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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended December 31, 2011

or

 

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

For the transition period from              to             

Commission File Number 001-15951

 

 

AVAYA INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-3713430

(State or other jurisdiction

of incorporation or organization)

  (I.R.S. Employer Identification No.)

211 Mount Airy Road

Basking Ridge, New Jersey

  07920
(Address of principal executive offices)   (Zip Code)

(908) 953-6000

(Registrant’s telephone number, including area code)

None

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

*See Explanatory Note in Part II, Item 5

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated

filer  ¨

 

Accelerated

filer  ¨

 

Non-accelerated

filer  x

  Smaller Reporting Company  ¨
    (Do not check if a smaller reporting company)  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of February 13, 2012, 100 shares of Common Stock, $.01 par value, of the registrant were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

Item

 

Description

   Page  
  PART I—FINANCIAL INFORMATION   

1.

  Financial Statements      1   

2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      33   

3.

  Quantitative and Qualitative Disclosures About Market Risk      51   

4.

  Controls and Procedures      51   
  PART II—OTHER INFORMATION   

1.

  Legal Proceedings      52   

1A.

  Risk Factors      52   

2.

  Unregistered Sales of Equity Securities and Use of Proceeds      52   

3.

  Defaults Upon Senior Securities      52   

4.

  Mine Safety Disclosures      52   

5.

  Other Information      52   

6.

  Exhibits      52   
  Signatures      53   

This Quarterly Report on Form 10-Q contains trademarks, service marks and registered marks of Avaya Inc. and its subsidiaries and other companies, as indicated. Unless otherwise provided in this Quarterly Report on Form 10-Q, trademarks identified by ® and ™ are registered trademarks or trademarks, respectively, of Avaya Inc. or its subsidiaries. All other trademarks are the properties of their respective owners.


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

Avaya Inc.

Consolidated Statements of Operations (Unaudited)

(In millions)

 

     Three months
ended

December  31,
 
     2011     2010  

REVENUE

    

Products

   $ 749      $ 722   

Services

     638        644   
  

 

 

   

 

 

 
     1,387        1,366   
  

 

 

   

 

 

 

COSTS

    

Products:

    

Costs (exclusive of amortization of technology intangible assets)

     296        332   

Amortization of technology intangible assets

     50        67   

Services

     337        348   
  

 

 

   

 

 

 
     683        747   
  

 

 

   

 

 

 

GROSS MARGIN

     704        619   
  

 

 

   

 

 

 

OPERATING EXPENSES

    

Selling, general and administrative

     433        461   

Research and development

     111        115   

Amortization of intangible assets

     56        56   

Restructuring charges, net

     21        22   

Acquisition-related costs

     1        4   
  

 

 

   

 

 

 
     622        658   
  

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     82        (39

Interest expense

     (109     (127

Other (expense) income, net

     (1     8   
  

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (28     (158

(Benefit from) provision for income taxes

     (2     22   
  

 

 

   

 

 

 

NET LOSS

   $ (26   $ (180
  

 

 

   

 

 

 

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

 

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Avaya Inc.

Consolidated Balance Sheets (Unaudited)

(In millions, except per share and shares amounts)

 

     December 31,
2011
    September 30,
2011
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 345      $ 400   

Accounts receivable, net

     749        755   

Inventory

     279        280   

Deferred income taxes, net

     7        8   

Other current assets

     276        274   
  

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     1,656        1,717   
  

 

 

   

 

 

 

Property, plant and equipment, net

     380        397   

Deferred income taxes, net

     26        28   

Intangible assets, net

     2,029        2,129   

Goodwill

     4,106        4,079   

Other assets

     202        196   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 8,399      $ 8,546   
  

 

 

   

 

 

 

LIABILITIES

    

Current liabilities:

    

