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EX-32 - EX-32 - ZAYO GROUP LLCzgl-20180331xex32.htm
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EX-31.1 - EX-31.1 - ZAYO GROUP LLCzgl-20180331ex311ccf0e1.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


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

Commission File Number: 333-169979


Zayo Group, LLC

(Exact Name of Registrant as Specified in Its Charter)


 

 

 

 

DELAWARE

 

26-2012549

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1821 30th Street, Unit A,

Boulder, CO 80301

(Address of Principal Executive Offices)

(303) 381-4683

(Registrant’s Telephone Number, Including Area Code)


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   ☒

 

 

 

 


 

ZAYO GROUP, LLC AND SUBSIDIARIES

INDEX 

 

 

 

 

 

 

 

 

Page

Part I. FINANCIAL INFORMATION 

 

 

Item 1. Financial Statements (Unaudited) 

 

1

Condensed Consolidated Balance Sheets as of March 31, 2018 and June 30, 2017 

 

1

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017 

 

2

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017 

 

3

Condensed Consolidated Statement of Member's Equity for the Three Months Ended March 31, 2018 

 

4

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017 

 

5

Notes to Condensed Consolidated Financial Statements 

 

6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

43

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

 

62

Item 4. Controls and Procedures 

 

63

Part II. OTHER INFORMATION 

 

63

Item 1. Legal Proceedings 

 

63

Item 1A. Risk Factors 

 

63

Item 6. Exhibits 

 

64

Signatures 

 

65

 

 

 


 

ZAYO GROUP, LLC AND SUBSIDIARIES

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.   FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions)  

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

    

March 31,
2018

    

June 30,
2017

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

328.6

 

$

220.0

Trade receivables, net of allowance of $7.9 and $9.5 as of March 31, 2018 and June 30, 2017, respectively

 

 

223.1

 

 

191.6

Prepaid expenses

 

 

79.1

 

 

68.3

Other current assets

 

 

15.3

 

 

34.1

Assets held for sale

 

 

47.4

 

 

 —

Total current assets

 

 

693.5

 

 

514.0

Property and equipment, net

 

 

5,366.9

 

 

5,016.0

Intangible assets, net

 

 

1,250.9

 

 

1,188.6

Goodwill

 

 

1,735.5

 

 

1,840.2

Deferred income taxes, net

 

 

14.3

 

 

27.3

Other assets

 

 

165.6

 

 

141.7

Total assets

 

$

9,226.7

 

$

8,727.8

Liabilities and stockholders' equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

63.6

 

$

72.4

Accrued liabilities

 

 

297.9

 

 

329.2

Accrued interest

 

 

85.1

 

 

63.5

Current portion of long-term debt

 

 

5.0

 

 

5.0

Capital lease obligations, current

 

 

10.0

 

 

8.0

Deferred revenue, current

 

 

160.8

 

 

146.0

Liabilities associated with assets held for sale

 

 

7.2

 

 

 —

Total current liabilities

 

 

629.6

 

 

624.1

Long-term debt, non-current

 

 

5,688.8

 

 

5,532.7

Capital lease obligation, non-current

 

 

125.1

 

 

93.6

Deferred revenue, non-current

 

 

1,050.3

 

 

989.7

Deferred income taxes, net

 

 

157.1

 

 

40.2

Other long-term liabilities

 

 

50.8

 

 

52.4

Total liabilities

 

 

7,701.7

 

 

7,332.7

Commitments and contingencies (Note 11)

 

 

 

 

 

 

Member's equity

 

 

 

 

 

 

Member's interest

 

 

1,946.8

 

 

1,879.0

Accumulated other comprehensive income

 

 

9.4

 

 

5.4

Accumulated deficit

 

 

(431.2)

 

 

(489.3)

Total member's equity

 

 

1,525.0

 

 

1,395.1

Total liabilities and member's  equity

 

$

9,226.7

 

$

8,727.8

 

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

1


 

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 

(in millions)  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

Nine months ended March 31,

 

 

2018

    

2017

 

2018

    

2017

Revenue

 

$

649.4

 

$

550.2

 

$

1,946.4

 

$

1,561.8

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs (excluding depreciation and amortization and including stock-based compensation—Note 8)

 

 

234.9

 

 

195.0

 

 

702.6

 

 

548.7

Selling, general and administrative expenses (including stock-based compensation—Note 8)

 

 

118.0

 

 

108.8

 

 

367.9

 

 

319.1

Depreciation and amortization

 

 

191.2

 

 

155.7

 

 

571.2

 

 

425.6

Total operating costs and expenses

 

 

544.1

 

 

459.5

 

 

1,641.7

 

 

1,293.4

Operating income

 

 

105.3

 

 

90.7

 

 

304.7

 

 

268.4

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(75.3)

 

 

(63.0)

 

 

(222.0)

 

 

(170.0)

Loss on extinguishment of debt

 

 

 —

 

 

(4.5)

 

 

(4.9)

 

 

(4.5)

Foreign currency gain/(loss) on intercompany loans

 

 

13.9

 

 

3.9

 

 

27.8

 

 

(24.7)

Other income, net

 

 

0.4

 

 

0.5

 

 

1.7

 

 

0.7

Total other expenses, net

 

 

(61.0)

 

 

(63.1)

 

 

(197.4)

 

 

(198.5)

Income from operations before income taxes

 

 

44.3

 

 

27.6

 

 

107.3

 

 

69.9

Provision for income taxes

 

 

20.9

 

 

0.6

 

 

49.2

 

 

7.4

Net income

 

$

23.4

 

$

27.0

 

$

58.1

 

$

62.5

 

 

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

2


 

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

Nine months ended March 31,

 

    

2018

    

2017

 

2018

    

2017

Net income

 

$

23.4

 

$

27.0

 

$

58.1

 

$

62.5

Foreign currency translation adjustments, net of tax

 

 

(8.1)

 

 

3.7

 

 

14.8

 

 

(22.5)

Defined benefit pension plan adjustments, net of tax

 

 

(5.8)

 

 

 —

 

 

(10.8)

 

 

(1.2)

Comprehensive income

 

$

9.5

 

$

30.7

 

$

62.1

 

$

38.8

 

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

3


 

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF MEMBER’S EQUITY (UNAUDITED)

NINE MONTHS ENDED MARCH 31, 2018

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Member's
Interest

    

Accumulated

Other

Comprehensive

Income/(Loss)

    

Accumulated
Deficit

    

Total
Member's
Equity

Balance at June 30, 2017

 

$

1,879.0

 

$

5.4

 

$

(489.3)

 

$

1,395.1

Stock-based compensation

 

 

67.8

 

 

 —

 

 

 —

 

 

67.8

Foreign currency translation adjustment

 

 

 —

 

 

14.8

 

 

 —

 

 

14.8

Defined benefit pension plan adjustments

 

 

 —

 

 

(10.8)

 

 

 —

 

 

(10.8)

Net income

 

 

 —

 

 

 —

 

 

58.1

 

 

58.1

Balance at March 31, 2018

 

$

1,946.8

 

$

9.4

 

$

(431.2)

 

$

1,525.0

 

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

 

 

 

4


 

ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 

 

 

 

 

 

 

 

 

Nine months ended March 31,

 

 

2018

 

2017

Cash flows from operating activities

 

 

 

    

 

 

Net income

 

$

58.1

 

$

62.5

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

 

 

 

 

 

 

Depreciation and amortization

 

 

571.2

 

 

425.6

Loss on extinguishment of debt

 

 

4.9

 

 

4.5

Non-cash interest expense

 

 

9.7

 

 

7.7

Stock-based compensation

 

 

70.5

 

 

93.0

Amortization of deferred revenue

 

 

(101.5)

 

 

(85.5)

Foreign currency (gain)/loss on intercompany loans

 

 

(27.8)

 

 

24.7

Deferred income taxes

 

 

41.5

 

 

(6.4)

Provision for bad debts

 

 

5.8

 

 

2.1

Non-cash loss on investments

 

 

0.5

 

 

0.7

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

Trade receivables

 

 

(33.7)

 

 

(6.0)

Accounts payable and accrued liabilities

 

 

23.7

 

 

9.1

Additions to deferred revenue

 

 

138.0

 

 

156.7

Other assets and liabilities

 

 

(41.6)

 

 

(23.8)

Net cash provided by operating activities

 

 

719.3

 

 

664.9

Cash flows from investing activities

 

 

 

 

 

 

Purchases of property and equipment

 

 

(581.9)

 

 

(630.2)

Cash paid for acquisitions, net of cash acquired

 

 

(155.3)

 

 

(1,424.5)

Other

 

 

(0.2)

 

 

1.5

Net cash used in investing activities

 

 

(737.4)

 

 

(2,053.2)

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from debt

 

 

462.8

 

 

3,293.8

Principal payments on long-term debt

 

 

(314.4)

 

 

(1,837.4)

Principal payments on capital lease obligations

 

 

(6.4)

 

 

(4.8)

Payment of debt issue costs

 

 

(4.2)

 

 

(29.0)

Cash paid for Santa Clara acquisition financing arrangement

 

 

(3.8)

 

 

(2.3)

Net cash provided by financing activities

 

 

134.0

 

 

1,420.3

Net cash flows

 

 

115.9

 

 

32.0

Effect of changes in foreign exchange rates on cash

 

 

(7.3)

 

 

(4.4)

Net increase in cash and cash equivalents

 

 

108.6

 

 

27.6

Cash and cash equivalents, beginning of year

 

 

220.0

 

 

170.1

Cash and cash equivalents, end of period

 

$

328.6

 

$

197.7

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Cash paid for interest, net of capitalized interest

 

$

195.1

 

$

109.2

Cash paid for income taxes

 

$

16.9

 

$

9.8

Non-cash purchases of equipment through capital leasing

 

$

18.2

 

$

11.6

(Decrease)/increase in accounts payable and accrued expenses for purchases of property and equipment

 

$

(45.8)

 

$

37.1

 

Refer to Note 2 — Acquisitions and Dispositions for details regarding the Company’s recent acquisitions.

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

 

 

5


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Zayo Group, LLC, a Delaware limited liability company, was formed on May 4, 2007, and is the operating parent company of a number of subsidiaries engaged in providing access to bandwidth infrastructure. Zayo Group LLC and its subsidiaries are collectively referred to as “Zayo Group” or the “Company.” Headquartered in Boulder, Colorado, the Company supplies high-bandwidth infrastructure, including fiber networks and data centers, and provides access to bandwidth infrastructure to users primarily in the United States (“U.S.”), Canada and Europe. The Company provides its products and offerings through six segments:

·

Fiber Solutions, including dark fiber and mobile infrastructure solutions.

·

Transport, including wavelength, wholesale IP and SONET solutions.

·

Enterprise Networks, including Ethernet, private lines, dedicated Internet and cloud-based computing and storage products.

·

Colocation, including provision of colocation space and power and interconnection offerings.

·

Voice, unified communications and offerings dedicated to small and medium sized businesses.

·

Other offerings, including Zayo Professional Services (“ZPS”).

Zayo Group is wholly owned by Zayo Group Holdings, Inc. (“Holdings” or “ZGH”).

Basis of Presentation

The accompanying condensed consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements and related notes are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for quarterly reports on Form 10-Q, and do not include all of the note disclosures required by GAAP for complete financial statements. These condensed consolidated financial statements should, therefore, be read in conjunction with the consolidated financial statements and notes thereto for the year ended June 30, 2017 included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2017. In the opinion of management, all adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows of the Company have been included herein.  The results of operations for the three and nine months ended March 31, 2018 are not necessarily indicative of the operating results for any future interim period or the full year. Certain prior period amounts in the condensed statement of cash flows have been reclassified to conform to the current period presentation. 

The Company’s fiscal year ends June 30 each year, and we refer to the fiscal year ending June 30, 2019 as “Fiscal 2019”, the fiscal year ending June 30, 2018 as “Fiscal 2018” and the fiscal year ended June 30, 2017 as “Fiscal 2017.”

Use of Estimates

The preparation of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Significant estimates are used when establishing allowances for doubtful accounts and accruals for billing disputes, determining useful lives for depreciation and amortization and accruals for exit activities associated with real estate leases, assessing the need for impairment charges (including those related to intangible assets and goodwill), determining the fair values of assets acquired and liabilities assumed in business combinations, accounting for income taxes and related valuation allowances against deferred tax assets, determining the defined benefit costs and defined benefit obligations related to post-employment benefits, determining the fair value of plan assets related to post-employment benefits and estimating certain restricted stock unit grant fair values used to compute the stock-based compensation liability and expense. Management evaluates these estimates and judgments on

6


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

an ongoing basis and makes estimates based on historical experience, current conditions, and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.

Significant Accounting Policies

Pensions

In connection with the Company’s acquisition of 100% of the equity interest in Allstream, Inc. and Allstream Fiber U.S. Inc. (together, the “Allstream Acquisition Entity” and such acquisition being the “Allstream Acquisition”) on January 15, 2016, the Company assumed obligations related to defined benefit pension plans and other non-pension post-retirement benefits (“OPEBs”) that cover qualifying foreign employees. Assets from the Allstream Acquired Entity former defined benefit plans related to pre-closing service obligations were legally transferred to the Company on October 31, 2017. Eligibility and the level of benefits for these plans varies depending on participants’ status, date of hire and or length of service. The Company recognizes the funded status of these defined benefit and post-retirement plans as an asset or a liability on the condensed consolidated balance sheet. Each year's actuarial gains or losses and prior period service costs are a component of other comprehensive income/(loss), which is then included in accumulated other comprehensive income. Pension and post-retirement benefit expenses are recognized over the period in which the employee renders service and becomes eligible to receive benefits.  The pension and post-retirement accruals and valuations are dependent on actuarial assumptions to calculate those amounts. These assumptions include discount rates, long-term rate of return on plan assets, retirement rates, mortality rates and other factors. A change in any of the above assumptions would have an effect on the projected benefit obligation and pension expense.  See Note 9 – Employee Benefits, for additional disclosure regarding the Company’s defined benefit pension plans and OPEBs. The Company’s policy is to fund the pension plans in accordance with applicable regulations. The OPEBs are not funded.

Property and Equipment

In accordance with its policy, the Company performs reviews to evaluate the depreciable lives of its fixed assets on a periodic basis. The Company completed a review during the three months ended March 31, 2018 and revised its estimated useful lives for fiber optic network assets from its previous estimate of a range of fifteen years to twenty years to a revised estimate of thirty-three years and revised its estimated useful lives for owned buildings from its historical estimate of thirty-nine years to a revised estimate of forty-five years. In determining the change in estimated useful lives, the Company, with input from its engineering team, utilized quantitative and qualitative analysis, including historical usage patterns and retirements, industry benchmarks and review of published data sources. The change in estimated useful lives of the fiber optic network assets and owned buildings was accounted for as a change in accounting estimate on a prospective basis effective March 1, 2018. The effect of this change in estimate resulted in a reduction to depreciation expense for the three months ended March 31, 2018 of $17.4 million and an increase to net income for the three months ended March 31, 2018 of $11.7 million.

There have been no other changes to the Company’s significant accounting policies as described in its Annual Report on Form 10-K for the year ended June 30, 2017.

Recently Issued Accounting Pronouncements

In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”), Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02), which allows companies to reclassify the income tax effects resulting from tax bill, H.R.1, from accumulated other comprehensive income to retained earnings. The standard also requires certain new disclosures regardless of the election. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (fiscal year ending June 30, 2020 “Fiscal 2020” for the Company), with early adoption permitted. The Company does not expect ASU 2018-02 to have a material impact on its consolidated financial statements.

7


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires an employer to report the service cost component of net periodic pension cost and net periodic postretirement cost in the same line item in the statement of operations as other compensation costs arising from services rendered by the related employees during the period. The other net cost components are required to be presented in the statement of operations separately from the service cost component and outside a subtotal of income from operations. Additionally, the line item used in the statement of operations to present the other net cost components must be disclosed in the notes to the financial statements. This ASU is effective for fiscal years beginning after December 15, 2017 (Fiscal 2019 for the Company), and interim periods within those fiscal years, and must be applied on a retrospective basis. Had the Company adopted this ASU in the quarter it would not have resulted in a material impact to the financial statements for the three and nine months ended March 31, 2018.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classifications of Certain Cash Receipts and Cash Payments. The new standard provides guidance for eight changes with respect to how cash receipts and cash payments are classified in the statement of cash flows, with the objective of reducing diversity in practice. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2017 (Fiscal 2019 for the Company), with early adoption permitted. The Company does not plan to early adopt, nor does it expect the adoption of this new standard to have a material impact on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. The new guidance supersedes existing guidance on accounting for leases in Topic 840 and is intended to increase the transparency and comparability of accounting for lease transactions. ASU 2016-02 requires most leases to be recognized on the balance sheet. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Lessor accounting remains similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard (ASU 2014-09). The ASU will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (Fiscal 2020 for the Company). Early adoption is permitted. The standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. The Company established a project team and commenced an initial impact assessment process. To date, the Company has reviewed a sample of lessee and lessor arrangements and made preliminary assessments of the impact this standard will have on the consolidated financial statements. Although it is still assessing the impact of this standard, the Company expects the new guidance to significantly increase the reported assets and liabilities on the consolidated balance sheets. There are currently no plans to early adopt ASU 2016-02.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaced most existing revenue recognition guidance under GAAP when it became effective. The ASU is effective for annual reporting periods and interim reporting periods within annual reporting periods beginning after December 15, 2017 (Fiscal 2019 for the Company). The standard permits the use of either the retrospective or cumulative effect transition method.

In Fiscal 2017, the Company established a project team and commenced an initial assessment to determine the impact ASU 2014-09 will have on the Company’s revenue arrangements. Lease revenue is not included in the scope of ASU 2014-09, and as a result, the revenue to which the Company must apply the new guidance is generally limited to solutions revenue, certain maintenance revenue not covered by lease arrangements, certain transactions that include the title transfer of integral components to customers and other fees charged to customers. 

Although the Company is still assessing the impact of this standard on its consolidated financial statements, management expects one of the impacts of ASU 2014-09 will be the manner in which the Company recognizes revenue on dark fiber sales that include the transfer of title to certain network assets, which under current accounting rules would be considered a sale of real estate or integral equipment. Currently, the Company defers the recognition of revenue on

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the sale of network infrastructure assets that are considered to be real estate under ASC 605, Revenue Recognition, to the extent the Company has a continuing involvement in the transferred asset. Upon the adoption of ASU 2014-09, the asset transferred in this type of arrangement would likely be derecognized from the balance sheet and the amount of the transaction price attributable to the asset being sold would be recognized upon customer acceptance. It has also preliminarily determined that due to changes in the timing of recognition of certain installations, discounts and promotional credits given to customers, there may be adjustments to contract assets and liabilities recorded in the consolidated balance sheets upon adoption. Additionally, the requirement to defer incremental costs incurred to acquire a contract, including sales commissions, and recognize such costs over the contract period or expected customer life is expected to result in additional deferred charges recognized in the consolidated balance sheets and could have the impact of deferring costs currently accounted for as operating expenses. The assessment of the impact of this standard on the Company’s consolidated financial statements also includes developing new accounting policies, internal controls and procedures and possible changes to our systems to facilitate the adoption of this accounting policy.

The Company will adopt this new standard as of July 1, 2018 and, based on its current assessment, expects to apply the modified retrospective method, which would result in a cumulative effect adjustment as of the date of adoption. The Company's initial assessment of changes to the reporting of its revenue and expenses and anticipated adoption method may change depending on the results of the Company’s ongoing and final assessment of this ASU. Until the Company is further along in its assessment, it does not anticipate being able to provide reasonably accurate estimates of the impact of ASU 2014-09.

(2) ACQUISITIONS AND DISPOSITIONS 

Since inception through March 31, 2018, the Company has consummated 43 transactions accounted for as business combinations. The acquisitions were executed as part of the Company’s business strategy of expanding through acquisitions. The acquisitions of these businesses have allowed the Company to increase the scale at which it operates, which in turn affords the Company the ability to increase its operating leverage, extend its network reach, and broaden its customer base.

The accompanying condensed consolidated financial statements include the operations of the acquired entities from their respective acquisition dates.

Acquisitions Completed During Fiscal 2018

Optic Zoo Networks

On January 18, 2018, the Company acquired Vancouver BC Canada-based Optic Zoo Networks for net purchase consideration of CAD $30.9 million (or $24.8 million), net of cash acquired, subject to certain post-closing adjustments. Optic Zoo Networks owns and provides access to high-capacity fiber in Vancouver.  As of March 31, 2018, CAD $3.8 million (or $2.9 million) of the purchase consideration is being held in escrow pending the expiration of the indemnification adjustment period. The acquisition was funded with cash on hand and was considered a stock purchase for tax purposes.

Spread Networks

On February 28, 2018, the Company acquired Spread Networks, LLC (“Spread Networks”), a privately owned telecommunications provider that owns and operates a high-fiber count long haul route connecting New York and Chicago, for net purchase consideration of $130.5 million, net of cash acquired, subject to certain post-closing adjustments. As of March 31, 2018, $6.4 million of the purchase consideration is being held in escrow pending the expiration of the indemnification adjustment period. The all-cash acquisition was funded with cash on hand and debt and was considered an asset purchase for tax purposes. Additional connectivity of the route will be enabled by Zayo’s existing network.

McLean Data Center and Neutral Path Communications

See Note 15-  Subsequent Events.

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Acquisitions Completed During Fiscal 2017

KIO Networks US Data Centers

On May 1, 2017, the Company completed the $11.9 million cash acquisition of Castle Access, Inc.’s (d/b/a “KIO Networks US”) San Diego, California data centers. As of March 31, 2018,  $1.2 million of the purchase consideration is being held in escrow pending the expiration of the indemnification adjustment period. The acquisition was funded with cash on hand and was considered a stock purchase for tax purposes.

Electric Lightwave Parent, Inc.

On March 1, 2017, the Company acquired Electric Lightwave Parent, Inc. (“Electric Lightwave”), an infrastructure and telecommunications solutions provider serving markets in the western U.S., for net purchase consideration of $1,426.6 million, net of cash acquired, subject to certain post-closing adjustments.  As of March 31, 2018,  $1.7 million of the purchase consideration is being held in escrow pending the expiration of the indemnification adjustment period.  The acquisition was funded through debt (see Note 5 – Long-Term Debt) and cash on hand. The acquisition was considered a stock purchase for tax purposes.

The acquisition added long haul fiber route miles and dense metro fiber across Denver, Minneapolis, Phoenix, Portland, Seattle, Sacramento, San Francisco, San Jose, Salt Lake City, Spokane and Boise, with on-net connectivity to enterprise buildings and data centers.

Santa Clara Data Center Acquisition

On October 3, 2016, the Company acquired a data center in Santa Clara, California (the “Santa Clara Data Center”) for net purchase consideration of $11.3 million. The net purchase consideration represents the net present value of ten quarterly payments of approximately $1.3 million beginning in the December 2016 quarter. As of March 31, 2018, the remaining cash consideration to be paid was $5.1 million. The acquisition was considered an asset purchase for tax purposes and a business combination for accounting purposes. Payments made to the previous owners of the Santa Clara Data Center during the nine months ended March 31, 2018 of $3.8 million, representing the principal portion of the financing arrangement, are included in the accompanying condensed consolidated statement of cash flows within financing activities.

Acquisition Method Accounting Estimates

The Company initially recognizes the assets and liabilities acquired from the aforementioned acquisitions based on its preliminary estimates of their acquisition date fair values. As additional information becomes known concerning the acquired assets and assumed liabilities, management may make adjustments to the opening balance sheet of the acquired company up to the end of the measurement period, which is no longer than a one year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. As a result of obtaining a third-party valuation report during the three and nine months ended March 31, 2018, the Company recorded final fair value estimates of its customer relationship intangible asset and property and equipment associated with the Electric Lightwave acquisition, including the impact of changes in useful lives. During the three months ended March 31, 2018, these changes resulted in a decrease to intangible assets of $56.3 million and an increase to property and equipment of $77.4 million, with a corresponding net decrease to goodwill. These changes resulted in an increase in depreciation and amortization of $1.2 million, of which $1.0 million was related to periods prior to December 31, 2017.  During the nine months ended March 31, 2018, these changes resulted in increases of $103.9 million to intangible assets and $129.6 million to property and equipment, with a corresponding decrease to goodwill. These changes resulted in an increase in depreciation and amortization of $16.6 million, of which $5.5 million is related to periods prior to June 30, 2017.  Additionally, the tax basis of assets was also updated during the three months ended March 31, 2018 resulting in an increase to the deferred tax liability of $29.8 million.

