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EX-32 - EX-32 - Zayo Group Holdings, Inc.zayo-20171231xex32.htm
EX-31.2 - EX-31.2 - Zayo Group Holdings, Inc.zayo-20171231ex312ada6a1.htm
EX-31.1 - EX-31.1 - Zayo Group Holdings, Inc.zayo-20171231ex31143ff1a.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 December 31, 2017

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)

 

1805 29th Street, Suite 2050, Boulder, CO 80301

(Former name, former address and former fiscal year, if changed since last report)


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 February 2, 2018, was 248,064,095 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  December 31, 2017 and June 30, 2017 

 

1

Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2017 and 2016 

 

2

Condensed Consolidated Statements of Comprehensive Income/(Loss) for the Three and Six Months Ended December 31, 2017 and 2016 

 

3

Condensed Consolidated Statement of Stockholders’ Equity for the Six Months Ended December 31, 2017  

 

4

Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2017 and 2016 

 

5

Notes to Condensed Consolidated Financial Statements 

 

6

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

 

35

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

 

54

Item 4. Controls and Procedures 

 

55

Part II. OTHER INFORMATION 

 

 

Item 1. Legal Proceedings 

 

55

Item 1A. Risk Factors 

 

55

Item 6. Exhibits 

 

56

Signatures 

 

57

35

54

54

55

55

56

527

 

 

 

 

 

 

 

 

 

 

 

 

 


 

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)

 

 

 

 

 

 

 

 

    

 

 

    

 

 

 

    

December 31,
2017

    

June 30,
2017

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

280.8

 

$

220.7

Trade receivables, net of allowance of $8.7 and $9.5 as of December 31, 2017 and June 30, 2017, respectively

 

 

233.8

 

 

191.6

Prepaid expenses

 

 

67.4

 

 

68.3

Other assets

 

 

24.4

 

 

34.0

Total current assets

 

 

606.4

 

 

514.6

Property and equipment, net

 

 

5,129.4

 

 

5,016.0

Intangible assets, net

 

 

1,302.8

 

 

1,188.6

Goodwill

 

 

1,712.9

 

 

1,840.2

Deferred income taxes, net

 

 

38.0

 

 

38.3

Other assets

 

 

146.4

 

 

141.7

Total assets

 

$

8,935.9

 

$

8,739.4

Liabilities and stockholders' equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

42.7

 

$

72.4

Accrued liabilities

 

 

330.5

 

 

325.4

Accrued interest

 

 

73.0

 

 

63.5

Current portion of long-term debt

 

 

5.0

 

 

5.0

Capital lease obligations, current

 

 

8.4

 

 

8.0

Deferred revenue, current

 

 

152.0

 

 

146.0

Total current liabilities

 

 

611.6

 

 

620.3

Long-term debt, non-current

 

 

5,538.6

 

 

5,532.7

Capital lease obligation, non-current

 

 

89.8

 

 

93.6

Deferred revenue, non-current

 

 

989.9

 

 

989.7

Deferred income taxes, net

 

 

147.7

 

 

40.2

Other long-term liabilities

 

 

48.0

 

 

52.4

Total liabilities

 

 

7,425.6

 

 

7,328.9

Commitments and contingencies (Note 11)

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

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

 

 

 —

 

 

 —

Common stock, $0.001 par value - 850,000,000 shares authorized; 248,105,766 and 246,471,551 shares issued and outstanding as of December 31, 2017 and June 30, 2017, respectively

 

 

0.2

 

 

0.2

Additional paid-in capital

 

 

1,931.2

 

 

1,884.0

Accumulated other comprehensive income

 

 

23.3

 

 

5.4

Accumulated deficit

 

 

(444.4)

 

 

(479.1)

Total stockholders' equity

 

 

1,510.3

 

 

1,410.5

Total liabilities and stockholders' equity

 

$

8,935.9

 

$

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 December 31,

 

Six months ended December 31,

 

    

2017

    

2016

 

2017

    

2016

Revenue

 

$

653.5

 

$

506.7

 

$

1,297.0

 

$

1,011.6

Operating costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

232.0

 

 

179.9

 

 

467.7

 

 

353.7

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

 

 

121.6

 

 

104.7

 

 

249.9

 

 

210.3

Depreciation and amortization

 

