Certain Factors That May Affect Future Results
Information contained or incorporated by reference in this Quarterly Report on Form 10-Q (this "Report") and in other filings byZayo Group Holdings, Inc. (the "Company," "we" or "us") with theSecurities and Exchange Commission (the "SEC") that is not historical by nature constitutes "forward-looking statements," within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and can be identified by the use of forward-looking terminology such as "believes," "expects," "plans," "intends," "estimates," "projects," "could," "may," "will," "should," or "anticipates," or the negatives thereof, other variations thereon or comparable terminology, or by discussions of strategy. No assurance can be given that future results expressed or implied by the forward-looking statements will be achieved, and actual results may differ materially from those contemplated by the forward-looking statements. Such statements are based on our current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, those relating to our financial and operating prospects, current economic trends, future opportunities, ability to retain existing customers and attract new ones, our acquisition strategy and ability to integrate acquired companies and assets, outlook of customers, reception of new products and technologies, strength of competition and pricing, completion of the Merger (defined below) and uncertainty among customers and employees regarding the Merger, and potential organizational strategies that we may opt to pursue in the future, such as our potential REIT conversion including our ability to successfully combine our divisions and the feasibility and timing of any REIT conversion. Other factors and risks that may affect our business and future financial results are detailed in ourSEC filings, including, but not limited to, those described under "Risk Factors" in our Annual Report on Form 10-K filed with theSEC onSeptember 4, 2019 , (our "Annual Report") and in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." We caution you not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events, except as may be required by law. The following discussion and analysis should be read together with our unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this Report and in our audited annual consolidated financial statements as of and for the year endedJune 30, 2019 , included in our Annual Report.
Amounts presented in this Item 2 are rounded. As such, rounding differences could occur in period-over-period changes and percentages reported throughout this Item 2.
InMay 2018 , we announced we completed the first phase of our investigation on the advisability and feasibility of a conversion to a real estate investment trust forU.S. federal income tax purposes (a "REIT"). Please see "Evaluation and Preparation for Potential REIT Conversion" in the below "Overview." OnMay 8, 2019 , we,Front Range TopCo, Inc. ("Parent"), aDelaware corporation, andFront Range BidCo, Inc. , aDelaware 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 andFMR LLC (the "Consortium"). Upon the close of the Merger, we will operate as a privately-held company. Parent and Merger Sub were formed by the Consortium. Capitalized terms used herein not otherwise defined have the meanings set forth in the Merger Agreement. Please see "Significant Merger Development " in the below "Overview". 34 Table of Contents Overview We are a large and growing provider of access to bandwidth infrastructure inthe United States ("U.S."),Europe andCanada . Our products and offerings enable our customers' mission-critical, high-bandwidth applications, such as cloud-based computing, video, mobile, social media, machine-to-machine connectivity, and other bandwidth-intensive applications. Our key products and offerings include leased dark fiber, fiber to cellular towers and small cell sites, dedicated wavelength connections, ethernet, IP connectivity, cloud-based computing and storage products and other high-bandwidth offerings. We provide access to our bandwidth infrastructure and other offerings over a unique set of dense metro, regional, and long-haul fiber network sections and through our interconnect-oriented data center facilities. Our fiber network sections and data center facilities are critical components of the overall physical network architecture of the internet and private networks. Our customer base includes some of the largest and most sophisticated users of bandwidth infrastructure, such as wireless service carriers; telecommunications service carriers; financial services companies; social networking, media, and web content companies; education, research, and healthcare institutions; and governmental agencies. We typically provide customers with access to our bandwidth infrastructure solutions for a fixed monthly recurring fee under contracts that vary between one and twenty years in length. We operate our business with a unique focus on capital allocation and financial performance with the ultimate goal of maximizing equity value for our stockholders. Our core values center on partnership, alignment, and transparency with our three primary constituent groups - employees, customers, and stockholders. OnOctober 22, 2014 , we completed an initial public offering ("IPO") of shares of our common stock, par value$0.001 per share ("Common Stock"), which were listed on theNew York Stock Exchange ("NYSE") under the ticker symbol "ZAYO". Prior to the IPO, we were a direct, wholly owned subsidiary ofCommunications Infrastructure Investments, LLC ("CII"). Our primary operating subsidiary isZayo Group, LLC , aDelaware limited liability company ("ZGL"), and we are headquartered inBoulder, Colorado .
Our fiscal year ends
Reportable Segments and our Strategic Product Groups ("SPG")
We use the management approach to determine the segment financial information that should be disaggregated and presented. The management approach is based on the manner by which management has organized the segments within the Company for making operating decisions, allocating resources, and assessing performance. With the continued increase in our scope and scale, during the fourth quarter of Fiscal 2019, our chief operating decision maker ("CODM"), who is our Chief Executive Officer, implemented certain organizational changes to the management and operation of the business that directly impact how the CODM makes resource allocation decisions and manages the Company. The changes in structure had the impact of combining our legacy Fiber Solutions, Transport, and Enterprise Networks segments into a single new segment, Zayo Networks, and re-aligning our Cloud and Cybersecurity SPG from our legacy Enterprise Networks segment to our zColo segment. These changes to our existing reportable segments have been recast for all prior period financial and operating metrics presented in this Annual Report for comparability. Our four reportable segments are described below. Zayo Networks. Our Zayo Networks segment provides access to bandwidth infrastructure. This includes our Fiber, Layer 2/3 and Transport solutions. Within the Fiber business, Zayo provides access to mobile infrastructure (fiber-to-the-tower and small cell). Our mobile infrastructure solutions permit direct fiber connections to cell towers, small cells, hub sites and mobile switching centers. Fiber Solutions customers include carriers and other communication service providers, internet service providers, wireless service providers, major media and content companies, large enterprises and other companies that have the expertise to run their own fiber optic networks or require interconnected technical space. The contract terms for Fiber Solutions customers tend to range from three to twenty or more years. Our Layer 2/3 line of business provides connectivity and telecommunications solutions to medium and large enterprises. Our offerings within Layer 2/3 include Ethernet, internet offerings, Wide Area Networking products and CloudLink. Solutions range from point-to-point data connections to multi-site managed networks to international 35 Table of Contents
outsourced IT infrastructure environments. The contract terms for Layer 2/3 solutions tend to range from one to five years. Our Transport line of business provide access to lit communications bandwidth infrastructure using customer-accessed optronics to light the fiber, and our customers pay for access based on the amount and type of bandwidth they require. We target customers who require a significant amount of bandwidth across their networks. Transport customers include carriers, content providers, financial services companies, healthcare, government entities, education institutions and other medium and large enterprises. The contract terms in this segment tend to range from two to five years.Zayo Colocation ("zColo"). The zColo segment provides data center and cloud infrastructure solutions to a broad range of enterprise, carrier, cloud and content customers. Our offerings within this segment include the provision of colocation space, power and interconnection offerings inNorth America andWestern Europe . Solutions range in size from single cabinet solutions to 1MW+ data center infrastructure environments. Our data centers also support networking components for the purpose of aggregating and accommodating customers' data, voice, internet and video traffic. The contract terms in this segment tend to range from two to five years. Our Cloud and Cybersecurity SPG is included in the zColo segment. The Cloud and Cybersecurity SPG combines private cloud, public cloud and managed offerings in order to provide its customers secure infrastructure as a service (IaaS), which enables on-demand scaling and virtual computing in hybrid environments. Allstream. The Allstream segment providesCloud VoIP and Data Solutions. This includes a full range of local voice offerings allowing business customers to complete telephone calls in their local exchange, as well as make long distance, toll-free and related calls.Unified Communications is the integration of real-time communication services such as telephony (including Cloud-based IP telephony), instant messaging and video conferencing with non-real-time communication services, such as integrated voicemail and e-mail. Allstream also provides customers with comprehensive telecommunications services including ethernet, and IP/MPLS VPN Solutions. Other. The Other segment is primarily comprised of Zayo Professional Services ("ZPS"). ZPS provides network and technical resources to customers who wish to leverage our expertise in designing, acquiring and maintaining a network. The contract terms typically run for one year for a fixed recurring monthly fee in the case of network and on an hourly basis for technical resources (usage revenue). ZPS also generates revenue via telecommunication equipment sales.
