income 
      of $6,873,000, or $.46 per share, for the fourth quarter of 2005. For 
      the full year 2006, NPSI’s net income 
      increased $8,699,000, or 37.7%, to $31,755,000 from $23,056,000 in 2005, 
      with earnings per share for 2006 amounting to $2.12 versus $1.54 for 
      2005, an increase of $.58 per share. As discussed in more detail below 
      in the analysis of full year 2006 results, net income for the full year 
      2006 was positively impacted by $11,479,000, or $.76 per share, from a 
      gain realized on the redemption of an investment.
    
    
      Addressing the fourth quarter of 2006 first, Mr. Brown reported that 
      operating revenues decreased $1,147,000, or 4.3%, from $26,768,000 for 
      the fourth quarter of 2005 to $25,621,000 for the fourth quarter of 
      2006. He noted that the decrease in revenues was attributable to several 
      sources, including a $531,000 decrease in access revenues, mostly due to 
      a decrease in overall access minutes of use on the Company’s 
      network and unfavorable changes in the National Exchange Carrier 
      Association (NECA) average schedule formulas applicable to the Company’s 
      Incumbent Local Exchange Carrier (ILEC). In addition, revenues were 
      negatively impacted by a $427,000 decrease in toll revenues due to 
      competitive pricing pressures experienced on the Company’s 
      toll offerings, a $221,000 decrease in local dial tone revenues as a 
      result of a decrease in the Company’s overall 
      number of access lines and by a $53,000 decline in revenue generated 
      from Primary Rate Interface (PRI) circuits provisioned to Internet 
      Service Providers. These revenue decreases were partially offset by the 
      Company’s ability to continue to penetrate its 
      Competitive Local Exchange Carrier’s (CLEC) 
      edge-out markets and by the further expansion of broadband service 
      offerings.
    
    
      Mr. Brown noted that the Company’s quarterly 
      access revenues were influenced by true-ups and settlements of regulated 
      revenue requirements and pooling arrangements. Although historically 
      having a nominal impact on revenues realized for a full year period, 
      these true-ups and settlements can be noteworthy on a comparative 
      quarterly basis. Access revenues for the fourth quarter of 2006 
      benefited from a favorable true-up of the Company’s 
      ILEC’s intrastate revenue requirement, which 
      resulted in approximately $790,000 of revenue recorded in the fourth 
      quarter of 2006 pursuant to the annual revenue requirement true-up that 
      related to prior quarters. In comparison, during the fourth quarter of 
      2005 access revenues benefited from an increase in revenues recorded 
      from the NECA pooling arrangements in which the Company’s 
      ILEC participates. In the fourth quarter of 2005, NECA determined that 
      the ILEC’s required pool settlement 
      contributions for the most recent settled two-year monitoring period 
      were approximately $275,000 lower than had been projected and accrued, 
      resulting in a positive adjustment to our ILEC’s 
      settlement revenues.
    
    
      Operating expenses for the fourth quarter of 2006 increased $1,120,000, 
      or 6.1%, compared to the prior year comparable quarter. Mr. Brown 
      observed that the increase in operating expenses was partially due to an 
      approximately $480,000 increase in combined labor and benefit expenses 
      and a $398,000 increase in depreciation expense. In addition, the 
      Company recorded $298,000 of curtailment expenses during the fourth 
      quarter of 2006 in conjunction with an amendment to the Company’s 
      North Pittsburgh Telephone Company (NPTC) subsidiary’s 
      qualified defined benefit pension plan that effective December 31, 2006 
      froze the benefit accrual for participants not covered by its collective 
      bargaining agreement.
    
