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 June 30, 2019

☐	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 August 2, 2019, the registrant had 193,143,385 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 effect of Windstream Holdings, Inc.’s (“Windstream Holdings” and together with its subsidiaries, “Windstream”) bankruptcy and Windstream’s performance under its long-term exclusive triple-net lease with us (the “Master Lease”); our expectations with respect to the treatment of the Master Lease in Windstream’s petitions for relief under Chapter 11 of the Bankruptcy Code; our expectations regarding the effect of substantial doubt about our ability to continue as a going concern; our expectations regarding the future growth and demand of the telecommunications industry, future financing plans, business strategies, growth prospects, operating and financial performance, and our future liquidity needs and access to capital; expectations regarding the impact and integration of Information Transport Solutions, Inc. (“ITS”) and M² Connections, including expectations regarding operational synergies with Uniti Towers and Uniti Fiber; 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; expectations regarding the closing of the operating company-property company partnership with Macquarie Infrastructure Partners and related acquisition of Bluebird Network, LLC (“Bluebird”); 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;

•

our ability to continue as a going concern if Windstream Holdings were to succeed in its recharacterization and fraudulent transfer claims against us, reject the Master Lease or be unable or unwilling to perform its obligations under the Master Lease;

•

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;

•

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;

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•

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 real estate investment trust (“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;

•

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;

•

the risk that the agreements regarding the Bluebird acquisition may be modified or terminated prior to expiration or that the conditions to the Bluebird acquisition may not be satisfied; and

•

additional factors discussed in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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, 2018, 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	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	16
	4.Leases	18
	5.Business Combinations, Asset Acquisitions and Dispositions	21
	6.Assets and Liabilities Held for Sale	22
	7.Fair Value of Financial Instruments	23
	8.Property Plant and Equipment	25
	9.Derivative Instruments and Hedging Activities	25
	10.Goodwill and Intangible Assets and Liabilities	27
	11.Notes and Other Debt	28
	12.Earnings Per Share	31
	13.Segment Information	33
	14.Commitments and Contingencies	35
	15.Accumulated Other Comprehensive Income	37
	16.Capital Stock	37
	17.Subsequent Events	37

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	59

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	63

Signatures		64

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Uniti Group Inc.

Condensed Consolidated Balance Sheets

(Thousands, except par value)	(Unaudited) June 30, 2019			December 31, 2018
Assets:
Property, plant and equipment, net	$	3,201,436		$	3,209,006
Cash and cash equivalents		299,394			38,026
Accounts receivable, net		77,303			104,063
Goodwill		692,833			692,385
Intangible assets, net		371,407			432,821
Straight-line revenue receivable		391			61,785
Derivative asset		-			31,043
Other assets, net		130,901			23,808
Assets held for sale, net		16,692			-
Total Assets	$	4,790,357		$	4,592,937
Liabilities, Convertible Preferred Stock and Shareholders' Deficit:
Liabilities:
Accounts payable, accrued expenses and other liabilities, net	$	206,350		$	94,179
Accrued interest payable		29,441			28,097
Deferred revenue		811,782			726,262
Derivative liability		19,117			-
Dividends payable		9,394			113,744
Deferred income taxes		34,672			52,434
Finance lease obligations		55,444			55,282
Contingent consideration		18,522			83,401
Notes and other debt, net		5,003,092			4,846,233
Liabilities held for sale		4,332			-
Total liabilities		6,192,146			5,999,632

Commitments and contingencies (Note 14)

Convertible preferred stock, Series A, $0.0001 par value, 88 shares authorized, issued and outstanding, $87,500 liquidation value		87,500			86,508

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: 183,123 shares at June 30, 2019 and 180,536 at December 31, 2018		18			18
Additional paid-in capital		855,425			757,517
Accumulated other comprehensive (loss) income		(18,960	)		30,105
Distributions in excess of accumulated earnings		(2,413,326	)		(2,373,218	)
Total Uniti shareholders' deficit		(1,576,843	)		(1,585,578	)
Noncontrolling interests - operating partnership units		87,554			92,375
Total shareholders' deficit		(1,489,289	)		(1,493,203	)
Total Liabilities, Convertible Preferred Stock, and Shareholders' Deficit	$	4,790,357		$	4,592,937

