Company Quick10K Filing
Zayo Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 0 $-0
10-Q 2019-11-06 Quarter: 2019-09-30
10-K 2019-09-04 Annual: 2019-06-30
10-Q 2019-05-09 Quarter: 2019-03-31
10-Q 2019-02-08 Quarter: 2018-12-31
10-Q 2018-11-08 Quarter: 2018-09-30
10-K 2018-08-24 Annual: 2018-06-30
10-Q 2018-05-07 Quarter: 2018-03-31
10-Q 2018-02-08 Quarter: 2017-12-31
10-Q 2017-11-07 Quarter: 2017-09-30
10-K 2017-08-22 Annual: 2017-06-30
10-Q 2017-05-10 Quarter: 2017-03-31
10-Q 2017-02-09 Quarter: 2016-12-31
10-Q 2016-11-09 Quarter: 2016-09-30
10-K 2016-08-26 Annual: 2016-06-30
10-Q 2016-05-06 Quarter: 2016-03-31
10-Q 2016-02-12 Quarter: 2015-12-31
10-Q 2015-11-10 Quarter: 2015-09-30
10-K 2015-09-24 Annual: 2015-06-30
10-Q 2015-05-13 Quarter: 2015-03-31
10-Q 2015-02-17 Quarter: 2014-12-31
10-Q 2014-11-14 Quarter: 2014-09-30
10-K 2014-09-29 Annual: 2014-06-30
10-Q 2014-05-12 Quarter: 2014-03-31
10-Q 2014-02-06 Quarter: 2013-12-31
10-Q 2013-11-08 Quarter: 2013-09-30
10-K 2013-09-23 Annual: 2013-06-30
10-Q 2013-05-15 Quarter: 2013-03-31
10-Q 2013-02-08 Quarter: 2012-12-31
10-Q 2012-11-14 Quarter: 2012-09-30
10-K 2012-09-14 Annual: 2012-06-30
10-Q 2012-05-15 Quarter: 2012-03-31
10-Q 2011-11-10 Quarter: 2011-09-30
10-K 2011-09-09 Annual: 2011-06-30
10-Q 2011-05-13 Quarter: 2011-03-31
10-Q 2011-02-11 Quarter: 2010-12-31
10-Q 2010-11-12 Quarter: 2010-09-30
8-K 2019-07-26 Shareholder Vote
8-K 2019-05-08 Other Events, Exhibits
8-K 2019-05-08 Enter Agreement, Exhibits
8-K 2019-05-08 Other Events, Exhibits
8-K 2019-04-03 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-02-11 Officers, Exhibits
8-K 2018-12-05 Officers, Exhibits
8-K 2018-10-23 Officers, Exhibits
8-K 2018-06-05 Regulation FD
8-K 2018-05-01 Officers
8-K 2018-02-26 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
ZGL 2019-09-30
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 ex-31d1.htm
EX-31.2 ex-31d2.htm
EX-32 ex-32.htm

Zayo Group Earnings 2019-09-30

ZGL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
CNHC 12,949 11,626 877 0 149 771 5,714 0% 7.4 1%
RMES 1 1 0 0 -0 -0 -0 0.5 -13%
TCT 210 12 13 0 11 11 -200 0% -18.3 5%
VDI 1,766 1,288 779 0 465 632 222 0% 0.4 26%
POYE 0 0 0 0 -0 -0 -0 0.0 -1,973%
SCTF 0 0 0 0 -0 -0 -0 3.0 -33%
SEK 302,033 283,794 0 0 0 0 -0 0%
DAVEY 570 398 1,095 98 32 97 161 9% 1.7 6%
SLDV 25 6 2 0 13 19 -1 0% -0.0 53%
MBCC 216 243 112 0 -7 10 215 0% 21.5 -3%

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Table of Contents

 

 

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, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-169979

Zayo Group, LLC

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE

26-2012549

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1821 30th Street, Unit A,

Boulder, CO 80301

(Address of Principal Executive Offices)

(303) 381-4683

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Not applicable

Not applicable

Not applicable

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  

 

 

Table of Contents

ZAYO GROUP, LLC AND SUBSIDIARIES

INDEX

 

Page

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

1

Condensed Consolidated Balance Sheets as of September 30, 2019 and June 30, 2019

1

Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2019 and 2018

2

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2019 and 2018

3

Condensed Consolidated Statement of Member's Equity for the Three Months Ended September 30, 2019 and 2018