 

195.9

 

 

131.4

 

 

380.0

 

 

269.9

Total operating costs and expenses

 

 

549.5

 

 

416.0

 

 

1,097.6

 

 

833.9

Operating income

 

 

104.0

 

 

90.7

 

 

199.4

 

 

177.7

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(73.1)

 

 

(53.7)

 

 

(146.7)

 

 

(107.0)

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

(4.9)

 

 

 —

Foreign currency gain/(loss) on intercompany loans

 

 

3.1

 

 

(17.4)

 

 

13.9

 

 

(28.6)

Other income, net

 

 

0.4

 

 

0.4

 

 

1.3

 

 

0.2

Total other expenses, net

 

 

(69.6)

 

 

(70.7)

 

 

(136.4)

 

 

(135.4)

Income from operations before income taxes

 

 

34.4

 

 

20.0

 

 

63.0

 

 

42.3

Provision for income taxes

 

 

22.9

 

 

0.2

 

 

28.3

 

 

6.8

Net income

 

$

11.5

 

$

19.8

 

$

34.7

 

$

35.5

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

247.4

 

 

243.1

 

 

246.9

 

 

242.9

Diluted

 

 

249.3

 

 

245.6

 

 

249.2

 

 

244.9

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

$

0.08

 

$

0.14

 

$

0.15

Diluted

 

$

0.05

 

$

0.08

 

$

0.14

 

$

0.14

 

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/(LOSS) (UNAUDITED)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended December 31,

 

Six months ended December 31,

 

    

2017

    

2016

 

2017

    

2016

Net income

 

$

11.5

 

$

19.8

 

$

34.7

 

$

35.5

Foreign currency translation adjustments, net of tax

 

 

0.8

 

 

(24.1)

 

 

22.9

 

 

(26.2)

Defined benefit pension plan adjustments, net of tax

 

 

(5.0)

 

 

 —

 

 

(5.0)

 

 

(1.2)

Comprehensive income/(loss)

 

$

7.3

 

$

(4.3)

 

$

52.6

 

$

8.1

 

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)

SIX MONTHS ENDED DECEMBER 31, 2017

(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

 

1,634,215

 

 

 —

 

 

47.2

 

 

 —

 

 

 —

 

 

47.2

Foreign currency translation adjustment, net of tax

 

 —

 

 

 —

 

 

 —

 

 

22.9

 

 

 —

 

 

22.9

Defined benefit pension plan adjustments, net of tax

 

 —

 

 

 —

 

 

 —

 

 

(5.0)

 

 

 —

 

 

(5.0)

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

34.7

 

 

34.7

Balance at December 31, 2017

 

248,105,766

 

$

0.2

 

$

1,931.2

 

$

23.3

 

$

(444.4)

 

$

1,510.3

 

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)

 

 

 

 

 

 

 

 

 

Six months ended December 31,

 

    

2017

    

2016

Cash flows from operating activities

 

 

 

    

 

 

Net income

 

$

34.7

 

$

35.5

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

 

 

 

 

 

 

Depreciation and amortization

 

 

380.0

 

 

269.9

Loss on extinguishment of debt

 

 

4.9

 

 

 —

Non-cash interest expense

 

 

4.8

 

 

5.1

Stock-based compensation

 

 

51.3

 

 

66.5

Amortization of deferred revenue

 

 

(66.4)

 

 

(55.6)

Foreign currency (gain)/loss on intercompany loans

 

 

(13.9)

 

 

28.6

Deferred income taxes

 

 

19.7

 

 

(0.5)

Provision for bad debts

 

 

2.3

 

 

1.4

Non-cash loss on investments

 

 

0.3

 

 

0.5

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

Trade receivables

 

 

(41.5)

 

 

(16.5)

Accounts payable and accrued liabilities

 

 

29.2

 

 

(33.0)

Additions to deferred revenue

 

 

61.9

 

 

84.3

Other assets and liabilities

 

 

(10.8)

 

 

16.3

Net cash provided by operating activities

 

 

456.5

 

 

402.5

Cash flows from investing activities

 

 

 

 

 

 

Purchases of property and equipment

 

 

(386.8)

 

 

(421.9)

Cash paid for acquisitions, net of cash acquired

 

 

 —

 

 

(1.3)

