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EX-32 - EX-32 - Zayo Group Holdings, Inc.zayo-20180930xex32.htm
EX-31.2 - EX-31.2 - Zayo Group Holdings, Inc.zayo-20180930ex312b13b92.htm
EX-31.1 - EX-31.1 - Zayo Group Holdings, Inc.zayo-20180930ex311121a6a.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 September 30, 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 every Interactive Data File required to be submitted 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 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

 

 

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 November 2, 2018, was 236,563,242 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 September 30, 2018 and June 30, 2018 

 

1

Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2018 and 2017 

 

2

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2018 and 2017 

 

3

Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended September 30, 2018  

 

4

Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 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 

 

34

Item 3. Quantitative and Qualitative Disclosures about Market Risk 

 

50

Item 4. Controls and Procedures 

 

50

Part II. OTHER INFORMATION 

 

 

Item 1. Legal Proceedings 

 

51

Item 1A. Risk Factors 

 

51

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

 

52

Item 6. Exhibits 

 

53

Signatures 

 

54

 

 

 


 

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)

 

 

 

 

 

 

 

 

    

September 30,
2018

    

June 30,
2018

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

353.9

 

$

256.7

Trade receivables, net of allowance of $11.2 and $11.1 as of September 30, 2018 and June 30, 2018, respectively

 

 

227.2

 

 

235.6

Prepaid expenses

 

 

68.2

 

 

74.1

Other current assets

 

 

31.6

 

 

29.7

Assets held for sale

 

 

 —

 

 

41.8

Total current assets

 

 

680.9

 

 

637.9

Property and equipment, net

 

 

5,524.7

 

 

5,427.6

Intangible assets, net

 

 

1,192.5

 

 

1,212.1

Goodwill

 

 

1,710.2

 

 

1,719.1

Deferred income taxes, net

 

 

36.2

 

 

37.6

Other assets

 

 

170.4

 

 

175.6

Total assets

 

$

9,314.9

 

$

9,209.9

Liabilities and stockholders' equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

41.9

 

$

45.9

Accrued liabilities

 

 

311.5

 

 

312.3

Accrued interest

 

 

85.4

 

 

72.6

Current portion of long-term debt

 

 

5.0

 

 

5.0

Capital lease obligations, current

 

 

10.5

 

 

11.9

Deferred revenue, current

 

 

171.6

 

 

162.9

Liabilities associated with assets held for sale

 

 

 —

 

 

6.1

Total current liabilities

 

 

625.9

 

 

616.7

Long-term debt, non-current

 

 

5,691.3

 

 

5,690.1

Capital lease obligation, non-current

 

 

142.9

 

 

121.6

Deferred revenue, non-current

 

 

1,085.6

 

 

1,076.3

Deferred income taxes, net

 

 

162.1

 

 

147.1

Other long-term liabilities

 

 

52.3

 

 

57.8

Total liabilities

 

 

7,760.1

 

 

7,709.6

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 September 30, 2018 and June 30, 2018, respectively

 

 

 —

 

 

 —

Common stock, $0.001 par value - 850,000,000 shares authorized; 247,132,693 and 246,438,483 shares issued and outstanding as of September 30, 2018 and June 30, 2018, respectively

 

 

0.2

 

 

0.2

Additional paid-in capital

 

 

1,907.7

 

 

1,881.6

Accumulated other comprehensive loss

 

 

(9.2)

 

 

(15.5)

Accumulated deficit

 

 

(343.9)

 

 

(366.0)

Total stockholders' equity

 

 

1,554.8

 

 

1,500.3

Total liabilities and stockholders' equity

 

$

9,314.9

 

$

9,209.9

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 September 30,

 

    

2018

    

2017

Revenue

 

$

641.1

 

$

643.1

Operating costs and expenses

 

 

 

 

 

 

Operating costs (excluding depreciation and amortization and including stock-based compensation—Note 9)

 

 

228.4

 

 

235.7

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

 

 

122.1

 

 

128.1

Depreciation and amortization

 

 

167.8

 

 

183.8

Total operating costs and expenses

 

 

518.3

 

 

547.6

Operating income

 

 

122.8

 

