10-Q 1 unit-10q_20180331.htm 10-Q unit-10q_20180331.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, 2018

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 May 3, 2018, the registrant had 175,703,882 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 integration 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 reclassification of accumulated other comprehensive income (loss) related to derivatives to interest expense; expectations regarding the amortization of intangible assets; expectations regarding the U.S. TelePacific Holdings Corp (“TPx”) transaction; 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 retain our contracts or to obtain new contracts with significant customers (including customers of the businesses that we acquire); 

 

the availability of and our ability to identify suitable acquisition opportunities and our ability to acquire and lease the respective properties on favorable terms or operate and integrate the acquired businesses; 

 

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

 

our ability to access debt and equity capital markets; 

 

the impact on our business or the business of our customers as a result of credit rating downgrades, and fluctuating interest rates; 

 

adverse impacts of litigation or disputes involving us or our customers;

 

our ability to retain our key management personnel; 

 

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, including the impact of the recently enacted U.S. tax reform legislation; 

 

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

 

the possibility that we may experience equipment failures, natural disasters, cyber attacks or terrorist attacks for which our insurance may not provide adequate coverage; 

 

the risk that we fail to fully realize the potential benefits of or have difficulty in integrating the companies we acquire; 

 

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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;

 

the risk that the TPx transaction agreements may be modified or terminated prior to expiration or that the conditions to the TPx transaction may not be satisfied; and

 

additional factors discussed in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q and in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2017, 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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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

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

Item 4.

Controls and Procedures

39

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3.

Defaults Upon Senior Securities

41

Item 4.

Mine Safety Disclosures

41

Item 5.

Other Information

41

Item 6.

Exhibits

42

 

 

 

Signatures

43

 

 

 

 

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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, 2018

 

 

December 31, 2017

 

Assets:

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

3,049,714

 

 

$

3,053,889

 

Cash and cash equivalents

 

 

56,901

 

 

 

59,765

 

Accounts receivable, net

 

 

37,601

 

 

 

43,652

 

Goodwill

 

 

677,132

 

 

 

673,729

 

Intangible assets, net

 

 

425,694

 

 

 

429,357

 

Straight-line revenue receivable

 

 

51,447

 

 

 

47,041

 

Derivative asset

 

 

42,061

 

 

 

6,793

 

Other assets

 

 

22,963

 

 

 

15,856

 

Total Assets

 

$

4,363,513

 

 

$

4,330,082

 

 

Liabilities, Convertible Preferred Stock and Shareholders' Deficit:

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

80,419

 

 

$

77,634

 

Accrued interest payable

 

 

70,517

 

 

 

28,684

 

Deferred revenue

 

 

586,595

 

 

 

537,553

 

Dividends payable

 

 

109,365

 

 

 

109,557

 

Deferred income taxes

 

 

55,611

 

 

 

55,478

 

Capital lease obligations

 

 

55,651

 

 

 

56,329

 

Contingent consideration

 

 

89,236

 

 

 

105,762

 

Notes and other debt, net

 

 

4,503,462

 

 

 

4,482,697

 

      Total liabilities

 

 

5,550,856

 

 

 

5,453,694

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

84,274

 

 

 

83,530

 

 

 

 

 

 

 

 

 

 

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: 174,970 shares at March 31, 2018 and 174,852 at December 31, 2017

 

 

17

 

 

 

17

 

Additional paid-in capital

 

 

645,403

 

 

 

644,328

 

Accumulated other comprehensive income

 

 

46,735

 

 

 

7,821

 

Distributions in excess of accumulated earnings

 

 

(2,063,640

)

 

 

(1,960,715

)

Total Uniti shareholders' deficit

 

 

(1,371,485

)

 

 

(1,308,549

)

Noncontrolling interests - operating partnership units

 

 

99,868

 

 

 

101,407

 

      Total shareholders' deficit

 

 

(1,271,617

)

 

 

(1,207,142

)

Total Liabilities, Convertible Preferred Stock, and Shareholders' Deficit

 

$

4,363,513

 

 

