10-Q 1 unit-10q_20170331.htm UNIT-Q1-20170331 unit-10q_20170331.htm

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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 March 31, 2017

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

 

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 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        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

 

  (Do not check if a smaller reporting company)

  

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 April 28, 2017, the registrant had 175,448,233 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 future growth and demand of the telecommunication industry; future financing plans, business strategies, growth prospects and operating and financial performance; expectations regarding the impact and timing of the pending the acquisitions of Hunt Telecommunications, LLC ("Hunt") and Southern Light, LLC ("Southern Light"), including expectations regarding operational synergies with Uniti Towers and Uniti Fiber; expectations regarding settling conversion of our 3% convertible preferred stock in cash upon conversion; expectations regarding the probability of our obligation to pay contingent consideration upon Tower Cloud, Inc.'s ("Tower Cloud") or Hunt's achievement of certain defined operational and financial milestones; expectations regarding future deployment of fiber strand miles and recognition of revenue related thereto; expectations regarding levels of capital expenditures; expectations regarding the deductibility of goodwill for tax purposes; expectations regarding the amortization of intangible assets; 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 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 obtain our 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; 

 

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

 

the 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, and fluctuating interest rates; 

 

our ability to retain our key management personnel; 

 

our ability to 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 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; 

 

our ability to complete our pending acquisitions; and 

 

2


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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, 2016, 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.

 

 

3


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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

9

 

Notes to Condensed Consolidated Financial Statements

10

 

 

 

Item 2.

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

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

40

Item 4.

Controls and Procedures

40

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3.

Defaults Upon Senior Securities

42

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

43

 

 

 

Signatures

45

 

 

Exhibit Index

46

 

 

 

 

4


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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Uniti Group Inc.

Condensed Consolidated Balance Sheets

(unaudited)

(Thousands, except par value)

 

March 31, 2017

 

 

December 31, 2016

 

Assets:

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

2,672,349

 

 

$

2,670,037

 

Cash and cash equivalents

 

 

68,726

 

 

 

171,754

 

Accounts receivable, net

 

 

17,236

 

 

 

15,281

 

Goodwill

 

 

262,086

 

 

 

262,334

 

Intangible assets, net

 

 

214,061

 

 

 

160,584

 

Straight-line revenue receivable

 

 

33,406

 

 

 

29,088

 

Other assets

 

 

12,813

 

 

 

9,674

 

Total Assets

 

$

3,280,677

 

 

$

3,318,752

 

 

Liabilities, Convertible Preferred Stock and Shareholders' Deficit:

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

56,023

 

 

$

40,977

 

Accrued interest payable

 

 

65,715

 

 

 

27,812

 

Deferred revenue

 

 

293,879

 

 

 

261,404

 

Derivative liability

 

 

1,536

 

 

 

6,102

 

Dividends payable

 

 

94,810

 

 

 

94,607

 

Deferred income taxes

 

 

47,048

 

 

 

28,394

 

Capital lease obligations

 

 

54,068

 

 

 

54,535

 

Contingent consideration

 

 

90,719

 

 

 

98,600

 

Notes and other debt, net

 

 

4,003,792

 

 

 

4,028,214

 

      Total liabilities

 

 

4,707,590

 

 

 

4,640,645

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

81,296

 

 

 

80,552

 

 

 

 

 

 

 

 

 

 

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: 155,276 shares at March 31, 2017 and 155,139 at December 31, 2016

 

 

16

 

 

 

15

 

Additional paid-in capital

 

 

141,503

 

 

 

141,092

 

Accumulated other comprehensive income (loss)

 

 

3,072

 

 

 

(6,369

)

Distributions in excess of accumulated earnings

 

 

(1,652,800

)

 

 

(1,537,183

)

      Total shareholders' deficit

 

 

(1,508,209

)

 

 

(1,402,445

)

Total Liabilities, Convertible Preferred Stock, and Shareholders' Deficit

 

$

3,280,677

 

 

$

3,318,752

 

 

 

 

 

 

 

 

 

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 March 31,

 

(Thousands, except per share data)

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

Leasing

 

$

170,306

 

 

$

168,613

 

Fiber Infrastructure

 

 

34,812

 

 

 

-

 

Tower

 

 

1,428

 

 

 

28

 

Consumer CLEC

 

 

4,927

 

 

 

6,034

 

Total revenues

 

 

211,473

 

 

 

174,675

 

Costs and Expenses:

 

 

 

 

 

 

 

 

Interest expense

 

 

73,365

 

 

 

66,049

 

Depreciation and amortization

 

 

101,361

 

