Forward Looking Statements
From time to time, in reports filed with the SEC, in press releases, and in
other communications to shareholders or the investing public, we may make
forward-looking statements concerning possible or anticipated future financial
performance, business activities or plans. These statements are typically
preceded by the words "expects", "anticipates", "intends", "plans", "believes",
"seeks", "estimates", "targets", "projects", "will", "may", "continues", and
"should", and variations of these words and similar expressions. For these
forward-looking statements, we claim the protection of the safe harbor for
forward-looking statements contained in the federal securities laws.
Shareholders and the investing public should understand that these
forward-looking statements are subject to risks and uncertainties which could
affect our actual results and cause actual results to differ materially from
those indicated in the forward-looking statements. These risks and uncertainties
may include, but are not limited to: i) unfavorable general economic conditions
that could negatively affect our operating results; ii) substantial regulatory
change and increased competition; iii) our possible pursuit of acquisitions
could be expensive or not successful; iv) we may not accurately predict
technological trends or the success of new products; v) shifts in our product
mix may result in declines in our operating profitability; vi) possible
consolidation among our customers; vii) a failure in our operational systems or
infrastructure could affect our operations; viii) data security breaches; ix)
possible replacement of key personnel; x) elimination of governmental network
support we receive; xi) our current debt structure may change due to increases
in interest rates or our ability to comply with lender loan covenants and xii)
possible customer payment defaults.
In addition, forward-looking statements speak only as of the date they are made,
which is the filing date of this Form 10-Q. With the exception of the
requirements set forth in the federal securities laws or the rules and
regulations of the SEC, we do not undertake any obligation to update or review
any forward-looking information, whether as a result of new information, future
events or otherwise.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of
operations stated in this Form 10-Q, are based upon Nuvera's consolidated
unaudited financial statements that have been prepared in accordance with GAAP,
rules and regulations of the SEC and, where applicable, conform to the
accounting principles as prescribed by federal and state telephone utility
regulatory authorities. We presently give accounting recognition to the actions
of regulators where appropriate. The preparation of our financial statements
requires our management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and the related disclosure
of contingent assets and liabilities at the date of the financial statements and
during the reporting period. Actual results may differ from these estimates. Our
senior management has discussed the development and selection of accounting
estimates and the related Management Discussion and Analysis disclosure with our
Audit Committee. For a summary of our significant accounting policies, see Note
1 - "Summary of Significant Accounting Policies" to the Consolidated Financial
Statements contained in our Annual Report on Form 10-K for the year ended
December 31, 2019, which is incorporated herein by reference.
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Results of Operations
Overview
Nuvera has a state-of-the-art; fiber-rich communications network and offers a
diverse array of communications products and services. Our businesses provide
local telephone service and network access to other communications carriers for
connections to our networks. In addition, we provide long distance service,
broadband Internet access, video services, and managed and hosted solutions
services.
Our operations consist primarily of providing services to customers for a
monthly charge. Because many of these services are recurring in nature, backlog
orders and seasonality are not significant factors. Our working capital
requirements include financing the construction of our networks. We also require
capital to maintain our networks and infrastructure; fund the payroll costs of
our highly skilled labor force; maintain inventory to service capital projects,
our network and our telephone equipment customers; pay dividends and provide for
the carrying value of trade accounts receivable, some of which may take several
months to collect in the normal course of business.
Impact of Coronavirus (COVID-19) on Our Business
Through the second quarter of 2020, the COVID-19 pandemic has had significant
impacts on our business. We continue to operate with some modifications because,
based on the various published standards to date, the work our employees are
performing, particularly with respect to providing communication services
required by our customers is critical, essential and life-sustaining. We took
actions intended to protect our employees and our customers that adversely
affected our results. First, we restricted public access to our offices and
halted all customer in-location service installations and performed those
installations remotely, which resulted in lower sales and installations through
the second quarter of 2020. Many of our locations have re-opened to the public
but with restrictions which has caused lower customer traffic and lower sales.
