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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 September 30, 2020

OR

 

 

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 November 2, 2020, the registrant had 232,749,009 shares of common stock, $0.0001 par value per share, outstanding.

 


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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 entered into with Windstream Holdings, Inc. (together with Windstream Holdings II, LLC, its successor in interest, and subsidiaries, “Windstream”);  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 effect of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) on our tax position; 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, following its emergence from bankruptcy;

 

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; 

 

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; 

 

2


Table of Contents

 

 

our ability to maintain our status as a REIT;

 

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 CARES Act;

 

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 Reports for the quarters ended March 31, 2020 and June 30, 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.

 

3


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 Income (Loss)

6

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

7

 

Condensed Consolidated Statements of Shareholders’ Deficit

8

 

Condensed Consolidated Statements of Cash Flows

10

 

Notes to Condensed Consolidated Financial Statements

11

 

1.Organization and Description of Business

11

 

2.Basis of Presentation and Summary of Significant Accounting Policies

11

 

3.Revenues

13

 

4.Leases

16

 

5.Asset Dispositions

20

 

6.Investments in Unconsolidated Entities

22

 

7.Fair Value of Financial Instruments

22

 

8.Property Plant and Equipment

25

 

9.Derivative Instruments and Hedging Activities

25

 

10.Goodwill and Intangible Assets

27

 

11.Notes and Other Debt

28

 

12.Earnings Per Share

32

 

13.Segment Information

33

 

14.Commitments and Contingencies

36

 

15.Accumulated Other Comprehensive (Loss) Income

39

 

16.Capital Stock

40

 

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

45

 

3.Non-GAAP Financial Measures

58

 

4.Liquidity and Capital Resources

60

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

66

Item 4.

Controls and Procedures

66

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

67

Item 1A.

Risk Factors

68

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

68

Item 3.

Defaults Upon Senior Securities

68

Item 4.

Mine Safety Disclosures

68

Item 5.

Other Information

69

Item 6.

Exhibits

69

 

 

 

Signatures

70

 

 

 

 

4


Table of Contents

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Uniti Group Inc.

Condensed Consolidated Balance Sheets

 

(Thousands, except par value)

 

(Unaudited)

September 30, 2020

 

 

December 31, 2019

 

Assets:

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

3,287,300

 

 

$

3,409,945

 

Cash and cash equivalents

 

 

195,570

 

 

 

142,813

 

Accounts receivable, net

 

 

61,320

 

 

 

77,623

 

Goodwill

 

 

690,672

 

 

 

690,672

 

Intangible assets, net

 

 

405,833

 

 

 

531,979

 

Straight-line revenue receivable

 

 

4,249

 

 

 

2,408

 

Other assets, net

 

 

126,419

 

 

 

161,560

 

Investments in unconsolidated entities

 

 

66,602

 

 

 

-

 

Total Assets

 

$

4,837,965

 

 

$

5,017,000

 

Liabilities and Shareholders' Deficit:

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities, net

 

$

161,330

 

 

$

227,121

 

Settlement payable (Note 14)

 

 

438,577

 

 

 

-

 

Intangible liability, net

 

 

176,000

 

 

 

-

 

Accrued interest payable

 

 

96,394

 

 

 

28,800

 

Deferred revenue

 

 

999,122

 

 

 

1,070,671

 

Derivative liability, net

 

 

25,829

 

 

 

23,679

 

Dividends payable

 

 

36,253

 

 

 

43,282

 

Deferred income taxes

 

 

15,924

 

 

 

24,431

 

Finance lease obligations

 

 

49,412

 

 

 

52,994

 

Contingent consideration

 

 

3,880

 

 

 

11,507

 

Notes and other debt, net

 

 

4,830,371

 

 

 

5,017,679

 

Total liabilities

 

 

6,833,092

 

 

 

6,500,164

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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: 231,244 shares at September 30, 2020 and 192,142 at December 31, 2019

 

 

23

 

 

 

19

 

Additional paid-in capital

 

 

1,205,631

 

 

 

951,295

 

Accumulated other comprehensive loss

 

 

(23,155

)

 

 

(23,442

)

Distributions in excess of accumulated earnings

 

 

(3,248,089

)

 

 

(2,494,740

)

Total Uniti shareholders' deficit

 

 

(2,065,590

)

 

 

(1,566,868

)

Noncontrolling interests:

 

 

 

 

 

 

 

 

Operating partnership units

 

 

70,338

 

 

 

83,704

 

Cumulative non-voting convertible preferred stock, $0.01 par value, 3 shares authorized, 1 issued and outstanding

 

 

125

 

 

 

-

 

Total shareholders' deficit

 

 

(1,995,127

)

 

 

(1,483,164

)

Total Liabilities and Shareholders' Deficit

 

$

4,837,965

 

 

$

5,017,000

 

 

 

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

 

5


Table of Contents

 

 

Uniti Group Inc.

