10-Q 1 csal-10q_20160331.htm 10-Q csal-10q_20160331.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended March 31, 2016

OR

o

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

 

Communications Sales & Leasing, 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

 

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  x    No  o  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).     Yes  x      No  o

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (Do not check if a small reporting company)

  

Small reporting company

 

¨

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

As of May 6, 2016, the registrant had 151,623,214 shares of common stock, $0.0001 par value per share, outstanding.

 

 


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EXPLANATORY NOTE

Prior to April 24, 2015, Communications Sales & Leasing, Inc. (the “Company,” “CS&L,” “we,” “us” or “our”) was a wholly-owned subsidiary of Windstream Holdings, Inc. (“Windstream Holdings,” and together with its subsidiaries, “Windstream”). On April 24, 2015, Windstream contributed certain telecommunications network assets, including fiber and copper networks and other real estate (the “Distribution Systems”) and a small consumer competitive local exchange carrier (“CLEC”) business (the “Consumer CLEC Business”), to CS&L. In exchange, CS&L issued to Windstream (i) approximately 149.8 million shares of its common stock, (ii) $400.0 million aggregate principal amount of 6.00% Senior Secured Notes due April 15, 2023 (the “Senior Secured Notes”), (iii) $1.11 billion aggregate principal amount of 8.25% Senior Notes due October 15, 2023 (the “Senior Unsecured Notes” and together with the Senior Secured Notes, the “Notes”) and (iv) approximately $2.0 billion in cash obtained from borrowings under CS&L’s senior credit facilities. The contribution of the Distribution Systems and the Consumer CLEC Business and the related issuance of cash, debt and equity securities are referred to herein as the “Spin-Off.” The Spin-Off was effective on April 24, 2015.

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: the benefits and tax treatment of the Spin-Off; future financing plans, business strategies, growth prospects and operating and financial performance; expectations regarding the impact of the acquisition of PEG Bandwidth, LLC (“PEG”); expectations regarding the closing of the acquisition of certain towers and operating rights from Windstream; expectations regarding the making of distributions and the payment of dividends; and compliance with and changes in governmental regulations.

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 realized. 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:

 

·

our ability to achieve some or all the benefits that we expect to achieve from the Spin-Off;

 

·

the ability and willingness of Windstream and other current and future customers to meet and/or perform their obligations under any contractual arrangements entered into with us, including master lease arrangements, and any of their obligations to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities;

 

·

the ability of Windstream and other current and future customers to comply with laws, rules and regulations in the operation of the assets we lease to them;

 

·

the ability and willingness of Windstream and other current and future 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;

 

·

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 business;

 

·

our ability to generate sufficient cash flows to service our outstanding indebtedness;

 

·

our ability to access debt and equity capital markets;

 

·

the impact on our business or the business of our customers as a result of credit rating downgrades;

 

·

fluctuating interest rates;

 

·

our ability to retain our key management personnel;

 

·

our ability to qualify or maintain our status as a real estate investment trust (“REIT”);

 

·

changes in the U.S. tax law and other federal, state or local laws, whether or not specific to REITs;

 

·

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

 

·

the risk that we fail to full realize the potential benefits of the PEG transaction or have difficulty integrating PEG;  

 

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·

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, 2015, as well as those described from time to time in our future reports filed with the U.S. Securities and Exchange Commission (the “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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Communications Sales & Leasing, Inc.

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Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

5

 

Communication Sales & Leasing, Inc.

 

 

Condensed Consolidated Balance Sheets

5

 

Condensed Consolidated Statement of Income

6

 

Condensed Consolidated Statement of Comprehensive Income (Loss)

7

 

Condensed Consolidated Statement of Shareholders’ Deficit

8

 

Condensed Consolidated Statement of Cash Flows

9

 

Notes to Condensed Consolidated Financial Statements

10

 

CLEC Business

 

 

Statement of Revenues and Direct Expenses

24

 

Notes to Financial Statements

25

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

33

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

Item 3.

Defaults Upon Senior Securities

35

Item 4.

Mine Safety Disclosures

35

Item 5.

Other Information

35

Item 6.

Exhibits

36

 

 

 

Signatures

37

 

 

Exhibit Index

38

 

 

 

 

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Communications Sales & Leasing, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(Thousands, except par value)

 

March 31, 2016

 

 

December 31, 2015

 

Assets:

 

 

 

 

 

 

 

 

Real estate investments

 

$

6,127,422

 

 

$

6,093,541

 

Accumulated depreciation - real estate investments

 

 

(3,806,298

)

 

 

(3,720,890

)

Net real estate investments

 

 

2,321,124

 

 

 

2,372,651

 

Cash and cash equivalents

 

 

165,340

 

 

 

142,498

 

Accounts receivable, net

 

 

832

 

 

 

2,083

 

Intangible assets, net

 

 

11,190

 

 

 

10,530

 

Straight-line rent receivable

 

 

16,117

 

 

 

11,795

 

Other assets

 

 

3,312

 

 

 

3,079

 

Total Assets

 

$

2,517,915

 

 

$

2,542,636

 

 

Liabilities and Shareholders' Deficit:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

8,596

 

 

$

10,409

 

Accrued interest payable

 

 

53,340

 

 

 

24,440

 

Deferred revenue

 

 

99,260

 

 

 

67,817

 

Derivative liability

 

 

45,869

 

 

 

5,427

 