As of March 31, 2018, for the KIO Networks US Data Centers, Spread Networks and Optic Zoo Networks acquisitions, the Company has not completed its fair value analysis and calculations in sufficient detail necessary to arrive at the final estimates of the fair value of certain working capital and non-working capital acquired assets and

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assumed liabilities, including the allocations to goodwill and intangible assets, property and equipment and resulting deferred taxes. All information presented with respect to certain working capital and non-working capital acquired assets and liabilities assumed as it relates to these acquisitions is preliminary and subject to revision pending the final fair value analysis.

The table below reflects the Company's estimates of the acquisition date fair values of the assets and liabilities assumed from its Fiscal 2018 acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Spread Networks

 

Optic Zoo Networks

Acquisition date

    

 

 

 

    

February 28, 2018

    

January 18, 2018

 

 

 

 

 

 

 

 

(in millions)

Cash

 

 

 

 

 

 

 

$

1.5

 

$

1.4

Other current assets

 

 

 

 

 

 

 

 

 3.0

 

 

 0.3

Property and equipment

 

 

 

 

 

 

 

 

 133.7

 

 

 13.6

Intangibles

 

 

 

 

 

 

 

 

 19.8

 

 

 5.2

Goodwill

 

 

 

 

 

 

 

 

 23.3

 

 

 9.2

Other assets

 

 

 

 

 

 

 

 

 1.4

 

 

 0.2

Total assets acquired

 

 

 

 

 

 

 

 

182.7

 

 

29.9

Current liabilities

 

 

 

 

 

 

 

 

 3.7

 

 

 0.6

Deferred revenue

 

 

 

 

 

 

 

 

 27.2

 

 

 1.3

Deferred tax liability, net

 

 

 

 

 

 

 

 

 —

 

 

 1.8

Other liabilities

 

 

 

 

 

 

 

 

 19.8

 

 

 —

Total liabilities assumed

 

 

 

 

 

 

 

 

50.7

 

 

3.7

Net assets acquired

 

 

 

 

 

 

 

 

 132.0

 

 

 26.2

Less cash acquired

 

 

 

 

 

 

 

 

 1.5

 

 

 1.4

Net consideration paid

 

 

 

 

 

 

 

$

130.5

 

$

24.8

 

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The table below reflects the Company's estimates of the acquisition date fair values of the assets and liabilities assumed from its Fiscal 2017 acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

KIO Networks US Data Centers

 

Electric Lightwave

 

Santa Clara Data
Center

Acquisition date

    

 

 

 

May 1, 2017

 

March 1, 2017

 

October 3, 2016

 

 

 

 

 

 

 

 

(in millions)

Cash

 

 

 

 

$

 0.1

 

$

 12.6

 

$

 —

Other current assets

 

 

 

 

 

 —

 

 

55.0

 

 

 —

Property and equipment

 

 

 

 

 

 2.4

 

 

 650.2

 

 

 31.9

Deferred tax assets, net

 

 

 

 

 

2.9

 

 

 —

 

 

 —

Intangibles

 

 

 

 

 

6.4

 

 

416.1

 

 

6.0

Goodwill

 

 

 

 

 

2.7

 

 

488.0

 

 

 —

Other assets

 

 

 

 

 

0.6

 

 

1.7

 

 

 —

Total assets acquired

 

 

 

 

 

15.1

 

 

1,623.6

 

 

37.9

Current liabilities

 

 

 

 

 

1.7

 

 

61.7

 

 

 —

Capital lease obligations

 

 

 

 

 

 —

 

 

 —

 

 

26.6

Deferred tax liabilities, net

 

 

 

 

 

 —

 

 

64.9

 

 

 —

Deferred revenue

 

 

 

 

 

0.5

 

 

80.0

 

 

 —

Other liabilities

 

 

 

 

 

 —

 

 

1.2

 

 

 —

Total liabilities assumed

 

 

 

 

 

2.2

 

 

207.8

 

 

26.6

Net assets acquired

 

 

 

 

 

12.9

 

 

1,415.8

 

 

11.3

Less cash acquired

 

 

 

 

 

(0.1)

 

 

(12.6)

 

 

 —

Impact of U.S. Tax Reform

 

 

 

 

 

(0.9)

 

 

23.4

 

 

 —

Net consideration paid/payable

 

 

 

 

$

11.9

 

$

1,426.6

 

$

11.3

The goodwill arising from the Company’s acquisitions results from synergies, anticipated incremental sales to the acquired company customer base and economies-of-scale expected from the acquisitions. The Company has allocated the goodwill to the reporting units (in existence on the respective acquisition dates) that were expected to benefit from the acquired goodwill. The allocation was determined based on the excess of the estimated fair value of the reporting unit over the estimated fair value of the individual assets acquired and liabilities assumed that were assigned to the reporting units.  See Note 3 – Goodwill for the allocation of the Company's acquired goodwill to each of its reporting units.

In the Company’s acquisitions, the Company acquired certain customer relationships. These relationships represent a valuable intangible asset, as the Company anticipates continued business from the acquired customer bases. The Company’s estimate of the fair value of the acquired customer relationships is generally based on a multi-period excess earnings valuation technique that utilizes Level 3 inputs.

Transaction Costs

Transaction costs include expenses associated with professional services (i.e., legal, accounting, regulatory, etc.) rendered in connection with signed and/or closed acquisitions or disposals, travel expense, severance expense incurred associated with acquisitions or disposals, and other direct expenses incurred that are associated with signed and/or closed acquisitions or disposals and unsuccessful acquisitions. The Company incurred transaction costs of $3.3 million and $17.5 million for the three and nine months ended March 31, 2018, respectively, and $8.4 million and $17.6 million for the three and nine months ended March 31, 2017, respectively. Transaction costs have been included in selling, general and administrative expenses in the condensed consolidated statements of operations and in cash flows from operating activities in the condensed consolidated statements of cash flows during these periods. 

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Pro-forma Financial Information

The pro forma results presented below include the effects of the Company’s Fiscal 2018 and 2017 acquisitions as if the acquisitions occurred on July 1, 2016. The pro forma net income for the periods ended March 31, 2018 and 2017 includes the additional depreciation and amortization resulting from the adjustments to the value of property and equipment and intangible assets resulting from purchase accounting and adjustment to amortized revenue during Fiscal 2018 and 2017 as a result of the acquisition date valuation of assumed deferred revenue. The pro forma results also include interest expense associated with debt used to fund the acquisitions. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisitions. The unaudited pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated as of July 1, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

Nine months ended March 31,

 

    

2018

    

2017

 

2018

    

2017

 

 

(in millions)

Revenue

 

$

653.0

 

$

646.8

 

$

1,962.0

 

$

1,946.1

Net income

 

$

21.6

 

$

12.5

 

$

51.2

 

$

7.7

As a result of integrated reporting, it is impracticable to determine the amount of revenue and net income associated with each acquisition recognized in the post-acquisition period with the exception of revenue for Spread Networks and Optic Zoo Networks, which we recognized $1.7 million and $0.7 million, respectively, during the three months ended March 31, 2018.

Scott-Rice Telephone Co.

On February 23, 2018, the Company announced that it has entered into an agreement to sell Scott-Rice Telephone Co. (“SRT”), a Minnesota incumbent local exchange carrier, for $42 million to New Ulm Telecom, Inc. The Company acquired SRT as part of its March 2017 purchase of Electric Lightwave and it is reported as part of the Allstream segment. The Electric Lightwave purchase price which is attributable to the assets and liabilities of SRT has been allocated in the balances presented below. SRT did not meet the held-for-sale criteria upon acquisition.  Disposal groups to be sold are classified as held for sale in the period in which they meet all the held for sale criteria.  The Company concluded that SRT was not a significant disposal group and did not represent a strategic shift, and therefore was not classified as discontinued operations.    The closing of the transaction is subject to regulatory approvals and customary closing conditions, and is expected to occur in the quarter ended June 30, 2018.  The following tables summarize the net assets and liabilities held for sale:

 

 

 

 

 

 

 

 

    

 

 

 

March 31, 2018

 

 

 

 

 

(in millions)

Assets held for sale:

 

 

 

 

 

 

Property and equipment, net

 

 

 

 

$

41.6

Goodwill

 

 

 

 

 

5.2

Other assets

 

 

 

 

 

0.6

Total assets held for sale

 

 

 

 

$

47.4

 

 

 

 

 

 

 

Liabilities associated with assets held for sale:

 

 

 

 

 

 

Deferred tax liability, net

 

 

 

 

$

6.1

Other liabilities

 

 

 

 

 

1.1

Total liabilities associated with assets held for sale

 

 

 

 

$

7.2

 

 

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(3) GOODWILL

The Company’s goodwill balance was $1,735.5 million and $1,840.2 million as of as of March 31, 2018 and June 30, 2017, respectively.  

The Company’s reporting units are comprised of its strategic product groups (“SPG” or “SPGs”). Effective January 1, 2017, the Company implemented organizational changes that had an impact on the composition of the Company’s SPGs. The change in structure had the impact of consolidating and/or regrouping existing SPGs, disaggregating the legacy Zayo Canada SPG among the existing SPGs and creating a new Allstream and IP Transit SPG (See Note 13 – Segment Reporting). In connection with the organizational change, goodwill was re-allocated to the Company’s SPGs on a relative fair value basis. The Company completed an assessment immediately prior to and after the organizational change at the SPG level and determined that it is more likely than not that the fair value of the Company’s reporting units is greater than their carrying amounts.       

As of March 31, 2018,  the Company’s SPGs were comprised of the following: Fiber Solutions, Zayo Wavelength Solutions (“Waves”), Zayo IP Transit Solutions (“IP Transit”), Zayo SONET Solutions (“SONET”), Zayo Ethernet Solutions (“Ethernet”), Wide Area Networks (“WANs”, formerly Enterprise Private and Connectivity), Zayo Cloud Solutions (“Cloud”), Zayo Colocation (“zColo"), Allstream and Other (primarily Zayo Professional Services).

The following reflects the changes in the carrying amount of goodwill during the nine months ended March 31, 2018:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product Group

    

As of June 30, 2017

    

Adjustments to Fiscal 2017
Acquisitions

    

Fiscal 2018
Acquisitions

    

Foreign Currency
Translation and Other
(1)

    

As of March 31, 2018

 

 

(in millions)

Fiber Solutions

 

$

633.9

 

$

110.0

 

$

11.6

 

$

6.0

 

$

761.5

Waves

 

 

247.4

 

 

(56.1)

 

 

20.8

 

 

3.4

 

 

215.5

Sonet

 

 

52.0

 

 

35.6

 

 

 —

 

 

0.1

 

 

87.7

Ethernet

 

 

359.5

 

 

(249.7)

 

 

0.1

 

 

0.3

 

 

110.2

WANs

 

 

89.5

 

 

89.8

 

 

 —

 

 

0.5

 

 

179.8

zColo

 

 

256.3

 

 

2.2

 

 

 —

 

 

2.2

 

 

260.7

Cloud

 

 

69.5

 

 

(4.2)

 

 

 —

 

 

0.1

 

 

65.4

Allstream

 

 

116.5

 

 

(72.2)

 

 

 —

 

 

(5.2)

 

 

39.1

Other

 

 

15.6

 

 

 —

 

 

 —

 

 

 —

 

 

15.6

Total

 

$

1,840.2

 

$

(144.6)

 

$

32.5

 

$

7.4

 

$

1,735.5

 

(1) Other includes $5.2 million reported as assets held for sale in the Allstream segment. See Note 2—Acquisitions and Dispositions.

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(4) INTANGIBLE ASSETS

Identifiable intangible assets as of March 31, 2018 and June 30, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

    

Gross Carrying Amount

    

Accumulated
Amortization

    

Net

 

 

(in millions)

March 31, 2018

 

 

 

 

 

 

 

 

 

Finite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

1,613.7

 

$

(383.5)

 

$

1,230.2

Underlying rights

 

 

1.7

 

 

(0.5)

 

 

1.2

Total

 

 

1,615.4

 

 

(384.0)

 

 

1,231.4

Indefinite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

Certifications

 

 

3.5

 

 

 —

 

 

3.5

Underlying Rights

 

 

16.0

 

 

 —

 

 

16.0

Total

 

$

1,634.9

 

$

(384.0)

 

$

1,250.9

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

Finite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

1,477.7

 

$

(308.6)

 

$

1,169.1

Underlying rights

 

 

1.6

 

 

(0.4)

 

 

1.2

Total

 

 

1,479.3

 

 

(309.0)

 

 

1,170.3

Indefinite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

Certifications

 

 

3.5

 

 

 —

 

 

3.5

Underlying Rights

 

 

14.8

 

 

 —

 

 

14.8

Total

 

$

1,497.6

 

$

(309.0)

 

$

1,188.6

 

 

(5) LONG-TERM DEBT

As of March 31, 2018 and June 30, 2017, long-term debt was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date of

 

 

 

Outstanding as of

 

 

Issuance or most
recent amendment

    

Maturity

    

Interest
Payments

    

Interest Rate

    

March 31,
2018

   

June 30,
2017

 

 

 

 

 

 

 

 

 

 

(in millions)

Term Loan Facility due 2021

 

Jan 2017

 

Jan 2021

 

Monthly

 

LIBOR +2.00%

 

$

495.0

 

$

498.8

B-2 Term Loan Facility

 

Feb 2018

 

Jan 2024

 

Monthly

 

LIBOR +2.25%

 

 

1,269.3

 

 

1,429.9

6.00% Senior Unsecured Notes

 

Jan & Mar 2015

 

Apr 2023

 

Apr/Oct

 

6.00%

 

 

1,430.0

 

 

1,430.0

6.375% Senior Unsecured Notes

 

May 2015 & Apr 2016

 

May 2025

 

May/Nov

 

6.375%

 

 

900.0

 

 

900.0

5.75% Senior Unsecured Notes

 

Jan, Apr & Jul 2017

 

Jan 2027

 

Jan/Jul

 

5.75%

 

 

1,650.0

 

 

1,350.0

Total obligations

 

 

 

 

 

 

 

 

 

 

5,744.3

 

 

5,608.7

Unamortized premium/(discounts), net

 

 

 

 

 

 

 

 

 

 

11.5

 

 

(3.2)

Unamortized debt issuance costs

 

 

 

 

 

 

 

 

 

 

(62.0)

 

 

(67.8)

Carrying value of debt

 

 

 

 

 

 

 

 

 

 

5,693.8

 

 

5,537.7

Less current portion

 

 

 

 

 

 

 

 

 

 

(5.0)

 

 

(5.0)

Total long-term debt, less current portion

 

 

 

 

 

 

 

 

 

$

5,688.8

 

$

5,532.7

Term Loan Facility and Revolving Credit Facility

On May 6, 2015, the Company and Zayo Capital, Inc. (“Zayo Capital”) entered into an Amendment and Restatement Agreement whereby its Credit Agreement (the “Credit Agreement”) governing its senior secured term loan facility (the “Term Loan Facility”) and $450.0 million senior secured revolving credit facility (the “Revolver”) was amended and restated in its entirety. The amended and restated Credit Agreement extended the maturity date of a portion of the outstanding term loans under the Term Loan Facility from July 2, 2019 to May 6, 2021. The terms of the Term Loan Facility require the Company to make quarterly principal payments of 25 basis points per quarter of the original loan amount (unless reduced by any prepayments) plus an annual payment of up to 50% of excess cash flow, as

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

determined in accordance with the Credit Agreement (no such annual payment was required during Fiscal 2017 or Fiscal 2016).

On January 15, 2016, the Company and Zayo Capital entered into an Incremental Amendment (the “Amendment”) to its Credit Agreement. Under the terms of the Amendment, the portion of the Term Loan Facility due 2021 was increased by $400.0 million (the “Incremental Term Loan”). The additional amounts borrowed bear interest at LIBOR plus 3.5% with a minimum LIBOR rate of 1.0%. The $400.0 million add-on was priced at 99.0%. No other terms of the Credit Agreement were amended.  The Incremental Term Loan proceeds were used to fund the Allstream Acquisition and for general corporate purposes.

On July 22, 2016, the Company and Zayo Capital entered into a Repricing Amendment (the “Repricing Amendment”) to the Credit Agreement.  Per the terms of the Repricing Amendment, the Incremental Term Loan was repriced at par and will bear interest at a rate of LIBOR plus 2.75%, with a minimum LIBOR rate of 1.0%, which represented a downward adjustment of 75 basis points. No other terms of the Credit Agreement were amended.

On January 19, 2017, the Company and Zayo Capital entered into an Incremental Amendment No. 2 (the “Incremental Amendment”) to the Company’s Credit Agreement. Per the terms of the Incremental Amendment, the existing $1.85 billion of term loans under the Credit Agreement were repriced at 99.75% with one $500.0 million tranche that bears interest at a rate of LIBOR plus 2.0%, with a minimum LIBOR rate of 0.0% and a maturity date of four years from incurrence, which represents a downward adjustment of 75 basis points along with the lowering of the previous LIBOR floor, and a second $1.35 billion tranche (the “B-2 Term Loan” and along with the $500.0 million tranche, the “Refinancing Term Loans”) that bears interest at a rate of LIBOR plus 2.5%, with a minimum LIBOR rate of 1.0% and a maturity of seven years from incurrence, which represents a downward adjustment of 25 basis points.  In addition, per the terms of the Incremental Amendment, the Company and Zayo Capital added a new $650.0 million term loan tranche under the Credit Agreement (the “Electric Lightwave Incremental Term Loan”) that bears interest at LIBOR plus 2.5%, with a minimum LIBOR rate of 1.0%, with a maturity of seven years from the closing date of the Incremental Amendment. In connection with the Incremental Amendment the full $2,500.0 million Term Loan Facility, including the Refinancing Term Loans and the Electric Lightwave Incremental Term Loan, was re-issued at a price of 99.75%.  No other material terms of the Credit Agreement with respect to the Refinancing Term Loans and the Electric Lightwave Incremental Term Loan were amended. On April 10, 2017, $570.1 million of the B-2 Term Loan and the Electric Lightwave Incremental Term Loan was repaid from proceeds of issuance of senior unsecured notes as further discussed below. Additionally, in July 2017, $310.7 million of the B-2 Term Loan was repaid from the proceeds of issuance of senior unsecured notes as further discussed below.

On July 20, 2017, the Company and Zayo Capital entered into a second repricing (the “Repricing Amendment No. 2”) to the Credit Agreement. Per the terms of the Repricing Amendment No. 2, the outstanding balances of the B-2 Term Loan and Electric Lightwave Incremental Term Loan were repriced at par and will bear interest at a rate of LIBOR plus 2.25%, with a minimum LIBOR rate of 1.0%, which represented a downward adjustment of 25 basis points. No other terms of the Credit Agreement were amended. 

In connection with the Repricing Amendment No. 2, the Company recognized an expense of $4.9 million during the three months ended September 30, 2017 associated with debt extinguishment.  The $4.9 million loss on extinguishment of debt primarily represents non-cash expenses associated with the write-off of unamortized debt issuance costs and the issuance discounts on the portion of the Credit Agreement, as further amended.  The loss on extinguishment of debt also includes certain fees paid to third parties involved in the Repricing Amendment No. 2.

On December 22, 2017, the Company and Zayo Capital entered into a third repricing (the “Repricing Amendment No. 3”) to the Credit Agreement. Per the terms of the Repricing Amendment No. 3, the Revolver under the Credit Agreement was repriced and will bear interest at a rate of LIBOR plus 1.00% to LIBOR plus 1.75% per annum based on the Company’s leverage ratio, which represented a downward adjustment of 100 basis points. No other terms of the Credit Agreement were amended. The Revolver matures on April 17, 2020. The Credit Agreement also allows for letter of credit commitments of up to $50.0 million.  The Revolver is subject to a fee per annum of 0.25% to 0.375% (based on the Company’s current leverage ratio) of the weighted-average unused capacity, and the undrawn amount of outstanding letters of credit backed by the Revolver are subject to a 0.25% fee per annum. Outstanding letters of credit backed by the Revolver are subject to a fee of 1.00% to 1.75% per annum based upon the Company’s leverage ratio. 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On February 26, 2018, the Company and Zayo Capital entered into an amendment (the “Incremental Amendment No. 3”) to the Credit Agreement. Per the terms of the Incremental Amendment No. 3, the Company added a new $150 million term loan tranche under the Credit Agreement (the “Incremental $150 Million Term Loan”). The Incremental $150 Million Term Loan will bear interest at LIBOR plus 2.25%, with a minimum LIBOR rate of 1.0%, with a maturity date of January 19, 2024, which is coterminous with the B-2 Term Loan. The Company intends to use the proceeds of the Incremental $150 Million Term Loan for general corporate purposes, including the funding of acquisitions permitted under the Credit Agreement. No other terms of the Credit Agreement were amended.

The weighted average interest rates (including margin) on the Term Loan Facility were approximately 4.1% and 3.4% as of March 31, 2018 and June 30, 2017, respectively. Interest rates on the Revolver as of March 31, 2018 and June 30, 2017 were approximately 3.6% and 3.8%, respectively.

As of March 31, 2018, no amounts were outstanding under the Revolver and $1,764.3 million in aggregate principal amount was outstanding under the Term Loan Facility. Standby letters of credit were outstanding in the amount of $8.0 million as of March 31, 2018, leaving $442.0 available under the Revolver.

Senior Unsecured Notes

6.00% Senior Unsecured Notes due 2023

On January 23, 2015 and March 9, 2015, the Company and Zayo Capital completed private offerings of aggregate principal amounts of $700.0 million and $730.0 million, respectively, of 6.00% senior unsecured notes due in 2023 (the “2023 Unsecured Notes”).  

6.375% Senior Unsecured Notes due 2025

On April 14, 2016, the Company and Zayo Capital completed a private offering of $550.0 million aggregate principal amount of 2025 Unsecured Notes (the “Incremental 2025 Notes”). The Incremental 2025 Notes were priced at 97.76% and were an additional issuance of the $350.0 million 6.375% senior unsecured notes due in 2025 that were originally issued on May 6, 2015 (the “2025 Notes” and together with the Incremental 2025 Notes, the “2025 Unsecured Notes”). The net proceeds from the Incremental 2025 Notes, plus cash on hand, were used to (i) redeem the then outstanding $325.6 million 10.125% senior unsecured notes due 2020, including the required $20.3 million make-whole premium and accrued interest, and (ii) repay $196.0 million of borrowings under the then outstanding secured Term Loan Facility.

5.75% Senior Unsecured Notes due 2027

On January 27, 2017, the Company and Zayo Capital completed a private offering of $800.0 million aggregate principal amount of 5.75% senior unsecured notes due 2027 (the “January 2027 Notes”), which were issued at par. The net proceeds from the offering, along with the Electric Lightwave Incremental Term Loan discussed above, were used to fund the Electric Lightwave acquisition (see Note 2 – Acquisitions and Dispositions), which closed on March 1, 2017.

On April 10, 2017, the Company completed a private offering of $550.0 million aggregate principal amount of 5.75% senior unsecured notes due 2027 (the “Incremental 2027 Notes”). The Incremental 2027 Notes were an additional issuance of the January 2027 Notes and were priced at 104.0%. The net proceeds from the Incremental 2027 Notes were used to repay certain outstanding balances on the Company’s B-2 Term Loan.

On July 5, 2017, the Company completed a private offering of $300.0 million aggregate principal amount of 5.75% senior notes due 2027 (the “July Incremental 2027 Notes” and together with the Incremental 2027 Notes and the January 2027 Notes, the “2027 Unsecured Notes”). The July Incremental 2027 Notes were an additional issuance of the January 2027 Notes and Incremental 2027 Notes and were priced at 104.25%. The net proceeds of $310.7 million from the offering were used to further repay certain outstanding balances on the Company’s B-2 Term Loan.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Debt covenants

The indentures (the “Indentures”) governing the 2023 Unsecured Notes,  the 2025 Unsecured Notes and the 2027 Unsecured Notes (collectively the “Notes”) contain covenants that, among other things, restrict the ability of the Company and its subsidiaries to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions with respect to any equity interests, make certain investments or other restricted payments, create liens, sell assets, incur restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other payments to the Company, consolidate or merge with or into other companies or transfer all or substantially all of their assets, engage in transactions with affiliates, and enter into sale and leaseback transactions.  The terms of the Indentures include customary events of default.