 

95.5

Other expenses

 

 

 

 

 

 

Interest expense

 

 

(82.2)

 

 

(73.6)

Loss on extinguishment of debt

 

 

 —

 

 

(4.9)

Foreign currency (loss)/gain on intercompany loans

 

 

(4.6)

 

 

10.8

Other income, net

 

 

6.6

 

 

0.9

Total other expenses, net

 

 

(80.2)

 

 

(66.8)

Income from operations before income taxes

 

 

42.6

 

 

28.7

Provision for income taxes

 

 

20.5

 

 

5.4

Net income

 

$

22.1

 

$

23.3

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

 

 

 

 

 

 

Basic

 

 

246.4

 

 

246.5

Diluted

 

 

247.8

 

 

248.0

Net income per share:

 

 

 

 

 

 

Basic and diluted

 

$

0.09

 

$

0.09

 

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 September 30,

 

    

2018

    

2017

Net income

 

$

22.1

 

$

23.3

Foreign currency translation adjustments, net of tax

 

 

8.2

 

 

22.1

Defined benefit pension plan adjustments, net of tax

 

 

(1.9)

 

 

 —

Comprehensive income

 

$

28.4

 

$

45.4

 

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)

THREE MONTHS ENDED SEPTEMBER 30, 2018

(in millions, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common
Shares

    

Common
Stock

    

Additional
paid-in
Capital

    

Accumulated
Other
Comprehensive
Loss

    

Accumulated
Deficit

    

Total
Stockholders'
Equity

Balance at June 30, 2018

 

246,438,483

 

$

0.2

 

$

1,881.6

 

$

(15.5)

 

$

(366.0)

 

$

1,500.3

Stock-based compensation

 

700,439

 

 

 —

 

 

26.3

 

 

 —

 

 

 —

 

 

26.3

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

8.2

 

 

 —

 

 

8.2

Repurchase and retirement of common shares

 

(6,229)

 

 

 —

 

 

(0.2)

 

 

 —

 

 

 —

 

 

(0.2)

Defined benefit pension plan adjustments

 

 —

 

 

 —

 

 

 —

 

 

(1.9)

 

 

 —

 

 

(1.9)

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

22.1

 

 

22.1

Balance at September 30, 2018

 

247,132,693

 

$

0.2

 

$

1,907.7

 

$

(9.2)

 

$

(343.9)

 

$

1,554.8

 

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)

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

    

2018

    

2017

Cash flows from operating activities

 

 

 

    

 

 

Net income

 

$

22.1

 

$

23.3

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

 

 

 

 

 

 

Depreciation and amortization

 

 

167.8

 

 

183.8

Loss on extinguishment of debt

 

 

 —

 

 

4.9

Gain on sale of SRT

 

 

(5.5)

 

 

 —

Non-cash interest expense

 

 

2.5

 

 

2.4

Stock-based compensation

 

 

26.7

 

 

27.8

Amortization of deferred revenue

 

 

(37.0)

 

 

(32.4)

Foreign currency loss / (gain) on intercompany loans

 

 

4.6

 

 

(10.8)

Deferred income taxes

 

 

15.9

 

 

2.7

Provision for bad debts

 

 

1.5

 

 

0.8

Non-cash loss on investments

 

 

0.3

 

 

0.1

Changes in operating assets and liabilities, net of acquisitions

 

 

 

 

 

 

Trade receivables

 

 

4.5

 

 

(32.0)

Accounts payable and accrued liabilities

 

 

9.0

 

 

53.4

Additions to deferred revenue

 

 

30.5

 

 

40.5

Other assets and liabilities

 

 

(1.1)

 

 

4.3

Net cash provided by operating activities

 

 

241.8

 

 

268.8

Cash flows from investing activities

 

 

 

 

 

 

Purchases of property and equipment

 

 

(182.5)

 

 

(193.4)

Proceeds from sale of SRT, net of cash held in escrow

 

 

39.0

 

 

 —

Net cash used in investing activities

 

 

(143.5)

 

 

(193.4)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from debt

 

 

 —

 

 

312.8

Principal payments on long-term debt

 

 

(1.3)

 

 