Condensed Consolidated Statements of Income (Loss)

(unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Thousands, except per share data)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leasing

 

$

182,370

 

 

$

179,648

 

 

$

552,042

 

 

$

532,773

 

Fiber Infrastructure

 

 

76,395

 

 

 

77,979

 

 

 

232,942

 

 

 

236,139

 

Tower

 

 

-

 

 

 

3,273

 

 

 

6,112

 

 

 

11,499

 

Consumer CLEC

 

 

-

 

 

 

2,729

 

 

 

651

 

 

 

8,663

 

Total revenues

 

 

258,765

 

 

 

263,629

 

 

 

791,747

 

 

 

789,074

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

102,791

 

 

 

104,655

 

 

 

388,427

 

 

 

286,842

 

Depreciation and amortization

 

 

79,880

 

 

 

101,166

 

 

 

250,970

 

 

 

307,571

 

General and administrative expense

 

 

26,659

 

 

 

25,267

 

 

 

81,686

 

 

 

75,921

 

Operating expense (exclusive of depreciation and amortization)

 

 

37,831

 

 

 

39,948

 

 

 

118,308

 

 

 

118,529

 

Settlement expense (Note 14)

 

 

-

 

 

 

-

 

 

 

650,000

 

 

 

-

 

Transaction related and other costs

 

 

20,816

 

 

 

15,179

 

 

 

55,344

 

 

 

28,883

 

Gain on sale of real estate (Note 5)

 

 

(22,908

)

 

 

(205

)

 

 

(86,726

)

 

 

(28,995

)

Other (income) expense

 

 

3,098

 

 

 

(859

)

 

 

12,186

 

 

 

(32,091

)

      Total costs and expenses

 

 

248,167

 

 

 

285,151

 

 

 

1,470,195

 

 

 

756,660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes and equity in earnings (loss) from unconsolidated entities

 

 

10,598

 

 

 

(21,522

)

 

 

(678,448

)

 

 

32,414

 

Income tax expense (benefit)

 

 

2,801

 

 

 

(1,745

)

 

 

(7,650

)

 

 

10,152

 

Equity in earnings (loss) from unconsolidated entities

 

 

(342

)

 

 

-

 

 

 

(342

)

 

 

-

 

Net income (loss)

 

 

7,455

 

 

 

(19,777

)

 

 

(671,140

)

 

 

22,262

 

Net income (loss) attributable to noncontrolling interests

 

 

190

 

 

 

(357

)

 

 

(11,808

)

 

 

523

 

Net income (loss) attributable to shareholders

 

 

7,265

 

 

 

(19,420

)

 

 

(659,332

)

 

 

21,739

 

Participating securities' share in earnings

 

 

(229

)

 

 

(50

)

 

 

(853

)

 

 

(301

)

Dividends declared on convertible preferred stock

 

 

(2

)

 

 

-

 

 

 

(6

)

 

 

(656

)

Amortization of discount on convertible preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(993

)

Net income (loss) attributable to common shareholders

 

$

7,034

 

 

$

(19,470

)

 

$

(660,191

)

 

$

19,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

 

$

(0.10

)

 

$

(3.40

)

 

$

0.11

 

Diluted

 

$

0.04

 

 

$

(0.10

)

 

$

(3.40

)

 

$

0.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

198,054

 

 

 

191,940

 

 

 

194,278

 

 

 

185,746

 

Diluted

 

 

198,373

 

 

 

191,940

 

 

 

194,278

 

 

 

185,746

 

 

 

 

 

 

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

 

 

6


Table of Contents

 

Uniti Group Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(Thousands)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss)

 

$

7,455

 

 

$

(19,777

)

 

$

(671,140

)

 

$

22,262

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss on derivative contracts

 

 

-

 

 

 

(8,646

)

 

 

(7,036

)

 

 

(58,695

)

Changes in foreign currency translation

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(63

)

Interest rate swap termination

 

 

2,829

 

 

 

-

 

 

 

7,325

 

 

 

-

 

Other comprehensive income (loss):

 

 

2,829

 

 

 

(8,646

)

 

 

289

 

 

 

(58,758

)

Comprehensive income (loss)

 

 

10,284

 

 

 

(28,423

)

 

 

(670,851

)

 

 

(36,496

)

Comprehensive income (loss) attributable to noncontrolling interest

 

 

237

 

 

 

(511

)

 

 

(11,806

)

 

 

(678

)

Comprehensive income (loss) attributable to common shareholders

 

$

10,047

 

 

$

(27,912

)

 

$

(659,045

)

 

$

(35,818

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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


 

7


Table of Contents

 

Uniti Group Inc.

Condensed Consolidated Statements of Shareholders’ Deficit

(unaudited)

 

 

 

For the Three Months Ended September 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 June 30, 2019

 

 

-

 

 

$

-

 

 

 

183,122,757

 

 

$

18

 

 

$

855,425

 

 

$

(18,960

)

 

$

(2,413,326

)

 

$

87,554

 

 

$

-

 

 

$

(1,489,289

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(19,420

)

 

 

(357

)

 

 

-

 

 

 

(19,777

)

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(8,492

)

 

 

-

 

 

 

(154

)

 

 

-

 

 

 

(8,646

)

Common stock dividends declared ($0.05 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(9,632

)

 

 

-

 

 

 

-

 

 

 

(9,632

)

Distributions to noncontrolling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(173

)

 

 

-

 

 

 

(173

)

Exchange of noncontrolling interest

 

 

-

 

 

 

-

 

 

 

275,788

 

 

 

-

 

 

 

2,280

 

 

 

-

 

 

 

-

 

 

 

(2,280

)

 

 

-

 

 

 

-

 

Net share settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(67

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(67

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

12,871

 

 

 

-

 

 

 

2,845

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,845

 

Equity settlement of convertible preferred stock

 

 

-

 

 

 

-

 

 

 

8,677,163

 

 

 

1

 

 

 

87,499