The Credit Agreement contains customary events of default, including among others, non-payment of principal, interest, or other amounts when due, inaccuracy of representations and warranties, breach of covenants, cross default to certain other indebtedness, insolvency or inability to pay debts, bankruptcy, or a change of control. The Credit Agreement also contains a covenant, applicable only to the Revolver, that the Company maintain a senior secured leverage ratio below 5.25:1.00 at any time when the aggregate principal amount of loans outstanding under the Revolver is greater than 35% of the commitments under the Revolver. The Credit Agreement also requires the Company and its subsidiaries to comply with customary affirmative and negative covenants, including covenants restricting the ability of the Company and its subsidiaries, subject to specified exceptions, to incur additional indebtedness, make additional guaranties, incur additional liens on assets, or dispose of assets, pay dividends, or make other distributions, voluntarily prepay certain other indebtedness, enter into transactions with affiliated persons, make investments and amend the terms of certain other indebtedness.

The Indentures limit any increase in the Company’s secured indebtedness (other than certain forms of secured indebtedness expressly permitted under the  Indentures) to a pro forma secured debt ratio of 4.50 times the Company’s previous quarter’s annualized modified EBITDA (as defined in the Indentures), and limit the Company’s incurrence of additional indebtedness to a total indebtedness ratio of 6.00 times the previous quarter’s annualized modified EBITDA.

The Company was in compliance with all covenants associated with its debt agreements as of March 31, 2018.

Guarantees

The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the Company’s current and future domestic restricted subsidiaries. The Notes were co-issued with Zayo Capital, which does not have independent assets or operations.

The Term Loan Facility and Revolver are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by all of the Company’s current and future domestic restricted subsidiaries.

Debt issuance costs

In connection with the Credit Agreement (and subsequent amendments thereto), and the various Notes offerings, the Company incurred debt issuance costs of $114.1 million (net of extinguishments). These costs are being amortized to interest expense over the respective terms of the underlying debt instruments using the effective interest method, unless extinguished earlier, at which time the related unamortized costs are to be immediately expensed.

The balance of debt issuance costs as of March 31, 2018 and June 30, 2017 was $62.0 million and $67.8 million, net of accumulated amortization of $52.1 million and $45.1 million, respectively. The amortization of debt issuance costs is included on the condensed consolidated statements of cash flows within the caption “Non-cash interest expense” along with the amortization or accretion of the premium and discount on the Company’s indebtedness.  Interest expense associated with the amortization of debt issuance costs was $2.4 million and $7.1 million for the three and nine months ended March 31, 2018, respectively, and $2.5 million and $6.9 million for the three and nine months ended March 31, 2017, respectively.

Debt issuance costs are presented in the condensed consolidated balance sheets as a reduction to “Long-term debt, non-current.”

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(6) INCOME TAXES

A reconciliation of the actual income tax provision and the tax computed by applying the U.S. federal rate to the earnings before income taxes during the three and nine month periods ended March 31, 2018 and 2017, respectively, is as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

Nine months ended March 31,

 

    

2018

    

2017

    

2018

    

 

2017

 

 

(in millions)

Expected provision at the statutory rate

 

$

12.4

 

$

9.6

 

$

30.0

 

$

24.4

Increase/(decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

State income tax expense, net of federal benefit

 

 

1.3

 

 

0.6

 

 

2.8

 

 

2.1

Stock-based compensation

 

 

1.6

 

 

(13.1)

 

 

4.1

 

 

(12.7)

Transactions costs not deductible for tax purposes

 

 

0.4

 

 

1.5

 

 

0.6

 

 

1.8

Change in statutory tax rate, non-U.S.

 

 

 —

 

 

 —

 

 

0.8

 

 

(1.7)

Foreign tax rate differential

 

 

(1.0)

 

 

(1.8)

 

 

(2.7)

 

 

(2.1)

Change in valuation allowance

 

 

(0.2)

 

 

(2.0)

 

 

(31.6)

 

 

(8.7)

U.S. Tax Reform

 

 

4.6

 

 

 —

 

 

48.7

 

 

 —

Other, net

 

 

1.8

 

 

5.8

 

 

(3.5)

 

 

4.3

Provision for income taxes

 

$

20.9

 

$

0.6

 

$

49.2

 

$

7.4

On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, previously known as Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”). U.S. Tax Reform reduced the U.S. corporate tax rate from 35% to 21%, created a territorial tax system with a one-time mandatory repatriation tax on previously deferred foreign earnings, and changed business-related deductions and credits.

ASC 740, Income Taxes, requires companies to recognize the effect of tax law changes in the period of enactment. The SEC staff issued SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which will allow registrants to record provisional amounts during a ‘measurement period’. The measurement period is similar to the measurement period used when accounting for business combinations under ASC 805, Business Combinations. SAB 118 allows a registrant to recognize provisional amounts when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. The measurement period ends when a registrant has obtained, prepared and analyzed the information necessary to finalize its accounting, but cannot extend beyond one year.

In accordance with SAB 118, the Company has recorded a provisional tax expense in the quarter ending December 31, 2017 of $44.1 million to record the impact of U.S. Tax Reform. During the quarter ending March 31, 2018, the Company recorded an additional provisional tax expense of $4.6 million, resulting in a year to date amount of $48.7 million.

The Company continues to use provisional amounts because actual year-end amounts for the following items are not yet known:  income, capital expenditures, foreign exchange rates, foreign distributable reserves, foreign earnings and profits, and foreign cash balances. Management is in the process of obtaining and evaluating further information related to the provisional amounts estimated for items including the mandatory repatriation amounts and impacts to deferred tax assets and liabilities. Management has made estimates as it anticipates additional guidance and legislative action from the U.S. Federal and State governments in addition to interpretations and guidance from the SEC and FASB regarding the application of U.S. Tax Reform. Future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized.

Other U.S. Tax Reform provisions are effective for years beginning after December 31, 2017, which would be the Company’s Fiscal 2019, including the tax on global intangible low taxed income, Base Erosion and Anti-abuse Tax, interest expense limitations, and executive compensation limitations. We continue to evaluate these and other impacts of U.S. Tax Reform as more information and guidance becomes available.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Provisional amounts recognized due to the U.S. Tax Reform for the three months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Tax Expense

 

Net Deferred Tax Liability

 

Tax Receivable

 

 

(in millions)

Change in statutory tax rate, U.S. only (net of refundable AMT credit)

 

$

0.2

 

$

0.8

 

$

0.6

Changes to indefinite reinvestment assertion

 

 

(0.4)

 

 

(0.4)

 

 

 

Repatriation Tax (offset against net operating loss carryforwards, non-cash)

 

 

4.8

 

 

4.8

 

 

 

Net discrete impacts of the enactment of U.S. Tax Reform

 

$

4.6

 

$

5.2

 

$

0.6

Provisional amounts recognized due to the U.S. Tax Reform for the nine months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

Tax Expense

 

Net Deferred Tax Liability

 

Tax Receivable

 

 

(in millions)

Change in statutory tax rate, U.S. only (net of refundable AMT credit)

 

$

1.6

 

$

12.2

 

$

10.6

Changes to indefinite reinvestment assertion

 

 

7.5

 

 

7.5

 

 

 

Repatriation Tax (offset against net operating loss carryforwards, non-cash)

 

 

39.6

 

 

39.6

 

 

 

Net discrete impacts of the enactment of U.S. Tax Reform

 

$

48.7

 

$

59.3

 

$

10.6

The interim period effective tax rate is driven from year-to-date and anticipated pre-tax book income for the full fiscal year adjusted for anticipated items that are deductible/non-deductible for tax purposes only (i.e., permanent items). Additionally, the tax expense or benefit related to discrete permanent differences in an interim period are recorded in the period in which they occur. The determination of the effective tax rate is based upon a number of significant estimates and judgments; therefore, there can be significant volatility in interim tax provisions. The following statutory tax rates were used to determine the tax provision.

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2017

 

Fiscal 2018

 

Fiscal 2019

 

Tax Rates

 

 

 

 

 

 

 

 

 

 

Federal Rate

 

 

35%

 

 

28%

 

 

21%

 

Blended Federal & State Rate

 

 

39%

 

 

33%

 

 

26%

 

The interim effective tax rate for the nine months ended March 31, 2018 was positively impacted by reversing the valuation allowances of $31.0 million on the deferred tax assets of certain foreign subsidiaries. The effective tax rate was negatively impacted by U.S. Tax Reform principally relating to the estimated income tax on the deemed repatriation of previously deferred foreign earnings.

The Company files income tax returns in various federal, state, and local jurisdictions including the United States, Canada, United Kingdom and France. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities in major tax jurisdictions for years before 2012.

As of March 31, 2018, the Company had a $1.8 million current liability for uncertain tax positions related to U.S. state taxing jurisdictions, including $0.2 million of accrued interest and penalties. During the quarter, an additional $1.6 million liability was recognized for prior year tax positions. We recognize interest and penalties related to uncertain tax positions in income tax expense. The entire balance could be settled within the next year and $0.5 million would impact the effective tax rate if recognized because the uncertain tax positions relate to permanent differences.

(7) EQUITY

During the nine months ended March 31, 2018, the Company recorded a $67.8 million increase in member’s interest associated with stock-based compensation expense related to the Company’s equity classified stock-based compensation awards (See Note 8 – Stock-based Compensation).

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(8) STOCK-BASED COMPENSATION

The following tables summarize the Company’s stock-based compensation expense for liability and equity classified awards included in the condensed consolidated statements of operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31,

 

 

Nine months ended March 31,

 

 

2018

    

2017

 

 

2018

    

2017

 

 

(in millions)

Included in:

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs

 

$

2.1

 

$

2.1

 

$

7.6

 

$

8.7

Selling, general and administrative expenses

 

 

17.1

 

 

24.4

 

 

62.9

 

 

84.3

Total stock-based compensation expense

 

$

19.2

 

$

26.5

 

$

70.5

 

$

93.0

 

 

 

 

 

 

 

 

 

 

 

 

 

CII common units

 

$

 —

 

$

 —

 

$

 —

 

$

10.1

Part A restricted stock units

 

 

16.8

 

 

17.5

 

 

58.4

 

 

57.6

Part B restricted stock units

 

 

1.9

 

 

8.6

 

 

10.6

 

 

24.3

Part C restricted stock units

 

 

0.5

 

 

0.4

 

 

1.5

 

 

1.0

Total stock-based compensation expense

 

$

19.2

 

$

26.5

 

$

70.5

 

$

93.0

CII Common Units

During the nine months ended March 31, 2017, the Company recognized $10.1 million of stock compensation expense relating to the vesting of units in Communication Infrastructure Investments, LLC ("CII"). On December 31, 2016, the CII common units became fully vested and as such there is no compensation cost associated with CII common units for any period subsequent to December 31, 2016.

Performance Compensation Incentive Program

During October 2014, ZGH adopted the 2014 Performance Compensation Incentive Program (“PCIP”). The PCIP includes incentive cash compensation and equity (in the form of RSUs). Grants under the PCIP RSU plans are made quarterly for all participants. The PCIP was effective on October 16, 2014 and will remain in effect for a period of 10 years (or through October 16, 2024) unless it is earlier terminated by ZGH’s Board of Directors.

The PCIP has the following components:

Part A

Under Part A of the PCIP, certain full-time employees, including the Company’s executives, are eligible to earn quarterly awards of RSUs. Each participant in Part A of the PCIP will have an RSU annual award target value, which will be allocated to each fiscal quarter. The final Part A value awarded to a participant for any fiscal quarter is determined by the Compensation Committee of the Board of Directors subsequent to the end of the respective performance period taking into account ZGH’s measured value creation for the quarter, as well as such other subjective factors that it deems relevant (including group and individual level performance factors). The number of Part A RSUs granted will be calculated based on the final award value determined by the Compensation Committee divided by the average closing price of ZGH’s common stock over the last ten trading days of the respective performance period. Part A RSUs will vest assuming continuous employment fifteen months subsequent to the end of the performance period (for awards relating to periods through June 30, 2017) or twelve months subsequent to the end of the performance period (for awards relating to the period ended September 30, 2017, and subsequent quarters). Upon vesting, the RSUs convert to an equal number of shares of the Company’s common stock. Additionally, under Part A of the PCIP, awards may be granted to certain employees upon commencement of their employment with the Company.

During the three and nine months ended March 31, 2018, the Company recognized $16.8 million and $58.4 million, respectively, of compensation expense associated with the vested portion of the Part A awards. During the three and nine months ended March 31, 2017, the Company recognized $17.5 million and $57.6 million, respectively, of compensation expense associated with the vested portion of the Part A awards. The March 2018 and June 2017 quarterly

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

awards were recorded as liabilities totaling $4.8 million and $5.5 million, as of March 31, 2018 and June 30, 2017, respectively, as the awards represent an obligation denominated in a fixed dollar amount to be settled in a variable number of shares during the subsequent quarter.  The quarterly stock-based compensation liability is included in “Accrued liabilities” in the accompanying condensed consolidated balance sheets. Upon the issuance of the RSUs, the liability is re-measured and then reclassified to member’s interest, with a corresponding charge (or credit) to stock based compensation expense. The value of the remaining unvested RSUs is expensed ratably through the vesting date. At March 31, 2018, the remaining unrecognized compensation cost to be expensed over the remaining vesting period for Part A awards is $27.6 million.

The following table summarizes the Company’s Part A RSU activity for the nine months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

    

 

Number of Part A
RSUs

    

Weighted average
grant-date fair
value per share

    

 

Weighted average
remaining contractual
term in months

Outstanding at July 1, 2017

 

 

2,364,386

 

$

31.63

 

 

7.1

Granted

 

 

1,782,991

 

 

35.27

 

 

 

Vested

 

 

(2,004,694)

 

 

31.37

 

 

 

Forfeited

 

 

(225,422)

 

 

n/a

 

 

 

Outstanding at March 31, 2018

 

 

1,917,261

 

$

34.47

 

 

6.6

Part B

Under Part B of the PCIP, participants, including the Company’s executives, are awarded quarterly grants of RSUs. The number of the RSUs earned by the participants is based on ZGH’s stock price performance over a performance period of one year with the starting price being the average closing price over the last ten trading days of the quarter immediately prior to the grant and vest. The RSUs vest assuming continuous employment through the end of the measurement period, twelve months after the beginning of the performance period (for awards vesting on or prior to June 30, 2018) or fifteen months after the beginning of the performance period (for awards vesting after June 30, 2018). The existence of a vesting provision that is associated with the performance of ZGH’s stock price is a market condition, which affects the determination of the grant date fair value.  Upon vesting, RSUs earned convert to an equal number of shares of ZGH’s common stock.

The following table summarizes the Company’s Part B RSU activity for the nine months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

    

 

Number of Part B
RSUs

    

Weighted average
grant-date fair
value per unit

    

 

Weighted average
remaining contractual
term in months

Outstanding at July 1, 2017

 

 

411,973

 

$

42.86

 

 

6.1

Granted

 

 

323,734

 

 

30.58

 

 

 

Vested

 

 

(374,515)

 

 

44.03

 

 

 

Forfeited

 

 

(73,953)

 

 

n/a

 

 

 

Outstanding at March 31, 2018

 

 

287,239

 

$

31.93

 

 

7.1

The table below reflects the total Part B RSUs granted during Fiscal 2018 and 2017, the maximum eligible shares of ZGH’s common stock that the respective Part B RSU grant could be converted into shares of ZGH’s common stock, and the grant date fair value per Part B RSU during the period indicated. The table below also reflects the units converted

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

to the ZGH’s common stock at a vesting date that is subsequent to the period indicated for those RSUs granted during the period indicated:

 

 

 

 

 

 

 

 

 

 

 

 

During the three months ended

 

 

March 31,
2018

 

December 31,
2017

    

September 30,
2017

Part B RSUs granted

 

 

77,218

 

 

82,556

 

 

163,960

Maximum eligible shares of the Company's common stock

 

 

532,804

 

 

569,636

 

 

590,256

Grant date fair value per Part B RSU

 

$

39.53

 

$

45.10

 

$

19.06

Units converted to Company's common stock at vesting date

 

 

n/a

 

 

n/a

 

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the three months ended

 

 

June 30,

2017

    

March 31,

2017

    

December 31,

2016

    

September 30,

2016

Part B RSUs granted

    

 

152,808

 

 

171,316

 

 

191,015

 

 

200,425

Maximum eligible shares of the Company's common stock

 

 

550,109

 

 

880,564

 

 

981,817

 

 

1,030,185

Grant date fair value per Part B RSU

 

$

26.52

 

$

27.39

 

$

75.56

 

$

47.00

Units converted to Company's common stock at vesting date

 

 

 —

 

 

41,368

 

 

102,511

 

 

99,508

 

During the three and nine months ended March 31, 2018, the Company recognized stock-based compensation expense of $1.9 million and $10.6 million, respectively, related to Part B awards. During the three and nine months ended March 31, 2017, the Company recognized stock-based compensation expense of $8.6 million and $24.3 million, respectively, related to Part B awards.

The grant date fair value of Part B RSU grants is estimated utilizing a Monte Carlo simulation.  This simulation estimates the ten-day average closing stock price ending on the vesting date, the stock price performance over the performance period, and the number of common shares to be issued at the vesting date. Various assumptions are utilized in the valuation method, including the target stock price performance ranges and respective share payout percentages, the Company’s historical stock price performance and volatility, peer companies’ historical volatility and an appropriate risk-free rate. The aggregate future value of the grant under each simulation is calculated using the estimated per share value of the common stock at the end of the vesting period multiplied by the number of common shares projected to be granted at the vesting date. The present value of the aggregate grant is then calculated under each of the simulations, resulting in a distribution of potential present values. The fair value of the grant is then calculated based on the average of the potential present values. The remaining unrecognized compensation cost associated with Part B RSU grants is $5.4 million at March 31, 2018.

Part C

Under Part C of the PCIP, independent directors of ZGH are eligible to receive quarterly awards of RSUs.  Independent directors electing to receive a portion of their annual director fees in the form of RSUs are granted a set dollar amount of Part C RSUs each quarter.  The quantity of Part C RSUs granted is based on the average closing price of ZGH’s common stock over the last ten trading days of the quarter ended immediately prior to the grant date and vest at the end of each quarter for which the grant was made. During the three and nine months ended March 31, 2018, the Company’s independent directors were granted 13,555 and 43,502 Part C RSUs, respectively. During the three and nine months ended March 31, 2017, the Company’s independent directors were granted 11,250 and 33,091 Part C RSUs, respectively. During the three and nine months ended March 31, 2018 the Company recognized $0.5 million and $1.5 million, respectively, of stock-based compensation expense associated with the Part C awards. During the three and nine months ended March 31, 2017, the Company recognized $0.4 million and $1.0 million, respectively, of compensation expense associated with the Part C RSUs.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(9) EMPLOYEE BENEFITS

In connection with the Allstream Acquisition on January 15, 2016 from Manitoba Telecom Services Inc. (now known as “Bell MTS” as a result of its acquisition by BCE Inc.), Bell MTS agreed to retain the Allstream Acquisition Entity’s former defined benefit pension obligations, and related pension plan assets, of retirees and other former employees of the Allstream Acquisition Entity and also agreed to reimburse the Allstream Acquisition Entity for certain solvency funding payments related to the pension obligations of active employees of the Allstream Acquisition Entity as of January 15, 2016. On October 31, 2017, Bell MTS transferred assets of CAD $117.9 million (or $91.6 million) from the Allstream Acquisition Entity’s former defined benefit pension plans related to pre-closing service obligations for active employees to defined benefit pension plans of the Allstream Acquisition Entity created by the Company on January 15, 2016. The assets were transferred on a fully funded basis calculated on a solvency basis, however on a GAAP basis, the plans are underfunded.  Upon transfer, a prior period service cost was recognized in other comprehensive income for the underfunded amount, consistent with the Company’s accounting policies. The Company became responsible for accruing post-acquisition liabilities related to these plans as of the Allstream Acquisition Entity date of January 15, 2016. The Company also sponsors an OPEB for certain former employees of  the Allstream Acquisition Entity, which provides health care and life insurance benefits for certain eligible retirees. These OPEB plans are not funded. Benefits are paid directly to the participants of these plans.

The Company uses a June 30 annual measurement date for its defined benefit and postretirement benefit plans. Upon the transfer of the pre-closing service obligation, a measurement was obtained. No comparative period figures were disclosed in the tables or notes below, as the amounts for employee benefits were not material for those periods.

Defined benefit plans

The Company maintains defined benefit pension plans that provide pension benefits for certain former employees of the Allstream Acquisition Entity. Benefits are based on the employee’s length of service and average rate of pay during the highest paid consecutive three years of service. The Company is responsible for adequately funding the pension plans. Contributions are made based on various actuarial cost methods permitted by pension regulatory bodies. Contributions reflect actuarial assumptions about future investment returns, salary projections, future service and life expectancy.

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The following tables provide a reconciliation of the changes in the benefit obligations, fair value of plan assets and the unfunded status for the Company’s defined benefit pension and OPEB, where applicable:

 

 

 

 

 

 

Pension Plans

 

 

(in millions)

Change in projected benefit obligation for defined benefit pension plans:

 

 

 

Projected benefit obligation at July 1, 2017

 

$

6.7

Service cost

 

 

2.1

Interest cost

 

 

1.6

Actuarial loss (gain)

 

 

4.0

Participant contributions

 

 

0.5

Benefits paid from plan assets

 

 

(5.1)

Acquisition transfer

 

 

99.4

Projected benefit obligation at March 31, 2018

 

$

109.2

 

 

 

 

 

 

 

Post-Retirement Benefit Plans

 

 

(in millions)

Change in projected benefit obligation for OPEB plans:

 

 

 

Projected benefit obligation at July 1, 2017

 

$

9.9

Service cost

 

 

0.1

Interest cost

 

 

0.3

Actuarial loss (gain)

 

 

0.4

Benefits paid by Company

 

 

(0.4)

Foreign currency exchange rate changes

 

 

0.1

Projected benefit obligation at March 31, 2018

 

$

10.4

The accumulated benefit obligation of the defined benefit plan and OPEB at March 31, 2018 are $101.5 million and $9.8 million, respectively. 

 

 

 

 

 

 

Pension Plans

 

 

(in millions)

Change in pension plan assets:

 

 

 

Fair value of plan assets at July 1, 2017

 

$

3.7

Return on plan assets

 

 

0.4

Employer contributions

 

 

2.5

Participant contributions

 

 

0.5

Benefits paid from plan assets

 

 

(5.1)

Acquisition transfer

 

 

91.4

Fair value of pension plan assets at March 31, 2018

 

$

93.4

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The unfunded status of the projected benefit obligation at March 31, 2018 was $15.8 million, which was recorded as other long-term liabilities.

 

 

 

 

 

 

Pension Plans

 

 

As of March 31, 2018

 

 

(in millions)

Projected benefit obligation

 

$

109.2

Fair value of plan assets

 

 

93.4

Unfunded status

 

$

15.8

Current portion of unfunded status

 

$

 —

Non-current portion of unfunded status

 

$

15.8

The following table provides information regarding change in amounts from June 30, 2017 in accumulated other comprehensive loss (“AOCI”)  that have not yet been recognized as components of net periodic benefit cost at March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017

 

Deferrals

 

Net Change in AOCI

 

As of March 31, 2018

 

 

(in millions)

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

Pension plans:

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial (loss)/gain

 

$

 —

 

$

(6.0)

 

$

(6.0)

 

$

(6.0)

Prior service benefit/(cost)

 

 

 —

 

 

(8.1)

 

 

(8.1)

 

 

(8.1)

Deferred income tax benefit/(expense)

 

 

 —

 

 

3.7

 

 

3.7

 

 

3.7

Total pension plans

 

 

 —

 

 

(10.4)

 

 

(10.4)

 

 

(10.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

Post-retirement benefit plans:

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial (loss)/gain

 

 

(1.2)

 

 

(0.4)

 

 

(0.4)

 

 

(1.6)

Prior service (cost)/benefit

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Deferred income tax benefit/(expense)

 

 

0.4

 

 

 —

 

 

 —

 

 

0.4

Total post-retirement benefit plans

 

 

(0.8)

 

 

(0.4)

 

 

(0.4)

 

 

(1.2)

Total accumulated other comprehensive loss

 

$

(0.8)

 

$

(10.8)

 

$

(10.8)

 

$

(11.6)

There have been no material amounts reclassified from AOCI during the period.