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

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(Thousands, except per share data)	2019			2018			2019			2018
Revenues:
Leasing	$	177,042		$	173,885		$	353,125		$	346,659
Fiber Infrastructure		81,327			67,389			158,160			134,356
Tower		3,146			2,472			8,226			5,842
Consumer CLEC		2,899			3,583			5,934			7,387
Total revenues		264,414			247,329			525,445			494,244
Costs and Expenses:
Interest expense		97,729			79,385			182,187			156,992
Depreciation and amortization		102,578			114,842			206,405			229,563
General and administrative expense		26,428			20,681			50,654			43,201
Operating expense (exclusive of depreciation and amortization)		40,163			31,522			78,581			61,426
Transaction related costs		7,035			3,789			13,704			9,702
Gain on sale of real estate (Note 5)		(28,790	)		-			(28,790	)		-
Other (income) expense		(28,119	)		3,349			(31,232	)		(536	)
Total costs and expenses		217,024			253,568			471,509			500,348

Income (loss) before income taxes		47,390			(6,239	)		53,936			(6,104	)
Income tax expense (benefit)		7,843			(2,646	)		11,897			(3,742	)
Net income (loss)		39,547			(3,593	)		42,039			(2,362	)
Net income (loss) attributable to noncontrolling interests		830			(90	)		880			(69	)
Net income (loss) attributable to shareholders		38,717			(3,503	)		41,159			(2,293	)
Participating securities' share in earnings		(223	)		(658	)		(251	)		(1,337	)
Dividends declared on convertible preferred stock		-			(656	)		(656	)		(1,312	)
Amortization of discount on convertible preferred stock		(248	)		(745	)		(993	)		(1,490	)
Net income (loss) attributable to common shareholders	$	38,246		$	(5,562	)	$	39,259		$	(6,432	)

Earnings (loss) per common share:
Basic	$	0.21		$	(0.03	)	$	0.22		$	(0.04	)
Diluted	$	0.20		$	(0.03	)	$	0.21		$	(0.04	)

Weighted-average number of common shares outstanding:
Basic		182,971			175,011			182,597			174,951
Diluted		193,105			175,011			192,276			174,951

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 June 30,						Six Months Ended June 30,
(Thousands)	2019			2018			2019			2018
Net income (loss)	$	39,547		$	(3,593	)	$	42,039		$	(2,362	)
Other comprehensive (loss) income:
Unrealized (loss) gain on derivative contracts		(28,363	)		14,605			(50,049	)		49,873
Changes in foreign currency translation		(843	)		(4,879	)		(63	)		(314	)
Other comprehensive (loss) income:		(29,206	)		9,726			(50,112	)		49,559
Comprehensive income (loss)		10,341			6,133			(8,073	)		47,197
Comprehensive income (loss) attributable to noncontrolling interest		245			134			(167	)		1,074
Comprehensive income (loss) attributable to common shareholders	$	10,096		$	5,999		$	(7,906	)	$	46,123

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 June 30,
(Thousands, except share data)	Preferred Stock				Common Stock				Additional Paid-in Capital			Accumulated Other Comprehensive Income		Distributions in Excess of Accumulated Earnings			Noncontrolling Interest			Total Shareholders' Deficit
	Shares		Amount		Shares		Amount
Balance at March 31, 2018		-	$	-		174,969,646	$	17	$	645,403		$	46,735	$	(2,063,640	)	$	99,868		$	(1,271,617	)
Net loss		-		-		-		-		-			-		(3,503	)		(90	)		(3,593	)
Amortization of discount of convertible preferred stock		-		-		-		-		(745	)		-		-			-			(745	)
Other comprehensive income		-		-		-		-		-			9,502		-			224			9,726
Common stock dividends declared		-		-		-		-		-			-		(106,417	)		-			(106,417	)
Convertible preferred stock dividends		-		-		-		-		-			-		(656	)		-			(656	)
Distributions to noncontrolling interest		-		-		-		-		-			-		-			(2,479	)		(2,479	)
Net share settlement		-		-		-		-		(916	)		-		-			-			(916	)
Stock-based compensation		-		-		59,189		-		1,885			-		-			-			1,885
Balance at June 30, 2018		-	$	-		175,028,835	$	17	$	645,627		$	56,237	$	(2,174,216	)	$	97,523		$	(1,374,812	)

Balance at March 31, 2019