Second, many of our customers either closed their locations or operated at
significantly diminished capacity as a result of local and national actions
taken, such as stay-at-home mandates that reduced business activity, which
negatively impacted sales and increased our customer churn for our legacy voice
and video products. Third, the COVID-19 pandemic has increased traffic on our
networks as the State of Minnesota had issued executive orders requiring
remote-learning for schools, the shutdown of non-essential businesses and a
work-from home order for many workers in multiple industries. Fourth, although
we have seen an increase in customers for our internet product including
increased demand for higher bandwidth speeds, that increase has not been able to
offset the loss in customers we have experienced in our legacy voice and video
products and we have experienced a decline in revenues in the second quarter of
2020 compared to the second quarter of 2019. We also expect that due to number
of job losses due to the COVID-19 pandemic that a number of customers may have
difficulty in paying for their existing services which will affect our ability
to ultimately collect from and retain those customers. Fifth, social actions
taken to mitigate the effects of the pandemic produced increased costs for us
through significant demand for personal protection equipment and sanitation
products to protect our employees and customers. At the end of the second
quarter of 2020, many of the markets in which we operate had begun to ease
restrictions that were in place earlier in the period. This is having two
effects. The first is to improve the outlook in the sales and installation of
our internet products and the second is that the increased traffic on our
networks has somewhat eased as we had made substantial investments in the second
quarter of 2020 to accommodate the increased traffic we had seen on our networks
due to the pandemic. However, as of the date of this filing, viral infections
have begun to increase again and the State of Minnesota has implemented a
mandatory mask requirement for all state residents, which may result in the
resumption of restrictions in certain markets in which we operate. As a result,
there remains significant uncertainty concerning the magnitude of the impact and
duration of the COVID-19 pandemic. Factors deriving from the COVID-19 response
that have or may negatively impact sales and gross margins in the future
include, but are not limited to: limitations on the ability of our suppliers and
content providers to manufacture, or procure from manufactures, the products and
services we sell, or to meet delivery and installation requirements and
commitments; limitations on the ability of our employees to perform their work
due to illness caused by the pandemic or local, state, or federal orders
requiring employees to remain at home; limitations on the ability of carriers to
deliver our products or our inability to install our products; limitations on
the ability of our customers to conduct business and purchase our products and
services; and limitations on the ability of our customers to pay us on a timely
basis. With respect to liquidity, we continue to evaluate and limit costs and
spending across our organization. This includes limiting or eliminating
discretionary spending and non-essential capital investment expenditures. As of
the end of second quarter of 2020, we have our entire $10M bank revolver
available for use in the event that the need arises. We will continue to
actively monitor the situation and may take further actions that alter our
business operations as may be required by federal, state or local authorities or
that we determine are in the best interests of our employees, customers,
suppliers and shareholders. The full extent to which the COVID-19 pandemic and
the various responses to it impacts our business, operations and financial
results will depend on numerous evolving factors that we may not be able to
accurately predict, including: the duration and scope of the pandemic;
governmental, business and individuals' actions that have been and continue to
be taken in response to the pandemic; the availability and cost to access the
capital markets; the effect on our customers and customer demand for and ability
to pay for our services; disruptions or restrictions on our employees' ability
to work and travel; interruptions or restrictions related to the provision of
our services, including impacts on content delivery networks and; and any
stoppages, disruptions or increased costs associated with our operations. During
the COVID-19 crisis, we may not be able to provide the same level of customer
service and product installation, that our customers are used to which could
negatively impact their perception of our service resulting in an increase in
service cancellations. If we need to access the capital markets, there can be no
assurance that financing may be available on attractive terms, if at all. We
will continue to actively monitor the issues raised by the COVID-19 pandemic and
may take further actions that alter our business operations as may be required
by federal, state or local authorities, or that we determine are in the best
interests of our employees, customers, partners and stockholders. While we are
unable to determine or predict the nature, duration or scope of the overall
impact the COVID-19 pandemic will have on our business, results of operations,
liquidity or capital resources, we believe that it is important to share where
our company stands today, how our response to COVID-19 is progressing and how
our operations and financial condition may change as the fight against COVID-19
progresses.
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Executive Summary
Highlights:
? On April 16, 2020, Nuvera received a $2,889,000 loan under the SBA's PPP.
The PPP is designed to provide a direct incentive for small businesses to keep
their workers employed during the COVID-19 crisis. The SBA will forgive loans if
all employees are kept on the payroll for a required period under the program
starting April 16, 2020 and the loan funds are used for payroll, rent and
utilities. Nuvera has retained employment of all employees through this period
and followed all the SBA rules regarding this loan.
? In January 2020, the Company was awarded a broadband grant from the DEED.