Evaluation and Preparation for Potential REIT Conversion
OnMay 3, 2018 , we announced the completion of the first phase of our investigation on the advisability and feasibility of a conversion to a REIT. As part of the current phase of our evaluation and preparation for a potential conversion to a REIT, we began a direct dialogue with theU.S. Internal Revenue Service ("IRS") in an effort to obtain clarity and support for our position, and we are seeking a private letter ruling ("PLR") from theIRS that addresses among other things, whether revenues from dark and lit fiber satisfy applicable REIT income tests. We submitted the PLR request to theIRS inJuly 2018 , but theIRS may not provide a response until later in 2020 or beyond or may not respond at all. Our ultimate decision to convert to a REIT may depend upon a favorable PLR from theIRS . Also, we have begun to execute various organizational changes that are required to operate as a REIT, including the adoption of amendments to our organizational documents that, among other things, impose certain stock ownership limitations and transfer restrictions, the realignment of our business segments to clearly delineate the leasing of network assets from ancillary services and, in particular, the separation and potential divestiture or deconsolidation of our Allstream business segment. These organizational changes are not expected to result in any changes to our reportable segments. If, following the current phase of our evaluation and preparation, we decide to convert to a REIT and are successful in qualifying for taxation as a REIT, then we will generally be permitted to deduct from federal income taxes 36 Table of Contents the dividends that we pay to our stockholders. The income represented by such dividends would not be subject to federal income taxation at the entity level but would be taxed, if at all, at the stockholder level. Nevertheless, the income of our domestic taxable REIT subsidiaries (each a "TRS"), which will hold ourU.S. operations that may not be REIT-compliant, will be subject, as applicable, to federal and state corporate income tax. Likewise, our foreign subsidiaries will continue to be subject to foreign income taxes in jurisdictions in which they hold assets or conduct operations, regardless of whether held or conducted through TRSs or through entities that are disregarded from us forU.S. federal income tax purposes. Also, we will be subject to a separate corporate income tax on any gains recognized during a specified period (generally five years) following the REIT conversion that are attributable to "built-in" gains with respect to the assets that we own on the date we convert to a REIT. Our ability to qualify for taxation as a REIT will depend upon our compliance with various requirements following our REIT conversion, including requirements related to the nature of our assets, the sources of our income and the distributions to our stockholders. If we fail to qualify for taxation as a REIT, we will be subject to federal and state income tax at regular corporate income tax rates in the same manner as we are currently taxed. Even if we qualify for taxation as a REIT, we may be subject to certain federal, state, local and foreign taxes on our income and property. In particular, while state income tax regimes often parallel the federal income tax regime for REITs described above, many states do not completely follow federal rules and some may not follow them at all. At this stage of our evaluation and preparation for a potential conversion to a REIT, we cannot accurately estimate the costs required to support any potential conversion, but we anticipate that our costs would include various administrative costs in addition to certain related tax liabilities.
OnMay 8, 2019 , we, Parent and Merger Sub entered into a Merger Agreement to be acquired by the Consortium. Upon the close of the Merger, we will operate as a privately-held company. Parent and Merger Sub were formed by the Consortium. The Merger Agreement provides that, 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 us (the "Merger"), with us as the surviving and continuing corporation in the Merger and a wholly owned subsidiary of Parent, and (ii) at the effective time of the Merger, each of our outstanding shares of Common Stock (other than Common Stock owned by Parent, Merger Sub or any wholly owned subsidiary of Parent or Merger Sub or held in our treasury, all of which shall be canceled without any consideration being exchanged therefor, or shares of our 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 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 our 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. The closing of the Merger is not subject to a financing condition. Our board of directors and the board of directors of Parent have each unanimously approved the Merger and the Merger Agreement. OnJuly 26, 2019 , the Company held a special meeting of stockholders where our stockholders approved the adoption of the Merger Agreement. OnJuly 31, 2019 , the Company 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 approvals relating to review and clearance by theCommittee on Foreign Investment inthe United States (which have been obtained) and the receipt of certain foreign antitrust approvals (which have been obtained), certain other foreign direct investment review approvals (which have been obtained), and the approval of multipleU.S. states (all of which have been obtained except for approval from theCalifornia public utility commission), and the receipt of FCC approval. We expect to receive all remaining approvals in the first calendar quarter of 2020, but
37 Table of Contents
cannot guarantee that such approvals will be timely provided. The Merger is expected to close by late first calendar quarter or early second calendar quarter of 2020. Until the closing, we will continue to operate as an independent company.
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 hereto.
Factors Affecting Our Results of Operations
Business Acquisitions
We were founded in 2007 with the investment thesis of building a bandwidth infrastructure platform to take advantage of the favorable internet, data, and wireless growth trends driving the ongoing demand for access to bandwidth infrastructure, and to be an active participant in the consolidation of the industry. These trends have continued in the years since our founding, despite volatile economic conditions, and we believe we are well positioned to continue to capitalize on those trends. We have built a significant portion of our network and product offerings through 45 acquisitions throughDecember 31 ,
2019. DispositionScott-Rice Telephone Co. OnJuly 31, 2018 , we completed the sale ofScott-Rice Telephone Co. ("SRT"), aMinnesota incumbent local exchange carrier, for$42.2 million to Nuvera Communications, Inc. (formerly New Ulm Telecom, Inc.). As ofDecember 31, 2019 ,$3.2 million of purchase consideration was held in escrow. We 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. We acquired SRT as part of ourMarch 1, 2017 purchase ofElectric 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 endedJune 30, 2018 and pre-tax net income of$2.9 million from when it was acquired onMarch 1, 2017 throughJune 30, 2017 . 38 Table of Contents Substantial Indebtedness
As of
Date of Outstanding as of Issuance or most Interest recent amendment Maturity Payments Interest Rate December 31, 2019 June 30, 2019 (in millions) Term Loan Facility due 2021 Jan 2017 Jan
2021 Monthly LIBOR +2.00% $ 486.2 $ 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% 50.0 145.0 Total obligations 5,785.5 5,883.0 Unamortized premium, net 12.0 11.9
Unamortized debt issuance costs
(44.9) (50.2) Carrying value of debt 5,752.6 5,844.7 Less current portion (2) (55.0) (5.0)
Total long-term debt, less current portion $ 5,697.6 $
5,839.7
The most recent borrowings under the Revolving Loan Facility occurred in
(1)
The earliest possible maturity under the Extension Amendment No. 1 entered
(2) into on
Facility is classified as current. See Note 6 - Long-term Debt to the
condensed consolidated financial statements for further details.