Dividends payable

 

 

90,621

 

 

 

90,507

 

Deferred income taxes

 

 

5,498

 

 

 

5,714

 

Notes and other debt, net

 

 

3,503,642

 

 

 

3,505,228

 

      Total liabilities

 

 

3,806,826

 

 

 

3,709,542

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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: 150,034 shares at March 31, 2016 and 149,862 at December 31, 2015

 

 

15

 

 

 

15

 

Additional paid-in capital

 

 

3,407

 

 

 

1,392

 

Accumulated other comprehensive loss

 

 

(45,789

)

 

 

(5,427

)

Distributions in excess of accumulated earnings

 

 

(1,246,544

)

 

 

(1,162,886

)

      Total shareholders' deficit

 

 

(1,288,911

)

 

 

(1,166,906

)

Total Liabilities and Shareholders' Deficit

 

$

2,517,915

 

 

$

2,542,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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Communications Sales & Leasing, Inc.

Condensed Consolidated Statement of Income

(unaudited)

 

 

 

Three Months Ended

 

(Thousands, except per share data)

 

March 31, 2016

 

Revenues:

 

 

 

 

Rental revenues

 

$

168,641

 

Consumer CLEC

 

 

6,034

 

Total revenues

 

 

174,675

 

Costs and Expenses:

 

 

 

 

Interest expense

 

 

66,049

 

Depreciation and amortization

 

 

86,340

 

General and administrative expense

 

 

5,189

 

Operating expense

 

 

4,707

 

Transaction related costs

 

 

3,910

 

Total costs and expenses

 

 

166,195

 

Income before income taxes

 

 

8,480

 

Income tax expense

 

 

444

 

Net income

 

 

8,036

 

Participating securities' share in earnings

 

 

(355

)

Net income applicable to common shareholders

 

$

7,681

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

Basic

 

$

0.05

 

Diluted

 

$

0.05

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

 

 

 

Basic

 

 

149,918

 

Diluted

 

 

149,984

 

 

 

 

 

 

Dividends declared per common share

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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Communications Sales & Leasing, Inc.

Condensed Consolidated Statement of Comprehensive Income (Loss)

(unaudited)

 

 

 

Three Months Ended

 

(Thousands)

 

March 31, 2016

 

Net income

 

$

8,036

 

Other comprehensive (loss) income:

 

 

 

 

Unrealized loss on derivative contracts

 

 

(40,442

)

Changes in foreign currency translation

 

 

80

 

Other comprehensive loss

 

 

(40,362

)

 

 

 

 

 

Comprehensive loss

 

$

(32,326

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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


 

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Communications Sales & Leasing, Inc.

Condensed Consolidated Statement of Shareholders’ Deficit

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Loss

 

 

Distributions in Excess of Accumulated Earnings

 

 

Total Shareholders' Deficit

 

(Thousands, except share data)

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2015

 

 

-

 

 

$

-

 

 

 

149,862,459

 

 

$

15

 

 

$

1,392

 

 

$

(5,427

)

 

$

(1,162,886

)

 

$

(1,166,906

)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,036

 

 

 

8,036

 

Equity consideration related to Summit Wireless acquisition

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,085

 

 

 

-

 

 

 

-

 

 

 

1,085

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(40,362

)

 

 

-

 

 

 

(40,362

)

Common stock dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(90,428

)

 

 

(90,428

)

Net share settlement (Note 9)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,266

)

 

 

(1,266

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

171,785

 

 

 

-

 

 

 

930

 

 

 

-

 

 

 

-

 

 

 

930

 

Balance at March 31, 2016

 

 

-

 

 

$

-

 

 

 

150,034,244

 

 

$

15

 

 

$

3,407

 

 

$

(45,789

)

 

$

(1,246,544

)

 

$

(1,288,911

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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Communications Sales & Leasing, Inc.

Condensed Consolidated Statement of Cash Flows

(unaudited)

 

 

 

Three Months Ended

 

(Thousands)

 

March 31, 2016

 

Cash flow from operating activities

 

 

 

 

Net income

 

$

8,036

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

Depreciation and amortization

 

 

86,340

 

Amortization of deferred financing costs

 

 

1,818

 

Amortization of debt discount

 

 

1,946

 

Deferred income taxes

 

 

(216

)

Straight-line rental revenues

 

 

(4,322

)

Stock-based compensation

 

 

930

 

Other

 

 

(9

)

Changes in:

 

 

 

 

Accounts receivable

 

 

1,307

 

Other assets

 

 

(252

)

Accounts payable, accrued expenses and other liabilities

 

 

26,123

 

Net cash provided by operating activities

 

 

121,701

 

 

 

 

 

 

Cash flow from investing activities

 

 

 

 

Acquisition of real estate

 

 

(1,347

)

Acquisition of business, to include cash acquired

 

 

111

 

Capital expenditures

 

 

(77

)

Net cash used in investing activities

 

 

(1,313

)

 

 

 

 

 

Cash flow from financing activities

 

 

 

 

Principal payment on debt

 

 

(6,044

)

Net share settlement (Note 9)

 

 

(1,266

)

Dividends paid

 

 

(90,314

)

Net cash used in financing activities

 

 

(97,624

)

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

 

78

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

22,842

 

Cash and cash equivalents at beginning of period

 

 

142,498

 

Cash and cash equivalents at end of period

 

$

165,340

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

Cash paid for interest

 

$

32,850

 

Cash paid for income taxes

 

$

143

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

Accrual of dividends declared

 

$

90,621

 

Tenant capital improvements

 

$

32,359

 

Acquisition of business through equity consideration

 

$

974

 

 

 

 

 

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

.