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The expected benefit payments for the Company’s defined benefit pension and OPEB plans for the years indicated are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Post-Retirement

 

 

 

Pension Plans

 

Benefit Plans

 

 

 

(in millions)

Year ended June 30,

 

 

 

 

 

 

 

2018

 

$

2.7

 

$

0.6

 

2019

 

 

2.9

 

 

0.5

 

2020

 

 

3.1

 

 

0.5

 

2021

 

 

3.4

 

 

0.5

 

2022

 

 

3.6

 

 

0.5

 

2023-2027

 

 

22.0

 

 

2.4

 

Net periodic (benefit) cost of the defined benefit pension and OPEB is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations includes the following components:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Pension Plans

 

    

Three months ended March 31, 2018

 

Nine months ended March 31, 2018

 

 

( in millions)

Service cost

 

$

0.7

 

$

2.1

Interest cost

 

 

0.9

 

 

1.6

Expected return on plan assets

 

 

(1.4)

 

 

(2.5)

Amortization of loss from earlier periods

 

 

0.2

 

 

0.2

Net periodic pension benefit expense

 

$

0.4

 

$

1.4

 

 

 

 

 

 

 

 

 

 

OPEB Plans

 

    

Three months ended March 31, 2018

 

Nine months ended March 31, 2018

 

    

(in millions)

Service cost

 

$

 —

 

$

0.1

Interest cost

 

 

0.1

 

 

0.3

Net periodic post-retirement benefit expense

 

$

0.1

 

$

0.4

The following tables present the assumptions used in determining benefit obligations of the defined benefit pension and OPEB plans:

 

 

 

 

 

 

 

 

 

Pension Plans

 

OPEB Plans

Actuarial assumptions:

 

 

 

 

 

 

Discount rate

 

 

3.5%

 

 

3.5%

Price inflation

 

 

1.75%

 

 

N/A

Expected long-term rate of return on plan assets

 

 

5.9%

 

 

N/A

Rate of compensation increase

 

 

2% plus merit & promotion

 

 

N/A

The discount rates utilized reflect the average yield on high quality corporate bonds of similar duration to the plans’ liabilities.  The discount rate used to calculate the employee future benefits obligation is determined at each year end by referring to the most recently available market interest rates based on “AA”-rated corporate bond yields reflecting the duration of the employee future benefit plans.  Under the yield curve approach, expected future benefit payments for

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

each plan are discounted by a rate on a third-party bond yield curve corresponding to each duration. The yield curve is based on “AA” long-term corporate bonds. A single discount rate is calculated that would yield the same present value as the sum of the discounted cash flows.

The expected return on assets assumption for the plans is determined as the estimate of future experience for trust asset returns, reflecting the plans’ current asset allocation and any expected changes during the current plan year, current market conditions and expectations for future market conditions.

The investment objective of the defined benefit pension plans is to provide a risk-adjusted return that will ensure the payment of benefits while protecting against the risk of substantial investment losses. Correlations among the asset classes are used to identify an asset mix that the Company believes will provide the most attractive returns. Long-term return forecasts for each asset class using historical data and other qualitative considerations to adjust for projected economic forecasts are used to set the expected rate of return for the entire portfolio.

The defined benefit pension plan utilizes various investment securities. Generally, investment securities are exposed to various risks, such as interest rate risks, credit risk, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur and that such changes could materially affect the amounts reported.

The following table presents the Company’s target for the allocation of invested defined benefit pension plan assets at March 31, 2018:

 

 

 

 

 

 

As of March 31, 2018

Fixed income

 

 

40%

Equities

 

 

55%

Other

 

 

5%

Total

 

 

100%

The plans assets are invested in various fund categories utilizing multiple strategies and investment managers. Interests in funds are valued using the net asset value ("NAV") per unit of each fund. The NAV reported by the fund manager is based on the market value of the underlying investments owned by each fund, minus its liabilities, divided by the number of shares outstanding.  These funds can be redeemed at NAV, generally at any time.  As the funds do not publish publicly available prices, the NAV practical expedient is the most appropriate fair value classification for the plan asset investments. The value associated with these investments is disclosed in the reconciliation of the total investments measured at fair value shown below.

The table below presents the fair value of plan assets valued at NAV by category for the pension and post-retirement plans at March 31, 2018.

 

 

 

 

 

 

As of March 31, 2018

 

 

(in millions)

Fixed income

 

$

34.1

Equities

 

 

54.3

Other

 

 

5.0

Total

 

$

93.4

Fixed income – Fixed income represents investments in commingled bond funds comprised of Canadian government, corporate bonds, and mortgage-backed securities.

EquitiesEquities represent investments in commingled equities funds comprised of investments in U.S., Canadian and global equities.

Other – Other investments are comprised of investments in commingled real estate funds

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(10) FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist of cash and cash equivalents, restricted cash, trade receivables, accounts payable, long-term debt, certain post-employment plans and stock-based compensation liability. The carrying values of cash and cash equivalents, restricted cash, trade receivables and accounts payable approximated their fair values at March 31, 2018 and June 30, 2017 due to the short maturity of these instruments.

The carrying value of the Company’s Notes, excluding debt issuance costs, reflects the original amounts borrowed, inclusive of net unamortized premium, and was $4,003.9 million and $3,692.8 million as of March 31, 2018 and June 30, 2017, respectively. Based on market interest rates for debt of similar terms and average maturities, the fair value of the Company's Notes as of March 31, 2018 and June 30, 2017 was estimated to be $4,007.9 million and $3,895.7 million, respectively. The Company’s fair value estimates associated with its Note obligations were derived utilizing Level 2 inputs—quoted prices for similar instruments in active markets.

The carrying value of the Company’s Term Loan Facility, excluding debt issuance costs, reflects the original amounts borrowed, inclusive of unamortized discounts, and was $1,751.9 million and $1,912.7 million as of March 31, 2018 and June 30, 2017, respectively. The Company’s Term Loan Facility accrues interest at variable rates based upon the one-month, three-month or nine-month LIBOR plus i) a spread of 2.0% on the Company’s $500.0 million tranche (which has a LIBOR floor of 0.0%) and ii) a spread of 2.25% on its B-2 Term Loan tranche (which has a LIBOR floor of 1.00%). Based on market interest rates for debt of similar terms and average maturities, the fair value of the Company’s Term Loan Facility as of March 31, 2018 and June 30, 2017 was estimated to be $1,773.5 million and $1,930.5 million, respectively. The Company’s fair value estimates associated with its Term Loan Facility obligations were derived utilizing Level 2 inputs—quoted prices for similar instruments in active markets. A hypothetical increase in the applicable interest rate on the Company’s Term Loan Facility of one percentage point above the 1.0% LIBOR floor would increase the Company’s annual interest expense by approximately $17.6 million.

As of March 31, 2018 and June 30, 2017, there was no balance outstanding under the Company's Revolver.

(11) COMMITMENTS AND CONTINGENCIES

Purchase commitments

At March 31, 2018, the Company was contractually committed for $506.3 million of capital expenditures for construction materials and purchases of property and equipment,  as well as energy and network expenditures. A majority of these purchase commitments are expected to be satisfied in the next twelve months. These purchase commitments are primarily success based; that is, the Company has executed customer contracts that support the future capital expenditures.

Outstanding Letters of Credit

As of March 31, 2018, the Company had $8.0 million in outstanding letters of credit, which were primarily entered into in connection with various lease agreements. Additionally, as of March 31, 2018, Zayo Canada, Inc., a subsidiary of the Company, had CAD $3.5 million (or $2.7 million) in letters of credit, under a CAD $5.0 million (or $3.9 million) unsecured credit agreement.

Contingencies

In the normal course of business, the Company is party to various outstanding legal proceedings, asserted and unasserted claims, and carrier disputes. In the opinion of management, the ultimate disposition of these matters, both asserted and unasserted, will not have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

(12) RELATED PARTY TRANSACTIONS

In May 2016, CII sold Onvoy, LLC and its subsidiaries (“OVS”), a company that provided voice and managed offerings that the Company spun off during the year ended June 30, 2014, to an entity that has a material ownership interest in the Company. The Company continues to have ongoing contractual relationships with Inteliquent, Inc.,

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

successor by merger to OVS (“Inteliquent”), whereby the Company provides Inteliquent and its subsidiaries with bandwidth capacity and Inteliquent provides the Company and its subsidiaries with voice offerings. The contractual relationships are based on agreements that were entered into at estimated market rates.

The following table represents the revenue and expense transactions the Company recorded with Inteliquent for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

Nine months ended March 31,

 

 

2018

    

2017

 

2018

    

2017

 

 

(in millions)

Revenues

 

$

1.9

 

$

1.4

 

$

5.6

 

$

4.5

Operating costs

 

$

0.8

 

$

0.2

 

$

2.0

 

$

0.4

As of March 31, 2018 and June 30, 2017, the Company had $0.5 million due from Inteliquent.

Dan Caruso, the Company’s Chief Executive Officer and Chairman of the Board, is a party to an aircraft charter (or membership) agreement through his affiliate, Bear Equity LLC, for business and personal travel.  Under the terms of the charter agreement, all fees for the use of the aircraft are effectively variable in nature. For his business travel on behalf of the Company, Mr. Caruso is reimbursed for his use of the aircraft subject to an annual maximum reimbursement threshold approved by the Company's Nominating and Governance Committee. During the three and nine months ended March 31, 2018 the Company reimbursed Mr. Caruso $0.2 million and $0.5 million, respectively, and during the three and nine months ended March 31, 2017 reimbursed $0.2 million and $0.6 million, respectively, for his business use of the aircraft.

(13) SEGMENT REPORTING

The Company uses the management approach to determine the segment financial information that should be disaggregated and presented separately in the Company's notes to its financial statements. The management approach is based on the manner by which management has organized the segments within the Company for making operating decisions, allocating resources, and assessing performance.

As the Company has increased in scope and scale, it has developed its management and reporting structure to support this growth. The Company’s bandwidth infrastructure, colocation and connectivity offerings are comprised of various related product groups generally defined around the type of offering to which the customer is licensing access, referred to as SPGs. Each SPG is responsible for the revenue, costs and associated capital expenditures of its respective solutions. The SPGs enable licensing and sales, make pricing and product decisions, engineer networks and deliver solutions to customers, and support customers for specific telecom and Internet infrastructure requirements.

In connection with the Company’s continued increase in scope and scale, effective January 1, 2017, and in contemplation of the Company’s acquisition of Electric Lightwave which was completed March 1, 2017, the Company's chief operating decision maker ("CODM"), the Company's Chief Executive Officer, implemented certain organizational changes to the management and operation of the business that directly impact how the CODM makes resource allocation decisions and manages the Company. Under the new structure, the Company’s reportable segments include: Fiber Solutions, Transport, Enterprise Networks, Zayo Colocation, Allstream and Other.  The change in structure had the impact of consolidating and/or regrouping existing SPGs and product offerings among the Company’s reportable segments and disaggregating the legacy Zayo Canada segment among the existing SPGs and a new Allstream reportable segment.  The change in structure also resulted in adjustments to intercompany pricing that more closely align to third party pricing on the offerings that are provided between the Company’s SPGs.  

The Company’s legacy SPGs included Dark Fiber and Mobile Infrastructure Group (“MIG”).  Effective January 1, 2017, the Dark Fiber and MIG SPGs were merged together and are now reported as part of the Fiber Solutions reporting segment.  Waves and Ethernet solutions that are provided on dedicated dark fiber strands and colocation facilities that support only dark fiber customers, which were historically reported as part of the Waves, Ethernet or zColo SPGs, were transferred to the Fiber Solutions reportable segment effective January 1, 2017 (the “Dedicated Solutions Transfers”).

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The Company’s legacy Waves, IP and Sonet SPGs, after giving effect to the Dedicated Solutions Transfers, are now reported under the Company’s Transport reportable segment.

The Company’s legacy Ethernet and Cloud SPGs, after giving effect to the Dedicated Solutions Transfers, are now reported under the Company’s Enterprise Networks segment.

The Company’s legacy Zayo Canada reporting segment was disaggregated based upon the products offered by the legacy Zayo Canada segment to the Company’s existing SPGs and two new SPGs were established: Voice and Small and Medium Business (“SMB”).

The Company’s segments are further described below:

Fiber Solutions. Through the Fiber Solutions segment, the Company provides access to raw bandwidth infrastructure to customers that require more control of their internal networks. These solutions include dark fiber, dedicated lit networks and mobile infrastructure (fiber-to-the-tower and small cell). Dark fiber is a physically separate and secure, private platform for dedicated bandwidth. The Company leases dark fiber pairs (usually 2 to 12 total fibers) to its customers, who “light” the fiber using their own optronics. The Company’s mobile infrastructure solutions permit direct fiber connections to cell towers, small cells, hub sites, and mobile switching centers. Fiber Solutions customers include carriers and other communication service providers, Internet service providers, wireless service providers, major media and content companies, large enterprises, and other companies that have the expertise to run their own fiber optic networks or require interconnected technical space. The contract terms in the Fiber Solutions segment tend to range from three to twenty years.

Transport. The Transport segment provides access to lit bandwidth infrastructure solutions over the Company’s metro, regional, and long-haul fiber networks. The segment uses customer-accessed optronics to light the fiber, and the Company’s customers pay for its offerings based on the amount and type of bandwidth access they require. The Company’s offerings within this segment include wavelengths, wholesale IP and SONET. The Company targets customers who require a minimum of 10G of bandwidth across their networks. Transport customers include carriers, content providers, financial services companies, healthcare, government entities, education institutions and other medium and large enterprises. The contract terms in this segment tend to range from two to five years.

Enterprise NetworksThe Enterprise Networks segment provides connectivity and lit bandwidth telecommunication solutions to medium and large enterprises. The Company’s offerings within this segment include Ethernet, Internet, wide area networking products, managed products and cloud-based computing and storage products. Solutions range from point-to-point data connections to multi-site managed networks to international outsourced IT infrastructure environments. The contract terms in the Enterprise Networks segment tend to range from one to ten years.

Zayo Colocation (zColo).  The Colocation segment provides data center infrastructure solutions to a broad range of enterprise, carrier, cloud, and content customers. The Company’s offerings within this segment include the provision of colocation space, power and interconnection solutions in North America and Western Europe.  Solutions range in size from single cabinet solutions to 1MW+ data center infrastructure environments. The Company’s data centers also support a large component of the Company’s networking components for the purpose of aggregating and accommodating data, voice, Internet, and video traffic. The contract terms in this segment tend to range from two to five years.

Allstream.  The Allstream segment provides Voice, SIP Trunking, Unified Communications and scalable data offerings using a variety of technologies for businesses.  Voice provides a full range of local voice offerings allowing business customers to complete telephone calls in their local exchange, as well as make long distance, toll-free and related calls. Unified Communications is the integration of real-time communication functions such as telephony (including cloud-based IP telephony), instant messaging and video conferencing with non-real-time communication offerings, such as integrated voicemail and e-mail.  Unified Communications provides a set of products that give users the ability to work and communicate across multiple components, media types and geographies. Allstream also offers a range of products that help small and medium business (“SMB”) customers implement the right data and

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networking solutions for their business. Those scalable products make use of technologies including Ethernet, IP/MPLS VPN Solutions, and wavelength solutions.  Allstream provides support to customers in the SMB market while leveraging its extensive network and product offerings.  These include IP, internet, voice, IP Trunking, cloud private branch exchange, collaboration offerings and unified communications.

Other. The Other segment is primarily comprised of ZPS. ZPS provides network and technical resources to customers who wish to leverage our expertise in designing, acquiring and maintaining networks. The contract terms typically provide for a term of one year for a fixed recurring monthly fee in the case of network and on an hourly basis for technical resources (usage revenue). ZPS also generates revenue via telecommunication component sales.

Effective January 1, 2017, revenues for all of the Company’s products are included in one of the Company’s six segments. This segment presentation has been recast for all periods presented for comparability. The results of operations for each segment include an allocation of certain indirect costs and corporate related costs, including overhead and third party-financed debt. The allocation is based on a percentage that represents management’s estimate of the relative burden each segment bears of indirect and corporate costs. Management has evaluated the allocation methods utilized to allocate these costs and determined they are systematic, rational and consistently applied. Identifiable assets for each reportable segment are reconciled to total consolidated assets including unallocated corporate assets and intersegment eliminations. Unallocated corporate assets consist primarily of cash and deferred taxes.

During the quarter ending June 30, 2018, the Company's CODM will implement certain organizational changes to the management and operation of the business that directly impact how the CODM makes resource allocation decisions and manages the Company. These changes will include moving the Company's Ethernet Transport business from the Enterprise Networks segment to the Company's Transport segment and will be retrospectively presented beginning with the Company's segment reporting disclosure in the June 30, 2018 consolidated financial statements.

Segment Adjusted EBITDA

Segment Adjusted EBITDA is the primary measure used by the Company’s CODM to evaluate segment operating performance.

The Company defines Segment Adjusted EBITDA as earnings/(loss) from operations before interest, income taxes, depreciation and amortization (“EBITDA”) adjusted to exclude acquisition or disposal-related transaction costs, losses on extinguishment of debt, stock-based compensation, unrealized foreign currency gains/(losses) on intercompany loans, and non-cash income/(loss) on equity and cost method investments. The Company uses Segment Adjusted EBITDA to evaluate operating performance, and this financial measure is among the primary measures used by management for planning and forecasting of future periods. The Company believes that the presentation of Segment Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by management and facilitates comparison of the Company’s results with the results of other companies that have different financing and capital structures.

Segment Adjusted EBITDA results, along with other quantitative and qualitative information, are also utilized by the Company and its Compensation Committee for purposes of determining bonus payouts to employees.

Segment Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of the Company’s results from operations and operating cash flows as reported under GAAP. For example, Segment Adjusted EBITDA:

·

does not reflect capital expenditures, or future requirements for capital and major maintenance expenditures or contractual commitments;

·

does not reflect changes in, or cash requirements for, working capital needs;

·

does not reflect the significant interest expense, or the cash requirements necessary to service the interest payments, on the Company’s debt; and

·

does not reflect cash required to pay income taxes.

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company’s computation of Segment Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies because all companies do not calculate segment Adjusted EBITDA in the same fashion.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2018

 

    

Fiber
Solutions

  

Transport

  

Enterprise
Networks

  

zColo

  

Allstream

  

Other

  

Corp/
Eliminations

  

Total

 

 

(in millions)

Revenue from external customers

  

$

210.3

 

$

117.2

 

$

138.8

 

$

59.6

 

$

117.7

 

$

5.8

 

$

 —

 

$

649.4

Segment Adjusted EBITDA

  

 

164.6

 

 

48.2

 

 

50.5

 

 

29.4

 

 

25.5

 

 

1.6

 

 

(0.2)

 

 

319.6

Capital expenditures

  

 

102.7

 

 

40.5

 

 

24.2

 

 

25.5

 

 

2.2

 

 

 —

 

 

 —

 

 

195.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the nine months ended March 31, 2018

 

    

Fiber
Solutions

    

Transport

    

Enterprise Networks

 

zColo

 

Allstream

    

Other

    

Corp/
Eliminations

    

Total

 

 

(in millions)

Revenue from external customers

  

$

606.3

 

$

353.6

 

$

422.4

 

$

177.9

 

$

368.9

 

$

17.3

 

$

 —

 

$

1,946.4

Segment Adjusted EBITDA

  

 

479.8

 

 

149.0

 

 

157.0

 

 

90.3

 

 

86.2

 

 

4.0

 

 

(0.2)

 

 

966.1

Total assets

  

 

4,861.9

 

 

1,306.6

 

 

1,292.2

 

 

1,036.6

 

 

467.0

 

 

33.2

 

 

229.2

 

 

9,226.7

Capital expenditures

  

 

324.5

 

 

106.0

 

 

64.7

 

 

78.1

 

 

8.6

 

 

 —

 

 

 —

 

 

581.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2017

 

    

Fiber
Solutions

  

Transport

  

Enterprise
Networks

  

zColo

  

Allstream

  

Other

  

Corp/
Eliminations

  

Total

 

 

(in millions)

Revenue from external customers

  

$

179.6

 

$

110.5

 

$

121.7

 

$

53.6

 

$

79.3

 

$

5.5

 

$

 —

 

$

550.2

Segment Adjusted EBITDA

  

 

137.6

 

 

45.7

 

 

46.6

 

 

28.7

 

 

22.0

 

 

1.4

 

 

 —

 

 

282.0

Capital expenditures

  

 

119.9

 

 

40.2

 

 

22.6

 

 

23.7

 

 

1.9

 

 

 —

 

 

 —

 

 

208.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended March 31, 2017

 

    

Fiber
Solutions

    

Transport

    

Enterprise Networks

 

zColo

 

Allstream

    

Other

    

Corp/
Eliminations

    

Total

 

 

(in millions)

Revenue from external customers

  

$

531.2

 

$

323.0

 

$

350.8

 

$

157.3

 

$

185.4

 

$

14.1

 

$

 —

 

$

1,561.8

Segment Adjusted EBITDA

  

 

416.8

 

 

134.9

 

 

126.9

 

 

82.6

 

 

41.3

 

 

3.5

 

 

 —

 

 

806.0

Capital expenditures

  

 

381.6

 

 

111.1

 

 

63.6

 

 

69.9

 

 

4.0

 

 

 —

 

 

 —

 

 

630.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017

 

    

Fiber
Solutions

    

Transport

    

Enterprise

Networks

 

zColo

 

Allstream

    

Other

    

Corp/
Eliminations

    

Total

 

 

(in millions)

Total assets

  

$

4,504.6

 

$

1,230.0

 

$

1,385.7

 

$

994.4

 

$

406.2

 

$

33.2

 

$

173.7

 

$

8,727.8

 

Reconciliation from Total Segment Adjusted EBITDA to income from operations before taxes:

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

 

2018

    

2017

 

 

 

(in millions)

Total Segment Adjusted EBITDA

  

$

319.6

 

$

282.0

Interest expense

  

 

(75.3)

 

 

(63.0)

Depreciation and amortization expense

  

 

(191.2)

 

 

(155.7)

Transaction costs

  

 

(3.3)

 

 

(8.4)

Stock-based compensation

  

 

(19.2)

 

 

(26.5)

Loss on extinguishment of debt

 

 

 —

 

 

(4.5)

Foreign currency gain/(loss) on intercompany loans

  

 

13.9

 

 

3.9

Non-cash loss on investments

 

 

(0.2)

 

 

(0.2)

Income from operations before income taxes

 

$

44.3

 

$

27.6

 

 

 

 

 

 

 

 

33


 

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

For the nine months ended March 31,

 

  

2018

    

2017

 

  

(in millions)

Total Segment Adjusted EBITDA

  

$

966.1

 

$

806.0

Interest expense

  

 

(222.0)

 

 

(170.0)

Depreciation and amortization expense

  

 

(571.2)

 

 

(425.6)

Transaction costs

  

 

(17.5)

 

 

(17.6)

Stock-based compensation

 

 

(70.5)

 

 

(93.0)

Loss on extinguishment of debt

 

 

(4.9)

 

 

(4.5)

Foreign currency gain/(loss) on intercompany loans

 

 

27.8

 

 

(24.7)

Non-cash loss on investments

 

 

(0.5)

 

 

(0.7)

Income from operations before income taxes

 

$

107.3

 

$

69.9

 

 

(14) CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As discussed Note 5 – Long-Term Debt, as of March 31, 2018, the Company has outstanding $1,430.0 million of 2023 Unsecured Notes, $900.0 million of 2025 Unsecured Notes, $1,650.0 million of 2027 Unsecured Notes. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the Company’s current and future domestic restricted subsidiaries. Zayo Capital does not have independent assets or operations. The non-guarantor subsidiaries consist of the foreign subsidiaries that were acquired in conjunction with the Company's acquisitions.

The accompanying condensed consolidating financial information has been prepared and is presented to display the components of the Company’s balance sheets, statements of operations and statements of cash flows in a manner that allows an existing or future holder of the Company’s Notes to review and analyze the current financial position and recent operating results of the legal subsidiaries that guarantee the Company’s debt obligations.

The operating activities of the separate legal entities included in the Company’s consolidated financial statements are interdependent. The accompanying condensed consolidating financial information presents the results of operations, financial position and cash flows of each legal entity. Zayo Group and its guarantors provide services to each other during the normal course of business. These transactions are eliminated in the consolidated results of operations of the Company. Activity related to income taxes is included at the issuer, or Zayo Group level, and the Company's non-guarantor subsidiaries and is not allocated to the Company's guarantor subsidiaries in the condensed consolidated financial information presented below.