(311.9)

Principal payments on capital lease obligations

 

 

(1.9)

 

 

(1.7)

Payment of debt issue costs

 

 

 —

 

 

(3.4)

Common stock repurchases

 

 

(0.2)

 

 

 —

Cash paid for Santa Clara acquisition financing arrangement and other

 

 

(3.3)

 

 

(1.3)

Net cash used in financing activities

 

 

(6.7)

 

 

(5.5)

Net cash flows

 

 

91.6

 

 

69.9

Effect of changes in foreign exchange rates on cash

 

 

2.2

 

 

0.6

Net increase in cash, cash equivalents and restricted cash

 

 

93.8

 

 

70.5

Cash, cash equivalents and restricted cash, beginning of year

 

 

261.3

 

 

225.2

Cash, cash equivalents and restricted cash, end of period

 

$

355.1

 

$

295.7

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Cash paid for interest, net of capitalized interest

 

$

63.4

 

$

54.3

Cash paid for income taxes

 

$

2.0

 

$

1.4

Non-cash purchases of equipment through capital leasing

 

$

21.9

 

$

0.1

Non-cash purchases of equipment through nonmonetary exchange

 

$

31.1

 

$

1.5

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

 

$

(2.4)

 

$

(18.0)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents, and restricted cash:

 

 

September 30, 2018

 

 

June 30, 2018

 

 

September 30, 2017

 

 

June 30, 2017

Cash and cash equivalents

 

$

353.9

 

$

256.7

 

$

291.2

 

$

220.7

Restricted cash included in other assets

 

 

1.2

 

 

4.6

 

 

4.5

 

 

4.5

Total cash, cash equivalents and restricted cash

 

$

355.1

 

$

261.3

 

$

295.7

 

$

225.2

 

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 provides communication infrastructure solutions, including fiber and bandwidth connectivity, colocation and cloud infrastructure,  to businesses 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 Ethernet, wavelength, wholesale IP, and SONET solutions.

·

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

·

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

·

Allstream, including Cloud VoIP and Data Solutions.

·

Other offerings, including Zayo Professional Services.

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

 

On May 3, 2018, the Company announced that it completed the first phase of its investigation on the advisability and feasibility of a conversion to a real estate investment trust for U.S. federal income tax purposes (a “REIT”). The Company has begun the next phase of its evaluation and preparation for a potential conversion to a REIT. As part of these efforts, the Company has begun a direct dialogue with the U.S. Internal Revenue Service (“IRS”) in an effort to obtain clarity and support for its position, and is seeking a private letter ruling (“PLR”) from the IRS.  The Company’s ability to qualify for taxation as a REIT will depend upon its continuing compliance following REIT conversion with various requirements, including requirements related to the nature of its assets, the sources of its income and the distributions to its stockholders.

The Company is requesting that the PLR address whether the Company’s revenues from dark and lit fiber satisfy applicable REIT income tests, and the Company’s ultimate decision to convert to a REIT may depend upon a favorable ruling from the IRS on this topic. The Company submitted a PLR request to the IRS in July 2018, but the IRS may not provide a response until 2019 or later or may not respond at all.

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, 2018 included in the Company’s Annual Report on Form 10-K/A for the year ended June 30, 2018. In the opinion of management, all adjustments considered necessary for the 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 months ended September 30, 2018 are not necessarily indicative of the operating

6


 

Table of Contents

ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

results for any future interim period or the full year. Unless otherwise noted, dollar amounts and disclosures throughout the Notes to the condensed consolidated financial statements are presented in millions of dollars.

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

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. 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.

Significant Accounting Policies

On July 1, 2018, the Company adopted the requirements of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. See “Recently Adopted Accounting Pronouncements” and Note 13 – Revenue and Contract Costs for additional disclosure on our adoption of ASC 606 and its impact on the condensed consolidated financial statements.

There have been no other changes to the Company’s significant accounting policies described in its Annual Report on Form 10-K/A for the year ended June 30, 2018.

Recently Issued Accounting Pronouncements

In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, 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 the 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

7


 

Table of Contents

ZAYO GROUP HOLDINGS, INC. AND SUBSIDIARIES

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 will require application of the new guidance at the beginning of the earliest comparative period presented using a modified retrospective transition, and provides for certain practical expedients. 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.