 

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Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements

(unaudited)

Note 1. Organization and Description of Business

CS&L was incorporated in the state of Maryland on September 4, 2014 as a subsidiary of Windstream. In connection with the the Spin-Off, Windstream and CS&L entered into a long-term, triple-net lease (the “Master Lease”) pursuant to which CS&L leases the Distribution Systems to Windstream. The assets and liabilities of the Distribution Systems and Consumer CLEC Business were recorded in our Condensed Consolidated Financial Statements on a carryover basis as of the date of the Spin-Off.

 

CS&L is an independent, internally managed real estate investment trust (“REIT”) engaged in the acquisition and construction of mission critical infrastructure in the communications industry. The Company is principally focused on acquiring and constructing fiber optic broadband networks, wireless communications towers, copper and coaxial broadband networks and data centers. With the acquisition of PEG Bandwidth LLC, the Company has also become a leading provider of infrastructure solutions to the telecommunications industry. Presently, CS&L’s primary source of revenue is rental revenues from leasing the Distribution Systems to Windstream Holdings pursuant to the Master Lease. CS&L intends to elect on our U.S. federal income tax return for the taxable year ending December 31, 2015 to be treated as a REIT.

 

The Consumer CLEC Business, which was reported as an integrated operation within Windstream prior to the Spin-Off, offers voice, broadband, long-distance, and value-added services to residential customers located primarily in rural locations. Substantially all of the network assets used to provide these services to customers are contracted through interconnection agreements with other telecommunications carriers. We have elected to treat Talk America Services, LLC, an indirect, wholly-owned subsidiary of CS&L (“Talk America”), through which we operate the Consumer CLEC Business as a “taxable REIT subsidiary” effective as of the first day of CS&L’s initial REIT tax year.

 

 

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information set forth in the Accounting Standards Codification (“ASC”), as published by the Financial Accounting Standards Board (“FASB”), and with the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. Operating results from any interim period are not necessarily indicative of the results that may be expected for the full fiscal year. The accompanying Consolidated Financial Statements and related notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015 (“Annual Report”), filed with the SEC on March 7, 2016. Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report. All material intercompany balances and transactions have been eliminated.

 

Income Taxes—We currently have no liabilities for uncertain income tax positions. We have not yet filed our initial corporate tax return and therefore are not yet subject to examination.

 

Business Combinations—In accordance with ASC 805, Business Combinations, we apply the acquisition method of accounting for acquisitions meeting the definition of a business combination, where assets acquired and liabilities assumed are recorded at fair value at the date of each acquisition, and the results of operations are included with those of the Company from the dates of the respective acquisitions. Any excess of the purchase price paid by the Company over the amounts recognized for assets acquired and liabilities assumed is recorded as goodwill. The Company continues to evaluate acquisitions for a period not to exceed one year after the applicable acquisition date of each transaction to determine whether any additional adjustments are needed to the allocation of the purchase price paid for the assets acquired and liabilities assumed.

Real Property InterestsDuring the quarter ended March 31, 2016, we initiated a program whereby we acquire real property interests from third parties owning land where communications infrastructure assets are located and who desired to monetize the underlying real property. These real property interests entitle us to receive rental payments from leases on our sites. The financial results of the acquired real property interests are included in the Leasing segment from the date of acquisition and were not material, individually or in the aggregate, to our results of operations. During the three months ended March 31, 2016, we invested approximately $1.3 million for the acquisition of real property interests which are recorded into real estate investments on our Condensed Consolidated Balance Sheet.

 

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Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

Foreign Currency TranslationThe financial statements of our international subsidiaries whose functional currency is the local currency are translated into U.S. dollars using the exchange rate at the balance sheet date for assets and liabilities and the weighted average exchange rate for the applicable period for revenues, expenses, gains and losses. Translation adjustments are recorded as a separate component of comprehensive income in stockholders’ equity.

Recently Issued Accounting Standards—In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The standard outlines a single comprehensive revenue recognition model for entities to follow in accounting for revenue from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive for those goods or services. ASU 2014-09 is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted for public companies for annual periods beginning after December 15, 2016. The Company is in the process of evaluating this guidance to determine the impact it will have on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASC 842”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee.  This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively.  A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification.  Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASC 842 is effective for fiscal years and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company is in the process of evaluating this guidance to determine the impact it will have on our financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09”) ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of the ASU 2016-09 on its consolidated financial statements.

 

 

Note 3. Business Combinations

On January 22, 2016, we acquired 100% of the outstanding equity of Summit Wireless Infrastructure LLC (“Summit”). Summit builds, owns and operates telecommunication infrastructure serving wireless carriers in Mexico. Consideration given to acquire Summit included performance-based shares of common equity valued at $1.1 million, which will vest in full on the third anniversary of closing subject to Summit meeting certain performance targets, and the assumption of Summit’s existing debt. The financial results of Summit are included in the Leasing segment from the date of acquisition and were not material, individually or in the aggregate, to our results of operations and therefore, pro forma financial information has not been presented.