 

 

86,340

 

General and administrative expense

 

 

13,978

 

 

 

5,189

 

Operating expense (exclusive of depreciation, accretion and amortization)

 

 

22,125

 

 

 

4,707

 

Transaction related costs

 

 

9,684

 

 

 

3,910

 

Other expenses

 

 

11,339

 

 

 

-

 

Total costs and expenses

 

 

231,852

 

 

 

166,195

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(20,379

)

 

 

8,480

 

Income (benefit) tax expense

 

 

(379

)

 

 

444

 

Net (loss) income

 

 

(20,000

)

 

 

8,036

 

Participating securities' share in earnings

 

 

(387

)

 

 

(355

)

Dividends declared on convertible preferred stock

 

 

(656

)

 

 

-

 

Amortization of discount on convertible preferred stock

 

 

(745

)

 

 

-

 

Net (loss) income applicable to common shareholders

 

$

(21,788

)

 

$

7,681

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per common share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.14

)

 

$

0.05

 

Diluted

 

$

(0.14

)

 

$

0.05

 

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

155,184

 

 

 

149,918

 

Diluted

 

 

155,184

 

 

 

149,984

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.60

 

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31,

 

(Thousands)

 

2017

 

 

2016

 

Net (loss) income

 

$

(20,000

)

 

$

8,036

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

Unrealized (loss) gain on derivative contracts

 

 

4,566

 

 

 

(40,442

)

Changes in foreign currency translation

 

 

4,875

 

 

 

80

 

Other comprehensive income (loss)

 

 

9,441

 

 

 

(40,362

)

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(10,559

)

 

$

(32,326

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

(Thousands, except share data)

 

Preferred Stock

 

 

Common Stock

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Loss

 

 

Distributions in Excess of Accumulated Earnings

 

 

Total Shareholders' Deficit

 

 

 

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

 

Issuance of common stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,085

 

 

 

-

 

 

 

-

 

 

 

1,085

 

Amortization of discount of convertible preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(40,362

)

 

 

-

 

 

 

(40,362

)

Common stock dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(90,428

)

 

 

(90,428

)

Equity issuance cost

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net share settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(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

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

 

-

 

 

$

-

 

 

 

155,138,637

 

 

$

15

 

 

$

141,092

 

 

$

(6,369

)

 

$

(1,537,183

)

 

$

(1,402,445

)

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(20,000

)

 

 

(20,000

)

Amortization of discount on convertible preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(745

)

 

 

-

 

 

 

-

 

 

 

(745

)

Other comprehensive gain

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,441

 

 

 

-

 

 

 

9,441

 

Common stock dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(93,692

)

 

 

(93,692

)

Convertible preferred stock dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(656

)

 

 

(656

)

Equity issuance cost

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(54

)

 

 

-

 

 

 

-

 

 

 

(54

)

Net share settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(421

)

 

 

-

 

 

 

(1,269

)

 

 

(1,690

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

136,866

 

 

 

1

 

 

 

1,631

 

 

 

-

 

 

 

-

 

 

 

1,632

 

Balance at March 31, 2017

 

 

-

 

 

$

-

 

 

 

155,275,503

 

 

$

16

 

 

$

141,503

 

 

$

3,072

 

 

$

(1,652,800

)

 

$

(1,508,209

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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Uniti Group Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

 

 

Three Months Ended March 31,

 

(Thousands)

 

2017

 

 

2016

 

Cash flow from operating activities

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(20,000

)

 

$

8,036

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

101,361

 

 

 

86,340

 

Amortization of deferred financing costs

 

 

2,487

 

 

 

1,818

 

Amortization of debt discount

 

 

2,778

 

 

 

1,946

 

Deferred income taxes

 

 

(1,002

)

 

 

(216

)

Straight-line revenues

 

 

(3,629

)

 

 

(4,322

)

Stock-based compensation

 

 

1,632

 

 

 

930

 

Other

 

 

124

 

 

 

(9

)

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,014

 

 

 

1,307

 

Other assets

 

 

(1,626

)

 

 

(252

)

Change in fair value of contingent consideration

 

 

10,910

 

 

 

-

 

Accounts payable, accrued expenses and other liabilities

 

 

34,153

 

 

 

26,123

 

Net cash provided by operating activities

 

 

128,202

 

 

 

121,701

 

Cash flow from investing activities

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

248

 

 

 

111

 

Acquisition of ground lease investments

 

 

(7,191

)

 

 

(1,347

)

NMS asset acquisition (Note 3)

 

 

(64,622

)

 

 

-

 