4

Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2019 and 2018

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

49

Item 4. Controls and Procedures

50

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

50

Item 1A. Risk Factors

51

Item 6. Exhibits

52

Signatures

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ZAYO GROUP, LLC AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in millions)

    

    

    

September 30,
2019

    

June 30,
2019

Assets

Current assets

Cash and cash equivalents

$

253.9

$

185.4

Trade receivables, net of allowance of $16.9 and $17.6 as of September 30, 2019 and June 30, 2019, respectively

151.9

177.0

Prepaid expenses

68.1

65.3

Other current assets

57.0

56.8

Total current assets

530.9

484.5

Property and equipment, net

5,851.8

5,808.9

Intangible assets, net

1,092.8

1,118.8

Goodwill

1,701.1

1,706.6

Right-of-use operating lease assets

499.2

Deferred income taxes, net

21.3

24.8

Other assets

184.0

190.2

Total assets

$

9,881.1

$

9,333.8

Liabilities and member's equity

Current liabilities

Accounts payable

$

31.9

$

73.7

Accrued liabilities

323.6

314.8

Accrued interest

84.9

73.1

Current portion of long-term debt

130.0

5.0

Operating lease obligations, current

127.2

Finance lease obligations, current

9.5

10.0

Deferred revenue, current

172.9

174.9

Total current liabilities

880.0

651.5

Long-term debt, non-current

5,696.1

5,839.7

Operating lease liabilities, non-current

387.4

Finance lease obligation, non-current

176.0

172.2

Deferred revenue, non-current

1,205.4

1,148.1

Deferred income taxes, net

147.5

138.8

Other long-term liabilities

30.1

54.7

Total liabilities

8,522.5

8,005.0

Commitments and contingencies (Note 11)

Member's equity

Member's interest

1,602.5

1,576.2

Accumulated other comprehensive loss

(38.3)

(23.9)

Accumulated deficit

(205.6)

(223.5)

Total member's equity

1,358.6

1,328.8

Total liabilities and member's equity

$

9,881.1

$

9,333.8

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

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ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions)

Three Months Ended September 30,

2019

    

2018

Revenue

 

$

638.6

$

641.1

Operating costs and expenses

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

231.0

228.4

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

122.6

122.1

Depreciation and amortization

156.1

167.8

Total operating costs and expenses

509.7

518.3

Operating income

128.9

122.8

Other expenses

Interest expense

(84.7)

(82.2)

Foreign currency loss on intercompany loans

(12.9)

(4.6)

Other income, net

0.6

6.6

Total other expenses, net

(97.0)

(80.2)

Income from operations before income taxes

31.9

42.6

Provision for income taxes

14.0

20.5

Net income

$

17.9

$

22.1

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

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ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(in millions)

Three Months Ended September 30,

    

2019

    

2018

Net income

$

17.9

$

22.1

Foreign currency translation adjustments, net of tax

(14.8)

8.2

Defined benefit pension plan adjustments, net of tax

0.4

(1.9)

Comprehensive income

$

3.5

$

28.4

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

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ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF MEMBER’S EQUITY (UNAUDITED)

(in millions)

    

Member's
Interest

    

Accumulated
Other
Comprehensive
Loss

    

Accumulated
Deficit

    

Total
Member's
Equity

Balance at June 30, 2019

$

1,576.2

$

(23.9)

$

(223.5)

$

1,328.8

Stock-based compensation

26.3

26.3

Foreign currency translation adjustment

(14.8)

(14.8)

Defined benefit pension plan adjustments

0.4

0.4

Net income

17.9

17.9

Balance at September 30, 2019

$

1,602.5

$

(38.3)

$

(205.6)

$

1,358.6

    

Member's
Interest

    

Accumulated
Other
Comprehensive
Loss

    

Accumulated
Deficit

    

Total
Member's
Equity

Balance at June 30, 2018

$

1,876.6

$

(15.5)

$

(373.5)

$

1,487.6

Stock-based compensation

26.3

26.3

Foreign currency translation adjustment

8.2

8.2

Capital distribution to parent

(0.2)

(0.2)

Defined benefit pension plan adjustments

(1.9)

(1.9)

Net income

22.1

22.1

Balance at September 30, 2018

$

1,902.7

$

(9.2)

$

(351.4)

$

1,542.1

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

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ZAYO GROUP, LLC AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

Three Months Ended September 30,

2019

2018

Cash flows from operating activities

    