    
      Other income (net) for the fourth quarter of 2006 increased $29,000 from 
      the prior year comparable period due primarily to a $983,000 increase in 
      equity income recorded from the Company’s 
      partnership investments (which consist primarily of limited partner 
      interests in three wireless partnerships). The increase in equity income 
      was a result of the continued strong operating results of the wireless 
      partnerships as well as partially due to the fact that the fourth 
      quarter of 2005 was negatively impacted by $422,000 in adjustments to 
      the wireless partnerships’ financial results 
      of operations as a result of the partnerships’ 
      annual audits for the year ended December 31, 2004. The Company also 
      benefited from a $136,000 increase in interest earned from higher 
      interest rates on invested cash and a $67 decrease in interest expense 
      resulting from continued debt reductions. The above-mentioned items were 
      mostly offset by a $1,123,000 decrease in dividend income earned because 
      of the redemption of NPTC’s Rural Telephone 
      Bank (RTB) stock in April of 2006. Prior to the redemption, the Company 
      had during its fourth quarter in recent previous years received annual 
      dividends on the RTB Class C stock that its NPTC subsidiary held.
    
    
      For comparative purposes, the Company’s 
      effective tax rate on income from continuing operations for the fourth 
      quarter of 2006 was 40.3%, as contrasted with 36.7% for the fourth 
      quarter of 2005. The increase in the effective tax rate was partially a 
      result of the elimination of a valuation allowance for state net 
      operating loss carryforwards at one of the Company’s 
      subsidiaries during the fourth quarter of 2005 because of the subsidiary’s 
      current history of producing state taxable income. The increase in the 
      effective tax rate was also partially the result of the impact of a 
      positive true-up of the Company’s income tax 
      liability during the fourth quarter of 2005. These factors contributed 
      to a $510,000 decrease in income tax expense for the fourth quarter of 
      2005.
    
    
      Addressing full year 2006 results, Mr. Brown stated that significant 
      items that were not routine in nature impacted the $8,699,000, or 37.7%, 
      increase in net income. During the second quarter of 2006, the Company’s 
      NPTC subsidiary received a payment of $19,622,000 from the RTB for the 
      redemption of NPTC’s RTB stock and recognized 
      a gain on the full amount of the proceeds received; this gain, on an 
      after tax basis, contributed $11,479,000, or $.76 per share, to the net 
      income recorded during 2006. In addition, depreciation expense decreased 
      $4,616,000 during 2006, mainly as a result of a decrease in depreciation 
      expense associated with certain ILEC assets whose useful lives the 
      Company in October 2005 reevaluated and extended. With respect to the 
      prior year, the second quarter of 2005 was favorably impacted by a 
      settlement agreement reached with a carrier. The $2,404,000 settlement, 
      which covered the exchange of traffic between the Company’s 
      ILEC and the carrier over a multi-year period of time, resulted in a 
      $1,604,000 increase in revenues and an $800,000 decrease in operating 
      expenses; on an after tax basis, the settlement contributed $1,406,000, 
      or $.09 per share, to the net income recorded during 2005.
    
    
      Mr. Brown further reported that operating revenues for 2006 decreased 
      $6,339,000, or 5.8%, from 2005. As noted above, the impact from the 
      aforementioned carrier settlement agreement in 2005 accounted for 
      $1,604,000 of this comparative decrease in 2006. Revenues from all other 
      sources decreased $4,735,000, or 4.4%, in 2006. The majority of this 
      decrease was a result of declines in revenues generated from access 
      services, toll and data PRI circuits.
    
    
      Full year operating expenses for 2006 increased $458,000, or 0.6%, over 
      2005. For comparative purposes, operating expenses in 2005 benefited 
      from the $800,000 cumulative reduction to operating expenses associated 
      with the aforementioned carrier settlement agreement. In 2006, the 
      Company experienced increases in the direct costs associated with the 
      growth in access lines and access line equivalents in the Company’s 
      CLEC edge-out markets and fees paid to terminate the increased voice and 
      Internet traffic generated by the Company’s 
      customer bases. In addition, combined labor and benefit expenses 
      increased approximately $1,470,000, or 5.6%, during 2006 and operational 
      support system expenses increased approximately $285,000 in conjunction 
      with one of the Company’s subsidiaries 
      migrating to a new billing system. Operating expenses for 2006 were 
      favorably impacted by the aforementioned $4,616,000 decrease in 
      depreciation expense.
    