 

 

Note 4. Fair Value of Financial Instruments

FASB ASC 820, Fair Value Measurements, establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring assets and liabilities at fair values. This hierarchy establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are as follows:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the assessment date

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

Level 3 – Unobservable inputs for the asset or liability

 

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Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

Our financial instruments consist of cash and cash equivalents, accounts and other receivables, a derivative liability, our outstanding notes and other debt, and accounts, interest and dividends payable.

The following table summarizes the fair value of our financial instruments at March 31, 2016 and December 31, 2015:

(Thousands)

 

Total

 

Quoted Prices in Active Markets

(Level 1)

 

Prices with Other Observable Inputs

(Level 2)

 

Prices with Unobservable Inputs (Level 3)

 

At March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

165,340

 

$

165,340

 

$

-

 

$

-

 

Accounts and other receivables

 

 

832

 

 

832

 

 

-

 

 

-

 

Total

 

$

166,172

 

$

166,172

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured notes - 6.00%, due April 15, 2023

 

$

388,000

 

$

-

 

$

388,000

 

$

-

 

Senior unsecured notes - 8.25%, due October 15, 2023

 

 

1,023,975

 

 

-

 

 

1,023,975

 

 

-

 

Senior secured term loan B - variable rate, due October 24, 2022

 

 

2,044,302

 

 

-

 

 

2,044,302

 

 

-

 

Derivative liability

 

 

45,869

 

 

-

 

 

45,869

 

 

-

 

Accounts, interest and dividends payable

 

 

152,557

 

 

152,557

 

 

-

 

 

-

 

Total

 

$

3,654,703

 

$

152,557

 

$

3,502,146

 

$

-

 

 

(Thousands)

 

Total

 

Quoted Prices in Active Markets

(Level 1)

 

Prices with Other Observable Inputs

(Level 2)

 

Prices with Unobservable Inputs (Level 3)

 

At December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

142,498

 

$

142,498

 

$

-

 

$

-

 

Accounts and other receivables

 

 

2,083

 

 

2,083

 

 

-

 

 

-

 

Total

 

$

144,581

 

$

144,581

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured notes - 6.00%, due April 15, 2023

 

$

376,000

 

$

-

 

$

376,000

 

$

-

 

Senior unsecured notes - 8.25%, due October 15, 2023

 

 

937,950

 

 

-

 

 

937,950

 

 

-

 

Senior secured term loan B - variable rate, due October 24, 2022

 

 

1,986,198

 

 

-

 

 

1,986,198

 

 

-

 

Derivative liability

 

 

5,427

 

 

-

 

 

5,427

 

 

-

 

Accounts, interest and dividends payable

 

 

125,356

 

 

125,356

 

 

-

 

 

-

 

Total

 

$

3,430,931

 

$

125,356

 

$

3,305,575

 

$

-

 

The carrying value of cash and cash equivalents, accounts and other receivables, accounts, interest and dividends payable approximate fair values due to the short-term nature of these financial instruments.

The total principal balance of our Notes and other debt was $3.63 billion at March 31, 2016, with a fair value of $3.46 billion. The estimated fair value of our Notes and other debt was based on available external pricing data and current market rates for similar debt instruments, among other factors, which are classified as Level 2 inputs within the fair value hierarchy. Derivative liabilities are carried at fair value. See Note 6. The fair value of an interest rate swap is determined based on the present value of expected future cash flows using observable, quoted LIBOR swap rates for the full term of the swap and also incorporate credit valuation adjustments to appropriately reflect both CS&L’s own non-performance risk and non-performance risk of the respective counterparties. The Company has determined that the majority of the inputs used to value its derivative liabilities fall within Level 2 of the fair value hierarchy; however the associated credit valuation adjustments utilized Level 3 inputs, such as estimates of credit spreads, to evaluate the likelihood of default by the Company and its counterparties. As of March 31, 2016, the Company has assessed the significance of

 

12


Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall value of the derivatives. As such, the Company classifies its derivative liabilities valuation in Level 2 of the fair value hierarchy.

 

 

Note 5. Real Estate Investments

The carrying value of real estate investments is as follows:

 

(Thousands)

 

Depreciable Lives

 

March 31, 2016

 

 

December 31, 2015

 

Land

 

 

 

$

33,769

 

 

$

33,386

 

Building and improvements

 

3 - 40 years

 

 

314,040

 

 

 

313,736

 

Real property interests

 

50 years

 

 

1,347

 

 

 

-

 

Poles

 

13 - 40 years

 

 

228,585

 

 

 

228,031

 

Fiber

 

7 - 40 years

 

 

1,973,547

 

 

 

1,948,192

 

Copper

 

7 - 40 years

 

 

3,483,885

 

 

 

3,475,987

 

Conduit

 

13 - 47 years

 

 

89,663

 

 

 

89,460

 

Construction in progress

 

 

 

 

2,586

 

 

 

4,749

 

 

 

 

 

 

6,127,422

 

 

 

6,093,541

 

Less accumulated depreciation

 

 

 

 

(3,806,298

)

 

 

(3,720,890

)

Net real estate investments

 

 

 

$

2,321,124

 

 

$

2,372,651

 

 

Depreciation expense related to real estate investments for the three months ended March 31, 2016 was $85.4 million.

 

Construction in progress represents in process capital projects that were transferred to us at the time of the Spin-Off. As Windstream completes these projects, amounts are reclassified to depreciable assets.