Debt maturing within one year

   $ 37      $ 37   

Accounts payable

     480        465   

Payroll and benefit obligations

     271        323   

Deferred revenue

     626        639   

Business restructuring reserve, current portion

     114        130   

Other current liabilities

     273        352   
  

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     1,801        1,946   
  

 

 

   

 

 

 

Long-term debt

     6,111        6,120   

Pension obligations

     1,604        1,636   

Other postretirement obligations

     495        502   

Deferred income taxes, net

     172        168   

Business restructuring reserve, non-current portion

     48        56   

Other liabilities

     502        496   
  

 

 

   

 

 

 

TOTAL NON-CURRENT LIABILITIES

     8,932        8,978   
  

 

 

   

 

 

 

Commitments and contingencies

    

DEFICIENCY

    

Common stock, par value $.01 per share; 100 shares authorized, issued and outstanding

     —          —     

Additional paid-in capital

     2,726        2,692   

Accumulated deficit

     (3,918     (3,892

Accumulated other comprehensive loss

     (1,142     (1,178
  

 

 

   

 

 

 

TOTAL DEFICIENCY

     (2,334     (2,378
  

 

 

   

 

 

 

TOTAL LIABILITIES AND DEFICIENCY

   $ 8,399      $ 8,546   
  

 

 

   

 

 

 

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

 

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Avaya Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In millions)

 

     Three months ended
December 31,
 
         2011             2010      

OPERATING ACTIVITIES:

    

Net loss

   $ (26   $ (180

Adjustments to reconcile net loss to net cash used for operating activities:

    

Depreciation and amortization

     143        168   

Share-based compensation

     3        3   

Amortization of debt issuance costs

     5        6   

Accretion of debt discount

     —          12   

Provision for uncollectible receivables

     —          2   

Deferred income taxes, net

     6        3   

Loss on investments and sale of long-lived assets, net

     1        —     

Unrealized gains on foreign currency exchange

     (1     (33

Changes in operating assets and liabilities:

    

Accounts receivable

     12        52   

Inventory

     —          (27

Accounts payable

     13        42   

Payroll and benefit obligations

     (50     (29

Business restructuring reserve

     (18     (14

Deferred revenue

     (18     6   

Other assets and liabilities

     (80     (98
  

 

 

   

 

 

 

NET CASH USED FOR OPERATING ACTIVITIES

     (10     (87
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Capital expenditures

     (14     (18

Capitalized software development costs

     (12     (8

Acquisition of businesses, net of cash acquired

     (4     —     

Return of funds held in escrow from the NES acquisition

     —          6   

Proceeds from sale of long-lived assets and investments

     4        1   

Restricted cash

     (1     —     

Advance to Parent

     (8     —     

Other investing activities, net

     (1     —     
  

 

 

   

 

 

 

NET CASH USED FOR INVESTING ACTIVITIES

     (36     (19
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Repayment of long-term debt

     (9     (12

Other financing activities, net

     (1     —     
  

 

 

   

 

 

 

NET CASH USED FOR FINANCING ACTIVITIES

     (10     (12
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     1        (1
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (55     (119

Cash and cash equivalents at beginning of period

     400        579   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 345      $ 460   
  

 

 

   

 

 

 

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

 

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Table of Contents

AVAYA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Background, Merger and Basis of Presentation

Background

Avaya Inc. together with its consolidated subsidiaries (collectively, the “Company” or “Avaya”) is a leading global provider of business collaboration and communications solutions. The Company’s solutions are designed to enable business users to work together more effectively as a team internally or with their customers and suppliers, increasing innovation, improving productivity and accelerating decision-making and business outcomes.

Avaya conducts its business operations in three segments. Two of those segments, Global Communications Solutions and Avaya Networking, make up Avaya’s product portfolio. The third segment contains Avaya’s services portfolio and is called Avaya Global Services.