34


 

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidating Balance Sheet

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

    

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

(Issuer)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

(in millions)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

161.7

 

$

4.6

 

$

162.3

 

$

 —

 

 

328.6

Trade receivables, net of allowance

 

 

124.9

 

 

3.7

 

 

94.5

 

 

 —

 

 

223.1

Prepaid expenses

 

 

56.2

 

 

0.2

 

 

22.7

 

 

 —

 

 

79.1

Other current assets

 

 

13.4

 

 

 —

 

 

1.9

 

 

 —

 

 

15.3

Assets held for sale

 

 

47.4

 

 

 —

 

 

 —

 

 

 —

 

 

47.4

Total current assets

 

 

403.6

 

 

8.5

 

 

281.4

 

 

 —

 

 

693.5

Property and equipment, net

 

 

4,653.8

 

 

 —

 

 

713.1

 

 

 —

 

 

5,366.9

Intangible assets, net

 

 

1,096.5

 

 

9.6

 

 

144.8

 

 

 —

 

 

1,250.9

Goodwill

 

 

1,549.5

 

 

14.6

 

 

171.4

 

 

 —

 

 

1,735.5

Deferred income taxes, net

 

 

12.3

 

 

 —

 

 

2.0

 

 

 —

 

 

14.3

Other assets

 

 

130.5

 

 

 —

 

 

35.1

 

 

 —

 

 

165.6

Related party receivable

 

 

368.5

 

 

 —

 

 

 —

 

 

(368.5)

 

 

 —

Investment in subsidiary

 

 

680.3

 

 

 —

 

 

 —

 

 

(680.3)

 

 

 —

Total assets

 

$

8,895.0

 

$

32.7

 

$

1,347.8

 

$

(1,048.8)

 

$

9,226.7

Liabilities and member's equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

43.7

 

$

0.1

 

$

19.8

 

$

 —

 

$

63.6

Accrued liabilities

 

 

201.4

 

 

0.7

 

 

95.8

 

 

 —

 

 

297.9

Accrued interest

 

 

85.1

 

 

 —

 

 

 —

 

 

 —

 

 

85.1

Current portion of long-term debt

 

 

5.0

 

 

 —

 

 

 —

 

 

 —

 

 

5.0

Capital lease obligations, current

 

 

8.6

 

 

 —

 

 

1.4

 

 

 —

 

 

10.0

Deferred revenue, current

 

 

121.0

 

 

0.2

 

 

39.6

 

 

 —

 

 

160.8

Liabilities associated with assets held for sale

 

 

7.2

 

 

 —

 

 

 —

 

 

 —

 

 

7.2

Total current liabilities

 

 

472.0

 

 

1.0

 

 

156.6

 

 

 —

 

 

629.6

Long-term debt, non-current

 

 

5,688.8

 

 

 —

 

 

 —

 

 

 —

 

 

5,688.8

Related party debt, long-term

 

 

 —

 

 

 —

 

 

368.5

 

 

(368.5)

 

 

 —

Capital lease obligation, non-current

 

 

114.3

 

 

 —

 

 

10.8

 

 

 —

 

 

125.1

Deferred revenue, non-current

 

 

954.5

 

 

 —

 

 

95.8

 

 

 —

 

 

1,050.3

Deferred income taxes, net

 

 

115.5

 

 

 —

 

 

41.6

 

 

 —

 

 

157.1

Other long-term liabilities

 

 

24.9

 

 

 —

 

 

25.9

 

 

 —

 

 

50.8

Total liabilities

 

 

7,370.0

 

 

1.0

 

 

699.2

 

 

(368.5)

 

 

7,701.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Member's equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Member's interest

 

 

1,955.9

 

 

17.3

 

 

575.4

 

 

(601.8)

 

 

1,946.8

Accumulated other comprehensive income

 

 

9.4

 

 

 —

 

 

9.4

 

 

(9.4)

 

 

9.4

Accumulated deficit

 

 

(440.3)

 

 

14.4

 

 

63.8

 

 

(69.1)

 

 

(431.2)

Total member's equity

 

 

1,525.0

 

 

31.7

 

 

648.6

 

 

(680.3)

 

 

1,525.0

Total liabilities and member's equity

 

$

8,895.0

 

$

32.7

 

$

1,347.8

 

$

(1,048.8)

 

$

9,226.7

 

35


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidating Balance Sheets

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

    

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

(Issuer)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

(in millions)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

96.6

 

$

2.1

 

$

121.3

 

$

 —

 

 

220.0

Trade receivables, net of allowance

 

 

117.9

 

 

4.5

 

 

69.2

 

 

 —

 

 

191.6

Prepaid expenses

 

 

42.6

 

 

0.3

 

 

25.4

 

 

 —

 

 

68.3

Other assets

 

 

25.1

 

 

 —

 

 

9.0

 

 

 —

 

 

34.1

Total current assets

 

 

282.2

 

 

6.9

 

 

224.9

 

 

 —

 

 

514.0

Property and equipment, net

 

 

4,306.3

 

 

 —

 

 

709.7

 

 

 —

 

 

5,016.0

Intangible assets, net

 

 

1,033.6

 

 

11.0

 

 

144.0

 

 

 —

 

 

1,188.6

Goodwill

 

 

1,660.8

 

 

14.6

 

 

164.8

 

 

 —

 

 

1,840.2

Deferred income taxes, net

 

 

27.2

 

 

 —

 

 

0.1

 

 

 —

 

 

27.3

Other assets

 

 

115.6

 

 

 —

 

 

26.1

 

 

 —

 

 

141.7

Related party receivable

 

 

341.5

 

 

 —

 

 

 —

 

 

(341.5)

 

 

 —

Investment in subsidiary

 

 

624.6

 

 

 —

 

 

 —

 

 

(624.6)

 

 

 —

Total assets

 

$

8,391.8

 

$

32.5

 

$

1,269.6

 

$

(966.1)

 

$

8,727.8

Liabilities and member's equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

57.0

 

$

 —

 

$

15.4

 

$

 —

 

$

72.4

Accrued liabilities

 

 

217.5

 

 

1.4

 

 

110.3

 

 

 —

 

 

329.2

Accrued interest

 

 

63.5

 

 

 —

 

 

 —

 

 

 —

 

 

63.5

Current portion of long-term debt

 

 

5.0

 

 

 —

 

 

 —

 

 

 —

 

 

5.0

Capital lease obligations, current

 

 

6.6

 

 

 —

 

 

1.4

 

 

 —

 

 

8.0

Deferred revenue, current

 

 

113.1

 

 

0.2

 

 

32.7

 

 

 —

 

 

146.0

Total current liabilities

 

 

462.7

 

 

1.6

 

 

159.8

 

 

 —

 

 

624.1

Long-term debt, non-current

 

 

5,532.7

 

 

 —

 

 

 —

 

 

 —

 

 

5,532.7

Related party debt, long-term

 

 

 —

 

 

 —

 

 

341.5

 

 

(341.5)

 

 

 —

Capital lease obligation, non-current

 

 

82.6

 

 

 —

 

 

11.0

 

 

 —

 

 

93.6

Deferred revenue, non-current

 

 

884.8

 

 

 —

 

 

104.9

 

 

 —

 

 

989.7

Deferred income taxes, net

 

 

 —

 

 

 —

 

 

40.2

 

 

 —

 

 

40.2

Other long-term liabilities

 

 

33.9

 

 

 —

 

 

18.5

 

 

 —

 

 

52.4

Total liabilities

 

 

6,996.7

 

 

1.6

 

 

675.9

 

 

(341.5)

 

 

7,332.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Member's equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Member's interest

 

 

1,888.1

 

 

18.5

 

 

574.2

 

 

(601.8)

 

 

1,879.0

Accumulated other comprehensive income

 

 

5.4

 

 

 —

 

 

5.4

 

 

(5.4)

 

 

5.4

Accumulated deficit

 

 

(498.4)

 

 

12.4

 

 

14.1

 

 

(17.4)

 

 

(489.3)

Total member's equity

 

 

1,395.1

 

 

30.9

 

 

593.7

 

 

(624.6)

 

 

1,395.1

Total liabilities and member's equity

 

$

8,391.8

 

$

32.5

 

$

1,269.6

 

$

(966.1)

 

$

8,727.8

 

36


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidating Statements

For the three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

    

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

(Issuer)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

(in millions)

Revenue

 

$

496.4

 

$

5.8

 

$

147.2

 

$

 —

 

$

649.4

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs (excluding depreciation amortization and including stock-based compensation)

 

 

164.0

 

 

4.0

 

 

66.9

 

 

 —

 

 

234.9

Selling, general and administrative expenses (including stock-based compensation)

 

 

80.5

 

 

0.3

 

 

37.2

 

 

 —

 

 

118.0

Depreciation and amortization

 

 

165.9

 

 

0.5

 

 

24.8

 

 

 —

 

 

191.2

Total operating costs and expenses

 

 

410.4

 

 

4.8

 

 

128.9

 

 

 —

 

 

544.1

Operating income

 

 

86.0

 

 

1.0

 

 

18.3

 

 

 —

 

 

105.3

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(69.5)

 

 

 —

 

 

(5.8)

 

 

 —

 

 

(75.3)

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Foreign currency gain on intercompany loans

 

 

7.9

 

 

 —

 

 

6.0

 

 

 —

 

 

13.9

Other income

 

 

0.3

 

 

 —

 

 

0.1

 

 

 —

 

 

0.4

Equity in net earnings of subsidiaries

 

 

19.6

 

 

 —

 

 

 —

 

 

(19.6)

 

 

 —

Total other expense, net

 

 

(41.7)

 

 

 —

 

 

0.3

 

 

(19.6)

 

 

(61.0)

Income from operations before income taxes

 

 

44.3

 

 

1.0

 

 

18.6

 

 

(19.6)

 

 

44.3

Provision for income taxes

 

 

20.9

 

 

 —

 

 

 —

 

 

 —

 

 

20.9

Net income

 

 

23.4

 

 

1.0

 

 

18.6

 

 

(19.6)

 

 

23.4

Other comprehensive loss, net of income taxes

 

 

(13.9)

 

 

 —

 

 

(13.9)

 

 

13.9

 

 

(13.9)

Comprehensive income

 

$

9.5

 

$

1.0

 

$

4.7

 

$

(5.7)

 

$

9.5

 

37


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidating Statements of Operations

For the nine months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

    

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

(Issuer)

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

(in millions)

Revenue

 

$

1,485.6

 

$

17.3

 

$

443.5

 

$

 —

 

$

1,946.4

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs (excluding depreciation amortization and including stock-based compensation)

 

 

482.5

 

 

13.0

 

 

207.1

 

 

 —

 

 

702.6

Selling, general and administrative expenses (including stock-based compensation)

 

 

265.1

 

 

0.9

 

 

101.9

 

 

 —

 

 

367.9

Depreciation and amortization

 

 

487.7

 

 

1.4

 

 

82.1

 

 

 —

 

 

571.2

Total operating costs and expenses

 

 

1,235.3

 

 

15.3

 

 

391.1

 

 

 —

 

 

1,641.7

Operating income

 

 

250.3

 

 

2.0

 

 

52.4

 

 

 —

 

 

304.7

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(205.0)

 

 

 —

 

 

(17.0)

 

 

 —

 

 

(222.0)

Loss on extinguishment of debt

 

 

(4.9)

 

 

 —

 

 

 —

 

 

 —

 

 

(4.9)

Foreign currency gain on intercompany loans

 

 

14.5

 

 

 —

 

 

13.3

 

 

 —

 

 

27.8

Other income

 

 

0.9

 

 

 —

 

 

0.8

 

 

 —

 

 

1.7

Equity in net earnings of subsidiaries

 

 

51.7

 

 

 —

 

 

 —

 

 

(51.7)

 

 

 —

Total other expense, net

 

 

(142.8)

 

 

 —

 

 

(2.9)

 

 

(51.7)

 

 

(197.4)

Income from operations before income taxes

 

 

107.5

 

 

2.0

 

 

49.5

 

 

(51.7)

 

 

107.3

Provision  for income taxes

 

 

49.4

 

 

 —

 

 

(0.2)

 

 

 —

 

 

49.2

Net income

 

 

58.1

 

 

2.0

 

 

49.7

 

 

(51.7)

 

 

58.1

Other comprehensive income, net of income taxes

 

 

4.0

 

 

 —

 

 

4.0

 

 

(4.0)

 

 

4.0

Comprehensive income

 

$

62.1

 

$

2.0

 

$

53.7

 

$

(55.7)

 

$

62.1

38


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidating Statements of Operations

For the three months ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

    

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

Issuer

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

(in millions)

Revenue

 

$

394.5

 

$

5.4

 

$

150.3

 

$

 —

 

$

550.2

Operating costs and expenses

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Operating costs (excluding depreciation amortization and including stock-based compensation)

 

 

121.7

 

 

3.9

 

 

69.4

 

 

 —

 

 

195.0

Selling, general and administrative expenses (including stock-based compensation)

 

 

73.9

 

 

0.3

 

 

34.6

 

 

 —

 

 

108.8

Depreciation and amortization

 

 

126.8

 

 

0.5

 

 

28.4

 

 

 —

 

 

155.7

Total operating costs and expenses

 

 

322.4

 

 

4.7

 

 

132.4

 

 

 —

 

 

459.5

Operating income

 

 

72.1

 

 

0.7

 

 

17.9

 

 

 —

 

 

90.7

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(57.4)

 

 

 —

 

 

(5.6)

 

 

 —

 

 

(63.0)

Loss on extinguishment of debt

 

 

(4.5)

 

 

 —

 

 

 —

 

 

 —

 

 

(4.5)

Foreign currency loss on intercompany loans

 

 

1.6

 

 

 —

 

 

2.3

 

 

 —

 

 

3.9

Other income

 

 

0.4

 

 

 —

 

 

0.1

 

 

 —

 

 

0.5

Equity in net earnings of subsidiaries

 

 

15.5

 

 

 —

 

 

 —

 

 

(15.5)

 

 

 —

Total other expense, net

 

 

(44.4)

 

 

 —

 

 

(3.2)

 

 

(15.5)

 

 

(63.1)

Income from operations before income taxes

 

 

27.7

 

 

0.7

 

 

14.7

 

 

(15.5)

 

 

27.6

Provision for income taxes

 

 

0.7

 

 

 —

 

 

(0.1)

 

 

 —

 

 

0.6

Net income

 

 

27.0

 

 

0.7

 

 

14.8

 

 

(15.5)

 

$

27.0

Other comprehensive income, net of income taxes

 

 

3.7

 

 

 —

 

 

3.7

 

 

(3.7)

 

$

3.7

Comprehensive income

 

$

30.7

 

$

0.7

 

$

18.5

 

$

(19.2)

 

$

30.7

 

39


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidating Statements of Operations

For the nine months ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

    

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

 

 

 

Issuer

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Total

 

 

(in millions)

Revenue

 

$

1,087.9

 

$

14.0

 

$

459.9

 

$

 —

 

$

1,561.8

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs (excluding depreciation amortization and including stock-based compensation)

 

 

320.4

 

 

10.0

 

 

218.3

 

 

 —

 

 

548.7

Selling, general and administrative expenses (including stock-based compensation)

 

 

207.5

 

 

1.0

 

 

110.6

 

 

 —

 

 

319.1

Depreciation and amortization

 

 

352.2

 

 

1.4

 

 

72.0

 

 

 —

 

 

425.6

Total operating costs and expenses

 

 

880.1

 

 

12.4

 

 

400.9

 

 

 —

 

 

1,293.4

Operating income

 

 

207.8

 

 

1.6

 

 

59.0

 

 

 —

 

 

268.4

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(153.4)

 

 

 —

 

 

(16.6)

 

 

 —

 

 

(170.0)

Loss on extinguishment of debt

 

 

(4.5)

 

 

 —

 

 

 —

 

 

 —

 

 

(4.5)

Foreign currency loss on intercompany loans

 

 

(5.6)

 

 

 —

 

 

(19.1)

 

 

 

 

 

(24.7)

Other income

 

 

0.4

 

 

 —

 

 

0.3

 

 

 —

 

 

0.7

Equity in net earnings of subsidiaries

 

 

27.0

 

 

 —

 

 

 —

 

 

(27.0)

 

 

 —

Total other expense, net

 

 

(136.1)

 

 

 —

 

 

(35.4)

 

 

(27.0)

 

 

(198.5)

Income from operations before income taxes

 

 

71.7

 

 

1.6

 

 

23.6

 

 

(27.0)

 

 

69.9

Provision/(benefit) for income taxes

 

 

9.2

 

 

 —

 

 

(1.8)

 

 

 —

 

 

7.4

Net income

 

 

62.5

 

$

1.6

 

$

25.4

 

$

(27.0)

 

$

62.5

Other comprehensive loss, net of income taxes

 

 

(23.7)

 

 

 —

 

 

(23.7)

 

 

23.7

 

 

(23.7)

Comprehensive income

 

$

38.8

 

$

1.6

 

$

1.7

 

$

(3.3)

 

$

38.8

 

40


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidating Statements of Cash Flows

Nine months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Zayo Group,

    

 

 

    

 

 

    

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Issuer)

 

Subsidiaries

 

Subsidiaries

 

Total

 

 

(in millions)

Net cash provided by operating activities

 

$

600.4

 

$

4.4

 

$

114.5

 

$

719.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(531.1)

 

 

 —

 

 

(50.8)

 

 

(581.9)

Acquisitions, net of cash acquired

 

 

(130.5)

 

 

 —

 

 

(24.8)

 

 

(155.3)

Other

 

 

(9.9)

 

 

 —

 

 

9.7

 

 

(0.2)

Net cash used in investing activities

 

 

(671.5)

 

 

 —

 

 

(65.9)

 

 

(737.4)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

462.8

 

 

 —

 

 

 —

 

 

462.8

Principal payments on long-term debt

 

 

(314.4)

 

 

 —

 

 

 —

 

 

(314.4)

Principal repayments on capital lease obligations

 

 

(5.2)

 

 

 —

 

 

(1.2)

 

 

(6.4)

Payment of debt issuance costs

 

 

(5.1)

 

 

 —

 

 

0.9

 

 

(4.2)

Contributions to parent

 

 

1.9

 

 

(1.9)

 

 

 —

 

 

 —

Cash paid for Santa Clara acquisition

 

 

(3.8)

 

 

 —

 

 

 —

 

 

(3.8)

Net cash provided by/(used in) financing activities

 

 

136.2

 

 

(1.9)

 

 

(0.3)

 

 

134.0

Net cash flows

 

 

65.1

 

 

2.5

 

 

48.3

 

 

115.9

Effect of changes in foreign exchange rates on cash

 

 

 —

 

 

 —

 

 

(7.3)

 

 

(7.3)

Net increase in cash and cash equivalents

 

 

65.1

 

 

2.5

 

 

41.0

 

 

108.6

Cash and cash equivalents, beginning of period

 

 

96.6

 

 

2.1

 

 

121.3

 

 

220.0

Cash and cash equivalents, end of period

 

$

161.7

 

$

4.6

 

$

162.3

 

$

328.6

 

41


 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Consolidating Statements of Cash Flows

Nine months ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Zayo Group,

    

 

 

    

 

 

    

 

 

 

 

LLC

 

Guarantor

 

Non-Guarantor

 

 

 

 

 

(Issuer)

 

Subsidiaries

 

Subsidiaries

 

Total

 

 

(in millions)

Net cash provided by operating activities

 

$

575.9

 

$

2.8

 

$

86.2

 

$

664.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(573.7)

 

 

 —

 

 

(56.5)

 

 

(630.2)

Acquisitions, net of cash acquired

 

 

(1,426.0)

 

 

 —

 

 

1.5

 

 

(1,424.5)

Other

 

 

1.5

 

 

 —

 

 

 —

 

 

1.5

Net cash used in investing activities

 

 

(1,998.2)

 

 

 —

 

 

(55.0)

 

 

(2,053.2)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

3,293.8

 

 

 —

 

 

 —

 

 

3,293.8

Principal payments on long-term debt

 

 

(1,837.4)

 

 

 —

 

 

 —

 

 

(1,837.4)

Principal repayments on capital lease obligations

 

 

(3.8)

 

 

 —

 

 

(1.0)

 

 

(4.8)

Payment of debt issuance costs

 

 

(29.0)

 

 

 —

 

 

 —

 

 

(29.0)

Contributions to parent

 

 

10.8

 

 

 —

 

 

(10.8)

 

 

 —

Cash paid for Santa Clara acquisition

 

 

(2.3)

 

 

 —

 

 

 —

 

 

(2.3)

Receipt from/(payment of) principal balance of intercompany loans

 

 

3.6

 

 

(3.6)

 

 

 —

 

 

 —

Net cash provided by/(used in) financing activities

 

 

1,435.7

 

 

(3.6)

 

 

(11.8)

 

 

1,420.3

Net cash flows

 

 

13.4

 

 

(0.8)

 

 

19.4

 

 

32.0

Effect of changes in foreign exchange rates on cash

 

 

(0.1)

 

 

 —

 

 

(4.3)

 

 

(4.4)

Net (decrease)/increase in cash and cash equivalents

 

 

13.3

 

 

(0.8)

 

 

15.1

 

 

27.6

Cash and cash equivalents, beginning of period

 

 

91.3

 

 

3.0

 

 

75.8

 

 

170.1

Cash and cash equivalents, end of period

 

$

104.6

 

$

2.2

 

$

90.9

 

$

197.7

 

 

(15) SUBSEQUENT EVENTS

McLean Data Center Acquisition

On April 4, 2018, the Company acquired a data center in McLean, Virginia. The acquisition was considered an asset purchase for tax purposes and a business combination for accounting purposes. The Company assumed an operating lease obligation and certain assets, such as cash, equipment and customer contracts. Due to the timing of the transaction, the initial accounting for this acquisition, including the measurement of assets acquired, liabilities assumed and goodwill, has not yet been determined and is pending detailed analyses of the facts and circumstances that existed as of the April 4, 2018 acquisition date.

Neutral Path Communications

On April 17, 2018, the Company acquired substantially all of the assets of Neutral Path Communications and Near North Partners for $31.5 million. The purchase price is subject to net working capital and other customary adjustments, as well as a contingent payment based on sales performance through June 30, 2018. The acquisition was considered an asset purchase for tax purposes and a business combination for accounting purposes. Neutral Path is a long haul infrastructure provider, providing access to a fiber network in the Midwest. The transaction will add owned plus additional leased route miles to the Company’s extensive North American network, including a unique, high-count fiber route from Minneapolis to Omaha. The all-cash transaction was funded with cash on hand. Due to the timing of the transaction, the initial accounting for this acquisition, including the measurement of assets acquired, liabilities assumed and goodwill, has not yet been determined and is pending detailed analyses of the facts and circumstances that existed as of the April 17, 2018 acquisition date.

 

 

 

42


 

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain Factors That May Affect Future Results

Information contained or incorporated by reference in this Quarterly Report on Form 10-Q (this “Report”) and in other filings by Zayo Group, LLC (“we” or “us”) with the Securities and Exchange Commission (the “SEC”) that is not historical by nature constitutes “forward-looking statements,” and can be identified by the use of forward-looking terminology such as “believes,” “expects,” “plans,” “intends,” “estimates,” “projects,” “could,” “may,” “will,” “should,” or “anticipates,” or the negatives thereof, other variations thereon or comparable terminology, or by discussions of strategy. No assurance can be given that future results expressed or implied by the forward-looking statements will be achieved, and actual results may differ materially from those contemplated by the forward-looking statements. Such statements are based on our current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, those relating to our financial and operating prospects, current economic trends, future opportunities, ability to retain existing customers and attract new ones, our acquisition strategy and ability to integrate acquired companies and assets, outlook of customers, reception of new products and technologies, strength of competition and pricing, and potential organizational strategies that we may opt to pursue in the future. Other factors and risks that may affect our business and future financial results are detailed in our SEC filings, including, but not limited to, those described under “Risk Factors” in our Annual Report on Form 10-K (our “Annual Report”) filed with the SEC on August 22, 2017 and in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We caution you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events, except as may be required by law.

The following discussion and analysis should be read together with our unaudited condensed consolidated financial statements and the related notes appearing in this Report and in our audited annual consolidated financial statements as of and for the year ended June 30, 2017, included in our Annual Report. 

Amounts presented in this Item 2 are rounded. As such, rounding differences could occur in period-over-period changes and percentages reported throughout this Item 2.