The weighted average interest rates (including margins) on the Term Loan Facility were approximately 4.0% and 4.6% atDecember 31, 2019 andJune 30, 2019 , respectively. Interest rates on the Company's senior secured revolving credit facility ("the Revolver") atDecember 31, 2019 andJune 30, 2019 were approximately 3.5% and 4.2%, respectively. As ofDecember 31, 2019 ,$50.0 million was outstanding under the Revolver. Standby letters of credit were outstanding in the amount of$8.8 million as ofDecember 31, 2019 , leaving$391.2 million available under the Revolver, subject to certain conditions. In connection with the Merger, onJanuary 17, 2020 , BidCo commenced cash tender offers for any and all of ZGL's outstanding Notes. OnJanuary 31, 2020 , BidCo announced that it had received tenders and related consents from the requisite number of holders of each such series of the Notes in order to authorize the amendments proposed as part of its offering. See Note 17-Subsequent Events.
Substantial Capital Expenditures
During the six months ended
Critical Accounting Policies and Estimates
For a description of our critical accounting policies and estimates, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report for the year ended
Background for Review of Our Results of Operations
Revenue
Our revenue is comprised predominately of monthly recurring revenue ("MRR"). MRR is related to an ongoing offering that is generally fixed in price and paid by the customer on a monthly basis. We also report monthly amortized revenue ("MAR"), which represents the amortization of previously collected upfront charges to customers. Upfront 39 Table of Contents charges are typically related to indefeasible rights of use ("IRUs") structured as pre-payments rather than monthly recurring payments (though we structure IRUs as both prepaid and recurring, largely dependent on the customers' preference) and installation fees. The last category of revenue we report is other revenue. Usage revenue represents charges to customers for variable contracts. Other revenue primarily includes credits and adjustments, termination revenue, construction contribution payments, and component sales.
Our consolidated reported revenue in any given period is a function of our beginning revenue under contract and the impact of organic growth and acquisition activity. Our organic activity is driven by net new sales ("bookings"), gross installed revenue ("installs") and churn processed ("churn") as further described below.
Net New Sales . Net new sales ("bookings") represent the dollar amount of orders, to be recorded as MRR and MAR upon installation, in a period that have been signed by the customer and accepted by our product offering delivery organization. The dollar value of bookings is equal to the monthly recurring price the customer will pay for the offerings and/or the monthly amortized amount of the revenue we will recognize for those offerings. To the extent a booking is cancelled by the customer prior to the offerings being originated, it is subtracted from the total bookings number in the period that it is cancelled. Bookings do not immediately impact revenue until the solutions are installed (gross installed revenue). Gross Installed Revenue. Installs are the amount of MRR and MAR for offerings that have been installed, tested, accepted by the customer, and have been recognized in revenue during a given period. Installs include new offerings, price increases, and upgrades. Churn Processed. Churn is any negative change to MRR and MAR. Churn includes disconnects, negative price changes, and disconnects associated with upgrades or replacement offerings. For each period presented, disconnects associated with attrition and upgrades or replacement offerings are the drivers of churn, accounting for more than 75% of negative changes in MRR and MAR, while price changes account for less than 25%. Monthly churn is also presented as a percentage of MRR and MAR ("churn percentage"). As we conduct operations outside of theU.S. and have historically acquired companies with functional currencies other than theU.S. dollar ("USD"), the estimated revenue growth rates may not adequately reflect operational performance as a result of changes in foreign currency exchange rates. The estimated revenue growth rates are not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated on the first day of the earliest period presented. We have foreign subsidiaries that enter into contracts with customers and vendors in currencies other than the USD-principally the British pound sterling ("GBP") and Canadian dollar ("CAD") and to a lesser extent the Euro. Changes in foreign currency exchange rates impact our revenue and expenses each period. The comparisons excluding the impact of foreign currency exchange rates assume exchange rates remained constant at the comparative period rate.
Operating Costs and Expenses
Our operating costs and expenses consist of network expense ("Netex"), compensation and benefits expenses, network operations expense ("Netops"), stock-based compensation expense, other expenses, and depreciation and amortization.
Netex consists of third-party network costs resulting from our leasing of certain network facilities, primarily leases of circuits and dark fiber, from third parties to augment our owned infrastructure, for which we are generally billed a fixed monthly fee. Netex also includes colocation facility costs for rent and license fees paid to the landlords of the buildings in which our colocation business operates, along with the utility costs to power those facilities. While increases in demand for our offerings will drive additional operating costs in our business, consistent with our strategy of leveraging our owned infrastructure assets, we expect to primarily utilize our existing network infrastructure or build new network infrastructure to meet the demand. In limited circumstances, we will augment our network with additional infrastructure or offerings from third-party providers. Third-party network costs include the upfront cost of the initial 40 Table of Contents
installation of such infrastructure. Such costs are included in operating costs in our condensed consolidated statements of operations over the respective contract period.
Compensation and benefits expenses include salaries, wages, incentive compensation and benefits. Employee-related costs that are directly associated with network construction and location installations (and development of business support systems) are capitalized and amortized to operating costs and expenses. Compensation and benefits expenses related to the departments attributed to generating revenue are included in our operating costs line item while compensation and benefits expenses related to the sales, product, and corporate departments are included in our selling, general and administrative expenses line item of our condensed consolidated statements of operations. Netops expense includes all of the non-personnel expenses of operating and maintaining our network infrastructure, including contracted maintenance fees, right-of-way costs, rent for cellular towers and other places where fiber is located, pole attachment fees, and relocation expenses. Such costs are included in operating costs in our condensed consolidated statements of operations. Stock-based compensation expense is included, based on the responsibilities of the awarded recipient, in either our operating costs or selling, general and administrative expenses in our condensed consolidated statements of operations. Other expenses include expenses such as property tax, franchise fees, colocation facility maintenance, travel, office expense and other administrative costs. Other expenses are included in both operating costs and selling, general and administrative expenses depending on their relationship to generating revenue or association with sales and administration. Transaction costs include expenses associated with professional services (i.e. legal, accounting, regulatory, etc.) rendered in connection with acquisitions or disposals, travel expenses and severance expenses incurred that are associated with acquisitions or disposals, and other direct expenses incurred that are associated with signed and/or closed acquisitions or disposals and unsuccessful acquisitions or disposals. Transaction costs are included in selling, general and administrative expenses in the condensed consolidated statements of operations. Three Months EndedDecember 31, 2019 Compared to the Three Months EndedDecember 31, 2018 Revenue For the Three Months Ended December 31, 2019 2018 $ Variance % Variance (in millions) Segment and consolidated revenue: Zayo Networks$ 502.5 $ 469.9 $ 32.6 7 % zColo 64.1 67.7 (3.6) (5) % Allstream 82.3 96.7 (14.4) (15) % Other 4.8 4.8 - * Consolidated$ 653.7 $ 639.1 $ 14.6 2 % _______________________ * not meaningful Our total revenue increased by$14.6 million to$653.7 million for the three months endedDecember 31, 2019 from$639.1 million for the three months endedDecember 31, 2018 . The revenue increase was primarily driven by organic growth and the restructuring of a customer's contract in our Zayo Networks segment offset by changes in exchange rates and churn associated with our Allstream segment. The average exchange rate of the GBP against the USD strengthened by 1.1%, the average exchange rate of the Euro against the USD strengthened by 3.0%, and the average exchange rate of the CAD against the USD weakened by 0.1% during the three months endedDecember 31, 2019 as compared to the three months endedDecember 31, 2018 . Normalizing 41 Table of Contents our estimated revenue to exclude the impact of foreign currency exchange rate fluctuations, we estimate revenue was negatively impacted by fluctuations in foreign currency rates between the three months endedDecember 31, 2019 andDecember 31, 2018 by$0.9 million , or approximately 0.1%. Zayo Networks. Revenue from our Zayo Networks segment increased by$32.6 million , or 7%, to$502.5 million for the three months endedDecember 31, 2019 from$469.9 million for the three months endedDecember 31, 2018 . The increase was due to organic growth and the restructuring of a customer's contract. zColo. Revenue from our zColo segment decreased by$3.6 million , or 5%, to$64.1 million for the three months endedDecember 31, 2019 from$67.7 million for the three months endedDecember 31, 2018 . The decrease was due to increased churn. Allstream. Revenue from our Allstream segment decreased by$14.4 million , or 15%, to$82.3 million for the three months endedDecember 31, 2019 from$96.7 million for the three months endedDecember 31, 2018 . The decrease was due to churn. Other. Revenue from our Other segment was$4.8 million for the three months endedDecember 31, 2019 andDecember 31, 2018 . The Other segment represented less than 1% of our total revenue during the three months endedDecember 31, 2019 .