The grant will provide up to 36.5% of the total cost of building fiber
connections to homes and businesses for improved high-speed internet in unserved
or underserved communities and businesses in the Company's service area. The
Company is eligible to receive $730,000 of the approximately $2,000,000 total
project costs. The Company will provide the remaining 63.5% matching funds.
Construction and expenditures for these projects will begin in the spring of
2020. We have not yet received any funds for these projects as of June 30,
2020.
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? On August 29, 2019, the Company entered into a second IRSA with CoBank
covering an additional $42,000,000 of our aggregate indebtedness to CoBank at
August 29, 2019. The swap effectively locked in a significant portion of our
variable-rate debt through July, 2025. Under this IRSA, we have changed the
variable rate cash flow exposure on the debt obligations to fixed cash flows.
Under the terms of the IRSA, we pay a fixed contractual interest rate and (i)
make an additional payment if the LIBOR variable rate payment is below a
contractual rate or (ii) receive a payment if the LIBOR variable rate payment is
above the contractual rate.
? On August 27, 2019, the Company announced that it had hired Glenn H. Zerbe
as Chief Executive Officer (CEO) of the Company effective Tuesday, September 3,
2019. Mr. Zerbe most recently served as Vice President of Sales for Frontier
Communications Corporation, where he held positions of increasing responsibility
since joining Frontier in 2011. Prior to his employment with Frontier, Mr. Zerbe
had more than 20 years of sales, marketing and management experience in the
communications industry, with companies such as Spanlink, Cisco Systems, SBC,
AT&T and IBM. Mr. Zerbe replaced former CEO Bill D. Otis who announced his
retirement on April 15, 2019. Mr. Otis's actual retirement date was effective
December 31, 2019. Mr. Otis will continue to provide consulting services to
ensure a smooth and successful leadership transition. Mr. Otis will also
continue to serve on the BOD after the effective date of his retirement. The
Company recognized approximately $1.06 million of one-time expenses associated
with the transition of the new CEO and payments to a former executive officer in
2019. A significant portion of these one-time expenses occurred in the third and
fourth quarters of 2019.
? On February 27, 2019, the Company's BOD authorized and directed the Company
to accept the FCC's revised offer of A-CAM support and the revised associated
service deployment obligations. Under the revised FCC offer Notice, the Company
will be entitled to annually receive (i) $596,084 for its Iowa operations and
(ii) $8,354,481 for its Minnesota operations. The Company will receive the
revised A-CAM offer over the next 10 years starting in 2019. The Company will
use the additional support that it receives through the A-CAM program to
continue to meet its defined broadband build-out obligations, which the Company
is currently completing. A letter of acceptance to elect the revised A-CAM
support was filed by the Company with the FCC on March 8, 2019. The FCC accepted
the Company's letter on March 11, 2019. In the second quarter of 2019, the
Company received a true-up payment for support back to January 1, 2019 and an
increased monthly payment representing the new revised A-CAM support offer.
? Net income for the second quarter of 2020 totaled $2,344,077, which was a
$213,843, or 8.36% decrease compared to the second quarter of 2019. This
decrease was primarily due to a decrease in operating income, partially offset
by a decrease in interest expense, all of which are described below.
? Consolidated revenue for the second quarter of 2020 totaled $16,143,963,
which was a $324,408 or 1.97% decrease compared to the second quarter of 2019.
This decrease was primarily due to decreases in network access and local service
revenues, partially offset by increases in data revenues. In the second quarter
of 2019 we received a one-time true-up payment for past A-CAM offers in 2018 and
2019 which resulted in the increase in A-CAM revenues in 2019 compared to 2020.
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Business Trends
Included below is a synopsis of business trends management believes will
continue to affect our business in 2020.
Voice and switched access revenues are expected to continue to be adversely
impacted by future declines in access lines due to competition in the
communications industry from CATV providers, VoIP providers, wireless, other
competitors, emerging technologies and the on-going effects of COVID-19. As we
experience access line losses, our switched access revenue will continue to
decline consistent with industry-wide trends. A combination of changing minutes
of use, carriers optimizing their network costs, lower demand for dedicated
lines and downward rate pressures may affect our future voice and switched
access revenues. Access line losses totaled 1,529 or 5.87% for the twelve months
ended June 30, 2020 due to the reasons mentioned above.