Other

 

 

(0.2)

 

 

1.5

Net cash used in investing activities

 

 

(387.0)

 

 

(421.7)

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from debt

 

 

312.8

 

 

 —

Principal payments on long-term debt

 

 

(313.2)

 

 

 —

Principal payments on capital lease obligations

 

 

(4.0)

 

 

(2.0)

Payment of debt issue costs

 

 

(3.4)

 

 

(0.7)

Cash paid for Santa Clara acquisition financing arrangement

 

 

(2.6)

 

 

 —

Net cash used in financing activities

 

 

(10.4)

 

 

(2.7)

Net cash flows

 

 

59.1

 

 

(21.9)

Effect of changes in foreign exchange rates on cash

 

 

1.0

 

 

(4.8)

Net increase/(decrease) in cash and cash equivalents

 

 

60.1

 

 

(26.7)

Cash and cash equivalents, beginning of year

 

 

220.7

 

 

170.7

Cash and cash equivalents, end of period

 

$

280.8

 

$

144.0

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Cash paid for interest, net of capitalized interest

 

$

136.3

 

$

97.3

Cash paid for income taxes

 

$

3.1

 

$

6.0

Non-cash purchases of equipment through capital leasing

 

$

0.3

 

$

37.9

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

 

$

(47.4)

 

$

22.7

 

Refer to Note 2 — Acquisitions 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 BASIS OF PRESENTATION

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 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 six months ended December 31, 2017 are not necessarily indicative of the operating results for any future interim period or the full year.

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.”

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 six months ended December 31, 2017 included an adjustment of 1.9 million and 2.3 million shares, respectively, and for the three and six months ended

6


 

Table of Contents

ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2016 included an adjustment of 2.5 million and 2.0 million shares, respectively, to the 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 8 – Stock-based Compensation) (calculated using the treasury method).

Significant Accounting Policies

 

 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 acquired defined benefit pension plans and other non-pension post-retirement benefits (“OPEBs”) that cover qualifying foreign employees. The pension plans and OPEBs were legally transferred to the Company during the three months ended December 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.

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

Recently Issued Accounting Pronouncements

 

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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

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Table of Contents

ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 six months ended December 31, 2017.

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 this ASU.

 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 will replace most existing revenue recognition guidance under GAAP when it becomes effective. In July 2015, the FASB deferred the effective date to annual reporting periods and interim reporting periods within annual reporting periods beginning after December 15, 2017 (Fiscal 2019 for the Company). Early adoption was permitted as of the original effective date or annual reporting periods and interim reporting periods within annual reporting periods beginning after December 15, 2016. 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, it has preliminarily determined that due to changes in the timing of recognition of certain installations, discounts and

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promotional credits given to customers, there may be additional 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 may result in additional deferred charges recognized in the consolidated balance sheets and could have the impact of deferring 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 may 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

Since inception through December 31, 2017, the Company has consummated 41 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 Announced During Fiscal 2018

Spread Networks

On November 26, 2017, the Company entered into a definitive agreement to acquire Spread Networks, LLC, a privately-owned telecommunications provider that owns and operates a 825-mile, high-fiber count long haul route connecting New York and Chicago, for $127.0 million in cash (subject to post-closing adjustments). The all-cash transaction is expected to be funded with cash on hand and debt and is expected to close in the first calendar quarter of 2018, subject to customary closing conditions.

The route will connect 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.

Optic Zoo Networks and Neutral Path Communications

See Note 14- 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. 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 December 31, 2017, $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 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 December 31, 2017, $7.0 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 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. 

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 December 31, 2017, the remaining cash consideration to be paid was $6.4 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 six months ended December 31, 2017 of $2.5 million, representing the principal portion of the financing arrangement, are included in the accompanying condensed consolidated statement of cash flows within financing activities.

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 Zayo’s long haul dark fiber routes between San Francisco and Los Angeles.

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. During the three months ended December 31, 2017, the Company recorded revised fair value estimates of its customer relationship intangible asset and property and equipment associated with the Electric Lightwave acquisition resulting in increases to intangible assets and property and equipment of $160.2 million and $52.2 million, respectively, with corresponding decreases to goodwill. Accordingly, the tax basis of assets was also updated during the three months ended December 31, 2017 resulting in a decrease to deferred tax assets of $80.2 million, or a $35.2 million deferred tax liability position.