The following table reflects the stratification of our revenues during these periods. The substantial majority of our revenue continued to come from recurring payments from customers under contractual arrangements.
For the Three Months Ended December 31, 2019 2018 (in millions) Monthly recurring revenue$ 573.0 88 %$ 576.0 90 %
Amortization of deferred revenue 41.4 6 %
37.3 6 % Usage revenue 13.4 2 % 15.0 2 % Other revenue 25.9 4 % 10.8 2 % Total Revenue$ 653.7 100 %$ 639.1 100 % Operating Costs and Expenses For the Three Months Ended December 31, 2019 2018 $ Variance % Variance (in millions) Segment and consolidated operating costs and expenses: Zayo Networks$ 347.2 $ 325.0 $ 22.2 7 % zColo 72.7 67.1 5.6 8 % Allstream 88.9 98.0 (9.1) (9) % Other 4.4 4.3 0.1 * Consolidated$ 513.2 $ 494.4 $ 18.8 4 % _______________________ * not meaningful Our operating costs increased by$18.8 million , or 4%, to$513.2 million for the three months endedDecember 31, 2019 from$494.4 million for the three months endedDecember 31, 2018 . The increase in consolidated operating costs was primarily due to increases of$11.0 million in depreciation and amortization,$9.4 million in Netops,$3.6 million in other expenses, and$0.8 million in stock-based compensation, partially offset by decreases of$3.8 million in Netex,$1.9 million in compensation and benefits expenses and$0.3 million
in transaction costs. 42 Table of Contents Zayo Networks. Zayo Networks operating costs increased by$22.2 million , or 7%, to$347.2 million for the three months endedDecember 31, 2019 from$325.0 million for the three months endedDecember 31, 2018 . The increase in operating costs and expenses was primarily a result of increases of$14.4 million in depreciation and amortization as a result of additional assets,$9.5 million increase in Netex and Netops costs, net and$2.1 million in other expenses, partially offset by decreases of$2.3 million in stock-based compensation,$1.2 million in compensation and benefits expenses and$0.3 million in transaction costs. zColo. zColo operating costs increased by$5.6 million , or 8%, to$72.7 million for the three months endedDecember 31, 2019 from$67.1 million for the three months endedDecember 31, 2018 . The increase in operating costs and expenses was primarily a result of increases of$3.7 million in depreciation and amortization expense,$2.4 million in stock-based compensation,$2.1 million in other expenses and$0.2 million in transaction costs, partially offset by decreases of$2.4 million in Netex and Netops costs, net and$0.4 million in compensation and benefits expenses. Allstream. Allstream operating costs decreased by$9.1 million , or 9%, to$88.9 million for the three months endedDecember 31, 2019 from$98.0 million for the three months endedDecember 31, 2018 . The decrease in operating costs and expenses was primarily a result of decreases of$6.9 million in depreciation and amortization expense,$2.5 million in Netex and Netops costs, net, other expenses of$0.5 million and$0.2 million in transaction costs, partially offset by increases of$0.5 million in compensation and benefits expenses and$0.5 million in stock-based compensation. Other. Other operating costs and expenses were$4.4 million for the three months endedDecember 31, 2019 , as compared to$4.3 million for the three months endedDecember 31, 2018 .
The table below sets forth the components of our operating costs and expenses
during the three months ended
For the Three Months Ended December 31, 2019 2018 $ Variance % Variance (in millions) Netex$ 117.3 $ 121.1 $ (3.8) (3) % Compensation and benefits expenses 79.4 81.3 (1.9) (2) % Network operations expense 80.3 70.9 9.4 13 % Other expenses 48.8 45.2 3.6 8 % Transaction costs 2.5 2.8 (0.3) (11) % Stock-based compensation 27.0 26.2 0.8 3 % Depreciation and amortization 157.9 146.9 11.0 7 %
Total operating costs and expenses
4 % Netex. Our Netex decreased by$3.8 million , or 3%, to$117.3 million for the three months endedDecember 31, 2019 from$121.1 million for the three months endedDecember 31, 2018 . The decrease in Netex was primarily due to our rationalization of available footprint for sale in our zColo segment. Compensation and Benefits Expenses. Compensation and benefits expenses decreased by$1.9 million , or 2%, to$79.4 million for the three months endedDecember 31, 2019 from$81.3 million for the three months endedDecember 31, 2018 . The decrease was primarily due to a decrease in incentive compensation. Network Operations Expenses. Network operations expenses increased by$9.4 million , or 13%, to$80.3 million for the three months endedDecember 31, 2019 from$70.9 million for the three months endedDecember 31, 2018 . The increase principally reflected the growth of our network assets and the related expenses of operating that expanded network. Our total network route miles increased approximately 2% to 133,000 miles atDecember 31, 2019 from 131,000 miles atDecember 31, 2018 . 43 Table of Contents
Other Expenses. Other expenses increased by$3.6 million , or 8%, to$48.8 million for the three months endedDecember 31, 2019 from$45.2 million for the three months endedDecember 31, 2018 . The increase was primarily due to foreign currency movements. Transaction Costs. Transaction costs decreased by$0.3 million to$2.5 million for the three months endedDecember 31, 2019 from$2.8 million for the three months endedDecember 31, 2018 . The decrease in transaction costs was primarily driven by costs related to our former plan to spin-off portions of our business in the three months endedDecember 31, 2018 . These costs were partially offset by increased Merger-related transaction costs in the three months endedDecember 31, 2019 . Stock-Based Compensation. Stock-based compensation expense increased by$0.8 million , or 3%, to$27.0 million for the three months endedDecember 31, 2019 from$26.2 million for the three months endedDecember 31, 2018 . The increase was driven by an increase in the expense associated with Part B awards due to a higher weighted average grant date value per share. Depreciation and Amortization. Depreciation and amortization expense increased by$11.0 million , or 7%, to$157.9 million for the three months endedDecember 31, 2019 from$146.9 million for the three months endedDecember 31, 2018 as a result of depreciation adjustments and an increase in depreciable assets.