Recently Adopted Accounting Pronouncements

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. The adoption did not result in a material impact to the condensed consolidated financial statements for either of the three months ended September 30, 2018 or 2017 and retrospective application was applied.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.  The new standard requires a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (Fiscal 2019 for the Company). The retrospective adoption of this accounting standard did not have a material impact on its condensed consolidated financial statements.

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). The retrospective adoption of this accounting standard did not have a material impact on its condensed consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”), which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from certain contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.  In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and addressed accounting for costs to acquire and fulfill contracts.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The standard does not impact the manner in which the Company accounts for revenue arrangements accounted for as leases. Effective July 1, 2018, the Company adopted the requirements of ASC 606 and used the full retrospective transition method. The full retrospective transition method requires the Company to restate each prior reporting period presented. The Company has implemented internal controls and system functionality to enable the preparation of financial information in accordance with ASC 606.

 

The adoption of ASC 606 has an impact on the manner in which the Company recognizes revenue associated with dark fiber sales that include the transfer of title to certain network assets, which prior to ASC 606 was considered a sale of real estate or integral equipment.  Under previous GAAP, the Company deferred the recognition of revenue on the sale of network infrastructure assets that were considered to be integral equipment if the Company had a substantial continuing involvement in the transferred asset.  The consideration received in this type of arrangement had historically been amortized to revenue ratably over the period in which the Company had a substantial continuing involvement in the transferred asset.  Under ASC 606 the asset transferred in this type of arrangement is derecognized from the balance sheet and the amount of the transaction price attributable to the asset being sold is recognized upon customer acceptance.  This change had an impact of (decreasing)/increasing the revenue previously reported by the Company during the years ended June 30, 2018 and 2017 by ($1.5) million and $20.5 million, respectively. The full retrospective adoption of ASC 606 also resulted in increasing the previously reported operating costs during the year ended June 30, 2017 by $18.8 million, which represents the net book value of assets transferred to customers in these types of arrangements during Fiscal 2017.

The assets transferred in these real estate sales had historically been included in property and equipment, net on the Company’s balance sheet.  Upon the adoption of ASC 606, the net book value of these assets of $19.6 million was removed from the Company’s condensed consolidated balance sheet. The Company also derecognized from its June 30, 2018 balance sheet $1.5 million and $20.5 million in related deferred revenue, current and non-current, respectively, which represented the unamortized consideration received on these arrangements.   

An additional impact from the adoption of ASC 606 is the accounting for the incremental costs of acquiring new service contracts, including certain compensation expense with internal sales representatives. Under ASC 606, the Company capitalizes these incremental costs of obtaining customer contracts and amortizes the expense over the relevant contract term. In addition, the Company will assess its deferred contract cost asset for impairment on a periodic basis. Prior to the adoption of ASC 606, compensation paid to internal sales representatives for obtaining new service contracts was expensed as incurred. The impact of the retrospective adoption of ASC 606 resulted in an increase to selling, general and administrative expenses as previously reported by the Company during the years ended June 30, 2018 and 2017 by $1.1 million and $0.2 million, respectively.  Additionally, the Company recorded an increase to the previously reported other current assets and other assets on the consolidated balance sheet as of June 30, 2018 of $7.1 million and $5.6 million, respectively, to reflect the deferred cost of acquiring service contracts that will be recognized in future periods over the relevant contract term.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The table below presents the impact the full retrospective adoption of ASC 606 had on the Company’s condensed statement of operations for the years ended June 30, 2018 and 2017 and each of the quarters of Fiscal 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year ended

 

Quarter Ended (unaudited)

 

    

June 30,
2018

    

June 30,
2017

    

September 30,
2017

    

December 31,
2017

    

March 31,
2018

    

June 30,
2018

 

 

(in millions)

Revenue

 

$

(1.5)

 

$

20.5

 

$

(0.4)

 

$

(0.4)

 

$

(0.4)

 

$

(0.3)

Operating costs

 

 

 —

 

 