$

4,330,082

 

 

 

 

 

 

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)

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

Leasing

 

$

172,774

 

 

$

170,306

 

Fiber Infrastructure

 

 

66,967

 

 

 

34,812

 

Tower

 

 

3,370

 

 

 

1,428

 

Consumer CLEC

 

 

3,804

 

 

 

4,927

 

Total revenues

 

 

246,915

 

 

 

211,473

 

Costs and Expenses:

 

 

 

 

 

 

 

 

Interest expense

 

 

77,607

 

 

 

73,365

 

Depreciation and amortization

 

 

114,721

 

 

 

101,361

 

General and administrative expense

 

 

22,520

 

 

 

13,978

 

Operating expense (exclusive of depreciation and amortization)

 

 

29,904

 

 

 

22,125

 

Transaction related costs

 

 

5,913

 

 

 

9,684

 

Other (income) expense

 

 

(3,885

)

 

 

11,339

 

      Total costs and expenses

 

 

246,780

 

 

 

231,852

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

135

 

 

 

(20,379

)

Income tax benefit

 

 

(1,096

)

 

 

(379

)

Net income (loss)

 

 

1,231

 

 

 

(20,000

)

Net income attributable to noncontrolling interests

 

 

21

 

 

 

-

 

Net income (loss) available to shareholders

 

 

1,210

 

 

 

(20,000

)

Participating securities' share in earnings

 

 

(679

)

 

 

(387

)

Dividends declared on convertible preferred stock

 

 

(656

)

 

 

(656

)

Amortization of discount on convertible preferred stock

 

 

(745

)

 

 

(745

)

Net loss attributable to common shareholders

 

$

(870

)

 

$

(21,788

)

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

Basic

 

$

-

 

 

$

(0.14

)

Diluted

 

$

(0.01

)

 

$

(0.14

)

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

174,892

 

 

 

155,184

 

Diluted

 

 

175,499

 

 

 

155,184

 

 

 

 

 

 

 

 

 

 

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)

 

2018

 

 

2017

 

Net income (loss)

 

$

1,231

 

 

$

(20,000

)

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized gain on derivative contracts

 

 

35,268

 

 

 

4,566

 

Changes in foreign currency translation

 

 

4,565

 

 

 

4,875

 

Other comprehensive income

 

 

39,833

 

 

 

9,441

 

Comprehensive income (loss)

 

 

41,064

 

 

 

(10,559

)

Comprehensive income attributable to noncontrolling interest

 

 

940

 

 

 

-

 

Comprehensive income (loss) attributable to common shareholders

 

$

40,124

 

 

$

(10,559

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 Income (Loss)

 

 

Distributions in Excess of Accumulated Earnings

 

 

Noncontrolling Interest

 

 

Total Shareholders' Deficit

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 of convertible preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(745

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(745

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

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

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

-

 

 

$

-

 

 

 

174,851,514

 

 

$

17

 

 

$

644,328

 

 

$

7,821

 

 

$

(1,960,715

)

 

$

101,407

 

 

$

(1,207,142

)

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,210

 

 

 

21

 

 

 

1,231

 

Amortization of discount on convertible preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(745

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(745

)

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

38,914

 

 

 

-

 

 

 

919

 

 

 

39,833

 

Common stock dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(105,069

)

 

 

-

 

 

 

(105,069

)

Distributions to noncontrolling interest

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,479

)

 

 

(2,479

)

Convertible preferred stock dividends

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(656

)

 

 

-

 

 

 

(656

)

Net share settlement

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(390

)

 

 

-

 

 

 

(269

)

 

 

-

 

 

 

(659

)

Stock-based compensation

 

 

-

 

 

 

-

 

 

 

118,132

 

 

 

-

 

 

 

2,210

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,210

 

Impact of change in accounting standard

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,859

 

 

 

-

 

 

 

1,859

 

Balance at March 31, 2018

 

 

-

 

 

$

-

 

 

 

174,969,646

 

 

$

17

 

 

$

645,403

 

 

$

46,735

 

 

