SEC Filing | Uniti Group, Inc.

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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

☐

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;

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•

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.

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Uniti Group Inc.

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		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

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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.

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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.

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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.

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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