    
      Other income (net) for the full year 2006 increased $22,365,000 over the 
      prior year due primarily to the aforementioned $19,622,000 gain 
      recognized on the redemption of NPTC’s RTB 
      stock. In addition, other income (net) benefited from a $2,622,000 
      increase in equity income recorded from the Company’s 
      partnership investments, a $1,089,000 increase in interest earned from 
      higher interest rates on higher average balances of invested cash, and a 
      $237,000 decrease in interest expense as a result of the Company’s 
      continued debt reduction. These factors were partially offset by a 
      $1,123,000 decrease in dividend income because of the redemption of NPTC’s 
      RTB stock.
    
    
      For comparative purposes, the Company’s 
      effective tax rate on income from continuing operations for the full 
      year 2006 was 41.5%, as contrasted with 39.9% for the full year 2005. 
      The increase in the annual effective tax rate was a result of the 
      previously mentioned elimination of a valuation allowance for state net 
      operating loss carryforwards and positive true-up of the Company’s 
      income tax liability, both of which occurred in the fourth quarter of 
      2005.
    
    
      Turning to operations, Mr. Brown reported that as of December 31, 2006, 
      the Company had a total of 63,317 access lines in its ILEC territory, 
      65,723 CLEC access line equivalents (including 2,332 DSL subscribers) 
      and a total of 15,592 DSL subscribers across all subsidiaries. He stated 
      that with the introduction during 2006 of telephony competition from the 
      two main cable companies whose service areas overlap the majority of the 
      Company’s ILEC territory, ILEC access line 
      losses have accelerated; the Company experienced a 10.1% decrease in 
      access lines in its ILEC territory during 2006. He noted that, in 
      contrast, total CLEC access line equivalents and consolidated DSL 
      subscribers had grown 8.5% and 8.4%, respectively, in 2006.
    
    
      North Pittsburgh Systems, Inc. has total assets of $157 million and 
      operates an integrated high-technology telecommunications business in 
      Western Pennsylvania, providing competitive and local exchange services, 
      long distance and Internet services through its subsidiaries, North 
      Pittsburgh Telephone Company, Penn Telecom, Inc. and Pinnatech, Inc. 
      (d/b/a Nauticom).
    
    
      In addition to historical information, this information may contain 
      forward-looking statements regarding events, performance, financial 
      trends and accounting policies that may affect the Company’s 
      future operating results, financial position or cash flows. Such 
      forward-looking statements are based on assumptions and estimates and 
      involve risks and uncertainties. Various factors could affect future 
      results and could cause actual results to differ materially from those 
      expressed in or implied by the forward-looking statements. Factors that 
      could cause such a difference include, but are not limited to: a change 
      in economic conditions; government and regulatory policies (at both the 
      federal and state levels); unanticipated higher capital spending for, or 
      delays in, the deployment of new technologies; the pricing and 
      availability of equipment, materials and inventories; changes in the 
      competitive environment; and the Company’s 
      ability to continue to penetrate its edge-out markets. This information 
      should be read in conjunction with the Company’s 
      periodic reports filed with the Securities and Exchange Commission, the 
      most recent of which is the Company’s Annual 
      Report on Form 10-K for the year ended December 31, 2006.
    
    
      
        
          NORTH PITTSBURGH SYSTEMS, INC.
        