 

 

Note 6. Derivative Instruments and Hedging Activities

The Company uses derivative instruments to mitigate the effects of interest rate volatility inherent in our variable rate debt, which could unfavorably impact our future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes.

On April 27, 2015, we entered into interest rate swap agreements to mitigate the interest rate risk inherent in our variable rate Senior Secured Term Loan B facility. These interest rate swaps are designated as cash flow hedges and have a notional value of $2.12 billion and mature on October 24, 2022. The weighted average fixed rate paid is 2.105%, and the variable rate received resets monthly to the one-month LIBOR subject to a minimum rate of 1.0%. The Company does not currently have any master netting arrangements related to its derivative contracts.

The following table summarizes the fair value and the presentation in our Condensed Consolidated Balance Sheet:

(Thousands)

 

Location on Condensed Consolidated Balance Sheet

 

March 31, 2016

 

 

December 31, 2015

 

Interest rate swaps

 

Derivative liability

 

$

45,869

 

 

$

5,427

 

 

As of March 31, 2016 and December 31, 2015, all of the interest rate swaps were valued in net unrealized loss positions and recognized as liability balances within the derivative liability balance. For the three months ended March 31, 2016, the amount recorded in other comprehensive income related to the unrealized loss on derivative instruments was $46.4 million. The amount reclassified out of other comprehensive income into interest expense on our Condensed Consolidated Statement of Income for the three months ended March 31, 2016 was $5.9 million. For the three months ended March 31, 2016, there was no ineffective portion of the change in fair value derivatives.

 

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Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the next twelve months, beginning April 1, 2016, we estimate that $23.6 million will be reclassified as an increase to interest expense.

 

 

Note 7. Intangible Assets

The carrying value of the intangible assets is as follows:

(Thousands)

 

March 31, 2016

December 31, 2015

 

Customer lists

 

$

36,001

 

 

$

34,501

 

Less: Accumulated amortization

 

 

(24,811

)

 

 

(23,971

)

Intangible assets, net

 

$

11,190

 

 

$

10,530

 

 

Amortization expense was $0.8 million for the three months ended March 31, 2016. Amortization expense is estimated to be $3.4 million for the full year of 2016, $2.8 million in 2017, $2.1 million in 2018, $1.5 million in 2019, $1.0 million in 2020 and $0.6 million in 2021.

 

 

Note 8. Notes and Other Debt

Notes and other debt is as follows:

(Thousands)

 

March 31, 2016

 

 

December 31, 2015

 

Principal amount

 

$

3,633,950

 

 

$

3,639,300

 

Less unamortized discount and debt issuance costs

 

 

(130,308

)

 

 

(134,072

)

Notes and other debt less unamortized discount and debt issuance costs

 

$

3,503,642

 

 

$

3,505,228

 

 

Notes and other debt at March 31, 2016 and December 31, 2015 consisted of the following:

 

 

March 31, 2016

 

 

December 31, 2015

 

(Thousands)

 

Principal

 

 

Unamortized Discount and Debt Issuance Costs

 

 

Principal

 

 

Unamortized Discount and Debt Issuance Costs

 

Senior secured notes - 6.00%, due April 15, 2023

(discount is based on imputed interest rate of 6.29%)

 

$

400,000

 

 

$

(6,582

)

 

$

400,000

 

 

$

(6,767

)

Senior unsecured notes - 8.25%, due October 15, 2023

(discount is based on imputed interest rate of 9.06%)

 

 

1,110,000

 

 

 

(49,074

)

 

 

1,110,000

 

 

 

(50,200

)

Senior secured term loan B - variable rate, due October 24, 2022

(discount is based on imputed interest rate of 5.66%)

 

 

2,123,950

 

 

 

(74,652

)

 

 

2,129,300

 

 

 

(77,105

)

Senior secured revolving credit facility, variable rate, due April 24, 2020

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

3,633,950

 

 

$

(130,308

)

 

$

3,639,300

 

 

$

(134,072

)

 

 

On April 24, 2015 we, along with our wholly owned subsidiary CSL Capital, LLC (“CSL Capital”), co-issued $400 million aggregate principal amount of 6.00% Senior Secured Notes due April 15, 2023 (the “Senior Secured Notes”) and $1.11 billion aggregate principal amount of 8.25% Senior Unsecured Notes due October 15, 2023 (the “Senior Unsecured Notes” and together with the Secured Notes, the “Notes”). The Senior Secured Notes were issued at an issue price of 100% of par value, while the Senior Unsecured Notes were issued at an issue price of 97.055% of par value. The Notes are guaranteed by each of CS&L’s wholly-owned domestic subsidiaries that guarantee indebtedness under CS&L’s senior credit facilities. The Notes were issued to Windstream Services as partial consideration for the contribution of the Distribution Systems and the Consumer CLEC Business in connection with the Spin-Off. As such, CS&L did not receive any proceeds from the issuance of the Notes. The issuance of the Notes and their exchange by Windstream Services for certain of its outstanding indebtedness were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but were exempt from registration under Rule 144A, Regulation S and other applicable exemptions of the Securities Act. Pursuant to a registration rights agreement entered into by the Company in connection with the sale of the Senior

 

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Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

Unsecured Notes, the Company subsequently filed with the SEC a registration statement relating to an exchange offer pursuant to which 8.25% Senior Notes due 2023 (the “Exchange Notes”) that were registered with the SEC, were offered in exchange for Senior Unsecured Notes tendered by the holders of those notes. The terms of the Exchange Notes are substantially identical to the terms of the Senior Unsecured Notes in all material respects, except that the Exchange Notes are registered under the Securities Act, and the transfer restrictions, registration rights and additional interest provision applicable to the Senior Unsecured Notes do not apply to the Exchange Notes. The exchange offer was launched on August 5, 2015, and completed on September 2, 2015, with all outstanding Senior Unsecured Notes being tendered and exchanged for Exchange Notes.