$

(2,063,640

)

 

$

99,868

 

 

$

(1,271,617

)

 

 

 

 

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)

 

2018

 

 

2017

 

Cash flow from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,231

 

 

$

(20,000

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

114,721

 

 

 

101,361

 

Amortization of deferred financing costs and debt discount

 

 

6,034

 

 

 

5,265

 

Deferred income taxes

 

 

(1,502

)

 

 

(1,002

)

Straight-line revenues

 

 

(4,592

)

 

 

(3,629

)

Stock-based compensation

 

 

2,210

 

 

 

1,632

 

Change in fair value of contingent consideration

 

 

(3,864

)

 

 

10,910

 

Other

 

 

921

 

 

 

124

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

6,409

 

 

 

1,014

 

Other assets

 

 

(4,621

)

 

 

(1,626

)

Accounts payable, accrued expenses and other liabilities

 

 

39,919

 

 

 

34,153

 

Net cash provided by operating activities

 

 

156,866

 

 

 

128,202

 

Cash flow from investing activities

 

 

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

-

 

 

 

248

 

Acquisition of ground lease investments

 

 

-

 

 

 

(7,191

)

NMS asset acquisitions (Note 4)

 

 

(962

)

 

 

(64,622

)

Capital expenditures - other

 

 

(51,143

)

 

 

(14,931

)

Net cash used in investing activities

 

 

(52,105

)

 

 

(86,496

)

Cash flow from financing activities

 

 

 

 

 

 

 

 

Principal payments on debt

 

 

(5,270

)

 

 

(5,270

)

Dividends paid

 

 

(105,920

)

 

 

(94,133

)

Payments of contingent consideration

 

 

(12,662

)

 

 

(18,791

)

Distributions paid to noncontrolling interest

 

 

(2,479

)

 

 

-

 

Borrowings under revolving credit facility

 

 

70,000

 

 

 

25,000

 

Payments under revolving credit facility

 

 

(50,000

)

 

 

(25,000

)

Capital lease payments

 

 

(899

)

 

 

(672

)

Deferred financing costs

 

 

-

 

 

 

(24,418

)

Common stock issuance, net of costs

 

 

-

 

 

 

(54

)

Net share settlement

 

 

(658

)

 

 

(1,690

)

Net cash used in financing activities

 

 

(107,888

)

 

 

(145,028

)

Effect of exchange rates on cash and cash equivalents

 

 

263

 

 

 

294

 

Net decrease in cash and cash equivalents

 

 

(2,864

)

 

 

(103,028

)

Cash and cash equivalents at beginning of period

 

 

59,765

 

 

 

171,754

 

Cash and cash equivalents at end of period

 

$

56,901

 

 

$

68,726

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment acquired but not yet paid

 

$

18,078

 

 

$

4,013

 

Tenant capital improvements

 

$

47,352

 

 

$

33,824

 

 

 

 

 

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 & Leasing, Inc., was incorporated in the state of Delaware in February 2014 and reorganized in the state of Maryland on September 4, 2014. We are an internally managed real estate investment trust (“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. We manage our operations in four separate lines of business: Uniti Fiber, Uniti Towers, Uniti Leasing, and the Consumer CLEC Business.

The Company operates through a customary “up-REIT” structure, pursuant to which we hold substantially all of our assets through a partnership, Uniti Group LP, a Delaware limited partnership (the “Operating Partnership”), that we control as general partner, with the only significant difference between the financial position and results of operations of the Operating Partnership and its subsidiaries compared to the consolidated financial position and consolidated results of operations of Uniti is that the results for the Operating Partnership and its subsidiaries do not include Uniti’s Consumer CLEC segment, which consists of Talk America Services. The up-REIT structure is intended to facilitate future acquisition opportunities by providing the Company with the ability to use common units of the Operating Partnership as a tax-efficient acquisition currency.  We are the sole general partner of the Operating Partnership and own approximately 97.7% of the partnership interests in the Operating Partnership as of March 31, 2018 and December 31, 2017, respectively.