Net income

$

17.9

$

22.1

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

Depreciation and amortization

156.1

167.8

Gain on sale of SRT

(5.5)

Non-cash interest expense

2.7

2.5

Stock-based compensation

27.2

26.7

Amortization of deferred revenue

(40.3)

(37.0)

Foreign currency loss on intercompany loans

12.9

4.6

Deferred income taxes

11.8

15.9

Provision for bad debts

2.6

1.5

Non-cash loss on investments

0.3

Changes in operating assets and liabilities, net of acquisitions

Trade receivables

20.9

4.5

Accounts payable and accrued liabilities

27.3

9.0

Additions to deferred revenue

81.4

30.5

Other assets and liabilities

(8.7)

(1.1)

Net cash provided by operating activities

311.8

241.8

Cash flows from investing activities

Purchases of property and equipment

(217.1)

(182.5)

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

39.0

Net cash used in investing activities

(217.1)

(143.5)

Cash flows from financing activities

Principal payments on long-term debt

(21.3)

(1.3)

Principal payments on finance lease obligations

(2.1)

(1.9)

Payments to repurchase ZGH common stock

(0.2)

Cash paid for Santa Clara acquisition financing arrangement and other

(3.3)

Net cash used in financing activities

(23.4)

(6.7)

Net cash flows

71.3

91.6

Effect of changes in foreign exchange rates on cash

(2.7)

2.2

Net increase in cash, cash equivalents and restricted cash

68.6

93.8

Cash, cash equivalents and restricted cash, beginning of period

186.6

260.6

Cash, cash equivalents and restricted cash, end of period

$

255.2

$

354.4

Supplemental disclosure of non-cash investing and financing activities:

Cash paid for interest, net of capitalized interest

$

67.2

$

63.4

Cash paid for income taxes

$

3.0

$

2.0

Non-cash purchases of equipment through finance leasing

$

5.7

$

21.9

Non-cash purchases of equipment through nonmonetary exchange

$

19.5

$

31.1

Decrease in accounts payable and accrued expenses for purchases of property and equipment

$

(39.9)

$

(2.4)

Reconciliation of cash, cash equivalents, and restricted cash:

September 30, 2019

June 30, 2019

September 30, 2018

June 30, 2018

Cash and cash equivalents

$

253.9

$

185.4

$

353.2

$

256.0

Restricted cash included in other assets

1.3

1.2

1.2

4.6

Total cash, cash equivalents and restricted cash

$

255.2

$

186.6

$

354.4

$

260.6

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

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ZAYO GROUP, LLC AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS (UNAUDITED)

(1) BUSINESS AND BASIS OF PRESENTATION

Business

Zayo Group, LLC, a Delaware limited liability company, was formed on May 4, 2007, and is the operating parent company of a number of subsidiaries engaged in providing access to bandwidth infrastructure. Zayo Group LLC and its subsidiaries are collectively referred to as “Zayo Group” or the “Company.” The Company is a wholly-owned subsidiary of Zayo Group Holdings, Inc. (“ZGH”). 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 four segments:

Zayo Networks, including dark fiber, mobile infrastructure solutions, ethernet, wavelength, wholesale IP, SONET solutions, private lines, and dedicated internet.
Zayo Colocation (“zColo”), including provision of colocation space and power and interconnection offerings, and cloud-based computing offerings.
Allstream, including Cloud VoIP and Data Solutions.
Other offerings, including Zayo Professional Services (“ZPS”).

Significant Merger Development

On May 8, 2019, ZGH, Front Range TopCo, Inc. (“Parent”), a Delaware corporation and Front Range BidCo, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) to be acquired by a consortium of private equity funds including affiliates of EQT Infrastructure IV, Digital Colony Partners, LP, DC Front Range Holdings I, LP and FMR LLC (the “Consortium”). Upon the close of the Merger (defined below), ZGH will operate as a privately-held company. Parent and Merger Sub were formed by the Consortium.

The Merger Agreement provides, among other things and upon the terms and subject to the conditions of the Merger Agreement, (i) Merger Sub will be merged with and into ZGH (the “Merger”), with ZGH surviving and continuing as the surviving corporation in the Merger and a wholly owned subsidiary of Parent, and (ii) at the effective time of the Merger, each outstanding share of common stock of ZGH, par value $0.001 per share (“Common Stock”) (other than Common Stock owned by Parent, Merger Sub or any wholly owned subsidiary of Parent or Merger Sub or held in the treasury of ZGH, all of which shall be cancelled without any consideration being exchanged therefore, shares of ZGH Common Stock held by holders who have made a valid demand for appraisal in accordance with Section 262 of the Delaware General Corporation Law) will be converted into the right to receive an amount equal to $35.00 per share in cash (the “Merger Consideration”).