The Notes contain customary high yield covenants limiting our ability to incur or guarantee additional indebtedness; incur or guarantee secured indebtedness; pay dividends or distributions on, or redeem or repurchase, capital stock; make certain investments or other restricted payments; sell assets; enter into transactions with affiliates; merge or consolidate or sell all or substantially all of our assets; and create restrictions on the ability of CS&L, CSL Capital and our restricted subsidiaries to pay dividends. The covenants are subject to a number of important and significant limitations, qualifications and exceptions. As of March 31, 2016, we were in compliance with all of the covenants under the Notes.

In addition, on April 24, 2015, the Company and CSL Capital entered into a credit agreement (the “Credit Agreement”), which provides for a $2.14 billion Senior Secured Term Loan B facility due October 24, 2022 (the “Term Loan Facility”) and a $500 million senior secured revolving credit facility maturing April 24, 2020 (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Facilities”). The term loans under the Facilities were issued at an issue price of 98.00% of par value, bear interest at a rate equal to a Eurodollar rate, subject to a 1.0% floor, plus an applicable margin equal to 4.00%, and are subject to amortization of 1.0% per annum. The loans have been incurred by the Company and CSL Capital, are guaranteed by certain of CS&L’s wholly-owned subsidiaries (the “Guarantors”), and are secured by substantially all of the assets of CS&L, CSL Capital and the Guarantors, subject to certain exceptions, which assets also secure the Senior Secured Notes. The Revolving Credit Facility bears interest at a rate equal to LIBOR plus 1.75% to 2.25% based on our consolidated secured leverage ratio, as defined in the Credit Agreement.

We are subject to customary covenants under the Credit Agreement, including an obligation to maintain a consolidated secured leverage ratio, as defined in the Credit Agreement, not to exceed 5.00 to 1.00. We are permitted, subject to customary conditions, to incur incremental term loan borrowings and/or increased commitments under the Credit Agreement in an aggregate amount equal to $150 million plus, an unlimited amount, so long as, on a pro forma basis after giving effect to any such increases, our consolidated total leverage ratio, as defined in the Credit Agreement, does not exceed 6.50 to 1.00 and our consolidated secured leverage ratio, as defined in the Credit Agreement, does not exceed 4.00 to 1.00. As of March 31, 2016, we were in compliance with all of the covenants under the Credit Agreement.

The Company transferred $1.04 billion of cash proceeds under the Facilities to Windstream Services, the Company’s parent immediately preceding the Spin-Off, as partial consideration for the contribution of the Distribution Systems and the Consumer CLEC Business in connection with the Spin-Off. After giving effect to the borrowings under the Facilities, the issuance of the Notes and the transfer of cash to Windstream Services, the Company retained net borrowing proceeds of $62.2 million.

Deferred financing costs were incurred in connection with the issuance of the Notes and the Facilities. These costs are amortized using the effective interest method over the term of the related indebtedness, and are included in interest expense in our Condensed Consolidated Statement of Income. For the three months ended March 31, 2016, we recognized $1.8 million of non-cash interest expense related to the amortization of deferred financing costs.

 

 

Note 9. Related Party Transactions

In connection with the Spin-Off, we issued approximately 149.8 million shares of our common stock, par value $0.0001 per share, to Windstream as partial consideration for the contribution of the Distribution Systems and the Consumer CLEC Business. Windstream Holdings distributed approximately 80.4% of the CS&L shares it received to existing stockholders of Windstream Holdings and retained a passive ownership interest of approximately 19.6% of the common stock of CS&L. As a result of this ownership Windstream is deemed to be a related party. Our Condensed Consolidated Financial Statements reflect the following transactions with Windstream:

Revenues – The Company records leasing revenue pursuant to the Master Lease. For the three months ended March 31, 2016, we recognized leasing revenues of $168.6 million related to the Master Lease.

 

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Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

General and Administrative ExpensesWe are party to a Transition Services Agreement (“TSA”) pursuant to which Windstream and its affiliates provide, on an interim basis, various services, including but not limited to information technology services, payment processing and collection services, financial and tax services, regulatory compliance and other support services. For the three months ended March 31, 2016, we incurred $19,000 of TSA expense.

Operating Expenses – We are party to a Wholesale Master Services Agreement (“Wholesale Agreement”) and a Master Services Agreement with Windstream related to the Consumer CLEC Business. Under the Wholesale Agreement, Windstream provides us transport services (local and long distance telecommunications service), provisioning services (directory assistance, directory listing, service activation and service changes), and repair services (routine and emergency network maintenance, network audits and network security). Under the Master Services Agreement, Windstream provides billing and collections services to CS&L. During the three months ended March 31, 2016, we incurred expenses of $3.4 million and $0.4 million related to the Wholesale Agreement and Master Services Agreement, respectively.

