SEC Filing | Uniti Group, Inc.

View:

Download DOC

Download PDF

Download XLS

Download XBRL

unit-10q_20200630.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number: 001-36708

Uniti Group Inc.

(Exact name of registrant as specified in its charter)

Maryland	46-5230630
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
10802 Executive Center Drive Benton Building Suite 300 Little Rock, Arkansas	72211
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (501) 850-0820

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	UNIT	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 31, 2020, the registrant had 194,149,566 shares of common stock, $0.0001 par value per share, outstanding.

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements as defined under U.S. federal securities law. Forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief or expectations, including, but not limited to, statements regarding: our expectations regarding the settlement we have announced with Windstream Holdings, Inc. (“Windstream Holdings”) and its subsidiaries (Windstream Holdings, together with its subsidiaries, “Windstream”) and our ability to satisfy the conditions precedent to its effectiveness, and Windstream’s ability to implement a successful plan of reorganization and emerge from bankruptcy (including the timing thereof); if the settlement is not effected, the bankruptcy and Windstream’s performance under its long-term exclusive triple-net lease with us (the “Master Lease”); if the settlement is not effected, our expectations with respect to the treatment of the Master Lease in Windstream’s petitions for relief under Chapter 11 of the Bankruptcy Code, including with respect to Windstream’s claims that the Master Lease should be recharacterized as a financing transaction, that the Master Lease is a lease of personal property and that rent payments and tenant capital improvements made by Windstream under the Master Lease constituted constructive fraudulent transfers and that we are in breach of certain of our obligations under the Master Lease; our expectations about our ability to maintain our status as a real estate investment trust (a “REIT”); our expectations regarding the effect of the COVID-19 pandemic on our results of operations and financial condition, including the potential need to perform an interim goodwill analysis and report an impairment charge related thereto; our expectations regarding the future growth and demand of the telecommunication industry, future financing plans, business strategies, growth prospects, operating and financial performance, and our future liquidity needs and access to capital; our expectations regarding the probability of our obligation to pay contingent consideration upon Tower Cloud, Inc.'s ("Tower Cloud") achievement of certain defined operational and financial milestones; expectations regarding future deployment of fiber strand miles and small cell networks and recognition of revenue related thereto; expectations regarding levels of capital expenditures; expectations regarding the deductibility of goodwill for tax purposes; expectations regarding reclassification of accumulated other comprehensive income (loss) related to derivatives to interest expense; expectations regarding the amortization of intangible assets; our expectations regarding the wind down of the Consumer CLEC business; and expectations regarding the payment of dividends.

Words such as “anticipate(s),” “expect(s),” “intend(s),” “plan(s),” “believe(s),” “may,” “will,” “would,” “could,” “should,” “seek(s)” and similar expressions, or the negative of these terms, are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could lead to actual results differing materially from those projected, forecasted or expected. Although we believe that the assumptions underlying the forward-looking statements are reasonable, we can give no assurance that our expectations will be attained. Factors which could have a material adverse effect on our operations and future prospects or which could cause actual results to differ materially from our expectations include, but are not limited to:

•

the future prospects of our largest customer, Windstream Holdings, which, following a finding that it is in default of certain of its debt, on February 25, 2019, and along with all of its subsidiaries, filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code;

•

the risk that our settlement with Windstream is not implemented because the conditions to the implementation of the settlement are not satisfied and/or Windstream is not able to successfully emerge and the settlement is not implemented;

•

adverse impacts of the COVID-19 pandemic on our employees, our business, the business of our customers and other business partners and the global financial markets;

•

the ability and willingness of our customers to meet and/or perform their obligations under any contractual arrangements entered into with us, including master lease arrangements;

•

the ability of our customers to comply with laws, rules and regulations in the operation of the assets we lease to them;

•

the ability and willingness of our customers to renew their leases with us upon their expiration, and the ability to reposition our properties on the same or better terms in the event of nonrenewal or in the event we replace an existing tenant;

•

our ability to renew, extend or retain our contracts or to obtain new contracts with significant customers (including customers of the businesses that we acquire);

•

the availability of and our ability to identify suitable acquisition opportunities and our ability to acquire and lease the respective properties on favorable terms or operate and integrate the acquired businesses;

•

our ability to generate sufficient cash flows to service our outstanding indebtedness and fund our capital funding commitments;

Table of Contents

•

our ability to access debt and equity capital markets;

•

adverse impacts of changes to our business, economic trends or key assumptions regarding our estimates of fair value, including potential impacts of recent developments surrounding Windstream that could result in an impairment charge in the future, which could have a significant impact to our reported earnings;

•

the impact on our business or the business of our customers as a result of credit rating downgrades, and fluctuating interest rates;

•

adverse impacts of litigation or disputes involving us or our customers;

•

our ability to retain our key management personnel;