The closing of the Merger is subject to customary closing conditions, including (i) the adoption of the Merger Agreement by the holders of not less than a majority of the outstanding shares of ZGH Common Stock, (ii) the receipt of specified required regulatory approvals, (iii) the absence of any law or order enjoining or prohibiting the Merger or making it illegal, (iv) the accuracy of the representations and warranties contained in the Merger Agreement (subject to “material adverse effect” and materiality qualifications) and (v) compliance with covenants in the Merger Agreement in all material respects.

ZGH’s board of directors and the board of directors of Parent have each unanimously approved the Merger and the Merger Agreement. On July 26, 2019, ZGH held a special meeting of stockholders where our stockholders approved the adoption of the Merger Agreement. On July 31, 2019, ZGH announced the early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, satisfying one of the conditions to the closing of the pending transaction. The closing of the deal continues to be subject to customary conditions, including regulatory clearances relating to review and clearance by the Committee on Foreign Investment in the United States and

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the receipt of certain foreign antitrust approvals, certain other foreign direct investment review approvals, and specified FCC and state public utility commission approvals. In addition, the Merger Agreement may be terminated under specified circumstances. The closing of the Merger is not subject to a financing condition. The Merger is expected to close in the first half of 2020. Until the closing, we will continue to operate as an independent company. The Company has incurred ongoing Merger-related costs of $2.0 million during the three months ended September 30, 2019, which are included in “Selling, general and administrative expenses” in the condensed consolidated statements of operations. The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement, which has been filed as Exhibit 2.1 to ZGH’s Current Report on Form 8-K filed with the SEC on May 9, 2019.

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, 2019 included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019. 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 months ended September 30, 2019 are not necessarily indicative of the operating 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, 2020 as “Fiscal 2020” and the fiscal year ended June 30, 2019 as “Fiscal 2019.”

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, selection of the discount rate used to value lease liabilities, determining the fair value of nonmonetary exchanges, 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, 2019, the Company adopted the requirements of Accounting Standards Update (“ASU”) 2016-02, Leases (ASC 842). See Recently Adopted Accounting Pronouncements below and Note 13 – Leases for additional disclosure on the Company’s adoption of ASC 842 and its impact on the condensed consolidated financial statements.

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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, 2019.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." The primary impact of ASU 2016-13 for us is a change in the model for the recognition of credit losses related to our financial instruments from an incurred loss model, which recognized credit losses only if it was probable a loss had been incurred, to an expected loss model, which requires our management team to estimate the total credit losses expected on the portfolio of financial instruments. We are currently reviewing the requirements of the standard and evaluating the impact on our consolidated financial statements. We are required to adopt the provisions of ASU 2016-13 no later than July 1, 2020. 

Recently Adopted Accounting Pronouncements

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 are required to recognize a right-of-use asset and a lease liability for virtually all leases. The liability is equal to the present value of lease payments. The asset is based on the liability, subject to certain adjustments. 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 (ASC 606).  ASU 2016-02 requires both quantitative and qualitative disclosures regarding key information about leasing arrangements. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Company adopted ASC 842 effective July 1, 2019 using the modified retrospective transition method. Under this method, the Company recognized a cumulative effect adjustment in the first quarter of Fiscal 2020, rather than restating any prior periods. Comparative information for prior periods has not been restated and continues to be reported in accordance with Topic 840.

The Company elected the package of practical expedients permitted under the transition guidance, which does not require reassessment of prior conclusions related to contracts containing a lease, lease classification and initial direct lease costs. As an accounting policy election, the Company will exclude short-term leases (term of 12 months or less) from the balance sheet presentation and will account for non-lease and lease components in a contract as a single lease component for certain asset classes. The Company also elected the land easements practical expedient which permits the Company to carry forward the historical accounting treatment for agreements entered into prior to the adoption date.

The adoption of ASC 842 impacted the Company’s condensed consolidated balance sheet with the recognition of existing operating leases as lessee resulting in $527.6 million of right-of-use (“ROU”) assets and $545.1 million of lease liabilities recorded as of July 1, 2019. The standard did not materially impact the Company’s consolidated net earnings or cash flows for the three months ended September 30, 2019.