18.8

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Selling, general and administrative expenses

 

 

1.1

 

 

0.2

 

 

(0.2)

 

 

0.6

 

 

(0.3)

 

 

1.0

Depreciation and amortization

 

 

(0.9)

 

 

(0.7)

 

 

(0.3)

 

 

(0.3)

 

 

(0.2)

 

 

(0.1)

Provision for income taxes

 

 

(2.7)

 

 

0.8

 

 

 —

 

 

(2.5)

 

 

 —

 

 

(0.2)

Net income

 

 

1.0

 

 

1.4

 

 

0.1

 

 

1.8

 

 

0.1

 

 

(1.0)

 

The table below presents the impact the full retrospective adoption of ASC 606 had on the Company’s consolidated balance sheet for the year ended June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2018

 

    

As Previously Reported

    

Effect of Adoption

 

As Adjusted

 

 

(in millions)

Assets

 

 

 

 

 

 

 

 

 

Other current assets

 

$

22.6

 

$

7.1

 

$

29.7

Property and equipment, net

 

$

5,447.2

 

$

(19.6)

 

$

5,427.6

Other assets

 

$

170.0

 

$

5.6

 

$

175.6

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Deferred revenue, current

 

$

164.4

 

$

(1.5)

 

$

162.9

Deferred revenue, non-current

 

$

1,096.8

 

$

(20.5)

 

$

1,076.3

Deferred income taxes, net

 

$

143.2

 

$

3.9

 

$

147.1

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

$

(377.2)

 

$

11.2

 

$

(366.0)

 

 

(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 months ended September 30, 2018 and 2017 included an adjustment of 1.4 million and 1.5 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 and related issuance of common shares upon vesting (see Note 9 – Stock-based Compensation) (calculated using the treasury method).

(3) ACQUISITIONS AND DISPOSITIONS

Since inception through September 30, 2018, the Company has consummated 45 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.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

Acquisitions Completed During Fiscal 2018

Neutral Path Communications

On April 17, 2018, the Company acquired substantially all of the assets of Neutral Path Communications and Near North Partners (collectively, “Neutral Path”) for $33.3 million, which is net of cash acquired and also included an estimate for a contingent payment based on sales performance through June 30, 2018. The purchase price is subject to net working capital and certain post-closing adjustments. As of September 30, 2018, $4.0 million of the purchase consideration is being held in escrow pending the expiration of the indemnification adjustment period. The all-cash acquisition was funded with cash on hand and was considered an asset purchase for U.S. federal income tax purposes. Neutral Path is a long haul infrastructure provider, providing access to a fiber network section in the Midwest. The transaction added owned plus additional leased route miles to the Company’s extensive North American network, including a unique high-count fiber route from Minneapolis to Omaha.

McLean Data Center

On April 4, 2018, the Company acquired McLean Data Center, a privately owned data center for an insignificant amount.  The acquisition was considered an asset purchase for U.S. federal income tax purposes and a business combination for accounting purposes. The Company assumed an operating lease obligation and acquired certain assets, such as cash, structural components, equipment, and assumed customer contracts.

Spread Networks

On February 28, 2018, the Company acquired Spread Networks, LLC (“Spread Networks”), a privately owned telecommunications provider that owns and offers access to 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 September 30, 2018, $0.6 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 U.S. federal income tax purposes. Additional connectivity of the route will be enabled by Zayo’s existing network.

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, BC. As of September 30, 2018, CAD $3.2 million (or $2.5 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 U.S. federal income tax purposes.

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 of September 30, 2018, for the Optic Zoo Networks, Spread Networks, McLean Data Center and Neutral Path acquisitions, the

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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. For the Spread Networks acquisition, the items with the highest likelihood of change are working capital related accounts, property and equipment and goodwill. 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 determination. 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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Neutral Path

 

McLean Data Center

 

Spread Networks

 

Optic Zoo Networks

Acquisition date

    

April 17, 2018

    

April 4, 2018

    

February 28, 2018

    

January 18, 2018

 

 

(in millions)

Cash

 

$

0.7

 

$

9.2

 

$

1.5

 

$

1.4

Other current assets

 

 

 0.2

 