•

our ability to maintain our status as a REIT, including as a result of the effects of the recent events with respect to our largest customer, Windstream Holdings;

•

changes in the U.S. tax law and other federal, state or local laws, whether or not specific to REITs, including the impact of the 2017 U.S. tax reform legislation and the Coronavirus Aid, Relief, and Economic Security Act or the “CARES” Act;

•

changes in the accounting treatment of our settlement with Windstream;

•

covenants in our debt agreements that may limit our operational flexibility;

•

the possibility that we may experience equipment failures, natural disasters, cyber attacks or terrorist attacks for which our insurance may not provide adequate coverage;

•

the risk that we fail to fully realize the potential benefits of or have difficulty in integrating the companies we acquire;

•

other risks inherent in the communications industry and in the ownership of communications distribution systems, including potential liability relating to environmental matters and illiquidity of real estate investments; and

•

additional factors discussed in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q and in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2019, and Part II, Item 1A “Risk Factors” our Quarterly Report for the quarter ended March 31, 2020, as well as those described from time to time in our future reports filed with the U.S. Securities and Exchange Commission (“SEC”).

Forward-looking statements speak only as of the date of this Quarterly Report. Except in the normal course of our public disclosure obligations, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements to reflect any change in our expectations or any change in events, conditions or circumstances on which any such statement is based.

Table of Contents

Uniti Group Inc.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	5
	Uniti Group Inc.
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of (Loss) Income	6
	Condensed Consolidated Statements of Comprehensive (Loss) Income	7
	Condensed Consolidated Statements of Shareholders’ Deficit	8
	Condensed Consolidated Statements of Cash Flows	11
	Notes to Condensed Consolidated Financial Statements	13
	1.Organization and Description of Business	13
	2.Basis of Presentation and Summary of Significant Accounting Policies	13
	3.Revenues	16
	4.Leases	18
	5.Asset Dispositions	21
	6.Investment in Unconsolidated Partnership	21
	7.Assets and Liabilities Held for Sale	22
	8.Fair Value of Financial Instruments	22
	9.Property Plant and Equipment	24
	10.Derivative Instruments and Hedging Activities	25
	11.Goodwill and Intangible Assets	26
	12.Notes and Other Debt	27
	13.Earnings Per Share	31
	14.Segment Information	32
	15.Commitments and Contingencies	35
	16.Accumulated Other Comprehensive (Loss) Income	39
	17.Subsequent Events	40

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
	1.Overview	41
	2.Results of Operations	44
	3.Non-GAAP Financial Measures	56
	4.Liquidity and Capital Resources	58
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62
Item 4.	Controls and Procedures	63

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	64
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3.	Defaults Upon Senior Securities	67
Item 4.	Mine Safety Disclosures	67
Item 5.	Other Information	67
Item 6.	Exhibits	68

Signatures		68

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Uniti Group Inc.

Condensed Consolidated Balance Sheets

(Thousands, except par value)	(Unaudited) June 30, 2020			December 31, 2019
Assets:
Property, plant and equipment, net	$	3,098,191		$	3,409,945
Cash and cash equivalents		88,269			142,813
Accounts receivable, net		72,353			77,623
Goodwill		690,672			690,672
Intangible assets, net		346,052			531,979
Straight-line revenue receivable		3,287			2,408
Other assets, net		126,944			161,560
Assets held for sale		364,423			-
Investment in unconsolidated entity		26,004			-
Total Assets	$	4,816,195		$	5,017,000
Liabilities and Shareholders' Deficit:
Liabilities:
Accounts payable, accrued expenses and other liabilities, net	$	168,288		$	227,121
Settlement payable (Note 15)		650,000			-
Accrued interest payable		97,889			28,800
Deferred revenue		987,318			1,070,671
Derivative liability, net		28,464			23,679
Dividends payable		29,634			43,282
Deferred income taxes		13,222			24,431
Finance lease obligations		50,436			52,994
Contingent consideration		10,562			11,507
Notes and other debt, net		4,819,654			5,017,679
Liabilities held for sale		177,866			-
Total liabilities		7,033,333			6,500,164

Commitments and contingencies (Note 15)

Shareholders' Deficit:
Preferred stock, $0.0001 par value, 50,000 shares authorized, no shares issued and outstanding		-			-
Common stock, $0.0001 par value, 500,000 shares authorized, issued and outstanding: 192,523 shares at June 30, 2020 and 192,142 at December 31, 2019		19			19
Additional paid-in capital		957,656			951,295
Accumulated other comprehensive loss		(25,937	)		(23,442	)
Distributions in excess of accumulated earnings		(3,219,623	)		(2,494,740	)
Total Uniti shareholders' deficit		(2,287,885	)		(1,566,868	)
Noncontrolling interests:
Operating partnership units		70,622			83,704
Cumulative non-voting convertible preferred stock, $0.01 par value, 3 shares authorized, 1 issued and outstanding		125			-
Total shareholders' deficit		(2,217,138	)		(1,483,164	)
Total Liabilities and Shareholders' Deficit	$	4,816,195		$	5,017,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

Uniti Group Inc.