As lessor, accounting for the Company’s leases remains largely unchanged from ASC 840. The Company leases dark fiber and circuits (within the Zayo Networks segment) and provides leases of colocation space (within the zColo segment) which have contract terms that are accounted for as operating leases and are further described in Note 15 – Segment Reporting. The new lease standard more narrowly defines initial direct costs as only costs that are incremental to origination of a lease (i.e. costs that would not have been incurred had the lease not been obtained). The Company did not historically capitalize non-incremental costs; therefore, this change will not have an impact on the accounting for initial direct costs in the condensed consolidated financial statements on a prospective basis.

(2) ACQUISITIONS AND DISPOSITIONS

Since inception through September 30, 2019, 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

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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.

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 utilizing 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 associated with signed and/or closed acquisitions or disposals and unsuccessful acquisitions. The Company incurred transaction costs of $2.0 million and $0.7 million for the three months ended September 30, 2019 and 2018, respectively. Transaction costs of $2.0 million in the three months ended September 30, 2019 are related to the Merger Agreement between the Company, Parent and Merger Sub (see Note 1 – Organization and Description of Business). 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.

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, 2019, $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. The Company concluded SRT was not a significant disposal group and did not represent a strategic shift, and therefore was not classified as discontinued operations.

(3) GOODWILL

During the fourth quarter of Fiscal 2019, the Company implemented organizational changes resulting in changes to its reportable segments. In connection with the organizational change, the Company’s reporting units changed and goodwill was re-allocated to the new reporting units on a relative fair value basis. The Company completed an assessment immediately prior to and after the organizational change and determined it is more likely than not the fair value of the Company’s reporting units is greater than their carrying amounts. 

The following reflects the changes in the carrying amount of goodwill during the three months ended September 30, 2019:

Product Group

    

As of June 30, 2019

    

Foreign Currency
Translation and
Other

    

As of September 30, 2019

(in millions)

Fiber Solutions

$

1,000.9

$

(3.2)

$

997.7

Layer 2/3

200.8

(0.7)

200.1

Transport

176.2

(0.6)

175.6

zColo

259.6

(1.0)

258.6

Cloud

14.7

14.7

Allstream

39.0

39.0

Other

15.4

15.4

Total

$

1,706.6

$

(5.5)

$

1,701.1

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(4) INTANGIBLE ASSETS

Identifiable intangible assets as of September 30, 2019 and June 30, 2019 were as follows:

    

Gross Carrying Amount

    

Accumulated
Amortization

    

Net

(in millions)

September 30, 2019

Finite-Lived Intangible Assets

Customer relationships

$

1,550.6

$

(477.0)

$

1,073.6

Underlying rights and other

3.4

(1.7)

1.7

Total

1,554.0

(478.7)

1,075.3

Indefinite-Lived Intangible Assets

Certifications

3.5

3.5

Underlying rights and other

14.0

14.0

Total

$

1,571.5

$

(478.7)

$

1,092.8

June 30, 2019

Finite-Lived Intangible Assets

Customer relationships

$

1,597.6

$

(498.7)

$

1,098.9

Underlying rights and other

3.4

(1.5)

1.9

Total

1,601.0

(500.2)

1,100.8

Indefinite-Lived Intangible Assets

Certifications

3.5

3.5

Underlying rights and other

14.5

14.5

Total

$

1,619.0

$

(500.2)

$

1,118.8

(5) LONG-TERM DEBT

As of September 30, 2019 and June 30, 2019, long-term debt was as follows:

Date of

Outstanding as of

Issuance or most
recent amendment

    

Maturity

    

Interest
Payments

    

Interest Rate

    

September 30, 2019

   

June 30, 2019

(in millions)

Term Loan Facility due 2021

Jan 2017

Jan 2021

Monthly

LIBOR +2.00%

$

487.5

$

488.7

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

Revolving Loan Facility

Jan/Apr 2019 (1)

Jul 2020 (2)

Monthly

LIBOR +1.75%

125.0

145.0

Total obligations

5,861.8

5,883.0

Unamortized premium, net

11.9

11.9

Unamortized debt issuance costs

(47.6)

(50.2)

Carrying value of debt

5,826.1

5,844.7

Less current portion (2)

(130.0)

(5.0)

Total long-term debt, less current portion

$

5,696.1

$

5,839.7

(1)The most recent borrowings under the Revolving Loan Facility occurred in January 2019 and the most recent amendment on the Revolving Loan Facility was April 2019.
(2)The earliest possible maturity under the Extension Amendment No. 1 entered into on April 3, 2019 is July 2020 and as a result, the Revolving Loan Facility is classified as current. See below for further details.