 

 —

 

 

 4.2

 

 

 0.4

Property and equipment

 

 

 15.2

 

 

 0.6

 

 

 143.7

 

 

 13.6

Intangibles

 

 

 6.9

 

 

 —

 

 

 9.3

 

 

 3.8

Goodwill

 

 

 15.9

 

 

 —

 

 

 14.4

 

 

 9.9

Deferred tax assets

 

 

 1.5

 

 

 —

 

 

 7.1

 

 

 —

Other assets

 

 

 —

 

 

 —

 

 

 1.4

 

 

 0.2

Total assets acquired

 

 

 40.4

 

 

 9.8

 

 

 181.6

 

 

 29.3

Current liabilities

 

 

 0.6

 

 

 1.6

 

 

 2.6

 

 

 0.6

Deferred revenue

 

 

 5.8

 

 

 —

 

 

 27.2

 

 

 1.2

Deferred tax liability, net

 

 

 —

 

 

 —

 

 

 —

 

 

 1.3

Other liabilities

 

 

 —

 

 

 8.2

 

 

 19.8

 

 

 —

Total liabilities assumed

 

 

 6.4

 

 

 9.8

 

 

 49.6

 

 

 3.1

Net assets acquired

 

 

 34.0

 

 

 —

 

 

 132.0

 

 

 26.2

Less cash acquired

 

 

 (0.7)

 

 

 (9.2)

 

 

 (1.5)

 

 

 (1.4)

Net consideration paid

 

$

33.3

 

$

(9.2)

 

$

130.5

 

$

24.8

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 $0.7 million and $8.3 million for the three months ended September 30, 2018 and 2017, respectively. Transaction costs have been included in

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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.

 

Scott-Rice Telephone Co.

 

On July 31, 2018, the Company completed the sale of Scott-Rice Telephone Co. (“SRT”), a Minnesota incumbent local exchange carrier, for $42.2 million to Nuvera Communications, Inc. (formerly New Ulm Telecom, Inc.). As of September 30, 2018, $3.2 million of purchase consideration was held in escrow.  The Company recognized a pre-tax gain of $5.5 million on the sale, which is included in other income, net in the condensed consolidated statements of operations. The Company acquired SRT as part of its March 1, 2017 purchase of Electric Lightwave Parent, Inc. and it was included as part of the Allstream segment. SRT had a pre-tax net loss of $1.6 million for the year ended June 30, 2018 and pre-tax net income of $2.9 million from when it was acquired in March 1, 2017 through June 30, 2017.

SRT qualified as held-for-sale as of March 31, 2018 and was classified as held-for-sale in the Company’s June 30, 2018 balance sheet. 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 following tables summarize the net assets and liabilities held for sale as of June 30, 2018:

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

(in millions)

Assets held for sale:

 

 

 

 

 

Property and equipment, net

 

 

 

$

35.7

Goodwill

 

 

 

 

5.2

Other assets

 

 

 

 

0.9

Total assets held for sale

 

 

 

$

41.8

 

 

 

 

 

 

Liabilities associated with assets held for sale:

 

 

 

 

 

Deferred tax liability, net

 

 

 

$

5.1

Other liabilities

 

 

 

 

1.0

Total liabilities associated with assets held for sale

 

 

 

$

6.1

 

 

 

 

 

 

 

 

(4) GOODWILL

The Company’s goodwill balance was $1,710.2 million and $1,719.1 million as of September 30, 2018 and June 30, 2018, respectively.

The Company’s reporting units are comprised of its strategic product groups (“SPG” or “SPGs”). Effective April 1, 2018, the Company implemented further organizational changes by creating two new reporting units: CloudLink Solutions (“CloudLink”) and Live Video Solutions (“Live Video”). 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 September 30, 2018, the Company’s SPGs were comprised of the following: Fiber Solutions, Zayo Wavelength Solutions (“Waves”), Zayo SONET Solutions (“SONET”), Zayo Ethernet Solutions (“Ethernet”),  Live Video, Wide Area Networks (“WANs”, formerly Enterprise Private and Connectivity), Zayo Cloud Solutions (“Cloud”), Zayo Colocation (“zColo”), CloudLink, 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 three months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product Group