Total Other Expense, Net
The table below sets forth the components of our total other expense, net for
the three months ended
For the Three
Months Ended
2019 2018 $ Variance % Variance (in millions) Interest expense$ (82.0) $ (84.0) $ 2.0 2 % Foreign currency gain/(loss) on intercompany loans 27.4 (8.3) 35.7 * Other income, net 0.6 0.3 0.3 * Total other expenses, net$ (54.0) $ (92.0) $ 38.0 41 % * not meaningful Interest expense. Interest expense decreased by$2.0 million , or 2%, to$82.0 million for the three months endedDecember 31, 2019 from$84.0 million for the three months endedDecember 31, 2018 . The decrease was primarily a result of fluctuations in LIBOR interest rates and the timing of our borrowings under the Revolver. Foreign currency gain/(loss) on intercompany loans. We recorded a foreign currency gain on intercompany loans of$27.4 million for the three months endedDecember 31, 2019 , compared to an$8.3 million loss for the three months endedDecember 31, 2018 . We have intercompany loans primarily between ourU.S. andUK entities, which were established to fund our international acquisitions. As the loans are recorded as an intercompany receivable by ourU.S. entities, strengthening of the USD over a foreign currency results in a foreign currency loss on intercompany loans and the weakening of the USD over a foreign currency results in a gain on intercompany loans. This non-cash gain was driven by the weakening of the USD over the GBP period-over-period and the related impact on intercompany loans entered into with foreign subsidiaries whose functional
currency is in GBP. 44 Table of Contents Provision for Income Taxes
Our provision for income taxes increased over the same quarter in the prior year by$2.6 million to$25.1 million for the current quarter endedDecember 31, 2019 from$22.5 million for the three months endedDecember 31, 2018 . Our provision for income taxes included both the current provision and a provision for deferred income tax expense resulting from timing differences between tax and financial reporting accounting bases. The following table reconciles an expected tax provision based on a statutory federal tax rate applied to our earnings before income tax to our actual provision for income taxes: For the Three Months EndedDecember 31, 2019 2018 (in millions)
Expected provision at the statutory rate $ 18.2 $ 11.1 Increase/(decrease) due to: Stock-based compensation (0.6) 2.5 State income tax expense, net of federal benefit 2.8 2.5 Changes in uncertain tax benefits - 6.4 Foreign tax rate differential 0.4 1.3 Adjustments to taxes recorded in a prior year 2.8 - U.S. Tax Reform - (0.4) Change in valuation allowance (1.3)
(0.5) Other, net 2.8 (0.4) Provision for income taxes $ 25.1 $ 22.5
During the three months ended
OnDecember 22, 2017 , theU.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, previously known as Tax Cuts and Jobs Act of 2017 ("U.S. Tax Reform").U.S. Tax Reform reduced theU.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 ofU.S. Tax Reform were recorded in the six months endedJune 30, 2018 and further adjusted during the three months endedSeptember 30, 2018 . In accordance withSAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, the Company recorded the final impacts ofU.S. Reform prior to the end of the provisional measurement period onDecember 31, 2018 . Six Months EndedDecember 31, 2019 Compared to the Six Months EndedDecember 31, 2018 For the Six Months Ended December 31, 2019 2018 $ Variance % Variance (in millions) Segment and consolidated revenue: Zayo Networks$ 985.7 $ 931.5 $ 54.2 6 % zColo 127.8 137.0 (9.2) (7) % Allstream 168.9 201.7 (32.8) (16) % Other 9.9 10.0 (0.1) (1) % Consolidated$ 1,292.3 $ 1,280.2 $ 12.1 1 %
Our total revenue increased by$12.1 million to$1,292.3 million , or 1% for the six months endedDecember 31, 2019 , from$1,280.2 million for the six months endedDecember 31, 2018 .
The revenue increase was primarily driven by organic growth and the restructuring of a customer's contract in our Zayo Networks segment offset by changes in exchange rates and churn associated with our Allstream and zColo
45 Table of Contents
segments. The average exchange rate of the GBP against the USD strengthened by 2.6%, the average exchange rate of the Euro against the USD strengthened by 3.7%, and the average exchange rate of the CAD against the USD strengthened by 0.4% during the six months endedDecember 31, 2019 as compared to the six months endedDecember 31, 2018 . Normalizing our estimated revenue to exclude the impact of foreign currency exchange rate fluctuations, we estimate revenue was negatively impacted by foreign currency exchange fluctuations between the six months endedDecember 31, 2019 andDecember 31, 2018 by$3.7 million or approximately 0.3%. Zayo Networks. Revenue from our Zayo Networks segment increased by$54.2 million , or 6%, to$985.7 million for the six months endedDecember 31, 2019 from$931.5 million for the six months endedDecember 31, 2018 . The increase was due to organic growth and the restructuring of a customer's contract. zColo. Revenue from our zColo segment decreased by$9.2 million , or 7%, to$127.8 million for the six months endedDecember 31, 2019 from$137.0 million for the six months endedDecember 31, 2018 . The decrease was due to increased churn. Allstream. Revenue from our Allstream segment decreased by$32.8 million , or 16%, to$168.9 million for the six months endedDecember 31, 2019 from$201.7 million for the six months endedDecember 31, 2018 . The decrease was due to churn. Other. Revenue from our Other segment decreased by$0.1 million , or 1%, to$9.9 million for the six months endedDecember 31, 2019 from$10.0 million for the six months endedDecember 31, 2018 . The Other segment represented less than 1% of our total revenue during the six months endedDecember 31, 2019 .
The following table reflects the stratification of our revenues during these periods. The substantial majority of our revenue continued to come from recurring payments from customers under contractual arrangements.