Accounts Receivable – As of March 31, 2016 and December 31, 2015, there were $0.3 million and $1.7 million accounts receivable, respectively, from Windstream related to the collection of Consumer CLEC Business revenues, net of amounts owed to Windstream under the Wholesale Agreement and Master Services Agreement recorded in accounts receivable on our Condensed Consolidated Balance Sheet.

Dividend Payable – At March 31, 2016, there was a $17.6 million dividend payable to Windstream related to the dividend declared on March 1, 2016, based on Windstream ownership of CS&L shares as of the March 31, 2016 record date. This amount was paid to Windstream on April 15, 2016 along with the dividends payable to all common shareholders. At December 31, 2015, there was a $17.6 million dividend payable to Windstream related to the dividend declared on November 6, 2015, based on Windstream ownership of CS&L shares as of the December 31, 2015 record date. This amount was paid to Windstream on January 15, 2016 along with the dividends payable to all common shareholders.

Employee Matters Agreement – We are party to an Employee Matters Agreement (“Employee Matters Agreement”) with Windstream that governs the respective compensation and employee benefit obligations of the Company and Windstream in connection with and following the Spin-Off. Under the Employee Matters Agreement, if requested by a Windstream employee, the Company is required to withhold shares to satisfy the employee’s tax obligations arising from the recognition of income and the vesting of shares related to awards of CS&L restricted stock held by the employee that were granted in connection with the Spin-Off. In that case, the Company must pay to Windstream an amount of cash equal to the amount required to be withheld to satisfy minimum statutory tax withholding obligations or, at the request of Windstream, remit such cash directly to the applicable taxing authorities. During the three months ended March 31, 2016, we withheld 91,412 common shares to satisfy these minimum statutory tax-withholding obligations and delivered $1.3 million to Windstream for remittance to the applicable taxing authorities.

Tower Purchase – On March 29, 2016, we entered into an agreement with Windstream to acquire 32 wireless towers owned by Windstream and operating rights for 49 wireless towers previously conveyed to the Company in the Spin-Off for a purchase price of approximately $3 million.  Wireless carriers currently leasing access to these towers will become customers of CS&L. The acquisition of the ownership and operating rights to the 81 towers is subject to regulatory approvals and other customary terms and conditions. Closing is expected during the second quarter of 2016.

Lease Amendment – During the quarter ended March 31, 2016, we amended the Master Lease with Windstream (the “Master Lease Amendment”) to allow for the transfer of ownership rights or exchanges of indefeasible rights of use (an “IRU”) and other long term rights in certain fiber and associated assets constituting leased property under the Master Lease. We will enter into such transactions pursuant to certain fiber exchange agreements under which we will grant to a third party ownership rights in certain fiber assets or an IRU in certain fiber assets that constitute leased property under the Master Lease in exchange for CS&L receiving ownership rights in certain fiber assets or an IRU in certain fiber assets of the third party, which we will then lease to Windstream as leased property under the Master Lease. Under the terms of the Master Lease Amendment, Windstream is responsible for any taxes imposed on CS&L  related to the sale, exchange or other disposition of the fiber assets delivered to a third party or granting of rights to the leased property that arise from fiber exchange agreements. As of March 31, 2016, no such transactions have been consummated. The Master Lease Amendment also permits us to install, own and operate certain wireless communication towers, antennas and related equipment on designated portions of the leased property.

 

 

 

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Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

Note 10. Earnings Per Share

Our restricted stock awards are considered participating securities as they receive non-forfeitable rights to dividends at the same rate as common stock. As participating securities, we included these instruments in the computation of earnings per share under the two-class method described in FASB ASC 260, Earnings per Share.

We also have outstanding performance-based restricted stock units that contain forfeitable rights to receive dividends. Therefore the awards are considered non-participating restrictive shares and are not dilutive under the two-class method until performance conditions are met.

The following sets forth the computation of basic and diluted earnings per share under the two-class method:

 

 

 

Three Months Ended

 

(Thousands, except per share data)

 

March 31, 2016

 

Basic earnings per share:

 

 

 

 

Numerator:

 

 

 

 

Net income

 

$

8,036

 

Less: Income allocated to participating securities

 

 

(355

)

Net income applicable to common shares

 

$

7,681

 

Denominator:

 

 

 

 

Basic weighted-average common shares outstanding

 

 

149,918

 

Basic earnings per common share

 

$

0.05

 

 

 

 

Three Months Ended

 

(Thousands, except per share data)

 

March 31, 2016

 

Diluted earnings per share:

 

 

 

 

Numerator:

 

 

 

 

Net income

 

$

8,036

 

Less: Income allocated to participating securities

 

 

(355

)

Net income applicable to common shares

 

$

7,681

 

Denominator:

 

 

 

 

Basic weighted-average common shares outstanding

 

 

149,918

 

Effect of dilutive non-participating securities

 

 

66

 

Weighted-average shares for dilutive earnings per common share

 

 

149,984

 

Dilutive earnings per common share

 

$

0.05

 

 

Note 11. Segment Information

Our management, including our chief executive officer, who is our chief operating decision maker, manages our operations as two reportable business segments: Leasing and Consumer CLEC. Our Leasing segment represents our REIT operations and corporate expenses not directly attributable to the Consumer CLEC segment. The Consumer CLEC segment represents the operations of our Consumer CLEC Business and corporate expenses directly attributable to the operation of that business. We evaluate the performance of each segment based on Adjusted EBITDA, which is an operating performance measure defined as net income determined in accordance with GAAP, before interest expense, provision for income taxes, depreciation and amortization, stock-based compensation expense, the impact, which may be recurring in nature, of transaction related expenses, the write off of unamortized deferred financing costs, costs incurred as a result of the early repayment of debt, changes in the fair value of contingent consideration and financial instruments, and other similar items.