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

The accompanying Condensed Consolidated Financial Statements include all accounts of the Company, its wholly-owned and/or controlled subsidiaries, which consist of the Operating Partnership. Under the Accounting Standards Codification 810, Consolidation (“ASC 810”), the Operating Partnership is considered a variable interest entity and is consolidated in the Condensed Consolidated Financial Statements of Uniti Group Inc. because the Company is the primary beneficiary.  All material intercompany balances and transactions have been eliminated.

ASC 810 provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIEs.  Generally, the consideration of whether an entity is a VIE applies when either: (1) the equity investors (if any) lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and substantially all of the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.  The Company consolidates VIEs in which it is considered to be the primary beneficiary.  The primary beneficiary is defined by the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance; and (2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE.

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, 2017 (“Annual Report”), filed with the SEC on March 1, 2018. 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.

Concentration of Credit Risks—We are party to a Master Lease agreement with from Windstream Holdings, Inc. (“Windstream Holdings” and together with its subsidiaries, “Windstream”) from which substantially all of Uniti’s leasing revenues and operating

 

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Uniti Group Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

cash flows are currently derived. Revenue under the Master Lease provided 70.0% and 80.5% of our revenue for the three months ended March 31, 2018 and 2017, respectively.  Because a substantial portion of our revenue and cash flows are derived from lease payments by Windstream pursuant to the Master Lease, there could be a material adverse impact on our consolidated results of operations, liquidity, financial condition and/or ability to pay dividends and service debt if Windstream were to default under the Master Lease or otherwise experiences operating or liquidity difficulties and becomes unable to generate sufficient cash to make payments to us. In recent years, Windstream has experienced annual declines in its total revenue, sales and cash flow, and has had its credit ratings downgraded by nationally recognized credit rating agencies. Most recently, Windstream is involved in litigation with an entity who acquired certain Windstream debt securities and immediately claimed an “event of default” under such securities relating to our spin-off from Windstream. On December 7, 2017, the entity issued a notice of acceleration to Windstream claiming that the principal amount, along with accrued interest, of such securities was due and payable immediately. Windstream is challenging the matter in federal court and a trial date has been scheduled for July 23, 2018.    If Windstream receives a final, unappealable adverse ruling, an “event of default” would be declared.  An actual “event of default” would trigger cross-default provisions in Windstream’s other debt instruments, including Windstream Services’ existing credit facility, which, in turn, would trigger a default under the Master Lease.  If an adverse outcome occurs with respect to this matter and Windstream does not have the ability to pay under the Master Lease, there could be a material adverse impact to us as disclosed above.

Accordingly, we monitor the credit quality of Windstream through numerous methods, including by (i) reviewing the credit ratings of Windstream by nationally recognized credit rating agencies, (ii) reviewing the financial statements of Windstream that are publicly available and that are required to be delivered to us pursuant to the Master Lease, (iii) monitoring ongoing litigation and news reports regarding Windstream and its businesses, (iv) conducting research to ascertain industry trends potentially affecting Windstream, and (v) monitoring the timeliness of its lease payments.

Windstream is a publicly traded company and is subject to the periodic filing requirements of the Securities Exchange Act of 1934, as amended. Windstream filings can be found at www.sec.gov. Windstream filings are not incorporated by reference in this Quarterly Report on Form 10-Q.

Income TaxesThe Tax Cuts and Jobs Act (“Tax Bill”) was enacted on December 22, 2017. The Tax Bill reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. Consistent with Staff Accounting Bulletin No. 118 issued by the SEC, which provides for a measurement period of one year from the enactment date to finalize the accounting for effects of the Tax Bill, the Company provisionally recorded income tax benefit of $17.0 million related to the Tax Bill in the fourth quarter of 2017.  As of March 31, 2018, we have not yet completed our accounting for the tax effects of the enactment of the Tax Bill.  Future regulatory and rulemaking interpretations or other guidance clarifying provisions of the Tax Bill could affect the Company’s analysis and tax position.

Reclassifications—Certain prior year asset categories and related amounts in Note 6 have been reclassified to conform with current year presentation.