Overview

We are a large and fast growing provider of access to bandwidth infrastructure in the United States (“U.S.”), Europe and Canada. Our products and offerings enable our customers’ mission-critical, high-bandwidth applications, such as cloud-based computing, video, mobile, social media, machine-to-machine connectivity, and other bandwidth-intensive applications. Our key products include leased dark fiber, fiber to cellular towers and small cell sites, dedicated wavelength connections, Ethernet, IP connectivity, cloud-based computing and storage products and other high-bandwidth offerings. We provide access to our bandwidth infrastructure and other offerings over a unique set of dense metro, regional, and long-haul fiber networks and through our interconnect-oriented data center facilities. Our fiber networks and data center facilities are critical components of the overall physical network architecture of the Internet and private networks. Our customer base includes some of the largest and most sophisticated users of bandwidth infrastructure, such as wireless service carriers; telecommunications service carriers; financial services companies; social networking, media, and web content companies; education, research, and healthcare institutions; and governmental agencies. We typically provide customers with access to our bandwidth infrastructure solutions for a fixed monthly recurring fee under contracts that vary between one and twenty years in length. We operate our business with a unique focus on capital allocation and financial performance with the ultimate goal of maximizing equity value for Zayo Group Holdings, Inc. (“ZGH”) stockholders. Our core values center on partnership, alignment, and transparency with our three primary constituent groups – employees, customers, and ZGH stockholders.

We are a wholly-owned subsidiary of Zayo Group Holdings, Inc., a Delaware corporation, which prior to October 16, 2014, was wholly owned by Communications Infrastructure Investments, LLC, a Delaware limited liability company (“CII”).

Our fiscal year ends June 30 each year, and we refer to the fiscal year ending June 30, 2018 as “Fiscal 2018” and the fiscal year ended June 30, 2017 as “Fiscal 2017.”

We are headquartered in Boulder, Colorado.

43


 

Reportable Segments and our Strategic Product Groups

We use the management approach to determine the segment financial information that should be disaggregated and presented. The management approach is based on the manner by which management has organized the segments within the Company for making operating decisions, allocating resources, and assessing performance. With the continued increase in our scope and scale, effective January 1, 2017, our chief operating decision maker ("CODM"), who is our Chief Executive Officer, implemented certain organizational changes to the management and operation of the business that directly impact how the CODM makes resource allocation decisions and manages the Company. The change in structure had the impact of revising our reportable segments and re-aligning our existing Strategic Product Groups (“SPGs”) within these segments. We have six reportable segments as described below:

Fiber Solutions. Through the Fiber Solutions segment, we provide access to raw bandwidth infrastructure to customers that require more control of their internal networks. These solutions include dark fiber, dedicated lit networks and mobile infrastructure (fiber-to-the-tower and small cell). Dark fiber is a physically separate and secure, private platform for dedicated bandwidth. We lease dark fiber pairs (usually 2 to 12 total fibers) to our customers, who “light” the fiber using their own optronics. Our mobile infrastructure solutions permit direct fiber connections to cell towers, small cells, hub sites, and mobile switching centers. Fiber Solutions customers include carriers and other communication service providers, Internet service providers, wireless service providers, major media and content companies, large enterprises, and other companies that have the expertise to run their own fiber optic networks or require interconnected technical space. The contract terms in the Fiber Solutions segment tend to range from three to twenty years.

Transport. The Transport segment provides access to lit bandwidth infrastructure solutions over our metro, regional, and long-haul fiber networks. The segment uses customer-accessed optronics to light the fiber, and our customers pay for our offerings based on the amount and type of bandwidth access they require. The offerings within this segment include wavelengths, wholesale IP and SONET. We target customers who require a minimum of 10G of bandwidth across their networks. Transport customers include carriers, content providers, financial services companies, healthcare, government entities, education institutions and other medium and large enterprises. The contract terms in this segment tend to range from two to five years.

Enterprise Networks. The Enterprise Networks segment provides connectivity and lit bandwidth telecommunication solutions to medium and large enterprises. Our offerings within this segment include Ethernet, enterprise private and connectivity products, managed products and cloud-based computing and storage products. Solutions range from point-to-point data connections to multi-site managed networks to international outsourced IT infrastructure environments.  The contract terms in the Enterprise Networks segment tend to range from one to ten years.

Zayo Colocation (zColo). The Colocation segment provides data center infrastructure solutions to a broad range of enterprise, carrier, cloud, and content customers. Our offerings within this segment include the provision of colocation space, power and interconnection solutions in North America and Western Europe.  Solutions range in size from single cabinet solutions to 1MW+ data center infrastructure environments. Our data centers also support a large component of our networking components for the purpose of aggregating and accommodating data, voice, Internet, and video traffic. The contract terms in this segment tend to range from two to five years.

Allstream. The Allstream segment provides Voice, SIP Trunking, Unified Communications and scalable data offerings using a variety of technologies for businesses.  Voice provides a full range of local voice offerings allowing business customers to complete telephone calls in their local exchange, as well as make long distance, toll-free and related calls. Unified Communications is the integration of real-time communication functions such as telephony (including cloud-based IP telephony), instant messaging and video conferencing with non-real-time communication offerings, such as integrated voicemail and e-mail.  Unified Communications provides a set of products that give users the ability to work and communicate across multiple components, media types and geographies. Allstream also offers a range of products that help small and medium business (“SMB”) customers implement the right data and networking solutions for their business. Those scalable products make use of technologies including Ethernet, IP/MPLS VPN Solutions, and wavelength solutions.  Allstream provides support to customers in the SMB market while leveraging its

44


 

extensive network and product offerings.  These include IP, internet, voice, IP Trunking, cloud private branch exchange, collaboration offerings and unified communications.

Other. Our Other segment is primarily comprised of Zayo Professional Services (“ZPS”). ZPS provides network and technical resources to customers who wish to leverage our expertise in designing, acquiring and maintaining networks. The contract terms typically provide for a term of one year for a fixed recurring monthly fee in the case of network and on an hourly basis for technical resources (usage revenue). ZPS also generates revenue via telecommunication component sales.

Factors Affecting Our Results of Operations

Business Acquisitions

We were founded in 2007 with the investment thesis of building a bandwidth infrastructure platform to take advantage of the favorable Internet, data, and wireless growth trends driving the ongoing demand for access to bandwidth infrastructure, and to be an active participant in the consolidation of the industry. These trends have continued in the years since our founding, despite volatile economic conditions, and we believe that we are well positioned to continue to capitalize on those trends. We have built a significant portion of our network and product offerings through 43 acquisitions through March 31, 2018.

As a result of the growth of our business from these acquisitions, and the capital expenditures and increased debt used to fund those investing activities, our results of operations for the respective periods presented and discussed herein are not comparable.

Recent Acquisitions

Optic Zoo Networks

On January 18, 2018, we acquired Vancouver BC Canada-based Optic Zoo Networks for net purchase consideration of CAD $30.9 million (or $24.8 million), net of cash acquired, subject to certain post-closing adjustments. Optic Zoo Networks owns and provides access to high-capacity fiber in Vancouver. As of March 31, 2018, CAD $3.8 million (or $2.9 million), of the purchase consideration is being held in escrow pending the expiration of the indemnification adjustment period. The acquisition was funded with cash on hand and was considered a stock purchase for tax purposes.

The results of the acquired Optic Zoo Networks are included in our operating results beginning January 18, 2018.

Spread Networks

On February 28, 2018, we acquired Spread Networks, LLC (“Spread Networks”), a privately-owned telecommunications provider that owns and operates a 825-mile, high-fiber count long haul route connecting New York and Chicago, for net purchase consideration of $130.5 million, net of cash acquired, subject to certain post-closing adjustments. As of March 31, 2018, $6.4 million of the purchase consideration is being held in escrow pending the expiration of the indemnification adjustment period. The all-cash acquisition was funded with cash on hand and was considered an asset purchase for tax purposes.

The route connects 755 Secaucus Road in Secaucus, New Jersey and 1400 Federal Boulevard in Carteret, New Jersey to 350 Cermak Road in Chicago, Illinois, with additional connectivity to be enabled by Zayo’s existing network. Zayo plans to use the acquired assets to provide a low-latency wavelength route from Seattle to New York.

The results of the acquired Spread Networks are included in our operating results beginning February 28, 2018.

KIO Networks US Data Centers

On May 1, 2017, we completed the $11.9 million cash acquisition of Castle Access, Inc.’s (d/b/a “KIO Networks US”) San Diego, California data centers.  The two data centers, located at 12270 World Trade Drive and 9606 Aero Drive, total more than 100,000 square feet of space and two megawatts (MW) of critical IT power, with additional power available.  As of March 31, 2018, $1.2 million of the purchase consideration is being held in escrow pending the

45


 

expiration of the indemnification adjustment period. The acquisition was funded with cash on hand and was considered a stock purchase for tax purposes.

The results of the acquired KIO Networks US business are included in our operating results beginning May 1, 2017.

Electric Lightwave Parent, Inc.

On March 1, 2017, we acquired Electric Lightwave Parent, Inc. (“Electric Lightwave”), an infrastructure and telecommunications solutions provider serving 35 markets in the western U.S., for net purchase consideration of $1,426.6 million, net of cash acquired, subject to certain post-closing adjustments. As of March 31, 2018, $1.7 million of the purchase price consideration is being held in escrow pending the expiration of the indemnification adjustment period. The acquisition was funded through debt and cash on hand. 

The acquisition added 8,100 route miles of long haul fiber and 4,000 miles of dense metro fiber across Denver, Minneapolis, Phoenix, Portland, Seattle, Sacramento, San Francisco, San Jose, Salt Lake City, Spokane and Boise, with on-net connectivity to more than 3,100 enterprise buildings and 100 data centers.

The results of the acquired Electric Lightwave business are included in our operating results beginning March 1, 2017.

Santa Clara Data Center

On October 3, 2016, we acquired a data center in Santa Clara, California (the “Santa Clara Data Center”) for net purchase consideration of $11.3 million. The net purchase consideration, which was valued using a discounted cash flow method, will be paid in ten quarterly payments of $1.3 million, beginning in the December 2016 quarter. As of March 31, 2018, the remaining consideration to be paid was $5.1 million.

The Santa Clara Data Center, located at 5101 Lafayette Street, includes 26,900 total square feet and three MW of critical IT power. The facility also includes high-efficiency power and cooling infrastructure, seismic reinforcement and proximity to our long haul dark fiber routes between San Francisco and Los Angeles.

The results of the acquired Santa Clara Data Center business are included in our operating results beginning October 3, 2016.

Substantial Indebtedness

As of March 31, 2018 and June 30, 2017, long-term debt was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date of

 

 

 

Outstanding as of

 

 

Issuance or most
recent amendment

    

Maturity

    

Interest
Payments

    

Interest Rate

    

March 31,
2018

   

June 30,
2017

 

 

 

 

 

 

 

 

 

 

(in millions)

Term Loan Facility due 2021

 

Jan 2017

 

Jan 2021

 

Monthly

 

LIBOR +2.00%

 

$

495.0

 

$

498.8

B-2 Term Loan Facility

 

Feb 2018

 

Jan 2024

 

Monthly

 

LIBOR +2.25%

 

 

1,269.3

 

 

1,429.9

6.00% Senior Unsecured Notes

 

Jan & Mar 2015

 

Apr 2023

 

Apr/Oct

 

6.00%

 

 

1,430.0

 

 

1,430.0

6.375% Senior Unsecured Notes

 

May 2015 & Apr 2016

 

May 2025

 

May/Nov

 

6.375%

 

 

900.0

 

 

900.0

5.75% Senior Unsecured Notes

 

Jan, Apr & Jul 2017

 

Jan 2027

 

Jan/Jul

 

5.75%

 

 

1,650.0

 

 

1,350.0

Total obligations

 

 

 

 

 

 

 

 

 

 

5,744.3

 

 

5,608.7

Unamortized premium/(discounts), net

 

 

 

 

 

 

 

 

 

 

11.5

 

 

(3.2)

Unamortized debt issuance costs

 

 

 

 

 

 

 

 

 

 

(62.0)

 

 

(67.8)

Carrying value of debt

 

 

 

 

 

 

 

 

 

 

5,693.8

 

 

5,537.7

Less current portion

 

 

 

 

 

 

 

 

 

 

(5.0)

 

 

(5.0)

Total long-term debt, less current portion

 

 

 

 

 

 

 

 

 

$

5,688.8

 

$

5,532.7

The weighted average interest rate (including margin) on the Company’s senior secured term loan facility (the “Term Loan Facility”) was approximately 4.1% and 3.4% at March 31, 2018 and June 30, 2017, respectively. Interest rates on Company’s senior secured revolving credit facility (“the Revolver”) as of March 31, 2018 and June 30, 2017 were approximately 3.6% and 3.8%, respectively. As of March 31, 2018, no amounts were outstanding under the

46


 

Revolver. Standby letters of credit were outstanding in the amount of $8.0 million as of March 31, 2018, leaving $442.0 million available under the Revolver, subject to certain conditions. See Note 5- Long-Term Debt.

Capital Expenditures

During the nine months ended March 31, 2018 and 2017, we invested $581.9 million and $630.2 million, respectively, in capital expenditures primarily to expand our fiber network to support new customer contracts. We expect to continue to make significant capital expenditures in future periods.

Critical Accounting Policies and Estimates

For a description of our critical accounting policies and estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report for the year ended June 30, 2017.

Background for Review of Our Results of Operations

Revenue

Our revenue is comprised predominately of monthly recurring revenue (“MRR”). MRR is related to an ongoing offering that is generally fixed in price and paid by the customer on a monthly basis. We also report monthly amortized revenue (“MAR”), which represents the amortization of previously collected upfront charges to customers. Upfront charges are typically related to indefeasible rights of use (“IRUs”) structured as pre-payments rather than monthly recurring payments (though we structure IRUs as both prepaid and recurring, largely dependent on the customers’ preference) and installation fees. The last category of revenue we report is other revenue. Other revenue primarily includes credits and adjustments, termination revenue, construction and component sales.

Our consolidated reported revenue in any given period is a function of our beginning revenue under contract and the impact of organic growth and acquisition activity. Our organic activity is driven by net new sales (“bookings”), gross installed revenue (“installs”) and churn processed (“churn”) as further described below.

Net New Sales.   Net new sales (“bookings”) represent the dollar amount of orders, to be recorded as MRR and MAR upon installation, in a period that have been signed by the customer and accepted by our product offering delivery organization. The dollar value of bookings is equal to the monthly recurring price that the customer will pay for the offerings and/or the monthly amortized amount of the revenue that we will recognize for those offerings. To the extent a booking is cancelled by the customer prior to the offerings being originated, it is subtracted from the total bookings number in the period that it is cancelled. Bookings do not immediately impact revenue until the solutions are installed (gross installed revenue).

Gross Installed Revenue.   Installs are the amount of MRR and MAR for offerings that have been installed, tested, accepted by the customer, and have been recognized in revenue during a given period.   Installs include new offerings, price increases, and upgrades.

Churn Processed.   Churn is any negative change to MRR and MAR. Churn includes disconnects, negative price changes, and disconnects associated with upgrades or replacement offerings. For each period presented, disconnects associated with attrition and upgrades or replacement offerings are the drivers of churn, accounting for more than 75% of negative changes in MRR and MAR, while price changes account for less than 25%. Monthly churn is also presented as a percentage of MRR and MAR (“churn percentage”).

Given the size and amount of acquisitions we have completed, we have estimated the revenue growth rate associated with our organic activity in each period reported. Our estimated organic growth rate is calculated as if acquisitions closed during the periods presented were closed on the first day of the earliest period presented within this Quarterly Report.   In calculating this pro-forma growth figure, we add the revenue recorded by the acquired companies (including estimated purchase accounting adjustments) for the reporting periods prior to the date of inclusion in our results of operations and then calculate the growth rate between the two reported periods. The estimated pro-forma revenue growth rates are not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated on the first day of the earliest period presented.  As we conduct operations outside of the U.S. and have historically acquired companies with functional currencies other than the U.S.

47


 

dollar (“USD”), the estimated pro-forma revenue growth rates may not adequately reflect operational performance as a result of changes in foreign currency exchange rates. 

We have foreign subsidiaries that enter into contracts with customers and vendors in currencies other than the USD – principally the British pound sterling (“GBP”) and Canadian dollar (“CAD”) and to a lesser extent the Euro. Changes in foreign currency exchange rates impact our revenue and expenses each period. The comparisons excluding the impact of foreign currency exchange rates assume exchange rates remained constant at the comparative period rate.

Operating Costs and Expenses

Our operating costs and expenses consist of network expense (“Netex”), compensation and benefits, network operations expense (“Netops”), stock-based compensation expense, other expenses, and depreciation and amortization.

Netex consists of third-party network costs resulting from our leasing of certain network facilities, primarily leases of circuits and dark fiber, from third parties to augment our owned infrastructure, for which we are generally billed a fixed monthly fee. Netex also includes colocation facility costs for rent and license fees paid to the landlords of the buildings in which our colocation business operates, along with the utility costs to power those facilities. While increases in demand for our offerings will drive additional operating costs in our business, consistent with our strategy of leveraging our owned infrastructure assets, we expect to primarily utilize our existing network infrastructure or build new network infrastructure to meet the demand. In limited circumstances, we will augment our network with additional infrastructure or offerings from third-party providers. Third-party network costs include the upfront cost of the initial installation of such infrastructure. Such costs are included in operating costs in our condensed consolidated statements of operations over the respective contract period.

Compensation and benefits expenses include salaries, wages, incentive compensation and benefits. Employee-related costs that are directly associated with network construction and location installations (and development of business support systems) are capitalized and amortized to operating costs and expenses. Compensation and benefits expenses related to the departments attributed to generating revenue are included in our operating costs line item while compensation and benefits expenses related to the sales, product, and corporate departments are included in our selling, general and administrative expenses line item of our condensed consolidated statements of operations.

Netops expense includes all of the non-personnel related expenses of operating and maintaining our network infrastructure, including contracted maintenance fees, right-of-way costs, rent for cellular towers and other places where fiber is located, pole attachment fees, and relocation expenses. Such costs are included in operating costs in our condensed consolidated statements of operations.

Stock-based compensation expense is included, based on the responsibilities of the awarded recipient, in either our operating costs or selling, general and administrative expenses in our condensed consolidated statements of operations.

Other expenses include expenses such as property tax, franchise fees, colocation facility maintenance, travel, office expense and other administrative costs. Other expenses are included in both operating costs and selling, general and administrative expenses depending on their relationship to generating revenue or association with sales and administration.

Transaction costs include expenses associated with professional services (i.e. legal, accounting, regulatory, etc.) rendered in connection with acquisitions or disposals (including spin-offs), travel expense, severance expense incurred that are associated with acquisitions or disposals, and other direct expenses incurred that are associated with signed and/or closed acquisitions or disposals and unsuccessful acquisitions. Transaction costs are included in selling, general and administrative expenses in our condensed consolidated statements of operations.

48


 

Three Months Ended March 31, 2018 Compared to the Three Months Ended March 31, 2017 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

 

    

2018

    

2017

    

 

$ Variance

    

% Variance

 

 

 

 

(in millions)

 

Segment and consolidated revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiber Solutions

 

$

210.3

 

$

179.6

 

 

$

30.7

 

17

%

Transport

 

 

117.2

 

 

110.5

 

 

 

6.7

 

 6

%

Enterprise Networks

 

 

138.8

 

 

121.7

 

 

 

17.1

 

14

%

zColo

 

 

59.6

 

 

53.6

 

 

 

6.0

 

11

%

Allstream

 

 

117.7

 

 

79.3

 

 

 

38.4

 

48

%

Other

 

 

5.8

 

 

5.5

 

 

 

0.3

 

 5

%

Consolidated

 

$

649.4

 

$

550.2

 

 

$

99.2

 

18

%

 

Our total revenue increased by $99.2 million, or 18%, to $649.4 million for the three months ended March 31, 2018 from $550.2 million for the three months ended March 31, 2017. The increase in revenue was driven by our Fiscal 2018 and 2017 acquisitions as well as organic growth.

We estimate that the period-over-period pro-forma organic revenue growth was approximately 1.0%. Our pro-forma revenue growth was primarily driven by installs that exceeded churn over the course of both periods as a result of the continued strong demand for bandwidth infrastructure access broadly across our network territory and our customer verticals offset by changes in exchange rates. The average exchange rate of the GBP against the USD strengthened by 12%, the average exchange rate of the Euro against the USD strengthened by 15%, and the average exchange rate of the CAD against the USD strengthened by 5% during the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. Normalizing our estimated pro-forma organic revenue growth to exclude the impact of foreign currency exchange rate fluctuations, we estimate that pro-forma revenue would have been negatively impacted between the three months ended March 31, 2018 and March 31, 2017 by $10.8 million for a total period-over-period pro-forma organic revenue decline of approximately 0.7%.

Additional underlying revenue drivers included:

·

MRR and MAR associated with new bookings during the three months ended March 31, 2018 and 2017 increased period-over-period to $9.5 million from $6.9 million, excluding Allstream. The total contract value associated with bookings for the three months ended March 31, 2018 was approximately $739.0 million, excluding Allstream.

·

During the three months ended March 31, 2018 and 2017, we recognized net installs of $2.3 million and $1.5 million, respectively, excluding Allstream.

·

 Monthly churn percentage decreased to 1.1% for the three months ended March 31, 2018 from 1.2% for the three months ended March 31, 2017,  excluding Allstream.

Fiber Solutions.  Revenue from our Fiber Solutions segment increased by $30.7 million, or 17%, to $210.3 million for the three months ended March 31, 2018 from $179.6 million for the three months ended March 31, 2017.  The increase was a result of both organic and acquisition related growth.

Transport.   Revenue from our Transport segment increased by $6.7 million, or 6%, to $117.2 million for the three months ended March 31, 2018 from $110.5 million for the three months ended March 31, 2017.  The increase was a result of both organic and acquisition related growth.

Enterprise Networks.   Revenue from our Enterprise Networks segment increased by $17.1 million, or 14%, to $138.8 million for the three months ended March 31, 2018 from $121.7 million for the three months ended March 31, 2017.  The increase was a result of both organic and acquisition related growth.

zColo.   Revenue from our zColo segment increased by $6.0 million, or 11%, to $59.6 million for the three months ended March 31, 2018 from $53.6 million for the three months ended March 31, 2017. The increase was a result of both organic and acquisition related growth.

49


 

Allstream.   Revenue from our Allstream segment increased by $38.4 million, or 48%, to $117.7 million for the three months ended March 31, 2018 from $79.3 million for the three months ended March 31, 2017. The increase was primarily a result of acquiring Electric Lightwave on March 1, 2017.

Other.   Revenue from our Other segment increased by $0.3 million, or 5%, to $5.8 million for the three months ended March 31, 2018 from $5.5 million for the three months ended March 31, 2017. The Other segment represented less than 1% of our total revenue during the three months ended March 31, 2018.

The following table reflects the stratification of our revenues during these periods. The substantial majority of our revenue continued to come from recurring payments from customers under contractual arrangements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

 

 

2018

    

 

2017

 

 

 

 

(in millions)

 

Monthly recurring revenue (1)

    

$

583.8

    

 

90

%  

 

$

494.5

    

90

%

Amortization of deferred revenue

 

 

35.1

 

 

5

%  

 

 

29.9

 

6

%

Usage revenue

 

 

18.4

 

 

3

%  

 

 

18.3

 

3

%

Other revenue (1)

 

 

12.1

 

 

2

%  

 

 

7.5

 

1

%

Total Revenue

 

$

649.4

 

 

100

%  

 

$

550.2

 

100

%

(1)

Prior period amounts were reclassified for comparability with the 2018 presentation.

Operating Costs and Expenses 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

 

    

2018

    

2017

    

$ Variance

    

% Variance

 

 

 

 

(in millions)

 

Segment and consolidated operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Fiber Solutions

 

$

139.2

 

$

143.0

 

$

(3.8)

 

(3)

%

Transport

 

 

101.7

 

 

95.7

 

 

6.0

 

6  

%

Enterprise Networks

 

 

119.6

 

 

101.6

 

 

18.0

 

18

%

zColo

 

 

56.1

 

 

48.1

 

 

8.0

 

17

%

Allstream

 

 

122.6

 

 

66.5

 

 

56.1

 

84

%

Other

 

 

4.9

 

 

4.6

 

 

0.3

 

7  

%

Consolidated

 

$

544.1

 

$

459.5

 

$

84.6

 

18

%

Our operating costs increased by $84.6 million, or 18%, to $544.1 million for the three months ended March 31, 2018 from $459.5 million for the three months ended March 31, 2017. The increase in consolidated operating costs was primarily due to the impact from our Fiscal 2018 and 2017 acquisitions and the organic growth of our network footprint.