Selected financial data related to our segments is presented below for the three months ended March 31, 2016:

 

17


Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

 

 

Three Months Ended March 31, 2016

 

(Thousands)

 

Leasing Operations

 

 

Consumer CLEC

 

 

Subtotal of Reportable Segments

 

Revenues

 

$

168,641

 

 

$

6,034

 

 

$

174,675

 

Adjusted EBITDA

 

 

164,377

 

 

 

1,332

 

 

 

165,709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

85,525

 

 

 

815

 

 

 

86,340

 

Interest expense

 

 

 

 

 

 

 

 

 

 

66,049

 

Transaction related costs

 

 

 

 

 

 

 

 

 

 

3,910

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

930

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

444

 

Net income

 

 

 

 

 

 

 

 

 

$

8,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

77

 

 

 

-

 

 

 

77

 

 

 

Total assets by business segment as of March 31, 2016 and December 31, 2015 are as follows:

 

(Thousands)

 

March 31, 2016

 

 

December 31, 2015

 

Leasing operations

 

$

2,502,957

 

 

$

2,527,915

 

Consumer CLEC

 

 

14,958

 

 

 

14,721

 

Subtotal of reportable segments

 

$

2,517,915

 

 

$

2,542,636

 

 

 

 

Note 12. Commitments and Contingencies

In the ordinary course of our business, we are subject to claims and administrative proceedings, none of which we believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows or results of operations.

Pursuant to the Separation and Distribution Agreement, Windstream has agreed to indemnify us (including our subsidiaries, directors, officers, employees and agents and certain other related parties) for any liability arising from or relating to legal proceedings involving Windstream's telecommunications business prior to the Spin-Off, and, pursuant to the Master Lease, Windstream has agreed to indemnify us for, among other things, any use, misuse, maintenance or repair by Windstream with respect to the Distribution Systems. Windstream is currently a party to various legal actions and administrative proceedings, including various claims arising in the ordinary course of its telecommunications business, which are subject to the indemnities provided by Windstream to us.

Under the terms of the Tax Matters Agreement entered into with Windstream, we are generally responsible for any taxes imposed on Windstream that arise from the failure of the Spin-Off and the debt exchanges to qualify as tax-free for U.S. federal income tax purposes, within the meaning of Section 355 and Section 368(a)(1)(D) of the Internal Revenue Code, as applicable, to the extent such failure to qualify is attributable to certain actions, events or transactions relating to our stock, indebtedness, assets or business, or a breach of the relevant representations or any covenants made by us in the Tax Matters Agreement, the materials submitted to the IRS in connection with the request for the private letter ruling or the representations provided in connection with the tax opinion. We believe that the probability of us incurring obligations under the Tax Matters Agreement are remote; and therefore, have recorded no such liabilities in our consolidated balance sheet.

 

 

Note 13. Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income by component is as follows for the three months ended March 31, 2016:

 

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Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

 

(Thousands)

 

Currency Translation Adjustment

 

 

Changes in Fair Value of Effective Cash Flow Hedge

 

 

Total

 

Beginning balance at December 31, 2015

 

$

-

 

 

$

(5,427

)

 

$

(5,427

)

Other comprehensive loss before reclassifications

 

 

80

 

 

 

(46,379

)

 

 

(46,299

)

Amounts reclassified from accumulated other comprehensive income

 

 

-

 

 

 

5,937

 

 

 

5,937

 

Ending balance at March 31, 2016

 

$

80

 

 

$

(45,869

)

 

$

(45,789

)

 

 

 

 

Note 14. Supplemental Guarantor Information

In connection with the issuance of the Senior Secured Notes, Senior Unsecured Notes and Term Loan Facility due 2022, the Guarantors provided guarantees of that indebtedness. These guarantees are full and unconditional as well as joint and several. All property assets and related operations of the Guarantors are pledged as collateral under these obligations and the Guarantors are subject to restrictions on certain investments and payments. Subject to the terms and provisions of the debt agreements, in certain circumstances, a Guarantor may be released from its guarantee obligation including, upon the sale or transfer of any portion of its equity interest or all or substantially all its property, and upon any Guarantor being designated an Unrestricted Subsidiary, as defined in the Credit Agreement, or otherwise no longer being required to remain a Guarantor given its size or regulatory restrictions.

The following information summarizes our Condensed Consolidating Balance Sheets as of March 31, 2016 and December 31, 2015, Condensed Consolidating Statement of Comprehensive Income (Loss) for the three months ended March 31, 2016, and the Condensed Consolidating Statement of Cash Flows for the three months ended March 31, 2016:

 

 

 

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Table of Contents

 

Communications Sales & Leasing, Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

 

 

Condensed Consolidating Balance Sheet

As of March 31, 2016

 

(Thousands)

 

CS&L

 

 

CSL Capital

 

 

Guarantors

 

 

Non-Guarantors

 

 

Eliminations

 

 

Consolidated

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate investments, net of accumulated depreciation

 

$

 

 

$

 

 

$

1,799,279

 

 

$

521,845

 

 

$

 

 

$

2,321,124

 

Cash and cash equivalents

 

 

58