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In addition, the change to the provisional amount resulted in a decrease to depreciation and amortization expense of $12.1 million for the three and six months ended December 31, 2017, of which $8.4 million relates to reporting periods prior to the three months ended December 31, 2017 and $4.8 million relates to reporting periods prior to the six months ended December 31, 2017. As of December 31, 2017, for the KIO Networks US Data Centers and Electric Lightwave 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.

 

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

 

 

 

 

 

0.1

 

 

55.0

 

 

 —

Property and equipment

 

 

 

 

 

 2.4

 

 

 572.8

 

 

 31.9

Deferred tax assets, net

 

 

 

 

 

1.8

 

 

 —

 

 

 —

Intangibles

 

 

 

 

 

6.4

 

 

472.4

 

 

6.0

Goodwill

 

 

 

 

 

2.9

 

 

498.4

 

 

 —

Other assets

 

 

 

 

 

0.5

 

 

1.7

 

 

 —

Total assets acquired

 

 

 

 

 

14.2

 

 

1,612.9

 

 

37.9

Current liabilities

 

 

 

 

 

1.7

 

 

57.4

 

 

 —

Deferred tax liabilities, net

 

 

 

 

 

 —

 

 

35.1

 

 

 —

Capital lease obligations

 

 

 

 

 

 —

 

 

 —

 

 

26.6

Deferred revenue

 

 

 

 

 

0.5

 

 

80.0

 

 

 —

Other liabilities

 

 

 

 

 

 —

 

 

1.2

 

 

 —

Total liabilities assumed

 

 

 

 

 

2.2

 

 

173.7

 

 

26.6

Net assets acquired

 

 

 

 

 

12.0

 

 

1,439.2

 

 

11.3

Less cash acquired

 

 

 

 

 

(0.1)

 

 

(12.6)

 

 

 —

Total 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.

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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 $5.9 million and $14.2 million for the three and six months ended December 31, 2017, respectively, and $6.2 million and $9.2 million for the three and six months ended December 31, 2016, 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. 

 

(3) GOODWILL

The Company’s goodwill balance was $1,712.9 million and $1,840.2 million as of December 31, 2017 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 December 31, 2017, 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”), Enterprise Private and Connectivity (“EPIC”), 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 six months ended December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product Group

    

As of June 30, 2017

    

Adjustments to Fiscal 2017
Acquisitions

    

Foreign Currency
Translation and
Other

    

As of December 31, 2017

 

 

(in millions)

Fiber Solutions

 

$

633.9

 

$

145.5

 

$

3.1

 

$

782.5

Waves

 

 

247.4

 

 

(62.3)

 

 

1.6

 

 

186.7

Sonet

 

 

52.0

 

 

30.9

 

 

0.1

 

 

83.0

Ethernet

 

 

359.5

 

 

(263.6)

 

 

0.2

 

 

96.1

EPIC

 

 

89.5

 

 

80.0

 

 

0.3

 

 

169.8

zColo

 

 

256.3

 

 

2.7

 

 

1.3

 

 

260.3

Cloud

 

 

69.5

 

 

(4.9)

 

 

0.1

 

 

64.7

Allstream

 

 

116.5

 

 

(62.3)

 

 

 —

 

 

54.2

Other

 

 

15.6

 

 

 —

 

 

 

 

 

15.6

Total

 

$

1,840.2

 

$

(134.0)

 

$

6.7

 

$

1,712.9

 

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(4) INTANGIBLE ASSETS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross Carrying Amount

    

Accumulated
Amortization

    

Net

 

 

(in millions)

December 31, 2017

 

 

 

 

 

 

 

 

 

Finite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

1,643.9

 

$

(361.1)

 

$

1,282.8

Underlying rights

 

 

1.6

 

 

(0.5)

 

 

1.1

Total

 

 

1,645.5

 

 

(361.6)

 

 

1,283.9

Indefinite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

Certifications

 

 

3.5

 

 

 —

 

 

3.5

Underlying Rights

 

 

15.4

 

 

 —

 

 

15.4

Total

 

$

1,664.4

 

$

(361.6)

 

$

1,302.8

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

 

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(5) LONG-TERM DEBT

As of December 31, 2017 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

    