For the Six Months Ended December 31, 2019 2018 (in millions) Monthly recurring revenue$ 1,145.2 89 %$ 1,154.7 90 % Amortization of deferred revenue 81.7 6 % 74.3 6 % Usage revenue 29.1 2 % 31.6 2 % Other revenue 36.3 3 % 19.6 2 % Total Revenue$ 1,292.3 100 %$ 1,280.2 100 % Operating Costs and Expenses For the Six Months Ended December 31, 2019 2018 $ Variance % Variance (in millions) Segment and consolidated operating costs and expenses: Zayo Networks$ 688.2 $ 662.4 $ 25.8 4 % zColo 147.2 140.0 7.2 5 % Allstream 178.9 201.2 (22.3) (11) % Other 8.6 9.1 (0.5) (5) % Consolidated$ 1,022.9 $ 1,012.7 $ 10.2 1 %
Our operating costs increased by$10.2 million , or 1%, to$1,022.9 million for the six months endedDecember 31, 2019 from$1,012.7 million for the six months endedDecember 31, 2018 . The increase in consolidated operating costs was primarily due to increases of$11.9 million in Netops costs,$5.7 million in other expenses,$1.3 million in stock-based compensation, and$1.0 million in transaction costs, partially offset by decreases of$5.8 million in Netex,$3.2 million in compensation and benefits expenses and$0.7 million in depreciation and amortization. 46 Table of Contents Zayo Networks. Zayo Networks operating costs increased by$25.8 million , or 4%, to$688.2 million for the six months endedDecember 31, 2019 from$662.4 million for the six months endedDecember 31, 2018 . The increase in operating costs and expenses was primarily a result of increases of$15.4 million in Netex and Netops costs, net,$9.4 million in depreciation and amortization,$4.9 million in other expenses,$1.2 million in transaction costs and$0.1 million in compensation and benefits expenses, partially offset by a decrease of$5.2 million in stock-based compensation. zColo. zColo operating costs increased by$7.2 million , or 5%, to$147.2 million for the six months endedDecember 31, 2019 from$140.0 million for the six months endedDecember 31, 2018 . The increase in operating costs and expenses was primarily a result of increases of$5.0 million in stock-based compensation,$3.8 million in depreciation and amortization expense,$2.9 million in other expenses, and$0.2 million in transaction costs, partially offset by decreases of$4.3 million in Netex and Netops costs, net, and$0.4 million in compensation and benefits. Allstream. Allstream operating costs decreased by$22.3 million , or 11%, to$178.9 million for the six months endedDecember 31, 2019 from$201.2 million for the six months endedDecember 31, 2018 . The decrease in operating costs and expenses was primarily a result of decreases of$13.7 million in depreciation and amortization,$7.5 million in Netex and Netops costs, net,$1.6 million in other expenses,$0.4 million in compensation and benefits expenses and$0.4 million in transaction costs, partially offset by an increase of$1.3 million in stock-based compensation. Other. Operating costs from our Other segment decreased by$0.5 million , or 5%, to$8.6 million for the six months endedDecember 31, 2019 from$9.1 million for the six months endedDecember 31, 2018 . The decrease was primarily related to a decrease in compensation and benefits expense.
The table below sets forth the components of our operating costs and expenses
during the six months ended
For the Six Months Ended December 31, 2019 2018 $ Variance % Variance (in millions) Netex$ 238.0 $ 243.8 $ (5.8) (2) % Compensation and benefits expenses 158.8 162.0 (3.2) (2) % Network operations expense 157.8 145.9 11.9 8 % Other expenses 95.6 89.9 5.7 6 % Transaction costs 4.5 3.5 1.0 29 % Stock-based compensation 54.2 52.9 1.3 2 % Depreciation and amortization 314.0 314.7 (0.7) *
Total operating costs and expenses
1 % * not meaningful
Netex. Our Netex decreased by
Compensation and Benefits Expenses. Compensation and benefits expenses decreased by$3.2 million , or 2%, to$158.8 million for the six months endedDecember 31, 2019 from$162.0 million for the six months endedDecember 31, 2018 . The decrease was primarily due to a decrease in incentive compensation. Network Operations Expenses. Network operations expenses increased by$11.9 million , or 8%, to$157.8 million for the six months endedDecember 31, 2019 from$145.9 million for the six months endedDecember 31, 2018 . The increase principally reflected the growth of our network assets and the related expenses of operating that expanded network. Our total network route miles increased approximately 2% to 133,000 miles atDecember 31, 2019 from 131,000 miles atDecember 31, 2018 . 47 Table of Contents Other Expenses. Other expenses increased by$5.7 million , or 6%, to$95.6 million for the six months endedDecember 31, 2019 , from$89.9 million for the six months endedDecember 31, 2018 . The increase was primarily due to increases in our property tax expenses. Transaction Costs. Transaction costs increased by$1.0 million , or 29%, to$4.5 million for the six months endedDecember 31, 2019 from$3.5 million for the six months endedDecember 31, 2018 . The increase was the result of Merger-related transaction costs. Stock-Based Compensation. Stock-based compensation expense increased by$1.3 million , or 2%, to$54.2 million for the six months endedDecember 31, 2019 from$52.9 million for the six months endedDecember 31, 2018 . The increase in stock-based compensation expense was primarily driven by an increase in the number of Part A awards granted as compared to the six months endedDecember 31, 2018 . Depreciation and Amortization. Depreciation and amortization expense decreased by$0.7 million to$314.0 million for the six months endedDecember 31, 2019 from$314.7 million for the six months endedDecember 31, 2018 as a result
of adjustments in depreciation. Total Other Expense, Net
The table below sets forth the components of our total other expense, net for
the six months ended
For the Six
Months Ended
2019 2018 $ Variance % Variance (in millions) Interest expense$ (166.7) $ (166.2) $ (0.5) * Foreign currency gain/(loss) on intercompany loans 14.5 (12.9) 27.4 * Other income, net 1.2 6.9 (5.7) * Total other expenses, net$ (151.0) $ (172.2) $ 21.2 12 % * not meaningful Interest expense. Interest expense increased by$0.5 million to$166.7 million for the six months endedDecember 31, 2019 from$166.2 million for the six months endedDecember 31, 2018 . The increase was primarily a result of timing of borrowings and payments under the Revolver and fluctuations in LIBOR rates. Foreign currency gain/(loss) on intercompany loans. We recorded a foreign currency gain on intercompany loans of$14.5 million for the six months endedDecember 31, 2019 , compared to a loss of$12.9 million for the six months endedDecember 31, 2018 . We have intercompany loans between ourU.S. andUK entities, which were established to fund our international acquisitions. As the loans are recorded as an intercompany receivable by ourU.S. entities, strengthening of the USD over a foreign currency results in a foreign currency loss on intercompany loans and the weakening of the USD over a foreign currency results in a gain on intercompany loans. This non-cash gain was driven by the weakening of the USD over the GBP period-over-period and the related impact on intercompany loans entered into by foreign subsidiaries with functional currency in GBP. Other income, net. Other income, net decreased by$5.7 million to$1.2 million for the six months endedDecember 31, 2019 from$6.9 million for the six months endedDecember 31, 2018 . The decrease was primarily a result of the pre-tax gain of$5.5 million on the sale ofScott-Rice Telephone Co. for the six months
endedDecember 31, 2018 . Provision for Income Taxes
Our provision for income taxes decreased over the same period in the prior year by$3.9 million to$39.1 million for the six months endedDecember 31, 2019 from$43.0 million for the six months endedDecember 31, 2018 . Our provision for income taxes included both the current provision and a provision for deferred income tax expense 48 Table of Contents
resulting from timing differences between tax and financial reporting accounting bases. The following table reconciles an expected tax provision based on a statutory federal tax rate applied to our earnings before income tax to our actual provision for income taxes:
For the Six Months Ended December 31, 2019 2018 (in millions) Expected provision at the statutory rate $ 24.9 $ 20.0 Increase/(decrease) due to: Stock-based compensation 0.1 3.6 State income tax expense, net of federal benefit 4.7 4.0 Change in statutory tax rates outside U.S. - (0.1) Changes in uncertain tax benefits 1.0 6.4 Foreign tax rate differential 1.6 1.5 State NOL expirations 1.6 - Adjustments to taxes recorded in a prior year 2.8 - U.S. Tax Reform - 7.2 Change in valuation allowance (1.3) (0.8) Other, net 3.7 1.2 Provision for income taxes $ 39.1 $ 43.0
During the six months ended
OnDecember 22, 2017 , theU.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018, previously known as Tax Cuts and Jobs Act of 2017 ("U.S. Tax Reform").U.S. Tax Reform reduced theU.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 ofU.S. Tax Reform were recorded in the six months endedJune 30, 2018 and further adjusted during the three months endedSeptember 30, 2018 . In accordance withSAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, the Company recorded the final impacts ofU.S. Reform prior to the end of the provisional measurement period onDecember 31, 2018 . Adjusted EBITDA We define Adjusted EBITDA as earnings/(loss) from operations before interest, income taxes, depreciation and amortization ("EBITDA") adjusted to exclude acquisition or disposal-related transaction costs, losses on extinguishment of debt, stock-based compensation, unrealized foreign currency gains/(losses) on intercompany loans, gains/(losses) on business dispositions and non-cash income/(loss) on equity and cost method investments. We use Adjusted EBITDA to evaluate operating performance, and this financial measure is among the primary measures used by management for planning and forecasting for future periods. We believe that the presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by management and facilitates comparison of our results with the results of other companies that have different financing and capital structures. We also monitor Adjusted EBITDA because our subsidiaries have debt covenants that restrict their borrowing capacity that are based on a leverage ratio, which utilizes a modified EBITDA, as defined in our Credit Agreement and the indentures governing our outstanding Notes. The modified EBITDA is consistent with our definition of Adjusted EBITDA; however, it includes the pro forma Adjusted EBITDA of and expected cost synergies from the companies acquired by us during the quarter for which the debt compliance certification is due.