 

Fiber Solutions.    Fiber Solutions operating costs decreased by $3.8 million, or 3%, to $139.2 million for the three months ended March 31, 2018 from $143.0 million for the three months ended March 31, 2017. The decrease in operating costs and expenses was primarily a result of decreases of $2.1 million in stock-based compensation and $4.5 million in depreciation and amortization, partially offset by a $3.3 million increase in Netex.

 

Transport.    Transport operating costs increased by $6.0 million, or 6%, to $101.7 million for the three months ended March 31, 2018 from $95.7 million for the three months ended March 31, 2017. The increase in operating costs and expenses was primarily a result of increases of $4.9 million in depreciation and amortization and $5.1 million in Netex and other operating expenses, partially offset by decreases of $2.2 million in stock-based compensation and $1.5 million in Netops.

 

Enterprise Networks.    Enterprise Networks operating costs increased by $18.0 million, or 18%, to $119.6 million for the three months ended March 31, 2018 from $101.6 million for the three months ended March 31, 2017. The increase in operating costs and expenses was primarily a result of increases of $8.0 million in depreciation and amortization and $13.3 million in Netex and other operating expenses, partially offset by decreases of $1.6 million in stock-based compensation and $1.4 million in transaction costs.

50


 

zColo.    zColo operating costs increased by $8.0 million, or 17%, to $56.1 million for the three months ended March 31, 2018 from $48.1 million for the three months ended March 31, 2017. The increase in operating costs and expenses was primarily a result of increases in depreciation and amortization expense of $4.6 million and $2.9 million in Netex and other operating costs and $1.6 million in administrative costs, partially offset by a $1.5 million decrease in stock-based compensation.

Allstream.    Allstream operating costs increased by $56.1 million to $122.6 million for the three months ended March 31, 2018 from $66.5 million for the three months ended March 31, 2017. The increase in operating costs and expenses was primarily a result of acquiring Electric Lightwave on March 1, 2017.

Other. Other operating costs were $4.9 million for the three months ended March 31, 2018, as compared to $4.6 million for the three months ended March 31, 2017. The increase was directly attributed to an increase in revenue associated with component sales.The table below sets forth the components of our operating costs and expenses during the three months ended March 31, 2018 and 2017.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

 

 

2018

    

2017

    

$ Variance

    

% Variance

 

 

 

 

(in millions)

 

Netex

 

$

127.2

 

$

102.3

 

$

24.9

 

24

%

Compensation and benefits expenses

 

 

82.8

 

 

67.4

 

 

15.4

 

23

%

Network operations expense

 

 

73.3

 

 

62.7

 

 

10.6

 

17

%

Other expenses

 

 

47.1

 

 

36.5

 

 

10.6

 

29

%

Transaction costs

 

 

3.3

 

 

8.4

 

 

(5.1)

 

(61)

%

Stock-based compensation

 

 

19.2

 

 

26.5

 

 

(7.3)

 

(28)

%

Depreciation and amortization

 

 

191.2

 

 

155.7

 

 

35.5

 

23

%

Total operating costs and expenses

 

$

544.1

 

$

459.5

 

$

84.6

 

18

%

Netex.    Our Netex increased by $24.9 million, or 24%, to $127.2 million for the three months ended March 31, 2018 from $102.3 million for the three months ended March 31, 2017. The increase in Netex was primarily due to our Fiscal 2018 and 2017 acquisitions, partially offset by cost savings as planned network related synergies were realized.

Compensation and Benefits Expenses.    Compensation and benefits expenses increased by $15.4 million, or 23%, to $82.8 million for the three months ended March 31, 2018 from $67.4 million for the three months ended March 31, 2017.

The increase in compensation and benefits expenses was primarily due to support our growing business, including employees retained from businesses acquired during Fiscal 2018 and 2017,  partially offset by a decrease in headcount from 3,899 for the three months ended March 31, 2017 to 3,655 for the three months ended March 31, 2018 as a result of synergies realized.

Network Operations Expenses.    Network operations expenses increased by $10.6 million, or 17%, to $73.3 million for the three months ended March 31, 2018 from $62.7 million for the three months ended March 31, 2017. The increase principally reflected the organic and inorganic growth of our network and the related expenses of operating that expanded network. Our total network route miles increased approximately 5% to 128,242 miles at March 31, 2018 from 121,923 miles at March 31, 2017.

Other Expenses.    Other expenses increased by $10.6 million, or 29%, to $47.1 million for the three months ended March 31, 2018 from $36.5 million for the three months ended March 31, 2017. The increase was primarily the result of additional expenses attributable to our Fiscal 2018 and 2017 acquisitions.

Transaction Costs.  Transaction costs decreased by $5.1 million to $3.3 million for the three months ended March 31, 2018 from $8.4 million for the three months ended March 31, 2017. The decrease was attributed to greater transaction costs incurred in Fiscal 2017 associated with our acquisition of Electric Lightwave.

Stock-Based Compensation.    Stock-based compensation expense decreased by $7.3 million, or 28%, to $19.2 million for the three months ended March 31, 2018 from $26.5 million for the three months ended March 31, 2017.  The

51


 

decrease in stock-based compensation expense was primarily driven by forfeitures on Part B awards and higher value Part B awards becoming fully vested in periods prior to January 1, 2018.

Depreciation and Amortization.    Depreciation and amortization expense increased by $35.5 million, or 23%, to $191.2 million for the three months ended March 31, 2018 from $155.7 million for the three months ended March 31, 2017.  The increase was primarily a result of depreciation related to increased capital expenditures and increased depreciation and amortization expense associated with our Fiscal 2018 and 2017 acquisitions, including $1.2 million resulting from recording revised fair value estimates of intangible assets and property and equipment associated with the Electric Lightwave acquisition, of which $1.0 million relates to previous reporting periods.

Total Other Expense, Net

The table below sets forth the components of our total other expense, net for the three months ended March 31, 2018 and 2017, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

 

    

2018

    

2017

    

$ Variance

    

% Variance

 

 

 

 

(in millions)

 

Interest expense

 

$

(75.3)

 

$

(63.0)

 

$

(12.3)

 

(20)

%

Loss on extinguishment of debt

 

 

 —

 

 

(4.5)

 

 

4.5

 

 

*

Foreign currency gain/(loss) on intercompany loans

 

 

13.9

 

 

3.9

 

 

10.0

 

 

*

Other income, net

 

 

0.4

 

 

0.5

 

 

(0.1)

 

20

%

Total other expenses, net

 

$

(61.0)

 

$

(63.1)

 

$

2.1

 

3

%


* not meaningful

Interest expense.   Interest expense increased by $12.3 million, or 20%, to $75.3 million for the three months ended March 31, 2018 from $63.0 million for the three months ended March 31, 2017. The increase was primarily a result of an increase in debt from the comparative period resulting from incremental debt raised to fund our acquisitions in addition to increasing LIBOR rates.

Foreign currency gain/(loss) on intercompany loans.   We recorded a foreign currency gain on intercompany loans of $13.9 million for the three months ended March 31, 2018, compared to $3.9 million for the three months ended March 31, 2017. We have intercompany loans between our U.S. and UK and Canadian legal entities, which were established to fund our international acquisitions. As the loans are recorded as an intercompany receivable at our U.S. entities, strengthening of the USD over a foreign currency results in a foreign currency loss on intercompany loans and the weakening of the USD over a foreign currency results in a gain on intercompany loans. This non-cash gain was driven by the weakening of the USD over the GBP period-over-period and the related impact on intercompany loans entered into by foreign subsidiaries with functional currency in GBP.

Provision for Income Taxes

On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, previously known as Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”). U.S. Tax Reform reduced the U.S. corporate tax rate from 35% to 21%, created a territorial tax system with a one-time mandatory repatriation tax on previously deferred foreign earnings, and changed business-related deductions and credits.

Our provision for income taxes increased over the same quarter in the prior year by $20.3 million to $20.9 million for the three months ended March 31, 2018 from $0.6 million for the three months ended March 31, 2017. Our provision for income taxes included both the current provision and a provision for deferred income tax expense resulting from timing differences between tax and financial reporting accounting bases. 

U.S. Tax Reform has a material impact on the comparison of our effective tax rate and the expected income tax expense at the statutory rate for the current quarter and is the significant reason our effective tax rate is higher than the expected tax provision at the statutory rate.

52


 

The following table reconciles an expected tax provision based on a statutory federal tax rate applied to our earnings before income tax to our actual provision for income taxes:

 

 

 

 

 

 

 

 

 

For the three months ended March 31,

 

    

2018

    

2017

 

 

 

(in millions)

Expected provision at the statutory rate

 

$

12.4

 

$

9.6

Increase/(decrease) due to:

 

 

 

 

 

 

State income tax expense, net of federal benefit

 

 

1.3

 

 

0.6

Stock-based compensation

 

 

1.6

 

 

(13.1)

Transaction costs not deductible for tax purposes

 

 

0.4

 

 

1.5

Foreign tax rate differential

 

 

(1.0)

 

 

(1.8)

Change in valuation allowance

 

 

(0.2)

 

 

(2.0)

U.S. Tax Reform

 

 

4.6

 

 

 —

Other, net

 

 

1.8

 

 

5.8

Provision for income taxes

 

$

20.9

 

$

0.6

Some U.S. Tax Reform provisions are effective for years beginning after December 31, 2017, which would be our fiscal-year ending on June 30, 2019, including the tax on global intangible low taxed income (“GILTI”), Base Erosion and Anti-abuse Tax” (“BEAT”), interest expense limitations, and executive compensation limitations. We continue to evaluate these and other impacts of U.S. Tax Reform as more information and guidance becomes available.

Nine months ended March 31, 2018 Compared to the Nine months ended March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended March 31,

 

 

    

2018

    

2017

    

 

$ Variance

    

% Variance

 

 

 

 

(in millions)

 

Segment and consolidated revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiber Solutions

 

$

606.3

 

$

531.2

 

 

$

75.1

 

14

%

Transport

 

 

353.6

 

 

323.0

 

 

 

30.6

 

 9

%

Enterprise Networks

 

 

422.4

 

 

350.8

 

 

 

71.6

 

20

%

zColo

 

 

177.9

 

 

157.3

 

 

 

20.6

 

13

%

Allstream

 

 

368.9

 

 

185.4

 

 

 

183.5

 

99

%

Other

 

 

17.3

 

 

14.1

 

 

 

3.2

 

23

%

Consolidated

 

$

1,946.4

 

$

1,561.8

 

 

$

384.6

 

25

%

Our total revenue increased by $384.6 million, or 25%, to $1,946.4 million for the nine months ended March 31, 2018, from $1,561.8 million for the nine months ended March 31, 2017. The increase in revenue was driven by our Fiscal 2018 and 2017 acquisitions as well as organic growth.

We estimate that the period-over-period pro-forma organic revenue growth was approximately 0.8%. Our pro-forma revenue growth was primarily driven by installs that exceeded churn over the course of both periods as a result of the continued strong demand for bandwidth infrastructure access broadly across our network territory and our customer verticals offset by the impact of changes in exchange rates. The average exchange rate of the GBP against the USD strengthened by 6%, the average exchange rate of the Euro against the USD strengthened by 10%, and the average exchange rate of the CAD against the USD strengthened by 5% during the nine months ended March 31, 2018 as compared to the nine months ended March 31, 2017. Normalizing our estimated pro-forma organic revenue growth to exclude the impact of foreign currency exchange rate fluctuations, we estimate that pro-forma revenue would have been negatively impacted between the nine months ended March 31, 2018 and March 31, 2017 by $25.8 million for a total period-over-period pro-forma organic revenue decline of approximately 0.5%.

·

MRR and MAR associated with new bookings during the nine months ended March 31, 2018 and 2017 increased period-over-period to $25.0 million from $19.4 million, excluding Allstream. The total contract value associated with bookings for the nine months ended March 31, 2018 was approximately $1.6 billion, excluding Allstream.

53


 

·

During the nine months ended March 31, 2018, we recognized net installs of $5.0 million as compared to $5.7 million during the nine months ended March 31, 2017, excluding Allstream.

·

Monthly churn percentage remained consistent period-over-period at 1.2%, excluding Allstream.

Fiber Solutions.   Revenue from our Fiber Solutions segment increased by $75.1 million, or 14%, to $606.3 million for the nine months ended March 31, 2018 from $531.2 million for the nine months ended March 31, 2017.  The increase was a result of both organic and acquisition related growth.

Transport.   Revenue from our Transport segment increased by $30.6 million, or 9%, to $353.6 million for the nine months ended March 31, 2018 from $323.0 million for the nine months ended March 31, 2017. The increase was a result of both organic and acquisition related growth.

Enterprise Networks.   Revenue from our Enterprise Networks segment increased by $71.6 million, or 20%, to $422.4 million for the nine months ended March 31, 2018 from $350.8 million for the nine months ended March 31, 2017. The increase was a result of both organic and acquisition related growth.

zColo.  Revenue from our zColo segment increased by $20.6 million, or 13%, to $177.9 million for the nine months ended March 31, 2018 from $157.3 million for the nine months ended March 31, 2017. The increase was a result of both organic and acquisition related growth.

Allstream.  Revenue from our Allstream segment increased by $183.5 million to $368.9 million for the nine months ended March 31, 2018 from $185.4 million for the nine months ended March 31, 2017. The increase was a result of acquiring Electric Lightwave on March 1, 2017.

Other.   Revenue from our Other segment increased by $3.2 million, or 23%, to $17.3 million for the nine months ended March 31, 2018 from $14.1 million for the nine months ended March 31, 2017. The Other segment represented less than 1% of our total revenue during the nine months ended March 31, 2018.

The following table reflects the stratification of our revenues during these periods. The substantial majority of our revenue continued to come from recurring payments from customers under contractual arrangements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended March 31,

 

 

 

2018

    

 

2017

 

 

 

 

(in millions)

 

Monthly recurring revenue (1)

 

$

1,752.5

 

 

90

%  

 

$

1,397.9

 

90

%

Amortization of deferred revenue

 

 

101.5

 

 

5

%  

 

 

85.5

 

 5

%

Usage revenue

 

 

56.6

 

 

3

%  

 

 

52.6

 

 3

%

Other revenue (1)

 

 

35.8

 

 

2

%  

 

 

25.8

 

 2

%

Total Revenue

 

$

1,946.4

 

 

100

%  

 

$

1,561.8

 

100

%

(1)

Prior period amounts were reclassified for comparability with the 2018 presentation.

Operating Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended March 31,

 

 

    

2018

    

2017

    

$ Variance

    

% Variance

 

 

 

(in millions)

 

Segment and consolidated operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Fiber Solutions

 

$

439.0

 

$

419.0

 

$

20.0

 

5

%

Transport

 

 

310.9

 

 

275.0

 

 

35.9

 

13

%

Enterprise Networks

 

 

355.4

 

 

295.8

 

 

59.6

 

20

%

zColo

 

 

166.5

 

 

142.8

 

 

23.7

 

17

%

Allstream

 

 

354.2

 

 

148.4

 

 

205.8

 

 

*

Other

 

 

15.7

 

 

12.4

 

 

3.3

 

27

%

Consolidated

 

$

1,641.7

 

$

1,293.4

 

$

348.3

 

27

%


* not meaningful

54


 

Our operating costs increased by $348.3 million, or 27%, to $1,641.7 million for the nine months ended March 31, 2018 from $1,293.4 million for the nine months ended March 31, 2017. The increase in consolidated operating costs was primarily due to the impact from our Fiscal 2018 and 2017 acquisitions and the organic growth of our network footprint.

Fiber Solutions.    Fiber Solutions operating costs increased by $20.0 million, or 5%, to $439.0 million for the nine months ended March 31, 2018 from $419.0 million for the nine months ended March 31, 2017. The increase in operating costs and expenses was primarily a result of increases in depreciation and amortization of $13.8 million, general and administrative of $8.8 million and transaction costs of $2.1 million, partially offset by a $7.9 million decrease in stock-based compensation.

Transport.    Transport operating costs increased by $35.9 million, or 13%, to $310.9 million for the nine months ended March 31, 2018 from $275.0 million for the nine months ended March 31, 2017. The increase in operating costs and expenses was primarily a result of increases in depreciation and amortization of $28.6 million and $15.0 million in Netex, Netops and other operating expenses as a result of Fiscal Year 2017 acquisitions and organic growth of our network, partially offset by a $8.5 million decrease in stock-based compensation.

Enterprise Networks.    Enterprise Networks operating costs increased by $59.6 million, or 20%, to $355.4 million for the nine months ended March 31, 2018 from $295.8 million for the nine months ended March 31, 2017. The increase in operating costs and expenses was primarily a result of increases in Netex, Netops and other operating expenses of $27.2 million as a result of acquisitions and organic growth of our network, $26.1 million of depreciation and amortization, partially offset by a decrease in stock-based compensation of $5.6 million.

zColo.    zColo operating costs increased by $23.7 million, or 17%, to $166.5 million for the nine months ended March 31, 2018 from $142.8 million for the nine months ended March 31, 2017. The increase in operating costs and expenses was primarily a result of increases of $13.7 million in depreciation and amortization expense, $13.7 million in Netex, and $2.9 million in compensation and benefits, partially offset by decreases of $2.4 million in Netops, $2.7 million in stock-based compensation and $1.4 million in other operating expenses.

Allstream.    Allstream operating costs increased by $205.8 million to $354.2 million for the nine months ended March 31, 2018 from $148.4 million for the nine months ended March 31, 2017. The increase in operating costs and expenses was primarily a result of increases in Netex, Netops and other operating expenses of $105.5 million as a result of acquisitions and organic growth of our network, $63.3 million of depreciation and amortization and $26.6 million of compensation and benefits expenses. 

Other.    Other operating costs increased by $3.3 million, or 27%, to $15.7 million for the nine months ended March 31, 2018 from $12.4 million for the nine months ended March 31, 2017.  The increase was directly attributed to an increase in revenue associated with component sales.

The table below sets forth the components of our operating costs and expenses during the nine months ended March 31, 2018 and 2017.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended March 31,

 

 

    

2018

    

2017

    

$ Variance

    

% Variance

 

 

 

 

(in millions)

 

Netex

 

$

390.7

 

$

289.0

 

$

101.7

 

35

%

Compensation and benefits expenses

 

 

242.0

 

 

192.2

 

 

49.8

 

26

%

Network operations expense

 

 

215.1

 

 

176.0

 

 

39.1

 

22

%

Other expenses

 

 

134.7

 

 

100.0

 

 

34.7

 

35

%

Transaction costs

 

 

17.5

 

 

17.6

 

 

(0.1)

 

(1)

%

Stock-based compensation

 

 

70.5

 

 

93.0

 

 

(22.5)

 

(24)

%

Depreciation and amortization

 

 

571.2

 

 

425.6

 

 

145.6

 

34

%

Total operating costs and expenses

 

$

1,641.7

 

$

1,293.4

 

$

348.3

 

27

%

Netex.    Our Netex increased by $101.7 million, or 35%, to $390.7 million for the nine months ended March 31, 2018 from $289.0 million for the nine months ended March 31, 2017. The increase in Netex was primarily due to our Fiscal 2018 and 2017 acquisitions, partially offset by cost savings as planned network related synergies were realized.

55


 

Compensation and Benefits Expenses.    Compensation and benefits expenses increased by $49.8 million, or 26%, to $242.0 million for the nine months ended March 31, 2018 from $192.2 million for the nine months ended March 31, 2017.

The increase in compensation and benefits expenses was primarily due to support our growing business, including employees retained from businesses acquired during Fiscal 2018 and 2017,  partially offset by a decrease in headcount from 3,899 for the nine months ended March 31, 2017 to 3,655 for the nine months ended March 31, 2018 as a result of synergies realized.

Network Operations Expenses.    Network operations expenses increased by $39.1 million, or 22%, to $215.1 million for the nine months ended March 31, 2018 from $176.0 million for the nine months ended March 31, 2017. The increase principally reflected the organic and inorganic growth of our network and the related expenses of operating that expanded network. Our total network route miles increased approximately 5% to 128,242 miles at March 31, 2018 from 121,923 miles at March 31, 2017.

Other Expenses.    Other expenses increased by $34.7 million, or 35%, to $134.7 million for the nine months ended March 31, 2018, from $100.0 million for the nine months ended March 31, 2017. The increase was primarily the result of additional expenses attributable to our Fiscal 2018 and 2017 acquisitions.

Transaction Costs.    Transaction costs decreased by $0.1 million, or 1%, to $17.5 million for the nine months ended March 31, 2018 from $17.6 million for the nine months ended March 31, 2017. The transaction costs recorded during the periods relate to direct costs associated with our Fiscal 2018 and 2017 acquisitions.

Stock-Based Compensation.    Stock-based compensation expense decreased by $22.5 million, or 24%, to $70.5 million for the nine months ended March 31, 2018 from $93.0 million for the nine months ended March 31, 2017.  The decrease in stock-based compensation expense was primarily driven by the remaining tranches of our pre-IPO common unit grants becoming fully vested in the quarter ended December 31, 2016 and by forfeitures on Part B awards and additional expenses attributable to the Part A liability.

Depreciation and Amortization.   Depreciation and amortization expense increased by $145.6 million, or 34%, to $571.2 million for the nine months ended March 31, 2018 from $425.6 million for the nine months ended March 31, 2017.  The increase was primarily a result of depreciation related to increased capital expenditures and increased depreciation and amortization expense associated with our Fiscal 2018 and 2017 acquisitions, including $16.6 million resulting from recording revised fair value estimates of intangible assets and property and equipment associated with the Electric Lightwave acquisition, of which $5.5 million relates to previous reporting periods. 

Total Other Expense, Net

The table below sets forth the components of our total other expense, net for the nine months ended March 31, 2018 and 2017, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended March 31,

 

 

    

2018

    

2017

    

$ Variance

    

% Variance

 

 

 

 

(in millions)

 

Interest expense

 

$

(222.0)

 

$

(170.0)

 

$

(52.0)

 

(31)

%

Loss on extinguishment of debt

 

 

(4.9)

 

 

(4.5)

 

 

(0.4)

 

(9)

%

Foreign currency gain/(loss) on intercompany loans

 

 

27.8

 

 

(24.7)

 

 

52.5

 

 

*

Other income, net

 

 

1.7

 

 

0.7

 

 

1.0

 

 

*

Total other expenses, net

 

$

(197.4)

 

$

(198.5)

 

$

1.1

 

1

%


* not meaningful

Interest expense.   Interest expense increased by $52.0 million, or 31%, to $222.0 million for the nine months ended March 31, 2018 from $170.0 million for the nine months ended March 31, 2017. The increase was primarily a result of an increase in debt from the comparative period resulting from incremental debt raised to fund our acquisitions in addition to increasing LIBOR rates.

Loss on extinguishment of debt.   Loss on extinguishment of debt was $4.9 million for the nine months ended March 31, 2018 as compared to $4.5 million for the nine months ended March 31, 2017. The $4.9 million loss on

56


 

extinguishment of debt includes a non-cash expense associated with the write-off of unamortized debt issuance costs and the issuance discounts on the portion of the credit agreement governing the Term Loan Facility (as amended, the “Credit Agreement”) that was deemed to have been extinguished as well as the portion extinguished through early prepayment.  The loss on extinguishment of debt also includes certain fees paid to third parties involved in the second repricing of the Credit Agreement that occurred on July 20, 2017. 

Foreign currency gain/loss on intercompany loans.   Foreign currency gain/loss on intercompany loans improved $52.5 million to a gain of $27.8 million for the nine months ended March 31, 2018, from a loss of $24.7 million for the nine months ended March 31, 2017.  We have intercompany loans between our U.S. and UK and Canadian legal entities, which were established to fund our international acquisitions. As the loans are recorded as an intercompany receivable at our U.S. entities, strengthening of the USD over a foreign currency results in a foreign currency loss on intercompany loans and the weakening of the USD over a foreign currency results in a gain on intercompany loans. This non-cash gain was driven by the weakening of the USD over the GBP period-over-period and the related impact on intercompany loans entered into by foreign subsidiaries with functional currency in GBP.

Provision for Income Taxes

Our provision for income taxes increased over the prior year by $41.8 million to $49.2 million for the nine months ended March 31, 2018 from $7.4 million for the nine months ended March 31, 2017. Our provision for income taxes included both the current provision and a provision for deferred income tax expense resulting from timing differences between tax and financial reporting accounting bases.