The expansion of our state-of-the-art; fiber-rich communications network, growth
in broadband customer sales along with continued migration to higher
connectivity speeds and the sales of Internet value-added services such as
on-line data backup, and hosted and managed service solutions are expected to
continue to offset the revenue declines from the access line trends discussed
above.
To be competitive, we continue to emphasize the bundling of our products and
services. Our customers have the option to bundle local phone, high-speed
Internet, long distance and video services. These bundles provide our customers
with one convenient location to obtain all of their communications and
entertainment options, a convenient billing solution and bundle discounts. We
believe that product bundles positively impact our customer retention, and the
associated discounts provide our customers the best value for their
communications and entertainment options. We have a state-of-the-art, fiber-rich
broadband network, which, along with the bundling of our voice, Internet and
video services allows us to meet customer demands for products and services. We
continue to focus on the research and deployment of advanced technological
products that include broadband services, wireless services, private line, VoIP,
digital video, IPTV and hosted and managed services.
We continue to evaluate our operating structure to identify opportunities for
increased operational efficiencies and effectiveness. This involves evaluating
opportunities for task automation, network efficiency and the balancing of our
workforce based on the current needs of our customers.
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Financial results for the Communications Segment are included below:
Communications Segment
Three Months Ended June 30,
2020 2019 Increase (Decrease)
Operating Revenues
Local Service $ 1,682,358 $ 1,827,178 $ (144,820) -7.93%
Network Access 1,584,838 1,778,167 (193,329) -10.87%
Video 3,096,144 3,048,826 47,318 1.55%
Data 5,830,858 5,401,856 429,002 7.94%
A-CAM/FUSF 2,994,620 3,365,229 (370,609) -11.01%
Other Non-Regulated 955,145 1,047,115 (91,970) -8.78%
Total Operating Revenues 16,143,963 16,468,371 (324,408) -1.97%
Cost of Services, Excluding Depreciation
and Amortization 6,881,940 6,826,754 55,186 0.81%
Selling, General and Administrative 2,557,721 2,399,875 157,846 6.58%
Depreciation and Amortization Expenses 3,048,424 3,013,579 34,845 1.16%
Total Operating Expenses 12,488,085 12,240,208 247,877 2.03%
Operating Income $ 3,655,878 $ 4,228,163 $ (572,285) -13.54%
Net Income $ 2,344,077 $ 2,557,920 $ (213,843) -8.36%
Capital Expenditures $ 2,300,017 $ 1,806,798 $ 493,219 27.30%
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Communications Segment
Six Months Ended June 30,
2020 2019 Increase (Decrease)
Operating Revenues
Local Service $ 3,431,054 $ 3,681,111 $ (250,057) -6.79%
Network Access 3,216,780 3,775,422 (558,642) -14.80%
Video 6,077,738 6,037,863 39,875 0.66%
Data 11,482,376 10,803,566 678,810 6.28%
A-CAM/FUSF 6,093,655 6,103,602 (9,947) -0.16%
Other 2,009,418 2,039,225 (29,807) -1.46%
Total Operating Revenues 32,311,021 32,440,789 (129,768) -0.40%
Cost of Services, Excluding Depreciation
and Amortization 13,818,437 13,377,278 441,159 3.30%
Selling, General and Administrative 5,228,589 5,119,606 108,983 2.13%
Depreciation and Amortization Expenses 6,100,526 6,049,904 50,622 0.84%
Total Operating Expenses 25,147,552 24,546,788 600,764 2.45%
Operating Income $ 7,163,469 $ 7,894,001 $ (730,532) -9.25%
Net Income $ 4,964,885 $ 4,850,220 $ 114,665 2.36%
Capital Expenditures $ 4,054,206 $ 4,119,328 $ (65,122) -1.58%
Key metrics
Access Lines 24,540 26,069 (1,529) -5.87%
Video Customers 11,218 12,028 (810) -6.73%
Broadband Customers 27,066 26,091 975 3.74%
Revenue
Local Service - We receive recurring revenue for basic local services that
enable customers to make and receive telephone calls within a defined local
calling area for a flat monthly fee. In addition to subscribing to basic local
telephone services, our customers may choose from a variety of custom calling
features such as call waiting, call forwarding, caller identification and
voicemail. Local service revenue was $1,682,358, which is $144,820 or 7.93%
lower in the three months ended June 30, 2020 compared to the three months ended
June 30, 2019 and was $3,431,054 which is $250,057 or 6.79% lower in the six
months ended June 30, 2020 compared to the six months ended June 30, 2019. These
decreases were primarily due to a decrease in access lines, partially offset by
a combination of rate increases introduced into several of our markets in the
first quarter of 2020.