Capital expenditures

 

 

(14,931

)

 

 

(77

)

Net cash used in investing activities

 

 

(86,496

)

 

 

(1,313

)

Cash flow from financing activities

 

 

 

 

 

 

 

 

Principal payment on debt

 

 

(5,270

)

 

 

(6,044

)

Dividends paid

 

 

(94,133

)

 

 

(90,314

)

Payments of contingent consideration

 

 

(18,791

)

 

 

-

 

Borrowings under revolving credit facility

 

 

25,000

 

 

 

-

 

Payments under revolving credit facility

 

 

(25,000

)

 

 

-

 

Capital lease payments

 

 

(672

)

 

 

-

 

Deferred financing costs

 

 

(24,418

)

 

 

-

 

Common stock issuance, net of costs

 

 

(54

)

 

 

-

 

Net share settlement

 

 

(1,690

)

 

 

(1,266

)

Net cash used in financing activities

 

 

(145,028

)

 

 

(97,624

)

Effect of exchange rates on cash and cash equivalents

 

 

294

 

 

 

78

 

Net (decrease) increase in cash and cash equivalents

 

 

(103,028

)

 

 

22,842

 

Cash and cash equivalents at beginning of period

 

 

171,754

 

 

 

142,498

 

Cash and cash equivalents at end of period

 

$

68,726

 

 

$

165,340

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment acquired but not yet paid

 

$

4,013

 

 

$

-

 

Tenant capital improvements

 

$

33,824

 

 

$

32,359

 

Acquisition of businesses through non-cash consideration

 

$

-

 

 

$

974

 

 

 

 

 

 

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

 

 

9


Table of Contents

 

Uniti Group Inc.

Notes to the Condensed Consolidated Financial Statements

(unaudited)

Note 1. Organization and Description of Business

Uniti Group Inc. (the “Company,” “Uniti,” “we,” “us,” or “our”), formerly known as Communications Sales and Leasing, Inc., was incorporated in the state of Maryland on September 4, 2014 as a subsidiary of Windstream Holdings, Inc. (“Windstream Holdings” and together with its subsidiaries, “Windstream”). On April 24, 2015, Uniti was separated and spun-off from Windstream (“the Spin-Off”). In connection with the Spin-Off, 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”). Immediately following the Spin-Off we entered into a long-term exclusive triple-net lease (the “Master Lease”) with Windstream pursuant to which Uniti 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.

 

We are an independent, internally managed REIT engaged in the acquisition and construction of mission critical infrastructure in the communications industry. We are principally focused on acquiring and constructing fiber optic broadband networks, wireless communications towers, copper and coaxial broadband networks and data centers. Effective the first quarter of 2017, we commenced managing our operations in four separate lines of business: Unit Fiber, Uniti Towers, Uniti Leasing, and the Consumer CLEC Business.

 

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 Condensed 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, 2016 (“Annual Report”), filed with the SEC on February 23, 2017. Accordingly, significant accounting policies and other disclosures normally provided have been omitted from the accompanying Condensed Consolidated Financial Statements and related notes since such items are disclosed in our Annual Report. All material intercompany balances and transactions have been eliminated.

 

Income Taxes—We currently have recorded a $5.3 million liability for unrecognized tax benefits in connection with the acquisition of Network Management Holdings, LTD (“NMS”). See Note 3. We have filed our initial U.S. federal and state income tax returns which are subject to examination.

 

Reclassifications—Certain amounts have been reclassified to conform with current year presentation. Following the acquisition of Network Management Holdings, LTD (“NMS”) in the first quarter of 2017, the Company manages and reports our operations in four reportable business segment: Leasing, Fiber Infrastructure, Towers and Consumer CLEC. Prior year information, including revenues on the Consolidated Statement of Income, has been recast to conform to the current year presentation. See Note 11We determined that certain immaterial misclassifications existed in the supplemental guarantor information condensed consolidating statements of comprehensive income for the three months ended March 31, 2016. During the first quarter of 2017, certain Non-Guarantor entities became Guarantor entities. Prior year information has been recast to conform to the current year presentation. See Note 14.

Recently Issued Accounting Standards

In February 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”), which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets and for partial sales of nonfinancial assets, and is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2017. The Company is currently evaluating the impacts the adoption of this accounting standard will have on our financial statements.