Recently Issued Accounting Standards

In August 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. ASU 2017-12 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, and earlier adoption is permitted. We adopted ASU 2017-12 effective January 1, 2018, and there was no material impact on our financial position.

In February 2017, the FASB issued 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. We adopted ASU 2017-05 effective January 1, 2018, using the modified retrospective approach and there was no material impact on our financial position.

 

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Uniti Group Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

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. We adopted ASU 2016-15 effective January 1, 2018, and there was no material impact on our financial position.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”). 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. Topic 606 is effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. We adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. See Note 3.

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 provisions of this guidance are effective for annual periods beginning after December 31, 2018, and for interim periods therein. 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 January 2018, the FASB issued ASU 2018-01, Leases (Topic 842) – Land Easement Practical Expedient for Transition to Topic 842. This standard permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expire before the Company's adoption of ASC 842 and that were not previously accounted for as leases under ASC 840. The Company intends to elect this transition provision.

 

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Uniti Group Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

Note 3. Revenues

Adoption of ASC Topic 606, Revenue from Contracts with Customers

Except for the changes below, we have consistently applied the accounting policies to all periods presented in these Condensed Consolidated Financial Statements.

On January 1, 2018, we adopted Topic 606 using the modified retrospective method, whereby the cumulative effect of initially applying Topic 606 is recognized as an adjustment to the opening balance of equity at January 1, 2018. Therefore, comparative information has not been adjusted and continues to be reported under ASC 605, Revenue Recognition. We recorded a net increase to opening retained earnings of $1.9 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to commission costs that are capitalized under Topic 606 which were previously expensed.  

The details of the significant changes and quantitative impact of the changes are set out below. We have applied this guidance only to contracts that are not completed as of the January 1, 2018, the date of initial application.

Commissions

We previously recognized commission fees related to obtaining a contract as selling expenses when incurred. Under Topic 606 and Topic 340, Other Assets and Deferred Costs, when they are incremental, expected to be recovered, we capitalize those commission fees as costs of obtaining a contract and amortize them consistently with the pattern of transfer of the product or service to which the asset relates. These costs are included in general and administrative expense on the Condensed Consolidated Statements of Income.  These deferred balances were $2.9 and $2.5 at March 31, 2018 and January 1, 2018, respectively, and included in Other Assets on the Condensed Consolidated Balance Sheets; Other Assets would have been lower by those amounts under revenue recognition and cost guidance applicable to us prior to the adoption of Topic 606 and Topic 340.  The impact to costs as a result of applying Topic 606 was a decrease of $0.4 million for the three months ended March 31, 2018 as compared to what the general and administrative expense would have been under previous revenue and cost recognition guidance.  There would have been no other differences in our Condensed Consolidated Balance Sheet as of March 31, 2018 or Condensed Consolidated Statements of Income for the quarter ended March 31, 2018 under previous revenue and cost recognition guidance as compared to Topic 606 and Topic 340.

Nature of goods and services

The following is a description of principal activities, separated by reportable segments (see Note 11), from which the Company generates its revenues.

Leasing

Leasing revenue represents the results from our leasing programs, Uniti Leasing, which is engaged in the acquisition of mission-critical communications assets and leasing them back to anchor customers on either an exclusive or shared-tenant basis. Due to the nature of these activities, they are outside the scope of the guidance of Topic 606, and are recognized under other applicable guidance, including ASC 840, Leases (“Topic 840”).

Fiber Infrastructure

The Fiber Infrastructure segment represents the operations of our fiber business, Uniti Fiber, which provides (i) consumer, enterprise, wholesale and backhaul lit fiber, (ii) e-rate, (iii) small cell, (iv) construction services, (v) dark fiber and (vi) other revenue generating activities.

 

i.

Consumer, enterprise, wholesale, and backhaul lit fiber fall under the guidance of Topic 606. Revenue is recognized over the life of the contracts in a pattern that reflects the satisfaction of Uniti’s stand-ready obligation to provide lit fiber services. The transaction price is equal to the monthly-recurring charge multiplied by the contract term, plus any non-recurring or variable charges. For each contract, the customer is invoiced monthly.

