(11) STOCK-BASED COMPENSATION

The following table summarizes the Company’s stock-based compensation expense for liability and equity classified awards included in the consolidated statements of operations:


	Year Ended June 30,
	2017		2016		2015
	(in millions)
Included in:
Operating costs	$	11.3	$	17.4	$	23.3
Selling, general and administrative expenses		102.8		138.5		177.4
Total stock-based compensation expense	$	114.1	$	155.9	$	200.7

CII common and preferred units	$	10.1	$	73.0	$	156.8
Part A restricted stock units		76.5		45.3		12.6
Part B restricted stock units		26.0		36.5		31.3
Part C restricted stock units		1.5		1.1		—
Total stock-based compensation expense	$	114.1	$	155.9	$	200.7

CII Common and Preferred Units

Prior to the Company’s IPO, the Company was given authorization by CII to award 625,000,000 of CII’s common units as profits interests to employees, directors, and affiliates of the Company. The common units were historically considered to be stock-based compensation with terms that required the awards to be classified as liabilities due to cash settlement features. The vested portion of the awards was reported as a liability and the fair value was re-measured at each reporting date until the date of settlement, with a corresponding charge (or credit) to stock-based compensation expense. In connection with the Company’s IPO and the related amendment to the CII operating agreement, there was a deemed modification to the stock compensation arrangements with the Company’s employees and directors. As a result, previously issued common units which were historically accounted for as liability awards, became classified as equity awards. Prior to reclassifying the common unit liability to equity, the Company re-measured the fair value of the CII common units factoring in the change in fair value since September 30, 2014 and the change in fair value caused by the modification. The fair value of these previously vested common units was estimated to be $490.2 million on the modification date and this amount is reflected in the Company’s consolidated statement of stockholders’ equity as an increase to additional-paid-in-capital during the year ended June 30, 2015. During the three months ended December 31, 2016, the CII common units became fully vested and as such there is no unrecognized compensation cost associated with CII common units as of June 30, 2017.

On October 9, 2014, the Company and CII’s board of managers approved a non-liquidating distribution by CII of shares of the Company's common stock held by CII to holders of CII vested common units. Employees and independent directors of the Company with vested CII common units received shares of the Company’s common stock equal in value to the underlying value of their vested CII common units. The total number of shares of the Company’s common stock that were distributed to CII common unit holders in connection with this non-liquidating distribution was 20,460,047 shares.

The valuation of the CII common units as of the IPO date was determined based on a Monte Carlo simulation. The Monte Carlo valuation analysis attempts to approximate the probability of certain outcomes by running multiple trial runs, called simulations, using random variables to generate potential future stock prices. This valuation technique was used to estimate the fair value associated with future distributions of common stock to CII common unit holders. The Monte Carlo simulation first projects the number of shares to be distributed by CII to the common unit holders at each subsequent measurement date based on stock price projections under each simulation. Shares attributable to unvested CII common units are subject to the existing vesting provisions of the CII common unit awards. The estimated future value of shares scheduled to be distributed by CII based on vesting provisions are calculated under each independent simulation. The present value of the number of shares of common stock to be distributed to common unit holders under each simulation is then computed, and the average of each simulation is the fair value of the Company’s common shares to be distributed by CII to the common unit holders. This value was then adjusted for prior non-liquidating distributions made by the Company to derive a value for CII common units by class and on per unit basis. These values were used to calculate the fair value of outstanding CII common units as of the IPO date. Various inputs and assumptions were utilized in the valuation method, including forfeiture behavior, vesting provisions, holding restrictions, peer companies’ historical volatility, and an appropriate risk-free rate.

The value of the CII common units is derived from the value of CII’s investments in the Company and Onvoy, LLC and its subsidiaries (“OVS”), a company that provided voice and managed services which the Company spun off during the year ended June 30, 2014. As the value derived from each of these investments is separately determinable and there is a plan in place to distribute the value associated with the investment in Company shares separate from the value derived from OVS, the two components are accounted for separately. The OVS component of the CII awards is adjusted to fair value each reporting period. On December 31, 2015, CII entered into an agreement to sell OVS to a third party. The sale was completed in May 2016. Based on the sale price, the estimated fair value of OVS awards has been increased, resulting in an increase to stock based compensation expense and corresponding increase to additional paid-in capital of $12.9 million for the year ended June 30, 2016. Proceeds from the sale to be distributed to the Company’s employees will be paid by CII.

During the years ended June 30, 2017, 2016 and 2015 the Company recognized $10.1 million, $73.0 million and $156.8 million, respectively, of stock-based compensation expense related to vesting of CII common and preferred units. During the three months ended December 31, 2016, the CII common units became fully vested and as such there is no unrecognized compensation cost associated with CII common units as of June 30, 2017.

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 the Company’s Board of Directors.

The PCIP has the following components:

Part A

Under Part A of the PCIP, all 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 a 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 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. Upon vesting, the RSUs convert to an equal number of shares of the Company’s common stock. Additionally, under Part A of the PCIP, awards may be granted to certain employees upon commencement of their employment with the Company.