Adjusted EBITDA results, along with other quantitative and qualitative information, are also utilized by management and our compensation committee for purposes of determining bonus payouts to employees.
49 Table of Contents Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation from, or as a substitute for, analysis of our results as reported under accounting principles generally accepted inthe United States ("GAAP"). For example, Adjusted EBITDA:
? does not reflect capital expenditures, or future requirements for capital and
major maintenance expenditures or contractual commitments;
? does not reflect changes in, or cash requirements for, our working capital
needs;
? does not reflect the significant interest expense, or the cash requirements
necessary to service the interest payments, on our debt; and
? does not reflect cash required to pay income taxes.
Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies because all companies do not calculate Adjusted EBITDA in the same manner.
Reconciliations from segment and consolidated Adjusted EBITDA to net income/(loss) are as follows:
For the
Three Months Ended
Corp/ Zayo Networks zColo Allstream Other Eliminations Total (in millions)
Segment and consolidated Adjusted EBITDA $ 291.9$ 29.7
$ 5.7 $ 1.2 $ -$ 328.5 Interest expense (71.7) (10.3) - - - (82.0) Provision for income taxes - - 3.2 - (28.3) (25.1)
Depreciation and amortization expense (114.7) (31.1)
(11.7) (0.4) - (157.9) Transaction costs (1.8) (0.7) - - - (2.5) Stock-based compensation (19.8) (6.4) (0.5) (0.3) - (27.0)
Foreign currency gain on intercompany loans - -
- - 27.4 27.4 Net income/(loss) $ 83.9$ (18.8) $ (3.3) $ 0.5 $ (0.9)$ 61.4 For the
Three Months Ended
Corp/ Zayo Networks zColo Allstream Other Eliminations Total (in millions)
Segment and consolidated Adjusted EBITDA $ 269.7$ 32.7
$ 17.6 $ 1.2 $ -$ 321.2 Interest expense (69.3) (10.6) (4.1) - - (84.0) Provision for income taxes - - (0.6) - (21.9) (22.5)
Depreciation and amortization expense (100.3) (27.4)
(18.6) (0.5) (0.1) (146.9) Transaction costs (2.1) (0.5) (0.2) - - (2.8) Stock-based compensation (22.1) (4.0) - (0.1) - (26.2)
Foreign currency loss on intercompany loans - - - - (8.3) (8.3) Non-cash (loss)/gain on investments (0.4) -
- - 0.1 (0.3) Net income/(loss) $ 75.5$ (9.8) $ (5.9) $ 0.6 $ (30.2) $ 30.2 50 Table of Contents For
the Six Months Ended
Corp/ Zayo Networks zColo Allstream Other Eliminations Total (in millions)
Segment and consolidated Adjusted EBITDA $ 569.4$ 56.3
$ 15.0 $ 2.6 $ -$ 643.3 Interest expense (142.6) (21.2) (2.8) - (0.1) (166.7) Provision for income taxes - - 4.9 - (44.0) (39.1)
Depreciation and amortization expense (228.2) (61.6)
(23.3) (0.9) - (314.0) Transaction costs (3.6) (0.9) - - - (4.5) Stock-based compensation (39.4) (13.0) (1.3) (0.5) - (54.2)
Foreign currency gain on intercompany loans - -
- - 14.5 14.5 Net income/(loss) $ 155.6$ (40.4) $ (7.5) $ 1.2 $ (29.6) $ 79.3 For
the Six Months Ended
Corp/ Zayo Networks zColo Allstream Other Eliminations Total (in millions)
Segment and consolidated Adjusted EBITDA $ 535.9$ 64.0
$ 38.4 $ 2.3 $ -$ 640.6 Interest expense (135.7) (22.4) (8.1) - - (166.2) Provision for income taxes - - (7.7) - (35.3) (43.0)
Depreciation and amortization expense (218.8) (57.8)
(37.0) (1.0) (0.1) (314.7) Transaction costs (2.4) (0.7) (0.4) - - (3.5) Stock-based compensation (44.6) (8.0) - (0.3) - (52.9)
Foreign currency loss on intercompany loans - - - - (12.9) (12.9) Gain on business disposition - - 5.5 - - 5.5 Non-cash loss on investments (0.6) -
- - - (0.6) Net income/(loss) $ 133.8$ (24.9) $ (9.3) $ 1.0 $ (48.3) $ 52.3
Liquidity and Capital Resources
Our primary sources of liquidity have been cash provided by operations, equity offerings and incurrence of debt. Historically, our principal uses of cash have been for acquisitions, capital expenditures, working capital, debt service requirements and repurchases of our common stock. We anticipate our principal uses of cash in the future will be for acquisitions, capital expenditures, working capital, and debt service. We have financial covenants under the indentures governing the 6.00% senior unsecured notes due 2023 (the "2023 Unsecured Notes"), the 6.375% senior unsecured notes due 2025 (the "2025 Unsecured Notes") and the 5.75% senior unsecured notes due 2027 (the "2027 Unsecured Notes" and collectively with the 2023 and 2025 Unsecured Notes, the "Notes") and the Credit Agreement that, under certain circumstances, restrict our ability to incur additional indebtedness. The indentures governing the Notes limit any increase in ZGL's secured indebtedness (other than certain forms of secured indebtedness expressly permitted under such indentures) to a pro forma secured debt ratio of 4.50 times ZGL's previous quarter's annualized modified EBITDA (as defined in the indentures), and limit ZGL's incurrence of additional indebtedness to a total indebtedness ratio of 6.00 times the previous quarter's annualized modified EBITDA. The Credit Agreement also contains a covenant, applicable only to the Revolver, that ZGL maintain a senior secured leverage ratio below 5.25:1.00 at any time when the aggregate principal amount of loans outstanding under the Revolver is greater than 35% of the commitments under the Revolver. The Credit Agreement also requires ZGL and its subsidiaries to comply with customary affirmative and negative covenants, including covenants restricting the ability of ZGL and its subsidiaries, subject to specified exceptions, to incur additional indebtedness, make additional guaranties, incur additional liens on assets, or dispose of assets, pay dividends, or make other distributions, voluntarily prepay certain other indebtedness, enter into transactions with affiliated persons, make investments and amend the terms of certain other indebtedness. The 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. 51 Table of Contents
As ofDecember 31, 2019 , we had$181.3 million in cash and cash equivalents which consisted of amounts held in bank accounts and highly-liquidU.S. treasury money market funds. As ofDecember 31, 2019 , we also had a working capital deficit of$359.9 million , which includes$170.8 million that we will be recognizing as revenue over the next twelve months. The actual cash outflows associated with fulfilling this deferred revenue obligation during the next twelve months will be significantly less than theDecember 31, 2019 current deferred revenue balance. The working capital deficit also included$124.7 million of operating lease liabilities. Additionally, as ofDecember 31, 2019 , we had$391.2 million available under our Revolver, subject to certain conditions. Accordingly, we believe we have sufficient resources to fund our obligations and foreseeable liquidity requirements in the near term and for the foreseeable future. Our capital expenditures increased by$87.0 million , or 23%, to$471.7 million during the six months endedDecember 31, 2019 , as compared to$384.7 million for the six months endedDecember 31, 2018 . The increase is primarily due to our continued investment in our network, which we plan to