 

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Uniti Group Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

 

ii.

E-rate contracts involve providing lit fiber services to schools and libraries, and is governed by Topic 606. Revenue is recognized over the life of the contract in a pattern that reflects the satisfaction of Uniti’s stand-ready obligation to provide lit fiber services. The transaction price is equal to the monthly-recurring charge multiplied by the contract term, plus any non-recurring or variable charges. For each contract, the customer is invoiced monthly.

 

iii.

Small cell contracts provide improved network connection to areas that may not require or accommodate a tower. These are smaller units, similar to a telephone pole that are constructed and then leased to the customer. As such, small cell contains five streams of revenue; site development, radio frequency (“RF”) design, dark fiber lease, construction services, and maintenance services. Site development, RF design and construction are each separate services and are considered distinct performance obligations under Topic 606. Dark fiber and associated maintenance services constitute a lease, and as such, they are outside the scope of Topic 606 and are governed by other applicable guidance.

 

iv.

Construction revenue is generated from contracts to provide various construction services such as equipment installation or the laying of fiber.  Construction revenue is recognized over time as construction activities occur as we are either enhancing a customer’s owned asset or we are constructing an asset with no alternative use to us and we would be entitled to our costs plus a reasonable profit margin if the contract was terminated early by the customer.  We are utilizing our costs incurred as the measure of progress of satisfying our performance obligation.

 

v.

Dark fiber arrangements represent operating leases under Topic 840 and, is outside the scope of Topic 606.  When (i) a customer makes an advance payment or (ii) a customer is contractually obligated to pay any amounts in advance, which is not deemed a separate performance obligation, deferred leasing revenue is recorded. This leasing revenue is recognized ratably over the expected term of the contract, unless the pattern of service suggests otherwise.

 

vi.

The Company generates revenues from other services, such as consultation services and equipment sales.  Revenue from the sale of customer premise equipment and modems that are not provided as an essential part of the telecommunications services, including broadband, long distance, and enhanced services is recognized when products are delivered to and accepted by customer. Revenue from customer premise equipment and modems provided as an essential part of the telecommunications services, including broadband, long distance, and enhanced services are recognized over time in a pattern that reflects the satisfaction of the service performance obligation.

Towers

The Towers segment represents the operations of our towers business, Uniti Towers, through which we acquire and construct tower and tower-related real estate, which we then lease to our customers in the United States and Latin America. Revenue from our towers business qualifies as a lease under Topic 840 and is outside the scope of Topic 606.

Consumer CLEC

The Consumer CLEC segment represents the operations of Talk America Services (“Talk America”) through which we operate the Consumer CLEC Business, which provides local telephone, high-speed internet and long-distance services to customers in the eastern and central United States. Customers are billed monthly for services rendered based on actual usage or contracted amounts. The transaction price is equal to the monthly-recurring charge multiplied by the initial contract term (typically 12 months), plus any non-recurring or variable charges.

Disaggregation of Revenue

The following table presents our revenues disaggregated by revenue stream.

 

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Uniti Group Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

 

 

Three Months Ended March 31,

 

(Thousands)

 

2018

 

 

2017(1)

 

Revenue disaggregated by revenue stream

 

 

 

 

 

 

 

 

Revenue from contracts with customers

 

 

 

 

 

 

 

 

Fiber Infrastructure

 

 

 

 

 

 

 

 

Lit backhaul

 

$

33,346

 

 

$

24,252

 

Enterprise and wholesale

 

 

15,418

 

 

 

3,479

 

E-Rate and government

 

 

14,230

 

 

 

6,951

 

Other

 

 

990

 

 

 

(240

)

Fiber Infrastructure

 

$

63,984

 

 

$

34,442

 

Consumer CLEC

 

 

3,804

 

 

 

4,927

 

Total revenue from contracts with customers

 

 

67,788

 

 

 

39,369

 

Revenue accounted for under other applicable guidance

 

 

179,127

 

 

 

172,104

 

Total revenue

 

$

246,915

 

 

$

211,473

 

(1)

As noted above, prior period amounts have not been adjusted under the modified retrospective method.