December 31,
2017

   

June 30,
2017

 

 

 

 

 

 

 

 

 

 

(in millions)

Term Loan Facility due 2021

 

Jan 2017

 

Jan 2021

 

Monthly

 

LIBOR +2.00%

 

$

496.3

 

$

498.8

B-2 Term Loan Facility

 

Jul 2017

 

Jan 2024

 

Monthly

 

LIBOR +2.25%

 

 

1,119.3

 

 

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/Ju1

 

5.75%

 

 

1,650.0

 

 

1,350.0

Total obligations

 

 

 

 

 

 

 

 

 

 

5,595.6

 

 

5,608.7

Unamortized premium/(discounts), net

 

 

 

 

 

 

 

 

 

 

11.4

 

 

(3.2)

Unamortized debt issuance costs

 

 

 

 

 

 

 

 

 

 

(63.4)

 

 

(67.8)

Carrying value of debt

 

 

 

 

 

 

 

 

 

 

5,543.6

 

 

5,537.7

Less current portion

 

 

 

 

 

 

 

 

 

 

(5.0)

 

 

(5.0)

Total long-term debt, less current portion

 

 

 

 

 

 

 

 

 

$

5,538.6

 

$

5,532.7

 

Term Loan Facility and Revolving Credit Facility

On May 6, 2015, ZGL and Zayo Capital, Inc. (“Zayo Capital”) entered into an Amendment and Restatement Agreement whereby the Credit Agreement (the “Credit Agreement”) governing their 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 determined in accordance with the Credit Agreement (no such annual payment was required during Fiscal 2017 or Fiscal 2016).

On January 15, 2016, ZGL and Zayo Capital entered into an Incremental Amendment (the “Amendment”) to the 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, ZGL 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, ZGL 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, ZGL and Zayo Capital added a new $650.0 million term loan tranche under

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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, ZGL 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, ZGL 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 ZGL’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 ZGL’s leverage ratio. 

The weighted average interest rates (including margin) on the Term Loan Facility were approximately 3.7% and 3.4% as of December 31, 2017 and June 30, 2017, respectively. Interest rates on the Revolver as of December 31, 2017 and June 30, 2017 were approximately 3.3% and 3.8%, respectively.

As of December 31, 2017, no amounts were outstanding under the Revolver and $1,615.6 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 December 31, 2017, 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, ZGL 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, ZGL 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%

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ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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, ZGL 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), 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.

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 ZGL 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 ZGL’s restricted subsidiaries to pay dividends or make other payments to ZGL, 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 ZGL 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 ZGL and its subsidiaries to comply with customary affirmative and negative covenants, including covenants restricting the ability of ZGL 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 ZGL’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 ZGL’s previous quarter’s annualized modified EBITDA (as defined in the Indentures), and limit ZGL’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 December 31, 2017.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Guarantees

The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of ZGL’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 ZGL’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 $113.1 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 December 31, 2017 and June 30, 2017 was $63.4 million and $67.8 million, net of accumulated amortization of $49.7 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 $2.3 million and $4.7 million for the three and six months ended December 31, 2017, respectively, and $2.2 million and $4.4 million for the three and six months ended December 31, 2016, respectively.

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

(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 six month periods ended December 31, 2017 and 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended December 31,

 

Six months ended December 31,

 

    

2017

    

2016

    

2017

    

 

2016

 

 

(in millions)

Expected provision at the statutory rate

 

$

7.6

 

$

7.1

 

$

17.6

 

$

14.8

Increase/(decrease) due to:

 

 

 

 

 

 

 

 

 

 

 

 

State income tax expense, net of federal benefit

 

 

0.9

 

 

0.8

 

 

1.5

 

 

1.5

Stock-based compensation

 

 

1.0

 

 

(2.9)

 

 

2.5

 

 

0.4

Transactions costs not deductible for tax purposes

 

 

0.1

 

 

0.2

 

 

0.2

 

 

0.3

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

 

 

0.8

 

 

 —

 

 

0.8

 

 

(1.7)

Foreign tax rate differential

 

 

0.5

 

 

0.4

 

 

(1.7)

 

 

(0.3)

Change in valuation allowance

 

 

(25.7)

 

 

(4.4)

 

 

(31.4)