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Term Loan Facility and Revolving Credit Facility

On May 6, 2015, the Company and Zayo Capital, Inc. (“Zayo Capital”) entered into an Amendment and Restatement Agreement whereby the Credit Agreement (the “Credit Agreement”) governing the 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, which was subsequently revised to January 19, 2021 in Incremental Amendment No. 2 (as defined and discussed below). 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 2020 or Fiscal 2019).

On January 19, 2017, the Company and Zayo Capital entered into an Incremental Amendment No. 2 (the “Incremental Amendment”) to the Company’s Credit Agreement. Per the terms of the Incremental Amendment, the existing $1.85 billion of term loans under the Credit Agreement were repriced at 99.75% with one $500.0 million tranche that bears interest at a rate of LIBOR plus 2.0%, with a minimum LIBOR rate of 0.0% and a maturity date of four years from incurrence (January 19, 2021), which represents a downward adjustment of 75 basis points along with the lowering of the previous LIBOR floor, and a second $1.35 billion tranche (the “B-2 Term Loan” and along with the $500.0 million tranche, the “Refinancing Term Loans”) that bears interest at a rate of LIBOR plus 2.5%, with a minimum LIBOR rate of 1.0% and a maturity of seven years from incurrence, which represents a downward adjustment of 25 basis points. In addition, per the terms of the Incremental Amendment, the Company and Zayo Capital added a new $650.0 million term loan tranche under the Credit Agreement (the “Electric Lightwave Incremental Term Loan”) that bears interest at LIBOR plus 2.5%, with a minimum LIBOR rate of 1.0%, with a maturity of seven years from the closing date of the Incremental Amendment. In connection with the Incremental Amendment, the full $2,500.0 million Term Loan Facility, including the Refinancing Term Loans and the Electric Lightwave Incremental Term Loan, was re-issued at a price of 99.75%. No other material terms of the Credit Agreement with respect to the Refinancing Term Loans and the Electric Lightwave Incremental Term Loan were amended. On April 10, 2017, $570.1 million of the B-2 Term Loan and the Electric Lightwave Incremental Term Loan was repaid from proceeds of issuance of senior unsecured notes as further discussed below. Additionally, in July 2017, $310.7 million of the B-2 Term Loan was repaid from the proceeds of issuance of senior unsecured notes as further discussed below.

On July 20, 2017, the Company and Zayo Capital entered into a second repricing (the “Repricing Amendment No. 2”) to the Credit Agreement. Per the terms of the Repricing Amendment No. 2, the outstanding balances of the B-2 Term Loan and Electric Lightwave Incremental Term Loan were repriced at par to 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. 

On December 22, 2017, the Company and Zayo Capital entered into a third repricing amendment (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 to 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, which was subsequently extended on April 3, 2019. Refer below for more information on the extension. The Credit Agreement also allows for letter of credit commitments of up to $50.0 million. The Revolver is subject to a fee per annum of 0.25% to 0.375% (based on the Company’s current leverage ratio) of the weighted-average unused capacity, and the undrawn amount of outstanding letters of credit backed by the Revolver are subject to a 0.25% fee per annum. Outstanding letters of credit backed by the Revolver are subject to a fee of 1.00% to 1.75% per annum based upon the Company’s leverage ratio.

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

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On April 3, 2019, the Company and Zayo Capital entered into Extension Amendment No. 1 to the Credit Agreement (the “Extension Amendment”) with respect to the Revolver. Under the terms of the Extension Amendment, the maturity date of the revolving credit facility was extended from April 17, 2020 to the earliest of (i) April 17, 2023, (ii) six months prior to the maturity date of the $500.0 million term loan tranche, which matures on January 19, 2021, subject to the refinancing thereof with debt having a maturity date no earlier than April 17, 2023 or repayment in full, and (iii) six months prior to the maturity date of the 2023 Unsecured Notes, which mature on April 1, 2023, subject to the refinancing thereof with debt having a maturity date no earlier than April 17, 2023 or repayment in full. As of September 30, 2019, the Company has reclassified the Revolver to current portion of long-term debt because July 2020 is the earliest possible maturity date under the Extension Amendment.