The number of access lines we serve as a company have been decreasing, which is
consistent with a general industry trend, as customers are increasingly
utilizing other technologies, such as wireless phones and IP services. To help
offset declines in local service revenue, we implemented an overall strategy
that continues to focus on selling a competitive bundle of services. Our focus
on marketing competitive service bundles to our customers creates value for the
customer and aids in the retention of our voice lines.
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Network Access - Weprovide access services to other telecommunications carriers
for the use of our facilities to terminate or originate traffic on our network.
Additionally, we bill SLCs to substantially all of our customers for access to
the public switched network. These monthly SLCs are regulated and approved by
the FCC. In addition, network access revenue was derived from several federally
administered pooling arrangements designed to provide network support and
distribute funding to ILECs. Network access revenue was $1,584,838, which is
$193,329 or 10.87% lower in the three months ended June 30, 2020 compared to the
three months ended June 30, 2019 and was $3,216,780, which is $558,642 or 14.80%
lower in the six months ended June 30, 2020 compared to the six months ended
June 30, 2019. These decreases were primarily due to lower minutes of use on our
network.
In recent years, IXCs and others have become more aggressive in disputing both
interstate carrier access charges and the applicability of access charges to
their network traffic. We believe that long distance and other communication
providers will continue to challenge the applicability of access charges either
before the FCC or directly with the LECs. We cannot predict the likelihood of
future claims and cannot estimate the impact.
Video - We receive monthly recurring revenue from our subscribers for providing
commercial TV programming in competition with local CATV, satellite dish TV and
off-air TV service providers. We serve twenty-two communities with our IPTV
services and five communities with our CATV services. Video revenue was
$3,096,144, which is $47,318 or 1.55% higher in the three months ended June 30,
2020 compared to the three months ended June 30, 2019 and was $6,077,738, which
is $39,875 or 0.66% higher in the six months ended June 30, 2020 compared to the
six months ended June 30, 2019. These increases were primarily due to a
combination of rate increases introduced into several of our markets over the
course of the last several years, partially offset by a decline in customers.
Data - Weprovide high speed Internet to business and residential customers. Our
revenue is earned based on the offering of various flat rate packages based on
the level of service, data speeds and features. We also provide e-mail and
managed services, such as web hosting and design, on-line file back up and
on-line file storage. Data revenue was $5,830,858, which is $429,002 or 7.94%
higher in the three months ended June 30, 2020 compared to the three months
ended June 30, 2019 and was $11,482,376, which is $678,810 or 6.28% higher in
the six months ended June 30, 2020 compared to the six months ended June 30,
2019. These increases were primarily due to an increase in data customers. We
expect continued growth in this area will be driven by expansion of service
areas, our aggressively packaging service bundles and marketing managed service
solutions to businesses.
A-CAM/FUSF - Prior to 2017, the Company received support from the FUSF based on
the pooling and redistribution of revenues based on a company's actual or
average costs. With the acquisition of Scott-Rice, the company now receives FUSF
for Scott-Rice based on their average costs. See Note 2 - "Revenue Recognition"
for a discussion regarding FUSF.
A-CAM/FUSF support totaled $2,994,620, which is $370,609 or 11.01% lower in the
three months ended June 30, 2020 compared to the three months ended June 30,
2019. A-CAM/FUSF support totaled $6,093,655, which is $9,947 or 0.16% lower in
the six months ended June 30, 2020 compared to the six months ended June 30,
2019. In the second quarter of 2019 we received a one-time true-up payment for
past A-CAM offers in 2018 and 2019 which resulted in the increase in A-CAM
revenues in 2019 compared to 2020.