continue for the foreseeable future. As ofDecember 31, 2019 , we were contractually committed for$612.7 million of capital expenditures for construction materials and purchases of property and equipment. A majority of these capital expenditure commitments are expected to be satisfied in the next twelve months. These capital expenditures, however, are expected to primarily be success-based; that is, in most situations, we will not invest the capital until we have an executed customer contract that supports the investment. As part of our corporate strategy, we continue to be regularly involved in discussions regarding potential acquisitions of companies and assets, some of which may be quite large. We expect to fund such acquisitions with cash from operations, debt issuances (including$391.2 million of availability under our Revolver), equity offerings, and available cash on hand. We regularly assess our projected capital requirements to fund future growth in our business, repay our debt obligations, and support our other general corporate and operational needs, and we regularly evaluate our opportunities to raise additional capital. As market conditions permit, we may refinance existing debt, issue new debt or equity securities through the capital markets, or obtain additional bank financing to fund our projected capital requirements or provide additional liquidity. In connection with the Merger, onJanuary 17, 2020 , BidCo commenced cash tender offers for any and all of ZGL's outstanding Notes. OnJanuary 31, 2020 , BidCo announced that it had received tenders and related consents from the requisite number of holders of each such series of the Notes in order to authorize the amendments proposed as part of its offering. See Note 17-Subsequent Events.
Cash Flows
We believe our cash flows from operating activities, in addition to cash and cash equivalents currently on-hand, will be sufficient to fund our operating activities and capital expenditures for the foreseeable future, and in any event for at least the next 12 to 18 months. Given the generally volatile global economic climate, no assurance can be given that this will be the case.
We regularly consider acquisitions and additional strategic opportunities, including large acquisitions, which may require additional debt or equity financing.
The following table sets forth components of our cash flow for the six months
ended
Six Months EndedDecember 31, 2019 2018 (in millions)
Net cash provided by operating activities $ 568.2 $ 472.4 Net cash used in investing activities$ (471.7) $ (345.7) Net cash used in financing activities$ (101.6) $ (203.6)
Net Cash Flows provided by Operating Activities
Net cash flows provided by operating activities increased by$95.8 million , or 20%, to$568.2 million during the six months endedDecember 31, 2019 from$472.4 million during the six months endedDecember 31, 2018 . Net cash 52 Table of Contents
flows provided by operating activities during the six months endedDecember 31, 2019 include our net income of$79.3 million , plus the add backs of non-cash items deducted in the determination of net income, principally depreciation and amortization of$314.0 million , stock-based compensation expense of$54.2 million and deferred income taxes of$28.7 million , partially offset by a foreign currency gain on intercompany loans of$14.5 million . Also contributing to the cash provided by operating activities were additions to deferred revenue of$141.0 million , which were partially offset by amortization of deferred revenue of$81.7 million . Cash flow during the period was increased by the net change in working capital components of$36.8 million . Net cash flows provided by operating activities during the six months endedDecember 31, 2018 include our net income of$52.3 million plus the add backs of non-cash items deducted in the determination of net income, principally depreciation and amortization of$314.7 million , stock-based compensation expense of$52.9 million , deferred income taxes of$32.4 million and foreign currency loss on intercompany loans of$12.9 million . Additions to deferred revenue of$81.1 million during the period were partially offset by amortization of deferred revenue of$74.3 million . Cash flow during the period was decreased by the net change in other working capital components of$3.8 million . The increase in net cash flows from operating activities during the six months endedDecember 31, 2019 as compared to the six months endedDecember 31, 2018 is primarily due to an increase in deferred revenue additions and working capital components.
Cash Flows used in Investing Activities
We used cash in investing activities of$471.7 million and$345.7 million during the six months endedDecember 31, 2019 and 2018, respectively. During the six months endedDecember 31, 2019 , we used$471.7 million of cash for additions to property and equipment. During the six months endedDecember 31, 2018 , we used$384.7 million of cash for additions to property and equipment, which was partially offset by proceeds from our sale of SRT of$39.0 million .
Cash Flows used in Financing Activities
Our net cash used in financing activities was$101.6 million and$203.6 million during the six months endedDecember 31, 2019 and 2018, respectively. During the six months endedDecember 31, 2019 , cash used in financing activities was primarily comprised of$95.0 million in payments on the Revolver,$4.1 million in finance lease payments and$2.5 million in principal payments on our long-term debt. During the six months endedDecember 31, 2018 , our net cash used in financing activities was$203.6 million and was primarily comprised of$402.5 million in purchases of our common stock,$40.0 million in payments on the Revolver,$4.0 million in finance lease payments,$2.6 million in payments on theSanta Clara acquisition financing agreement,$2.5 million in principal payments on our long-term debt and$2.0 million for other financing outflows. These outflows were partially offset by$250.0 million in borrowings under the Revolver.
Contractual Obligations
There were no material changes outside the ordinary course of our business with respect to our contractual obligations during the six months endedDecember 31, 2019 , from those disclosed in our Annual Report on Form 10-K for the year endedJune 30, 2019 .
Off-Balance Sheet Arrangements
We do not have any special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or market or credit risk support and we do not engage in hedging, or other similar activities that expose us to any significant liabilities that are not (i) reflected on the face of the condensed consolidated financial statements, (ii) disclosed in Note 12 - Commitments and Contingencies to the condensed consolidated financial statements, or in the Future Contractual Obligations table included in Management's Discussion and Analysis of Financial Condition and 53 Table of Contents
Results of Operations of our Annual Report or (iii) discussed under "Item 3: Quantitative and Qualitative Disclosures About Market Risk" below.
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