U.S. Tax Reform has a material impact on the comparison of our effective tax rate and the expected income tax expense at the statutory rate for the current quarter and is the significant reason our effective tax rate is higher than the expected tax provision at the statutory rate. During the nine months ended March 31, 2018, the effective tax rate was positively impacted by reversing the valuation allowance of $31.0 million on the deferred tax assets of certain foreign subsidiaries.

The following table reconciles an expected tax provision based on a statutory federal tax rate applied to our earnings before income tax to our actual provision for income taxes:

 

 

 

 

 

 

 

 

 

For the nine months ended March 31,

 

    

2018

    

2017

 

 

 

(in millions)

Expected provision at the statutory rate

 

$

30.0

 

$

24.4

Increase/(decrease) due to:

 

 

 

 

 

 

State income tax expense, net of federal benefit

 

 

2.8

 

 

2.1

Stock-based compensation

 

 

4.1

 

 

(12.7)

Transactions costs not deductible for tax purposes

 

 

0.6

 

 

1.8

Change in statutory tax rate, non-US

 

 

0.8

 

 

(1.7)

Foreign tax rate differential

 

 

(2.7)

 

 

(2.1)

Change in valuation allowance

 

 

(31.6)

 

 

(8.7)

U.S. Tax Reform

 

 

48.7

 

 

 —

Other, net

 

 

(3.5)

 

 

4.3

Provision for income taxes

 

$

49.2

 

$

7.4

Some U.S. Tax Reform provisions are effective for years beginning after December 31, 2017, which would be our fiscal-year ending on June 30, 2019, including the tax on GILTI, BEAT, interest expense limitations, and executive compensation limitations. We continue to evaluate these and other impacts of U.S. Tax Reform as more information and guidance becomes available.

Adjusted EBITDA

We define Adjusted EBITDA as earnings/(loss) from operations before interest, income taxes, depreciation and amortization (“EBITDA”) adjusted to exclude acquisition or disposal-related transaction costs, losses on extinguishment of debt, stock-based compensation, unrealized foreign currency gains/(losses) on intercompany loans, and non-cash income/(loss) on equity and cost method investments. We use Adjusted EBITDA to evaluate operating performance, and

57


 

this financial measure is among the primary measures used by management for planning and forecasting for future periods. We believe that the presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by management and facilitates comparison of our results with the results of other companies that have different financing and capital structures.

We also monitor Adjusted EBITDA because our subsidiaries have debt covenants that restrict their borrowing capacity that are based on a leverage ratio, which utilizes a modified EBITDA, as defined in our Credit Agreement and the indentures governing our outstanding Notes. The modified EBITDA is consistent with our definition of Adjusted EBITDA; however, it includes the pro forma Adjusted EBITDA of and expected cost synergies from the companies acquired by us during the quarter for which the debt compliance certification is due.

Adjusted EBITDA results, along with other quantitative and qualitative information, are also utilized by management and our compensation committee for purposes of determining bonus payouts to employees.

Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under GAAP. For example, Adjusted EBITDA:

·

does not reflect capital expenditures, or future requirements for capital and major maintenance expenditures or contractual commitments;

·

does not reflect changes in, or cash requirements for, our working capital needs;

·

does not reflect the significant interest expense, or the cash requirements necessary to service the interest payments, on our debt; and

·

does not reflect cash required to pay income taxes.

Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies because all companies do not calculate Adjusted EBITDA in the same fashion.

58


 

Reconciliations from segment and consolidated Adjusted EBITDA to net income/(loss) are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2018

 

    

Fiber Solutions

    

Transport

    

Enterprise

Networks

    

zColo

    

Allstream

    

Other

    

Corp/

Eliminations

    

Total

 

 

 

(in millions)

Segment and consolidated Adjusted EBITDA

 

$

164.6

 

$

48.2

 

$

50.5

 

$

29.4

 

$

25.5

 

$

1.6

 

$

(0.2)

 

$

319.6

Interest expense

 

 

(41.0)

 

 

(9.0)

 

 

(10.9)

 

 

(10.4)

 

 

(4.1)

 

 

 —

 

 

0.1

 

 

(75.3)

Provision for income taxes

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(20.9)

 

 

(20.9)

Depreciation and amortization expense

 

 

(84.2)

 

 

(28.9)

 

 

(25.3)

 

 

(23.4)

 

 

(29.0)

 

 

(0.4)

 

 

 —

 

 

(191.2)

Transaction costs

 

 

(1.3)

 

 

(0.5)

 

 

(0.8)

 

 

(0.3)

 

 

(0.4)

 

 

 —

 

 

 —

 

 

(3.3)

Stock-based compensation

 

 

(8.0)

 

 

(3.2)

 

 

(5.2)

 

 

(2.1)

 

 

(0.6)

 

 

(0.1)

 

 

 —

 

 

(19.2)

Foreign currency gain on intercompany loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13.9

 

 

13.9

Non-cash loss on investments

 

 

(0.1)

 

 

0.1

 

 

 —

 

 

 —

 

 

 —

 

 

(0.2)

 

 

 —

 

 

(0.2)

Net income/(loss)

 

$

30.0

 

$

6.7

 

$

8.3

 

$

(6.8)

 

$

(8.6)

 

$

0.9

 

$

(7.1)

 

$

23.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended March 31, 2018

 

    

Fiber Solutions

    

Transport

    

Enterprise
Networks

    

zColo

    

Allstream

    

Other

    

Corp/
Eliminations

    

Total

 

 

 

(in millions)

Segment and consolidated Adjusted EBITDA

 

$

479.8

 

$

149.0

 

$

157.0

 

$

90.3

 

$

86.2

 

$

4.0

 

$

(0.2)

 

$

966.1

Interest expense

 

 

(123.2)

 

 

(26.9)

 

 

(32.4)

 

 

(27.9)

 

 

(11.9)

 

 

 —

 

 

0.3

 

 

(222.0)

Provision for income taxes

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(49.2)

 

 

(49.2)

Depreciation and amortization expense

 

 

(279.4)

 

 

(92.6)

 

 

(67.3)

 

 

(69.5)

 

 

(61.1)

 

 

(1.3)

 

 

 —

 

 

(571.2)

Transaction costs

 

 

(5.0)

 

 

(2.2)

 

 

(4.3)

 

 

(1.2)

 

 

(4.7)

 

 

 —

 

 

(0.1)

 

 

(17.5)

Stock-based compensation

 

 

(27.5)

 

 

(11.4)

 

 

(18.4)

 

 

(8.2)

 

 

(4.5)

 

 

(0.5)

 

 

 —

 

 

(70.5)

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4.9)

 

 

(4.9)

Foreign currency gain on intercompany loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

27.8

 

 

27.8

Non-cash loss on investments

 

 

(0.4)

 

 

0.1

 

 

0.1

 

 

 —

 

 

 —

 

 

(0.3)

 

 

 —

 

 

(0.5)

Net income/(loss)

 

$

44.3

 

$

16.0

 

$

34.7

 

$

(16.5)

 

$

4.0

 

$

1.9

 

$

(26.3)

 

$

58.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2017

 

    

Fiber Solutions

    

Transport

    

Enterprise
Networks

    

zColo

    

Allstream

    

Other

    

Corp/
Eliminations

    

Total

 

 

(in millions)

Segment and consolidated Adjusted EBITDA

 

$

137.6

 

$

45.7

 

$

46.6

 

$

28.7

 

$

22.0

 

$

1.4

 

$

 —

 

$

282.0

Interest expense

 

 

(34.8)

 

 

(7.7)

 

 

(9.3)

 

 

(8.2)

 

 

(3.3)

 

 

 —

 

 

0.3

 

 

(63.0)

Provision for income taxes

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.6)

 

 

(0.6)

Depreciation and amortization expense

 

 

(88.7)

 

 

(24.0)

 

 

(17.3)

 

 

(18.8)

 

 

(6.6)

 

 

(0.3)

 

 

 —

 

 

(155.7)

Transaction costs

 

 

(1.8)

 

 

(1.4)

 

 

(2.2)

 

 

(1.0)

 

 

(1.9)

 

 

(0.1)

 

 

 —

 

 

(8.4)

Stock-based compensation

 

 

(10.1)

 

 

(5.4)

 

 

(6.8)

 

 

(3.6)

 

 

(0.5)

 

 

(0.1)

 

 

 —

 

 

(26.5)

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4.5)

 

 

 

 

 

(4.5)

Foreign currency gain on intercompany loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

0.1

 

 

3.8

 

 

3.9

Non-cash loss on investments

 

 

(0.2)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.2)

Net income/(loss)

 

$

2.0

 

$

7.2

 

$

11.0

 

$

(2.9)

 

$

9.7

 

$

(3.5)

 

$

3.5

 

$

27.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended March 31, 2017

 

    

Fiber Solutions

    

Transport

    

Enterprise
Networks

    

zColo

    

Allstream

    

Other

    

Corp/
Eliminations

    

Total

 

 

(in millions)

Segment and consolidated Adjusted EBITDA

 

$

416.8

 

$

134.9

 

$

126.9

 

$

82.6

 

$

41.3

 

$

3.5

 

$

 —

 

$

806.0

Interest expense

 

 

(96.4)

 

 

(21.7)

 

 

(26.2)

 

 

(22.7)

 

 

(3.3)

 

 

 —

 

 

0.3

 

 

(170.0)

Provision for income taxes

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7.4)

 

 

(7.4)

Depreciation and amortization expense

 

 

(265.6)

 

 

(64.0)

 

 

(41.2)

 

 

(55.8)

 

 

2.2

 

 

(1.2)

 

 

 —

 

 

(425.6)

Transaction costs

 

 

(2.9)

 

 

(2.8)

 

 

(6.5)

 

 

(1.4)

 

 

(3.9)

 

 

(0.1)

 

 

 —

 

 

(17.6)

Stock-based compensation

 

 

(35.4)

 

 

(19.9)

 

 

(24.0)

 

 

(10.9)

 

 

(2.3)

 

 

(0.5)

 

 

 —

 

 

(93.0)

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4.5)

 

 

 —

 

 

(4.5)

Foreign currency gain/(loss) on intercompany loans

 

 

 —

 

 

 —

 

 

(0.1)

 

 

 —

 

 

 —

 

 

0.1

 

 

(24.7)

 

 

(24.7)

Non-cash loss on investments

 

 

(0.5)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.2)

 

 

(0.7)

Net income/(loss)

 

$

16.0

 

$

26.5

 

$

28.9

 

$

(8.2)

 

$

34.0

 

$

(2.7)

 

$

(32.0)

 

$

62.5

59


 

Liquidity and Capital Resources

Our primary sources of liquidity have been cash provided by operations, equity contributions, and incurrence of debt. Our principal uses of cash have been for acquisitions, capital expenditures, and debt service requirements. We anticipate that our principal uses of cash in the future will be for acquisitions, capital expenditures, working capital, and debt service.

We have financial covenants under the indentures governing the 6.00% Senior Notes due 2023 (the “2023 Unsecured Notes”), the 6.375% Senior Notes due 2025 (the “2025 Senior Unsecured Notes”) and the 5.75% Senior Notes due 2027 (the “2027 Unsecured Notes and collectively, the “Notes”) and our Credit Agreement that, under certain circumstances, restrict our ability to incur additional indebtedness. The indentures governing the Notes limit any increase in our secured indebtedness (other than certain forms of secured indebtedness expressly permitted under such indentures) to a pro forma secured debt ratio of 4.50 times our previous quarter’s annualized modified EBITDA (as defined in the indentures), and limit our incurrence of additional indebtedness to a total indebtedness ratio of 6.00 times the previous quarter’s annualized modified EBITDA.  The Credit Agreement also contains a covenant, applicable only to the Revolver, that we maintain a senior secured leverage ratio below 5.25:1.00 at any time when the aggregate principal amount of loans outstanding under the Revolver is greater than 35% of the commitments under the Revolver. The Credit Agreement also requires us and our subsidiaries to comply with customary affirmative and negative covenants, including covenants restricting the ability of us and our subsidiaries, subject to specified exceptions, to incur additional indebtedness, make additional guaranties, incur additional liens on assets, or dispose of assets, pay dividends, or make other distributions, voluntarily prepay certain other indebtedness, enter into transactions with affiliated persons, make investments and amend the terms of certain other indebtedness. The Credit Agreement contains customary events of default, including among others, non-payment of principal, interest, or other amounts when due, inaccuracy of representations and warranties, breach of covenants, cross default to certain other indebtedness, insolvency or inability to pay debts, bankruptcy, or a change of control.

As of March 31, 2018, we had $328.6 million in cash and cash equivalents and a working capital surplus of $63.8 million, of which $40.2 million relates to net assets held for sale. Cash and cash equivalents consist of amounts held in bank accounts and highly-liquid U.S. treasury money market funds. We have a current deferred revenue balance of $160.8 million that we will be recognizing as revenue over the next twelve months. The actual cash outflows associated with fulfilling this deferred revenue obligation during the next twelve months will be significantly less than the March 31, 2018 current deferred revenue balance.  Additionally, as of March 31, 2018, we had $442.0 million available under our Revolver, subject to certain conditions. Accordingly, we believe that we have sufficient resources to fund our obligations and foreseeable liquidity requirements in the near term and for the foreseeable future.

Our capital expenditures decreased by $48.3 million, or 8%, to $581.9 million during the nine months ended March 31, 2018, as compared to $630.2 million for the nine months ended March 31, 2017. Although we had a decrease in the period, we expect to continue to invest in our network for the foreseeable future. As of March 31, 2018, we were contractually committed for $506.3 million of capital expenditures for construction materials and purchases of property and equipment, as well as energy and network expenditures. A majority of these purchase commitments are expected to be satisfied in the next twelve months. These capital expenditures, however, are expected to primarily be success-based; that is, in most situations, we will not invest the capital until we have an executed customer contract that supports the investment.

As part of our corporate strategy, we continue to be regularly involved in discussions regarding potential acquisitions of companies and assets, some of which may be quite large. We expect to fund such acquisitions with cash from operations, debt issuances (including available borrowings under our $450.0 million Revolver), contributions from Zayo Group Holdings, Inc., and available cash on hand. We regularly assess our projected capital requirements to fund future growth in our business, repay our debt obligations, and support our other general corporate and operational needs, and we regularly evaluate our opportunities to raise additional capital. As market conditions permit, we may refinance existing debt, issue new debt through the capital markets, or obtain additional bank financing to fund our projected capital requirements or provide additional liquidity.

Cash Flows

We believe that our cash flows from operating activities, in addition to cash and cash equivalents currently on-hand, will be sufficient to fund our operating activities and capital expenditures for the foreseeable future, and in any

60


 

event for at least the next 12 to 18 months. Given the generally volatile global economic climate, no assurance can be given that this will be the case.

We regularly consider acquisitions and additional strategic opportunities, including large acquisitions, which may require additional debt or equity financing.

The following table sets forth components of our cash flow for the nine months ended March 31, 2018 and 2017.  

 

 

 

 

 

 

 

 

 

Nine months ended March 31,

 

    

2018

    

2017

 

 

(in millions)

Net cash provided by operating activities

 

$

719.3

 

$

664.9

Net cash used in investing activities

 

$

(737.4)

 

$

(2,053.2)

Net cash provided by financing activities

 

$

134.0

 

$

1,420.3

Net Cash Flows provided by Operating Activities

Net cash flows provided by operating activities increased by $54.4 million, or 8%, to $719.3 million during the nine months ended March 31, 2018 from $664.9 million during the nine months ended March 31, 2017. Net cash flows provided by operating activities during the nine months ended March 31, 2018 include our net income of$58.1 million, plus the add backs of non-cash items deducted in the determination of net income, principally depreciation and amortization of $571.2 million, stock-based compensation expense of $70.5 million and deferred income taxes of $41.5 million, partially offset by foreign currency gain on intercompany loans of $27.8 million. Additions to deferred revenue of $138.0 million during the period were largely offset by amortization of deferred revenue of $101.5 million. Cash flow during the period was decreased by the net change in other working capital components of $51.6 million. 

Net cash flows provided by operating activities during the nine months ended March 31, 2017 include our net income of $62.5 million, plus the add backs of non-cash items deducted in the determination of net income, principally depreciation and amortization of $425.6 million, stock-based compensation expense of $93.0 million, foreign currency loss on intercompany loans of $24.7 million, and non-cash interest expense of $7.7 million. Also contributing to the cash provided by operating activities were additions to deferred revenue of $156.7 million, partially offset by amortization of deferred revenue of $85.5 million.  Cash flow during the period was decreased by the net change in working capital components of $20.7 million.

The increase in net cash flows provided by operating activities during the nine months ended March 31, 2018 as compared to the nine months ended March 31, 2017 is primarily a result of additional earnings and synergies realized from our Fiscal 2017 acquisitions as well as timing of cash receipts from customers and payments to vendors and for interest paid.

Net Cash Flows used in Investing Activities

We used cash in investing activities of $737.4 million and $2,053.2 million during the nine months ended March 31, 2018 and 2017, respectively. During the nine months ended March 31, 2018, our principal use of cash for investing activities was for $581.9 million of additions to property and equipment and $155.3 million related to Fiscal 2018 acquisitions.

During the nine months ended March 31, 2017, our uses of cash for investing activities were primarily related $630.2 million of additions to property and equipment and $1,424.5 million for our acquisition of Electric Lightwave.

Net Cash Flows provided by Financing Activities

Our net cash provided by financing activities was $134.0 million and $1,420.3 million during the nine months ended March 31, 2018 and 2017, respectively, and were primarily comprised of $462.8 million in debt proceeds partially offset by $314.4 million in principal payments on long-term debt, $6.4 million in principal payments on capital lease obligations and $4.2 million in payments of debt issuance costs.

Our net cash flows provided by financing activities during the nine months ended March 31, 2017 were primarily comprised of $3,293.8 million in debt proceeds, partially offset by $1,837.4 million in principal payments on long-term

61


 

debt, $4.8 million in principal payments on capital lease obligations, and $29.0 million in payments of debt issuance costs.

Off-Balance Sheet Arrangements

We do not have any special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support and we do not engage in leasing, hedging, or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of the condensed consolidated financial statements, (ii) disclosed in Note 11 –  Commitments and Contingencies to the condensed consolidated financial statements, or in the Future Contractual Obligations table included in Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report or (iii) discussed under “Item 3: Quantitative and Qualitative Disclosures About Market Risk”  below.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk consists of changes in interest rates from time to time and market risk arising from changes in foreign currency exchange rates that could impact our cash flows and earnings.

As of March 31, 2018, we had outstanding $1,430.0 million of 2023 Unsecured Notes, $900.0 million of 2025 Unsecured Notes, $1,650.0 million of 2027 Unsecured Notes, a balance of $495.0 million on our Term Loan Facility due 2021, a balance of $1,269.3 million on our Term Loan Facility due 2024, and $135.1 million of capital lease obligations. As of March 31, 2018, we had $442.0 million available for borrowing under our Revolver, subject to certain conditions.

Based on current market interest rates for debt of similar terms and average maturities and based on recent transactions, we estimate the fair value of our Notes to be $4,007.9 million as of March 31, 2018. Our 2023 Unsecured Notes, 2025 Unsecured Notes, and 2027 Unsecured Notes accrue interest at fixed rates of 6.00%, 6.375%, and 5.75%, respectively.

Both our Revolver and our Term Loan Facility accrue interest at floating rates subject to certain conditions. The Company’s Term Loan Facility accrues interest at variable rates based upon the one month, three month or nine month LIBOR plus i) a spread of 2.0% on the Company’s $500.0 million tranche (which has a LIBOR floor of 0.0%) and ii) a spread of 2.25% on its B-2 Term Loan tranche (which has a LIBOR floor of 1.00%). Our Revolver accrues interest at variable rates based upon LIBOR plus a spread of 1.00% to 1.75% depending on our leverage ratio. As of March 31, 2018, the weighted average interest rates (including margin) on the Term Loan Facility and our Revolver were approximately 4.1% and 3.6%, respectively. A hypothetical increase in the applicable interest rate on our Term Loan Facility of one percentage point would increase our annualized interest expense on the Term Loan Facility by approximately 25% or $17.6 million, based on the applicable interest rate as of March 31, 2018. Historically, this impact was limited as a result of the applicable interest rate being below the minimum 1.0% LIBOR floor on our Term Loan Facility tranche that matures on January 19, 2024. 

We are exposed to the risk of changes in interest rates if it is necessary to seek additional funding to support the expansion of our business and to support acquisitions. The interest rate that we may be able to obtain on future debt financings will be dependent on market conditions.

We have exposure to market risk arising from foreign currency exchange rates. During the three and nine months ended March 31, 2018, our foreign activities accounted for approximately 23% of our consolidated revenue.  We monitor foreign markets and our commitments in such markets to assess currency and other risks. A one percent change in foreign exchange rates would change consolidated revenue by approximately $1.5 million for the quarter ended March 31, 2018. To date, we have not entered into any hedging arrangement designed to limit exposure to foreign currencies. To the extent our level of foreign activities is expected to increase, through further acquisition and/or organic growth, we may determine that such hedging arrangements would be appropriate and will consider such arrangements to minimize our exposure to foreign exchange risk.

We do not have any material commodity price risk.

62


 

ITEM 4.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management has established and maintained disclosure controls and procedures that are designed to ensure that material information relating to the Company and our subsidiaries required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management, including our Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2018, our disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the most recently competed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.        LEGAL PROCEEDINGS

In the ordinary course of business, we are from time to time party to various litigation matters that we believe are incidental to the operation of our business. We record an appropriate provision when the occurrence of loss is probable and can be reasonably estimated. We cannot estimate with certainty our ultimate legal and financial liability with respect to any such pending litigation matters and it is possible one or more of them could have a material adverse effect on us. However, we believe that the outcome of such pending litigation matters will not have a material adverse effect upon our results of operations, our consolidated financial condition or our liquidity.

ITEM 1A.        RISK FACTORS 

Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2017 sets forth information relating to other important risks and uncertainties that could materially adversely affect our business, financial condition or operating results. Those risk factors, in addition to the other information set forth in this report, continue to be relevant to an understanding of our business, financial condition and operating results for the quarter ended March 31, 2018.

There have been no material changes in our risk factors from those disclosed in our Annual Report.

63


 

ITEM 6. EXHIBITS

 

 

 

Exhibit No.

    

Description of Exhibit

3.1**

 

Certificate of Formation of Zayo Group, LLC, as amended (incorporated by reference to Exhibit 3.1 of our Registration Statement on Form S-4 filed with the SEC on July 12, 2012, File No. 333-182643).

 

 

 

3.2**

 

Amended and Restated Operating Agreement of Zayo Group, LLC (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed with the SEC on December 9, 2014, File No. 333-169979).

 

 

 

4.1**

 

Indenture, dated as of January 23, 2015, among Zayo Group, LLC, Zayo Capital, Inc., the guarantors party thereto and The Bank of New York Mellon Trust Company N.A., as trustee (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed with the SEC on January 23, 2015, File No. 333-169979).

 

 

4.2**

 

Indenture, dated as of May 6, 2015, between Zayo Group, LLC, Zayo Capital, Inc., the guarantors party thereto and The Bank of New York Mellon Trust Company N.A., as trustee (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed with the SEC on May 7, 2015, File No. 333-169979).

 

 

4.3**

 

Indenture, dated as of January 27, 2017, among Zayo Group, LLC, Zayo Capital, Inc., the guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed with the SEC on January 27, 2017, File No. No. 333-169979).

 

 

 

10.1**

 

Incremental Amendment No. 3 to Amended and Restated Credit Agreement, dated as of February 26, 2018, by and among Zayo Group, LLC, Zayo Capital, Inc., Morgan Stanley Senior Funding, Inc., as term facility administrative agent, SunTrust Bank, as revolving facility administrative agent, and the other lenders signatory thereto (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on February 26, 2018, File No. 333-169979).

 

 

 

31.1*

 

Certification of Chief Executive Officer of the Registrant, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

 

31.2*

 

Certification of Chief Financial Officer of the Registrant, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

 

 

32*

 

Certification of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101*

 

Financial Statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income/(Loss), (iv) Consolidated Statement of Member’s Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.


*        Filed/furnished herewith.

**      Previously filed and incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

 

Zayo Group, LLC

 

 

 

Date: May 7, 2018

 

By:

 

/s/ Dan Caruso

 

 

 

 

Dan Caruso

 

 

 

 

Chief Executive Officer

 

 

 

 

 

 

 

Date: May 7, 2018

 

By:

 

/s/ Matt Steinfort

 

 

 

 

Matt Steinfort

 

 

 

 

Chief Financial Officer

 

 

65