The weighted average interest rates (including margin) on the Term Loan Facility were approximately 4.2% and 4.6% at September 30, 2019 and June 30, 2019, respectively. The weighted average interest rates on the Revolver were approximately 3.8% and 4.2% at September 30, 2019 and June 30, 2019, respectively.

The Company had no borrowings under the Revolver during the three months ended September 30, 2019 and 2018. As of September 30, 2019, $125.0 million was outstanding under the Revolver and $1,756.8 million in aggregate principal amount was outstanding under the Term Loan Facility. Standby letters of credit were outstanding in the amount of $8.6 million as of September 30, 2019, leaving $316.4 million available under the Revolver, subject to certain conditions.

Senior Unsecured Notes

6.00% Senior Unsecured Notes due 2023

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

6.375% Senior Unsecured Notes due 2025

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

5.75% Senior Unsecured Notes due 2027

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

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

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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 the Company and its subsidiaries to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions with respect to any equity interests, make certain investments or other restricted payments, create liens, sell assets, incur restrictions on the ability of the Company’s restricted subsidiaries to pay dividends or make other payments to the Company, consolidate or merge with or into other companies or transfer all or substantially all of their assets, engage in transactions with affiliates, and enter into sale and leaseback transactions.  The terms of the Indentures include customary events of default.

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

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

The Company was in compliance with all covenants associated with its debt agreements as of September 30, 2019.

Guarantees

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

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

Debt issuance costs

In connection with the Credit Agreement (and subsequent amendments thereto), and the various Notes offerings, the Company incurred debt issuance costs of $114.8 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 September 30, 2019 and June 30, 2019 was $47.6 million and $50.2 million, net of accumulated amortization of $67.3 million and $64.6 million, respectively. The amortization of debt issuance costs is included on the condensed consolidated statements of cash flows within non-cash interest expense along with the amortization or accretion of the premium and discount on the Company’s indebtedness.  Interest expense

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associated with the amortization of debt issuance costs of $2.7 million and $2.5 million for the three months ended September 30, 2019 and 2018, 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 month periods ended September 30, 2019 and 2018 is as follows:

Three Months Ended September 30,

    

2019

    

2018

(in millions)

Expected provision at the statutory rate

$

6.7

$

8.9

Increase/(decrease) due to:

Stock-based compensation

0.7

1.1

State income taxes expense, net of federal benefit

1.9

1.5

Change in statutory tax rate, outside U.S.

(0.1)

Change in uncertain tax benefits

1.0

Foreign tax rate differential

1.2

0.2

State NOL expirations

1.6

U.S. Tax Reform

7.6

Change in valuation allowance

(0.3)

Other, net

0.9

1.6

Provision for income taxes

$

14.0

$

20.5

The Company’s interim income tax provision reflects an estimate of the effective tax rate for the full fiscal year, applied to the year-to-date book income, adjusted for any discrete events, which are recorded in the period in which they occur. The estimates are re-evaluated each quarter based on estimated tax expense for the full fiscal year.

On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, previously known as the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”). U.S. Tax Reform reduced the U.S. corporate tax rate from 35% to 21%, created a territorial tax system with a one-time mandatory repatriation tax on previously deferred foreign earnings, and changed business-related deductions and credits. Provisional impacts of U.S. Tax Reform were recorded in the six months ended June 30, 2018 and further adjusted during the three months ended September 30, 2018. In accordance with SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, the Company recorded the final impacts of U.S. Reform at the end of the provisional measurement period on December 31, 2018.

The Company files income tax returns in various federal, state, and local jurisdictions including the United States, Canada, United Kingdom and France. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. With few exceptions, the Company is no longer subject to income tax examinations by tax authorities in major tax jurisdictions for years prior to 2014.

The Company had gross unrecognized tax benefits of $16.4 million and $15.7 million, as of September 30, 2019 and June 30, 2019, respectively. These amounts include accrued interest and penalties of $2.5 million and $2.2 million, respectively as of September 30, 2019 and June 30, 2019. The Company recognizes interest and penalties related to uncertain tax positions in the provision for income taxes.

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(7) EQUITY

On May 7, 2018, the Board of Directors of ZGH authorized the repurchase of up to $500 million of shares of ZGH outstanding common stock from time to time using a variety of methods, including open market purchases, privately negotiated transactions and other means in accordance with federal securities laws. During the three months ended September 30, 2018, the Company repurchased 6,229 shares of ZGH outstanding common stock at an average price of $34.00, or $0.2 million. The authorization expired on November 7, 2018 with the Company having repurchased $496.0 million under the authorization. The stock repurchase on behalf of ZGH is included in the condensed consolidated statement of member’s equity as a capital distribution to ZGH.