    

As of June 30, 2018

    

Adjustments to Fiscal 2018
Acquisitions

    

Foreign Currency
Translation and
Other

    

As of September 30, 2018

 

 

(in millions)

Fiber Solutions

 

$

756.4

 

$

(6.1)

 

$

(0.9)

 

$

749.4

Waves

 

 

194.8

 

 

(0.9)

 

 

(0.8)

 

 

193.1

Sonet

 

 

87.6

 

 

 —

 

 

 —

 

 

87.6

Ethernet

 

 

104.2

 

 

(0.2)

 

 

 —

 

 

104.0

Live Video

 

 

3.3

 

 

 —

 

 

 —

 

 

3.3

WANs

 

 

179.3

 

 

 —

 

 

0.1

 

 

179.4

zColo

 

 

260.1

 

 

 —

 

 

(0.1)

 

 

260.0

Cloud

 

 

65.3

 

 

 —

 

 

—  

 

 

65.3

Cloudlink

 

 

13.5

 

 

 —

 

 

 —

 

 

13.5

Allstream

 

 

39.0

 

 

 —

 

 

 —

 

 

39.0

Other

 

 

15.6

 

 

 —

 

 

 —

 

 

15.6

Total

 

$

1,719.1

 

$

(7.2)

 

$

(1.7)

 

$

1,710.2

 

 

(5) INTANGIBLE ASSETS

Identifiable intangible assets as of September 30, 2018 and June 30, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross Carrying Amount

    

Accumulated
Amortization

    

Net

 

 

(in millions)

September 30, 2018

 

 

 

 

 

 

 

 

 

Finite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

1,600.9

 

$

(429.3)

 

$

1,171.6

Underlying rights and other

 

 

3.4

 

 

(0.9)

 

 

2.5

Total

 

 

1,604.3

 

 

(430.2)

 

 

1,174.1

Indefinite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

Certifications

 

 

3.5

 

 

 —

 

 

3.5

Underlying rights and other

 

 

14.9

 

 

 —

 

 

14.9

Total

 

$

1,622.7

 

$

(430.2)

 

$

1,192.5

June 30, 2018

 

 

 

 

 

 

 

 

 

Finite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

1,597.0

 

$

(405.6)

 

$

1,191.4

Underlying rights and other

 

 

2.7

 

 

(0.6)

 

 

2.1

Total

 

 

1,599.7

 

 

(406.2)

 

 

1,193.5

Indefinite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

Certifications

 

 

3.5

 

 

 —

 

 

3.5

Underlying rights and other

 

 

15.1

 

 

 —

 

 

15.1

Total

 

$

1,618.3

 

$

(406.2)

 

$

1,212.1

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

(6) LONG-TERM DEBT

As of September 30, 2018 and June 30, 2018, long-term debt was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Date of

 

 

 

Outstanding as of

 

 

 

Issuance or most
recent amendment

    

Maturity

    

Interest
Payments

    

Interest Rate

    

September 30,
2018

   

June 30,
2018

 

 

 

 

 

 

 

 

 

 

 

(in millions)

Term Loan Facility due 2021

 

Jan 2017

 

Jan 2021

 

Monthly

 

LIBOR +2.00%

 

$

492.5

 

$

493.8

 

B-2 Term Loan Facility

 

Feb 2018

 

Jan 2024

 

Monthly

 

LIBOR +2.25%

 

 

1,269.3

 

 

1,269.3

 

6.00% Senior Unsecured Notes

 

Jan & Mar 2015

 

Apr 2023

 

Apr/Oct

 

6.00%

 

 

1,430.0

 

 

1,430.0

 

6.375% Senior Unsecured Notes

 

May 2015 & Apr 2016

 

May 2025

 

May/Nov

 

6.375%

 

 

900.0

 

 

900.0

 

5.75% Senior Unsecured Notes

 

Jan, Apr & Jul 2017

 

Jan 2027

 

Jan/Jul

 

5.75%

 

 

1,650.0

 

 

1,650.0

 

Total obligations

 

 

 

 

 

 

 

 

 

 

5,741.8