 

10


Table of Contents

 

Uniti Group Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment (ASU 2017-04”), which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual and interim periods beginning January 1, 2020, with early adoption permitted, and applied prospectively. We adopted ASU 2017-04 effective January 1, 2017, and there was no material impact on our financial position, results of operations or cash flows.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We adopted ASU 2017-01 effective January 1, 2017, with prospective application. As a result of the adoption of ASU 2017-01, the Company’s acquisition of NMS) (see Note 3) was determined to be an asset acquisition. Transaction cost associated with our real property interest investments are now capitalized as opposed to be recorded as an expense as was required prior to adoption of ASU 2017-01.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This update 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 intends to adopt the revenue recognition guidance on January 1, 2018. The Company’s implementation efforts include reviewing revenue contracts and the identification of revenue within scope of the guidance. While the Company currently has not identified any material changes in the timing of revenue recognition, the evaluation is ongoing and we are in the process of determining the method of adoption.

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. The Company is currently evaluating this guidance to determine the impact it will have on our financial statements by reviewing its existing operating lease contracts, where we are the lessee and service contracts that may include embedded leases. The Company expects a gross-up of its Consolidated Balance Sheets as a result of recognizing lease liabilities and right of use assets, the extent of the impact of a gross-up is under evaluation. The Company does not anticipate material changes to the recognition of operating lease expense in its Consolidated Statements of Income.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on reducing the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. In addition to other specific cash flow issues, ASU 2016-15 provides clarification on when an entity should separate cash receipts and cash payments into more than one class of cash flows and when an entity should classify those cash receipts and payments into one class of cash flows on the basis of predominance. The new guidance is effective for the fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impacts the adoption of this accounting standard will have on our financial statements.

 

Note 3. Business Combinations and Asset Acquisitions

Asset Acquisitions

Network Management Holdings LTD

 

11


Table of Contents

 

Uniti Group Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

On January 31, 2017, we completed the previously announced acquisition of NMS. The Company accounted for the acquisition of NMS as an asset purchase. At close, NMS owned and operated 366 wireless communications towers in Latin America with an additional 105 build to suit tower sites under development. The NMS portfolio spans three Latin America countries with 212 towers in Mexico, 54 towers in Nicaragua, and 100 towers in Colombia. The consideration for the 366 wireless towers currently in operation was $62.6 million, which was funded through cash on hand, and is presented in NMS asset acquisition on the Condensed Consolidated Statements of Cash Flows. NMS conducts its operations through three non-U.S. subsidiaries and the Company has determined that the functional currencies for the Mexico, Nicaraguan and Colombian subsidiaries are the Mexican Peso, US Dollar and Colombian Peso, respectively.  The non-U.S. subsidiaries in which NMS conducts its operations are subject to income tax in the jurisdictions in which they operate.  The acquisition did not result in a step up in tax basis under local law.  The Company recorded a net deferred tax liability of $18.4 million and a liability for unrecognized tax benefits of $5.3 million in connection with the acquisition. The deferred tax liability is primarily related to the excess of the recorded amounts for Property, Plant & Equipment and Intangibles over their respective historical tax bases.  Under the terms of the purchase agreement, we will acquire the towers under development when construction is completed. The NMS towers are reflected in our Towers segment. See note 11. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed:

 

 

 

(thousands)

 

Property, plant and equipment

 

$

36,417

 

Accounts receivable

 

 

2,826

 

Other assets

 

 

1,623

 

Intangible assets

 

 

52,437

 

Accounts payable, accrued expenses and other liabilities

 

 

(8,895

)

Intangible liabilities

 

 

(3,440

)

Deferred income taxes

 

 

(18,403

)

Total purchase consideration

 

$

62,565

 

 

Of the $52.4 million of acquired intangible assets, $37.4 million was assigned to tenant contracts (22 year life), $13.5 million was assigned to network (22 year life) and $1.5 million was assigned to acquired above-market leases (10 year life). The acquired below-market lease intangible liability of $3.4 million has a 10 year life. See Note 7.

 

On March 15, 2017, construction was completed on 24 towers that were under development, and we acquired the towers pursuant to the purchase agreement for approximately $2.1 million.

 

Business Combinations

Tower Cloud, Inc.