During the three months ended September 30, 2019 and 2018, the Company recorded $26.3 million in each period in member’s interest associated with stock-based compensation expense related to the Company’s equity classified stock-based compensation awards (See Note 8 – Stock-based Compensation).

(8) STOCK-BASED COMPENSATION

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

Three Months Ended September 30,

2019

    

2018

(in millions)

Included in:

Operating costs

$

3.2

$

2.7

Selling, general and administrative expenses

24.0

24.0

Total stock-based compensation expense

$

27.2

$

26.7

Part A restricted stock units

$

22.7

$

23.3

Part B restricted stock units

3.8

2.9

Part C restricted stock units

0.7

0.5

Total stock-based compensation expense

$

27.2

$

26.7

Performance Compensation Incentive Program

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

The PCIP has the following components:

Part A

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

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the end of the performance period (for awards relating to quarterly periods subsequent to June 30, 2017). Upon vesting, the RSUs convert to an equal number of shares of ZGH’s common stock. Additionally, Part A RSU awards may be granted to certain employees upon commencement of their employment with the Company.

The September 2019 and June 2019 quarterly awards were recorded as liabilities totaling $6.7 million and $6.2 million, as of September 30, 2019 and June 30, 2019, respectively, as the awards represent an obligation denominated in a fixed dollar amount to be settled in a variable number of shares during the subsequent quarter. The quarterly stock-based compensation liability is included in accrued liabilities in the accompanying condensed consolidated balance sheets. Upon the issuance of the RSUs, the liability is re-measured and then reclassified to additional paid-in-capital, with a corresponding charge (or credit) to stock based compensation expense. The value of the remaining unvested RSUs is expensed ratably through the vesting date. At September 30, 2019, the remaining unrecognized compensation cost to be expensed over the remaining vesting period for Part A awards is $29.2 million.

The following table summarizes the Company’s Part A RSU activity for the three months ended September 30, 2019:

    

Number of Part A
RSUs

    

Weighted average
grant-date fair
value per share

    

Weighted average
remaining contractual
term in months

Outstanding at July 1, 2019

2,324,396

$

28.49

6.6

Granted

640,191

33.73

Vested

(552,064)

25.93

Forfeited

(74,448)

n/a

Outstanding at September 30, 2019

2,338,075

$

30.39

5.8

Part B

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

The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are also awarded quarterly grants of RSUs under the same provisions as other Part B participants outlined above.  However, beginning with the grant during the three months ended December 31, 2018, in the case of the CEO, and beginning with the grant during the three months ended March 31, 2019, in the case of the CFO, awards are subject to additional vesting criteria that are based on ZGH’s stock performance subsequent to the end of the measurement period.  In order for the CEO and CFO to receive the maximum award, ZGH’s stock price must remain at or above the ending measurement period price for the six months subsequent to the end of the performance period. 

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The following table summarizes the Company’s Part B RSU activity for the three months ended September 30, 2019:

    

Number of Part B
RSUs

    

Weighted average
grant-date fair
value per unit

    

Weighted average
remaining contractual
term in months

Outstanding at July 1, 2019

289,254

$

49.73

8.0

Granted

64,705

69.86

Vested

(57,336)

64.41

Forfeited

n/a

Outstanding at September 30, 2019

296,623

$

51.28

7.5

The table below reflects the total Part B RSUs granted during each period presented, the maximum eligible shares of ZGH’s common stock that the respective Part B RSU grant could be converted into shares of ZGH’s common stock, and the grant date fair value per Part B RSU during the period indicated. The table below also reflects the units converted to ZGH’s common stock at a vesting date that is subsequent to the period indicated for those RSUs granted during the period indicated:

During the Three Months Ended

September 30,

2019

Part B RSUs granted

64,705

Maximum eligible shares of ZGH’s common stock

446,465

Grant date fair value per Part B RSU

$

69.86

Units converted to ZGH’s common stock at vesting date

n/a

During the Three Months Ended

June 30,

2019

    

March 31,

2019

    

December 31,

2018

    

September 30,

2018

Part B RSUs granted

    

75,370

98,342

61,123

58,418

Maximum eligible shares of ZGH's common stock

520,053

678,560

421,749

403,084

Grant date fair value per Part B RSU

$

63.67

$

52.81

$

22.43

$

64.41