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EX-31.2 - EX-31.2 - Zayo Group Holdings, Inc.zgh-20180331ex312d4d3e3.htm
EX-32 - EX-32 - Zayo Group Holdings, Inc.zgh-20180331xex32.htm
EX-31.1 - EX-31.1 - Zayo Group Holdings, Inc.zgh-20180331ex311822e73.htm

 

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: 001-36690


Zayo Group Holdings, Inc.

(Exact Name of Registrant as Specified in Its Charter)


 

 

 

 

DELAWARE

 

26-1398293

(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   ☒

The number of outstanding shares of common stock of Zayo Group Holdings, Inc. as of April 30, 2018, was 248,555,794 shares.

 

 


 

ZAYO GROUP HOLDINGS, INC. 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 and Nine Months Ended March 31, 2018 and 2017 

 

2

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

 

3

Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended March 31, 2018  

 

4

Condensed Consolidated Statements of Cash Flows for the Nine 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 

 

40

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

 

59

Item 4. Controls and Procedures 

 

60

Part II. OTHER INFORMATION 

 

 

Item 1. Legal Proceedings 

 

60

Item 1A. Risk Factors 

 

60

Item 6. Exhibits 

 

61

Signatures 

 

62

 

 

 

 

 


 

 

ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions, except share amounts)

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

    

March 31,
2018

    

June 30,
2017

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

329.3

 

$

220.7

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

 

 

18.4

 

 

34.0

Assets held for sale

 

 

47.4

 

 

 —

Total current assets

 

 

697.3

 

 

514.6

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

 

 

25.3

 

 

38.3

Other assets

 

 

165.6

 

 

141.7

Total assets

 

$

9,241.5

 

$

8,739.4

Liabilities and stockholders' equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

63.6

 

$

72.4

Accrued liabilities

 

 

295.3

 

 

325.4

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

 

 

627.0

 

 

620.3

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

 

 

159.1

 

 

40.2

Other long-term liabilities

 

 

50.8

 

 

52.4

Total liabilities

 

 

7,701.1

 

 

7,328.9

Commitments and contingencies (Note 12)

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

Preferred stock, $0.001 par value - 50,000,000 shares authorized; no shares issued and outstanding as of March 31, 2018 and June 30, 2017, respectively

 

 

 —

 

 

 —

Common stock, $0.001 par value - 850,000,000 shares authorized; 248,663,626 and 246,471,551 shares issued and outstanding as of March 31, 2018 and June 30, 2017, respectively

 

 

0.2

 

 

0.2

Additional paid-in capital

 

 

1,951.8

 

 

1,884.0

Accumulated other comprehensive income

 

 

9.4

 

 

5.4

Accumulated deficit

 

 

(421.0)

 

 

(479.1)

Total stockholders' equity

 

 

1,540.4

 

 

1,410.5

Total liabilities and stockholders' equity

 

$

9,241.5

 

$

8,739.4

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

1


 

 

ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions, except per share data)  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 9)

 

 

234.9

 

 

195.0

 

 

702.6

 

 

548.7

Selling, general and administrative expenses (including stock-based compensation—Note 9)

 

 

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

Weighted-average shares used to compute net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

248.1

 

 

244.1

 

 

247.3

 

 

243.3

Diluted

 

 

249.7

 

 

246.1

 

 

248.7

 

 

244.7

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.09

 

$

0.11

 

$

0.23

 

$

0.26

 

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

2


 

ZAYO GROUP HOLDINGS, INC. 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 HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

NINE MONTHS ENDED MARCH 31, 2018

(in millions, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common
Shares

    

Common
Stock

    

Additional
paid-in
Capital

    

Accumulated
Other
Comprehensive
Income/(Loss)

    

Accumulated
Deficit

    

Total
Stockholders'
Equity

Balance at June 30, 2017

 

246,471,551

 

$

0.2

 

$

1,884.0

 

$

5.4

 

$

(479.1)

 

$

1,410.5

Stock-based compensation

 

2,192,075

 

 

 —

 

 

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

 

248,663,626

 

$

0.2

 

$

1,951.8

 

$

9.4

 

$

(421.0)

 

$

1,540.4

 

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

4


 

ZAYO GROUP HOLDINGS, INC. 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)

 

 

(4.3)

Net increase in cash and cash equivalents

 

 

108.6

 

 

27.7

Cash and cash equivalents, beginning of year

 

 

220.7

 

 

170.7

Cash and cash equivalents, end of period

 

$

329.3

 

$

198.4

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 3 — 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 HOLDINGS, INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Zayo Group Holdings, Inc., a Delaware corporation, was formed on November 13, 2007, and is the parent company of a number of subsidiaries engaged in providing access to bandwidth infrastructure. Zayo Group Holdings, Inc. and its subsidiaries are collectively referred to as “Zayo Group Holdings” or the “Company.” The Company’s primary operating subsidiary is Zayo Group, LLC (“ZGL”). 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”).

The Company’s shares are listed on the New York Stock Exchange (NYSE) under the ticker symbol “ZAYO”.

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

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Table of Contents

ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 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 10 – 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, an increase to net income for the three months ended March 31, 2018 of $11.7 million, and an increase to basic and diluted earnings per share for the three months ended March 31, 2018 of $0.05.

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.

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Table of Contents

ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

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.

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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 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) EARNINGS PER SHARE

Basic earnings per share attributable to the Company’s common shareholders is computed by dividing net earnings attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share attributable to common shareholders presents the dilutive effect, if any, on a per share basis of potential common shares (such as restricted stock units) as if they had been vested or converted during the periods presented.

The Company’s computation of diluted income per share for the three and nine months ended March 31, 2018 included an adjustment of 1.6 million and 1.4 million shares, respectively, and for the three and nine months ended March 31, 2017 included an adjustment of 2.0 million and 1.4 million shares, respectively, to the basic weighted-average shares to account for the dilutive effect of the Part A and Part B restricted stock units (“RSUs”) and related issuance of common shares upon vesting (see Note 9 – Stock-based Compensation) (calculated using the treasury method).

 

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(3) 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.

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

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acquisition was funded through debt (see Note 6 – 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 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.

 

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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 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 4 – 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

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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. 

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

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.09

 

$

0.05

 

$

0.21

 

$

0.03

 

 

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.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

 

(4) 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 14 – 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).

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 3—Acquisitions and Dispositions.

 

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(5) 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)

 

$