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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 June 30, 2019

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 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; 

 

2


Table of Contents

 

 

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.

 

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

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

 

 

 

 

4


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, 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.

 

5


Table of Contents

 

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.

 

 

6


Table of Contents

 

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.


 

7


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

 

 

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

 

 

-

 

 

$

-

 

 

 

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

)