      
      
        
          SUMMARIZED FINANCIAL INFORMATION
        
      
      
        
          (Unaudited)
        
      
      
        
          (Amounts in Thousands - Except Per Share Data)
        
      
      
        
        
        
        
        
        
        
           
        
      
      
        
        
        
          For the Three Months

          
            Ended December 31
          
        
        
        
        
          For the Twelve Months

          
            Ended December 31
          
        
      
      
        
        
        
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
        
        
           
        
        
          2006 
        
        
        
        
           
        
        
          2005 
        
        
        
        
           
        
        
          2006 
        
        
        
        
           
        
        
          2005 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          Total operating revenues
        
        
          $
        
        
          25,621 
        
        
        
        
          $
        
        
          26,768 
        
        
        
        
          $
        
        
          103,465 
        
        
        
        
          $
        
        
          109,804 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          Total operating expenses
        
        
           
        
        
          19,466 
        
        
        
        
           
        
        
          18,346 
        
        
        
        
           
        
        
          78,524 
        
        
        
        
           
        
        
          78,066 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          Net operating income
        
        
        
        
          
            6,155 
          
        
        
        
        
        
        
          8,422 
        
        
        
        
        
        
          24,941 
        
        
        
        
        
        
          31,738 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          Other income, net
        
        
           
        
        
          2,517 
        
        
        
        
           
        
        
          2,488 
        
        
        
        
           
        
        
          29,276 
        
        
        
        
           
        
        
          6,911 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          
            Income from continuing operations before income taxes
          
        
        
        
        
          
            8,672 
          
        
        
        
        
        
        
          
            10,910 
          
        
        
        
        
        
        
          
            54,217 
          
        
        
        
        
        
        
          
            38,649 
          
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          Provision for income taxes
        
        
           
        
        
          3,498 
        
        
        
        
           
        
        
          4,002 
        
        
        
        
           
        
        
          22,473 
        
        
        
        
           
        
        
          15,407 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          Income from continuing operations
        
        
        
        
          5,174 
        
        
        
        
        
        
          6,908 
        
        
        
        
        
        
          31,744 
        
        
        
        
        
        
          23,242 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          
            Income (loss) from discontinued operations(a)
          
        
        
           
        
        
          
            2 
          
        
        
        
        
           
        
        
          
            (35)
          
        
        
        
        
           
        
        
          
            11 
          
        
        
        
        
           
        
        
          
            (186)
          
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          Net income
        
        
          $
        
        
          5,176 
        
        
        
        
          $
        
        
          6,873 
        
        
        
        
          $
        
        
          31,755 
        
        
        
        
          $
        
        
          23,056 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          Common shares outstanding
        
        
           
        
        
          15,005 
        
        
        
        
           
        
        
          15,005 
        
        
        
        
           
        
        
          15,005 
        
        
        
        
           
        
        
          15,005 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          Basic and diluted earnings per share
        
        
          $
        
        
          .34 
        
        
        
        
          $
        
        
          .46 
        
        
        
        
          $
        
        
          2.12 
        
        
        
        
          $
        
        
          1.54 
        
      
      
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
           
        
      
      
        
          Dividends per share
        
        
          $
        
        
          .20 
        
        
        
        
          $
        
        
          .19 
        
        
        
        
          $
        
        
          1.79 
        
        
        
        
          $
        
        
          .75 
        
      
    
    
      
        
        
        
          December 312006
        
        
        
        
          December 312005
        
      
      
        
        
        
        
        
        
        
           
        
      
      
        
          Cash and temporary investments
        
        
          $
        
        
          49,518 
        
        
        
        
          $
        
        
          55,567 
        
      
      
        
          Total assets
        
        
        
        
          157,433 
        
        
        
        
        
        
          159,200 
        
      
      
        
          Total debt
        
        
        
        
          18,512 
        
        
        
        
        
        
          21,597 
        
      
      
        
          Total shareholders’ equity
        
        
        
        
          101,296 
        
        
        
        
        
        
          99,517 
        
      
    
    
      (a) During the fourth quarter of 2005, the Company sold its business 
      telecommunications equipment operations, which engaged primarily in 
      selling and maintaining Nortel key systems and private branch exchanges. 
      The results of these operations have been classified as discontinued 
      operations.