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Other Revenue - Our customers are billed for toll and long-distance services on
either a per call or flat-rate basis. This also includes the offering of
directory assistance, operator service and long distance private lines. We also
generate revenue from directory publishing, sales and serviceof CPE, bill
processing and other customer services. Our directory publishing revenue in our
telephone directories recurs monthly. We also provide retail sales and service
of cellular phones and accessories through Telespire, a national wireless
provider. We resell these wireless services as Nuvera Wireless, our branded
product. We receive both recurring revenue for our wireless services, as well as
revenue collected for the sales of wireless phones and accessories. Other
revenue was $955,145, which is $91,970 or 8.78% lower in the three months ended
June 30, 2020 compared to the three months ended June 30, 2019 and was
$2,009,418, which is $29,807 or 1.46% lower in the six months ended June 30,
2020 compared to the six months ended June 30, 2019. These decreases were
primarily due to decreases in the sales and installation of CPE due to the
on-going effects of COVID-19.
Cost of Services (excluding Depreciation and Amortization)
Cost of services (excluding depreciation and amortization) was $6,881,940, which
is $55,186 or 0.81% higher in the three months ended June 30, 2020 compared to
the three months ended June 30, 2019 and was $13,818,437, which is $441,159 or
3.30% higher in the six months ended June 30, 2020 compared to the six months
ended June 30, 2019. These increases were primarily due to higher programming
costs from video content providers, higher costs associated with increased
maintenance and support agreements on our equipment and software, and the cost
to maintain a highly-skilled workforce, partially offset by cost containment
measures implemented by the Company due to COVID-19.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2,557,721, which is $157,846
or 6.58% higher in the three months ended June 30, 2020 compared to the three
months ended June 30, 2019 and was $5,228,589, which is $108,983 or 2.13% higher
in the six months ended June 30, 2020 compared to the six months ended June 30,
2019. These increases were primarily due to higher costs associated with
professional and consulting services.
Depreciation and Amortization
Depreciation and amortization was $3,048,424, which is $34,845 or 1.16% higher
in the three months ended June 30, 2020 compared to the three months ended June
30, 2019 and was $6,100,526, which is $50,622 or 0.84% higher in the six months
ended June 30, 2020 compared to the six months ended June 30, 2019. These
increases were primarily due to increases in our broadband property, plant and
equipment, reflecting our continual investment in technology and infrastructure
in order to meet our customers' demands for products and services.
Operating Income
Operating income was $3,655,878, which is $572,285 or 13.54% lower in the three
months ended June 30, 2020 compared to the three months ended June 30, 2019.
Operating income was $7,163,469, which is $730,532 or 9.25% lower in the six
months ended June 30, 2020 compared to the six months ended June 30, 2019. These
decreases were primarily due to lower operating revenues and higher operating
expenses, all of which are described above.
See Consolidated Statements of Income (for discussion below)
Other Income (Expense) and Interest Expense
Interest expense was $610,694, which is $283,874 or 31.73% lower in the three
months ended June 30, 2020 compared to the three months ended June 30, 2019 and
was $1,294,357, which is $538,032 or 29.36% lower in the six months ended June
30, 2020 compared to the six months ended June 30, 2019. These decreases were
primarily due to lower outstanding debt balances and lower interest rates in
connection with our credit facility with CoBank.
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Interest and dividend income was $52,336, which is $37,945 or 42.03% lower in
the three months ended June 30, 2020 compared to the three months ended June 30,
2019 and was $98,529, which is $12,529 or 11.28% lower in the six months ended
June 30, 2020 compared to the six months ended June 30, 2019. These decreases
were primarily due to decreases in dividend income earned on our investments due
to the timing of those dividend payments.
Other income for the six months ended June 30, 2020 and 2019 included a
patronage credit earned with CoBank as a result of our debt agreements with
them. The patronage credit allocated and received in 2020 was $647,369, compared
to $403,786 allocated and received in 2019. CoBank determines and pays the
patronage credit annually, generally in the first quarter of the calendar year,
based on its results from the prior year. We record these patronage credits as
income when they are received.
Other investment income was $78,883, which is $10,522 or 11.77% lower in the
three months ended June 30, 2020 compared to the three months ended June 30,
2019 and was $160,214, which is $27,703 or 14.74% lower in the six months ended
June 30, 2020 compared to the six months ended June 30, 2019. Other investment
income is primarily from our equity ownership in several partnerships and
limited liability companies.
Income Taxes
Income tax expense was $911,580, which is $83,162 or 8.36% lower in the three
months ended June 30, 2020 compared to the three months ended June 30, 2019.