At the core of the Company’s business is a large and diverse global installed customer base which includes large enterprises, small- and medium-sized businesses and government organizations. Avaya provides solutions in five key business collaboration and communications product and related services categories:

 

   

Unified Communications Software, Infrastructure and Endpoints

 

   

Real Time Video Collaboration

 

   

Contact Center

 

   

Data Networking

 

   

Applications, including their Integration and Enablement

Avaya sells solutions directly and through its channel partners. As of December 31, 2011, Avaya had approximately 9,600 channel partners worldwide, including system integrators, service providers, value-added resellers and business partners that provide sales and service support.

Merger

On June 4, 2007, Avaya entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Avaya Holdings Corp. (formerly Sierra Holdings Corp.), a Delaware corporation (“Parent”), and Sierra Merger Corp., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub was merged with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent (the “Merger”). Parent was formed by affiliates of two private equity firms, Silver Lake Partners (“Silver Lake”) and TPG Capital (“TPG”) (collectively, the “Sponsors”), solely for the purpose of entering into the Merger Agreement and consummating the Merger. The Merger Agreement provided for a purchase price of $8.4 billion for Avaya’s common stock and was completed on October 26, 2007 pursuant to the terms of the Merger Agreement.

Acquisition of the Enterprise Solutions Business of Nortel Networks Corporation

On December 18, 2009, Avaya acquired certain assets and assumed certain liabilities of the enterprise solutions business (“NES”) of Nortel Networks Corporation (“Nortel”), including all the shares of Nortel Government Solutions Incorporated, for $943 million in cash consideration (the “Acquisition”). The Company and Nortel were required to determine the final purchase price post-closing based upon the various purchase price adjustments included in the acquisition agreements. During the first quarter of fiscal 2011, the Company and Nortel agreed on a final purchase price of $933 million, and the Company received $6 million, representing all remaining amounts due to Avaya from funds held in escrow. The terms of the acquisition did not include any significant contingent consideration arrangements.

 

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Basis of Presentation

The consolidated financial statements include the accounts of Avaya Inc. and its subsidiaries. The accompanying unaudited interim consolidated financial statements as of December 31, 2011 and for the three months ended December 31, 2011 and 2010 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial statements, and should be read in conjunction with the consolidated financial statements and other financial information for the fiscal year ended September 30, 2011, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on December 9, 2011. The condensed balance sheet as of September 30, 2011 was derived from the Company’s audited financial statements. The significant accounting policies used in preparing these unaudited interim consolidated financial statements are the same as those described in Note 2 to those audited consolidated financial statements except for recently adopted accounting guidance as discussed in Note 2 “Recent Accounting Pronouncements” of these unaudited interim consolidated financial statements. In management’s opinion, these unaudited interim consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated.

Certain prior period amounts have been reclassified to conform to the current period’s presentation. The consolidated results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire fiscal year.

2. Recent Accounting Pronouncements

New Accounting Guidance Recently Adopted

Disclosure of Supplementary Pro Forma Information for Business Combinations

In December 2010, the Financial Accounting Standards Board (“FASB”) issued revised guidance which requires that if a company presents pro forma comparative financial statements for business combinations, the company should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This accounting guidance became effective for the Company for business combinations for which the acquisition date was on or after October 1, 2011. The adoption of this guidance did not have a material impact on the Company’s financial statement disclosures.

Goodwill Impairment Test

In December 2010, the FASB issued revised guidance on when a company should perform step two of the goodwill impairment test for reporting units with zero or negative carrying amounts. This guidance requires that for reporting units with zero or negative carrying amounts, a company is required to perform step two of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. This accounting guidance became effective for the Company beginning October 1, 2011 and is not expected to have an impact on the Company’s consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

In May 2011, the FASB issued revised guidance which is intended to achieve common fair value measurement and disclosure guidance in GAAP and International Financial Reporting Standards. The majority of the changes represent a clarification to existing GAAP. Additionally, the revised guidance includes expanded disclosure

 

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requirements. This accounting guidance is effective for the Company beginning in the second quarter of fiscal year 2012 and is not expected to have a material impact on the Company’s consolidated financial statements or financial statement disclosures.