Condensed Consolidated Statements of (Loss) Income

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(Thousands, except per share data)	2020			2019			2020			2019
Revenues:
Leasing	$	185,320		$	177,042		$	369,672		$	353,125
Fiber Infrastructure		79,140			81,327			156,547			158,160
Tower		2,392			3,146			6,112			8,226
Consumer CLEC		(32	)		2,899			651			5,934
Total revenues		266,820			264,414			532,982			525,445
Costs and Expenses:
Interest expense		107,243			97,729			285,636			182,187
Depreciation and amortization		84,969			102,578			171,090			206,405
General and administrative expense		27,894			26,428			55,027			50,654
Operating expense (exclusive of depreciation and amortization)		40,167			40,163			80,477			78,581
Settlement expense (Note 15)		650,000			-			650,000			-
Transaction related and other costs		18,556			7,035			34,528			13,704
Gain on sale of real estate (Note 5)		(63,818	)		(28,790	)		(63,818	)		(28,790	)
Other (income) expense		6,013			(28,119	)		9,088			(31,232	)
Total costs and expenses		871,024			217,024			1,222,028			471,509

(Loss) income before income taxes		(604,204	)		47,390			(689,046	)		53,936
Income tax (benefit) expense		(5,875	)		7,843			(10,451	)		11,897
Net (loss) income		(598,329	)		39,547			(678,595	)		42,039
Net (loss) income attributable to noncontrolling interests		(10,585	)		830			(11,998	)		880
Net (loss) income attributable to shareholders		(587,744	)		38,717			(666,597	)		41,159
Participating securities' share in earnings		(424	)		(223	)		(624	)		(251	)
Dividends declared on convertible preferred stock		(1	)		-			(4	)		(656	)
Amortization of discount on convertible preferred stock		-			(248	)		-			(993	)
Net (loss) income attributable to common shareholders	$	(588,169	)	$	38,246		$	(667,225	)	$	39,259

(Loss) earnings per common share:
Basic	$	(3.06	)	$	0.21		$	(3.47	)	$	0.22
Diluted	$	(3.06	)	$	0.20		$	(3.47	)	$	0.21

Weighted-average number of common shares outstanding:
Basic		192,479			182,971			192,358			182,597
Diluted		192,479			193,105			192,358			192,276

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

Uniti Group Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(Thousands)	2020			2019			2020			2019
Net (loss) income	$	(598,329	)	$	39,547		$	(678,595	)	$	42,039
Other comprehensive income (loss):
Unrealized loss on derivative contracts		-			(28,363	)		(7,036	)		(50,049	)
Changes in foreign currency translation		-			(843	)		-			(63	)
Interest rate swap termination		2,830			-			4,496			-
Other comprehensive income (loss):		2,830			(29,206	)		(2,540	)		(50,112	)
Comprehensive (loss) income		(595,499	)		10,341			(681,135	)		(8,073	)
Comprehensive (loss) income attributable to noncontrolling interest		(10,535	)		245			(12,043	)		(167	)
Comprehensive (loss) income attributable to common shareholders	$	(584,964	)	$	10,096		$	(669,092	)	$	(7,906	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

Uniti Group Inc.

Condensed Consolidated Statements of Shareholders’ Deficit

(unaudited)

	For the Three Months Ended June 30,
(Thousands, except share data)	Preferred Stock				Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Distributions in Excess of Accumulated Earnings			Noncontrolling Interest - OP Units			Noncontrolling Interest - Non-voting Preferred Shares		Total Shareholders' Deficit
	Shares		Amount		Shares		Amount
Balance at March 31, 2019		-	$	-		182,670,494	$	18	$	790,347		$	9,661		$	(2,442,564	)	$	91,756		$	-	$	(1,550,782	)
Impact of change in accounting standard, net of tax		-		-		-		-		-			-			(112	)		-			-		(112	)
Net income		-		-		-		-		-			-			38,717			830			-		39,547
Amortization of discount of convertible preferred stock		-		-		-		-		(248	)		-			-			-			-		(248	)
Other comprehensive loss		-		-		-		-		-			(28,621	)		-			(585	)		-		(29,206	)
Common stock dividends declared ($0.05 per share)		-		-		-		-		-			-			(9,148	)		-			-		(9,148	)
Distributions to noncontrolling interest		-		-		-		-		-			-			-			(187	)		-		(187	)
Exchange of noncontrolling interest		-		-		390,788		-		4,260			-			-			(4,260	)		-		-
Convertible preferred stock dividends