On August 31, 2016, we acquired 100% of the outstanding equity of Tower Cloud, Inc. (“Tower Cloud”) for $187.5 million in cash and 1.9 million shares of our common stock with an acquisition date fair value of $58.5 million. Additional contingent consideration of up to $130 million, with an acquisition date fair value of $98.6 million, may be paid upon the achievement of certain defined operational and financial milestones. See Note 4. At the Company’s discretion, a combination of cash and Uniti common shares may be used to satisfy the contingent consideration payments, provided that at least 50% of the aggregate amount of payments is satisfied in cash. Tower Cloud provides data transport services, with particular focus on providing infrastructure solutions to the wireless and enterprise sectors, including fiber-to-the-tower backhaul, small cell networks, and dark fiber deployments. The acquisition was recorded by allocating the costs of the assets acquired based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the fair value of the assets acquired is recorded as goodwill within our Fiber Infrastructure segment. During the first quarter of 2017, certain contractual working capital adjustments resulted in a $0.2 million reduction of the purchase price and goodwill. See Note 7. The following is a summary of the estimated fair values of the assets acquired and liabilities assumed:

 

 

12


Table of Contents

 

Uniti Group Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

 

 

(thousands)

 

Property, plant and equipment

 

$

163,680

 

Cash and cash equivalents

 

 

14,346

 

Accounts receivable

 

 

3,043

 

Other assets

 

 

2,595

 

Intangible assets

 

 

116,218

 

Accounts payable, accrued expenses and other liabilities

 

 

(16,782

)

Deferred revenue

 

 

(23,900

)

Deferred income taxes

 

 

(24,866

)

Capital lease obligations

 

 

(6,750

)

Net assets acquired

 

$

227,584

 

 

 

 

 

 

Goodwill

 

$

117,032

 

 

 

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

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, 2017 and December 31, 2016:

(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, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

2,100,069

 

$

-

 

$

2,100,069

 

$

-

 

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

 

 

567,875

 

 

-

 

 

567,875

 

 

-

 

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

 

 

1,168,275

 

 

-

 

 

1,168,275

 

 

-

 

Senior unsecured notes - 7.125%, due December 15, 2024

 

 

405,000

 

 

-

 

 

405,000

 

 

-

 

Derivative liability

 

 

1,536

 

 

-

 

 

1,536

 

 

-

 

Contingent consideration

 

 

90,719

 

 

-

 

 

-

 

 

90,719

 

Total

 

$

4,333,474

 

$

-

 

$

4,242,755

 

$

90,719

 

 

 

13


Table of Contents

 

Uniti Group Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

(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, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

2,139,586

 

$

-

 

$

2,139,586

 

$

-

 

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

 

 

569,250

 

 

-

 

 

569,250

 

 

-

 

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

 

 

1,176,600

 

 

-

 

 

1,176,600

 

 

-

 

Senior unsecured notes - 7.125%, due December 15, 2024

 

 

404,000

 

 

-

 

 

404,000

 

 

-

 

Derivative liability

 

 

6,102

 

 

-

 

 

6,102

 

 

-

 

Contingent consideration

 

 

98,600

 

 

-

 

 

-

 

 

98,600

 

Total

 

$

4,394,138

 

$

-

 

$

4,295,538

 

$

98,600

 

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

The total principal balance of our outstanding notes and other debt was $4.16 billion at March 31, 2017, with a fair value of $4.24 billion. The estimated fair value of our outstanding 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 Uniti’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, 2017, the Company has assessed the significance of 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.

As part of the acquisition of Tower Cloud on August 31, 2016, we may be obligated to pay contingent consideration upon achievement of certain defined operational and financial milestones; therefore, we recorded the estimated fair value of future contingent consideration of $98.6 million as of August 31, 2016. The fair value of the contingent consideration as of August 31, 2016, was determined using a discounted cash flow model and probability adjusted estimates of the future earnings and is classified as Level 3. During the three months ended March 31, 2017, we paid $18.8 million for the achievement of certain milestones in accordance with the Tower Cloud merger agreement. Changes in the fair value of contingent consideration will be recorded in our Condensed Consolidated Statement of Income in the period in which the change occurs. There was a $10.9 million increase in the fair value of the contingent consideration as of March 31, 2017 that was recorded in Other expenses on the Condensed Consolidated Statements of Income during the three months ended March 31, 2017.

The following is a roll forward of our liability measured at fair value on a recurring basis using unobservable inputs (Level 3):

(Thousands)

 

December 31, 2016

 

 

Transfers into Level 3

 

 

(Gain)/Loss included in earnings

 

 

Settlements

 

 

March 31, 2017

 

Contingent consideration

 

$

98,600

 

 

$

-

 

 

$

10,910

 

 

$

(18,791

)

 

$

90,719

 

 

 

 

14


Table of Contents

 

Uniti Group Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

Note 5. Property, Plant and Equipment

The carrying value of property, plant and equipment is as follows:

 

(Thousands)

 

Depreciable Lives

 

March 31, 2017

 

 

December 31, 2016

 

Land

 

Indefinite

 

$

28,385

 

 

$

26,833

 

Building and improvements

 

3 - 40 years

 

 

320,061