In June 2011, the FASB issued revised guidance on the presentation of comprehensive income and its components in the financial statements. As a result of the guidance, companies will now be required to present net income and other comprehensive income either in a single continuous statement or in two separate, but consecutive statements. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The standard does not, however, change the items that must be reported in other comprehensive income or the determination of net income. This new guidance is to be applied retrospectively. This accounting guidance is effective for the Company beginning in fiscal year 2013 and is only expected to impact the presentation of the Company’s consolidated financial statements.

In September 2011, the FASB issued revised guidance intended to simplify how an entity tests goodwill for impairment. As a result of the guidance, an entity will be allowed to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The accounting guidance is effective for the Company beginning in fiscal year 2013 and early adoption is permitted. This accounting guidance is not expected to have a material impact on the consolidated financial statements or financial statement disclosures.

In September 2011, the FASB issued revised guidance which requires additional disclosure about an employer’s participation in a multiemployer pension plan. The accounting guidance is effective for the Company as of September 30, 2012 and is to be applied retrospectively for all prior periods presented. This accounting guidance is not expected to have a material impact on the Company’s financial statement disclosures.

In December 2011, the FASB issued guidance which requires additional disclosures about financial instruments and derivative instruments that are either (1) offset in accordance with FASB Accounting Standards Codification (“ASC”) 210-20 “Balance Sheet—Offsetting” or (2) subject to an enforceable master netting arrangement or similar agreement. This accounting guidance is effective for the Company beginning in fiscal year 2014 and is not expected to have a material impact on the Company’s financial statement disclosures.

3. Business Combinations

During fiscal years 2012 and 2011, the Company completed several acquisitions primarily to enhance the Company’s technology portfolio. In October 2011, Parent completed a $31 million acquisition and immediately merged the acquired entity with and into the Company, with the Company surviving the merger. In connection with this acquisition, the Company advanced $8 million to Parent in exchange for a note receivable due October 2014 with interest at 1.63% per annum. The Company recognized $31 million of contributed capital associated with this merger. The aggregate purchase price of the acquisitions completed by the Company and Parent was $36 million for the three months ended December 31, 2011. No acquisitions were completed during the three months ended December 31, 2010.

The acquisitions have been accounted for under the acquisition method, which requires an allocation of the purchase price of the acquired entity to the assets acquired and liabilities assumed based on their estimated fair values from a market-participant perspective at the date of acquisition. The allocation of the purchase price as reflected within these consolidated financial statements is based on the best information available to management at the time these consolidated financial statements were issued and is provisional pending the completion of the valuation analysis of the assets and liabilities of each acquisition. During the measurement period (which is not to exceed one year from the acquisition date), the Company will be required to retrospectively adjust the provisional amounts recognized to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that

 

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date. Further, during the measurement period, the Company is also required to recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date.

The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income and market approaches. The fair value of acquired technologies was estimated using the income approach which values the subject asset using the projected cash flows to be generated by the asset, discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The market approach was utilized in combination with the income approach to estimate the fair values of most working capital accounts.

A preliminary allocation of the purchase price to the assets acquired and the liabilities assumed in the acquisitions was performed based on their estimated fair values. As additional information becomes available, differences between the allocation of the purchase price and the allocation of the purchase price when finalized, particularly as it pertains to intangible assets, deferred income taxes and goodwill, may be identified.

Intangible assets include acquired technologies of $7 million during the three months ended December 31, 2011. The acquired technologies are being amortized over a weighted average useful life of five years, on a straight-line basis. No in-process research and development was acquired in the acquisitions.

The excess of the purchase price over the preliminary assessment of the net tangible and intangible assets acquired resulted in goodwill of $29 million. The premiums paid by the Company and Parent in the transactions are largely attributable to the acquisition of assembled workforces and the synergies and economies of scale provided to a market participant, particularly as it pertains to marketing efforts and customer base. None of the goodwill is deductible for tax purposes.