 

At March 31, 2018, and January 1, 2018, lease receivables were $7.8 million and $10.9 million, respectively, and receivables from contract with customers were $28.3 million and $31.2 million, respectively.

Contract Assets (Unbilled Revenue) and Liabilities (Deferred Revenue)

Contract liabilities are generally comprised of upfront fees charged to the customer for the cost of establishing the necessary components of the Company’s network prior to the commencement of use by the customer. Fees charged to customers for the recurring use of the Company’s network are recognized during the related periods of service. Upfront fees that are billed in advance of providing services are deferred until such time the customer accepts the Company’s network and then are recognized as service revenues ratably over a period in which substantive services required under the revenue arrangement are expected to be performed, which is the initial term of the arrangement.

The following table provides information about contract assets and contract liabilities accounted for under Topic 606.

(Thousands)

 

Contract Assets

 

 

Contract Liabilities

 

Balance at January 1, 2018

 

$

2,490

 

 

$

26,256

 

Revenue recognized that was included in the contract liability balance at the beginning of the period

 

 

-

 

 

 

(2,398

)

Increases due to revenue recognized, and not billed during the period

 

 

2,795

 

 

 

-

 

Increases due to cash received, excluding amounts recognized as revenue during the period

 

 

-

 

 

 

1,497

 

Transferred to receivables from contract assets, recognized at the beginning of the period

 

 

(2,554

)

 

 

-

 

Balance at March 31, 2018

 

$

2,731

 

 

$

25,355

 

Transaction Price Allocated to Remaining Performance Obligations

Performance obligations within contracts to stand ready to provide services are typically satisfied over time or as those services are provided. Contract assets primarily relate costs incremental to obtaining contracts and contract liabilities primarily relate to deferred revenue from non-recurring charges.  The deferred revenue is recognized, and the liability reduced, over the contract term as the Company completes the performance obligation.  As of March 31, 2018, our future revenues (i.e. transaction price related to remaining performance obligations) under contract accounted for under Topic 606 totaled $700.4 million, of which $624.8 million is related to contracts that are currently being invoiced and have an average remaining contract term of 2.9 years, while $75.6 million represents our backlog for sales bookings which have yet to be installed and have an average remaining contract term of 4.3 years.

 

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Uniti Group Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

Practical Expedients and Exemptions

We do not disclose the value of unsatisfied performance obligations for contracts that have an original expected duration of one year or less.

We exclude from the transaction price any amounts collected from customers for sales taxes and therefore, they are not included in revenue.

Note 4. Business Combinations and Asset Acquisitions

2017 Transactions

Asset Acquisitions

Network Management Holdings LTD

On January 31, 2017, we completed the 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 American countries with 212 towers in Mexico, 54 towers in Nicaragua, and 100 towers in Colombia. The consideration for the 366 wireless towers in operation as of the transaction close date 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 Mexican, Nicaraguan and Colombian subsidiaries are the Mexican Peso, U.S. 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 8.

 

During the three months ended March 31, 2018, construction was completed on 15 of the towers that were under development at the time of the NMS acquisition. and we acquired the completed towers pursuant to the purchase agreement for approximately $1.0 million.  As of March 31, 2018, we acquired 65 of the 105 towers that were under development at the time of NMS acquisition.

Business Combinations

Southern Light, LLC

 

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Uniti Group Inc.

Notes to the Condensed Consolidated Financial Statements – Continued

(unaudited)

On July 3, 2017, we acquired 100% of the outstanding equity of Southern Light for $638.1 million in cash and 2.5 million common units in the Operating Partnership with an acquisition date fair value of $64.3 million. Southern Light is a leading provider of data transport services along the Gulf Coast region serving twelve attractive Tier II and Tier III markets across Florida, Alabama, Louisiana, and Mississippi. 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. 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

 

$

279,467

 

Cash and cash equivalents

 

 

</