This decrease was primarily due to a decrease operating income, partially offset
by a decrease in interest expense. Income tax expense was $1,930,781, which is
$44,590 or 2.36% higher in the six months ended June 30, 2020 compared to the
six months ended June 30, 2019. This increase was primarily due to an increase
CoBank patronage dividends and a decrease in interest expense, partially offset
by a decrease in operating income. The effective income tax rate for the six
months ending June 30, 2020 and 2019 was approximately 28.0%. The effective
income tax rate differs from the federal statutory income tax rate primarily due
to state income taxes and other permanent differences.
Liquidity and Capital Resources
Capital Structure
Nuvera's total capital structure (long-term and short-term debt obligations, net
of unamortized loan fees plus stockholders' equity) was $139,222,874 at June 30,
2020, reflecting 59.6% equity and 40.4% debt. This compares to a capital
structure of $136,342,185 at December 31, 2019, reflecting 59.2% equity and
40.8% debt. In the communications industry, debt financing is most often based
on operating cash flows. Specifically, our current use of our credit facilities
is in a ratio of approximately 2.15 times debt to EBITDA (as defined in the loan
documents), which is well within acceptable limits for our agreements and our
industry. Our management believes adequate operating cash flows and other
internal and external resources, such as our cash on hand, revolving credit
facility and funds received under the PPP Loan in April (which were used to fund
payroll costs), are available to finance ongoing operating requirements,
including capital expenditures, business development, debt service and temporary
financing of trade accounts receivables.
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Liquidity Outlook
Our short-term and long-term liquidity needs arise primarily from (i) capital
expenditures; (ii) working capital requirements needed to support the growth of
our business; (iii) debt service; (iv) dividend payments on our stock and (v)
potential acquisitions.
Our primary sources of liquidity for the six months ended June 30, 2020 were
proceeds from cash generated from operations and cash reserves held at the
beginning of the period. At June 30, 2020 we had a working capital surplus of
$2,947,882. Also, at June 30, 2020, we had $10.0 million available under our
revolving credit facility to fund any short-term working capital needs. The
working capital surplus as of June 30, 2020 was primarily the result of
increased cash balances.
Cash Flows
We expect our liquidity needs to include capital expenditures, payment of
interest and principal on our indebtedness, income taxes and dividends. We use
our cash inflow to manage the temporary increases in cash demand and utilize our
revolving credit facility to manage more significant fluctuations in liquidity
caused by growth initiatives.
While it is often difficult for us to predict the impact of general economic
conditions, including the impact of COVID-19 on our business, we believe that we
will be able to meet our current and long-term cash requirements primarily
through our operating cash flows and the receipt of PPP Loan funds (which were
used to fund payroll costs), and anticipate that we will be able to plan for and
match future liquidity needs with future internal and available external
resources.
We periodically seek to add growth initiatives by either expanding our network
or our markets through organic or internal investments or through strategic
acquisitions. We believe we can adjust the timing or the number of our
initiatives according to any limitations which may be imposed by our capital
structure or sources of financing.
Impact of COVID-19 on Our Cash Flows
The global spread of COVID-19 and the various attempts to contain it have
created and are expected to create volatility with our future cash flows. Our
future cash flows are expected to be impacted by our customer's inability to pay
for their existing services or their inability to acquire our services due to
their personal financial hardships created by COVID-19. We may not be able to
expand our network, acquire new customers or service existing customers based on
our future cash flow position. We have implemented a Company policy whereby we
are conserving cash by eliminating discretionary spending and limiting our CapEx
spending to critical projects including fulfilling our A-CAM build requirements.
We are experiencing disruptions in our business as we implement these
modifications to preserve adequate liquidity and ensure that our business can
continue to operate during this uncertain time.
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The following table summarizes our cash flow:
Six Months Ended June 30,
2020 2019
Net cash provided by (used in):
Operating activities $ 8,124,967 $ 11,901,270
Investing activities (3,743,212) (3,835,365)
Financing activities (340,398) (2,466,520)
Increase in cash $ 4,041,357 $ 5,599,385Cash Flows from Operating Activities
Cash generated by operations in the first six months of 2020 was $8,124,967,
compared to cash generated by operations of $11,901,270 in the first six months
of 2019. The decrease in cash from operating activities in 2020 was primarily
due to the timing of receipts of receivables, payables and income taxes.