During the years ended June 2017, 2016 and 2015, the Company recognized $76.5 million, $45.3 million and $12.6 million of compensation expense associated with Part A awards, respectively. The June 2017 and June 2016 quarterly awards were recorded as liabilities totaling $5.5 million and $2.0 million as of June 30, 2017 and 2016, 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 “Other long-term liabilities” in the accompanying 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 June 30, 2017, the remaining unrecognized compensation cost to be expensed over the remaining vesting period for Part A awards is $36.6 million.

The following table summarizes the Company’s Part A RSU activity for the years ended June 2017, 2016 and 2015:


	Number of Part A RSUs	Weighted average grant-date fair value per share		Weighted average remaining contractual term in months
Outstanding at July 1, 2014	—	$	—	—
Granted	955,831		26.25
Vested	—
Forfeited	(22,614)		n/a
Outstanding at July 1, 2015	933,217	$	26.25	7.1
Granted	2,190,785		26.04
Vested	(852,853)		26.14
Forfeited	(101,248)		n/a
Outstanding at July 1, 2016	2,169,901	$	26.04	7.9
Granted	2,678,503		31.64
Vested	(2,080,685)		26.03
Forfeited	(403,333)		n/a
Outstanding at June 30, 2017	2,364,386	$	31.63	7.1

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 the Company’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 vest, assuming continuous employment through the end of the measurement period. The existence of a vesting provision that is associated with the performance of the Company’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 the Company’s common stock.

The following table summarizes the Company’s Part B RSU activity for the years ended June 2017, 2016 and 2015:


	Number of Part B RSUs	Weighted average grant-date fair value per unit		Weighted average remaining contractual term in months
Outstanding at July 1, 2014	—	$	—	—
Granted	1,251,671		42.90
Vested	—
Forfeited	(1,798)		n/a
Outstanding at July 1, 2015	1,249,873	$	42.90	5.5
Granted	1,152,176		26.80
Vested	(1,463,893)		38.70
Forfeited	(77,220)		n/a
Outstanding at July 1, 2016	860,936	$	29.50	6.2
Granted	715,564		45.56
Vested	(793,478)		32.58
Forfeited	(371,049)		n/a
Outstanding at June 30, 2017	411,973	$	42.86	6.1

The table below reflects the total Part B RSUs granted during each period presented, the maximum eligible shares of the Company’s stock that the respective Part B RSU grant could be converted into shares of the Company’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 the Company’s common stock at a subsequent vesting date but for those RSUs granted during the period indicated:


	During the three months ended
	June 30, 2017		March 31, 2017		December 31, 2016		September 30, 2016
Part B RSUs granted		152,808		171,316		191,015		200,425
Maximum eligible shares of the Company's common stock		550,109		880,564		981,817		1,030,185
Grant date fair value per Part B RSU	$	26.52	$	27.39	$	75.56	$	47.00
Units converted to Company's common stock at vesting date		n/a		n/a		n/a		99,508


	During the three months ended
	June 30, 2016		March 31, 2016		December 31, 2015		September 30, 2015
Part B RSUs granted		312,516		284,773		282,074		272,813
Maximum eligible shares of the Company's common stock		1,606,332		1,463,733		1,449,860		1,426,812
Grant date fair value per Part B RSU	$	37.03	$	25.12	$	25.26	$	17.83
Units converted to Company's common stock at vesting date		1,078,812		475,446		40,182		—

During the years ended June 2017, 2016 and 2015, the Company recognized stock-based compensation expense of $26.0 million, $36.5 million and $31.3 million related to Part B awards, respectively.

The grant date fair value of Part B RSU grants is estimated utilizing a Monte Carlo simulation. This simulation estimates the ten-day average closing stock price ending on the vesting date, the stock price performance over the performance period, and the number of common shares to be issued at the vesting date. Various assumptions are utilized in the valuation method, including the target stock price performance ranges and respective share payout percentages, the Company’s historical stock price performance and volatility, peer companies’ historical volatility and an appropriate risk-free rate. The aggregate future value of the grant under each simulation is calculated using the estimated per share value of the common stock at the end of the vesting period multiplied by the number of common shares projected to be granted at the vesting date. The present value of the aggregate grant is then calculated under each of the simulations, resulting in a distribution of potential present values. The fair value of the grant is then calculated based on the average of the potential present values. The remaining unrecognized compensation cost associated with Part B RSU grants is $8.0 million at June 30, 2017.

Part C

Under Part C of the PCIP, independent directors of the Company are eligible to receive quarterly awards of RSUs. Independent directors electing to receive a portion of their annual director fees in the form of RSUs are granted a set dollar amount of Part C RSUs each quarter. The quantity of Part C RSUs granted is based on the average closing price of the Company’s common stock over the last ten trading days of the quarter ended immediately prior to the grant date and vest at the end of each quarter for which the grant was made. During the year ended June 30, 2017 and June 30, 2016, the Company’s independent directors were granted 47,420 and 41,793 Part C RSUs, respectively. During the year ended June 30, 2017 and June 30, 2016, the Company recognized $1.5 million and $1.1 million of compensation expense associated with the Part C RSUs, respectively.