Cash generated by operations continues to be our primary source of funding for
existing operations, capital expenditures, debt service and dividend payments to
stockholders. Cash at June 30, 2020 was $7,034,357 compared to $2,993,000 at
December 31, 2019.
Cash Flows Used in Investing Activities
We operate in a capital intensive business. We continue to upgrade our local
networks for changes in technology to provide advanced services to our
customers.
Cash flows used in investing activities were $3,743,212 during the first six
months of 2020 compared to $3,835,365 during the first six months of 2019.
Capital expenditures relating to on-going operations were $4,054,206 for the six
months ended June 30, 2020 compared to $4,119,328 for the six months ended June
30, 2019. Our investing expenditures are financed with cash flows from our
current operations and advances on our line of credit when needed. We believe
that our current operations will provide adequate cash flows to fund our plant
additions for the remainder of this year; however, funding from our revolving
credit facility is available if the timing of our cash flows from operations
does not match our cash flow requirements. As of June 30, 2020, we had $10.0
million available under our existing credit facility to fund capital
expenditures and other operating needs.
Cash Flows Used in Financing Activities
Cash used in financing activities for the six months ended June 30, 2020 was
$340,398. This included long-term debt repayments of $2,316,615, the issuance of
debt (PPP loan funds) of $2,889,000, the repurchase of common stock of $238,612
and the distribution of $674,171 of dividends to stockholders. Cash used in
financing activities for the six months ended June 30, 2019 was $2,466,520. This
included long-term debt repayments of $1,152,600, loan origination fees of
$18,084 and the distribution of $1,295,836 of dividends to our stockholders.
Working Capital
We had a working capital surplus (i.e. current assets minus current liabilities)
of $2,947,882 as of June 30, 2020, with current assets of approximately $13.8
million and current liabilities of approximately $10.8 million, compared to a
working capital deficit of $2,146,745 as of December 31, 2019. The ratio of
current assets to current liabilities was 1.27 and 0.81 as of June 30, 2020 and
December 31, 2019. The working capital surplus at June 30, 2020 was primarily
the result of increased cash balances.
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At June 30, 2020 and December 31, 2019 we were in compliance with all stipulated
financial ratios in our loan agreements.
Dividends and Restrictions
On May 6, 2020, the Company's BOD decided that, given the continuing uncertainty
about the severity and duration of the COVID-19 pandemic and its potential
effect on the country's economy generally and on the Company's future sales and
profitability specifically, as well as the Company's need to preserve its
liquidity and capital resources, the Company will (i) suspend declaring and
paying a dividend in the second quarter of 2020 and (ii) temporarily suspend
future purchases under its Stock Repurchase Program. The Company will continue
to monitor the COVID-19 pandemic and make decisions about future dividends and
stock repurchases as more information becomes available.
We declared a quarterly dividend of $0.13 per share for the first quarter of
2020, which totaled $674,171 for the first quarter. We declared a quarterly
dividend of $0.13 per share for the second quarter of 2019 and $0.12 per share
for the first quarter of 2019, which totaled $674,805 for the second quarter and
$621,031 for the first quarter.
Dividends on our common stock are not cumulative.
There are security and loan agreements underlying our current CoBank credit
facility that contain restrictions on our distributions to stockholders and
investment in, or loans, to others. See below and Note 6 - "Secured Credit
Facility" for additional information.
Our loan agreements include restrictions on our ability to pay cash dividends to
our stockholders. However, we are allowed to pay dividends (a) (i) in an amount
up to $2,700,000 in any year if our "Total Leverage Ratio," that is, the ratio
of our "Indebtedness" to "EBITDA" - as defined in the loan documents, is greater
than 2.00 to 1.00, and (ii) in any amount if our Total Leverage Ratio is less
than 2.00 to 1.00, and (b) in either case, if we are not in default or potential
default under the loan agreements. Our current Total Leverage Ratio at June 30,
2020 is 2.15.
Our BOD reviews quarterly dividend declarations based on our anticipated
earnings, capital requirements and our operating and financial conditions. The
cash requirements of our current dividend payment practices are in addition to
our other expected cash needs.
Long-Term Debt
See Note 6 - "Secured Credit Facility" for information pertaining to our
long-term debt.
Recent Accounting Developments
See Note 1 - "Basis of Presentation and Consolidation" for a discussion of
recent accounting developments.
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NUVERA COMMUNICATIONS, INC. 