These unaudited consolidated financial statements include the operating results of the acquired entities as of their respective acquisition dates. The revenues and expenses specific to these businesses and their pro forma results are not material to these unaudited consolidated financial statements.

4. Goodwill and Intangible Assets

Goodwill

Goodwill is not amortized but is subject to periodic testing for impairment in accordance with GAAP at the reporting unit level which is one level below the Company’s operating segments. The test for impairment is conducted annually each September 30th or more frequently if events occur or circumstances change indicating that the fair value of a reporting unit may be below its carrying amount. The Company determined that no events occurred or circumstances changed during the three months ended December 31, 2011 and 2010 that would indicate that the fair value of a reporting unit may be below its carrying amount.

Intangible Assets

Intangible assets include acquired technology, customer relationships, trademarks and trade-names and other intangibles. Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from five to fifteen years.

Acquired technology and patents do not include capitalized software development costs. Unamortized capitalized software developments costs of $61 million and $58 million at December 31, 2011 and September 30, 2011, respectively, are included in other assets.

Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Intangible assets determined to have indefinite useful lives are not amortized but are tested for impairment annually, or

 

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more frequently if events or changes in circumstances indicate the asset may be impaired. The Company determined that no events occurred or circumstances changed during the three months ended December 31, 2011 and 2010 that would indicate that its long-lived assets or indefinite-lived intangible assets may be impaired.

The Company’s trademarks and trade names are expected to generate cash flow indefinitely. Consequently, these assets are classified as indefinite-lived intangibles.

5. Supplementary Financial Information

Consolidated Statements of Operations Information

 

     Three months ended
December 31,
 

In millions

       2011             2010      

OTHER (EXPENSE) INCOME, NET

    

Interest income

   $ 1      $ 1   

(Loss) gain on foreign currency transactions

     (1     8   

Other, net

     (1     (1
  

 

 

   

 

 

 

Total other (expense) income, net

   $ (1   $ 8   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS)

    

Net loss

   $ (26   $ (180

Other comprehensive income (loss):

    

Pension, postretirement and postemployment benefit-related items, net of tax of $9 and $0 for the three months ended December 31, 2011 and 2010, respectively

     14        16   

Cumulative translation adjustment

     13        (5

Unrealized gain on term loan interest rate swap, net of tax of $4 and $0 for the three months ended December 31, 2011 and 2010, respectively

     6        22   

Unrealized loss on investments reclassified into earnings

     2        —     

Net loss on investments reclassified into earnings

     1        —     
  

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 10      $ (147
  

 

 

   

 

 

 

6. Business Restructuring Reserves and Programs

Fiscal 2012 Restructuring Program

During the first quarter of fiscal 2012, the Company continued to identify opportunities to streamline operations and generate cost savings which include exiting facilities and eliminating employee positions. Restructuring charges recorded during fiscal year 2012 associated with these initiatives include employee separation costs primarily associated with employee severance actions in the U.S., Germany, the United Kingdom, and Canada. The headcount reduction and related payments identified in these actions are expected to be completed in fiscal year 2012. As the Company continues to evaluate and identify additional operational synergies, additional cost saving opportunities may be identified.

 

In millions

   Employee
Separation
Costs
    Lease
Obligations
     Total  

2012 restructuring charges

   $ 18      $ 1       $ 19   

Cash payments

     (4     —           (4
  

 

 

   

 

 

    

 

 

 

Balance as of December 31, 2011

   $ 14      $ 1       $ 15   
  

 

 

   

 

 

    

 

 

 

 

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Fiscal 2011 Restructuring Program

During fiscal 2011, the Company identified opportunities to streamline operations and generate cost savings which included exiting facilities and eliminating employee positions. Restructuring charges recorded during fiscal 2011 associated with these initiatives included employee separation costs primarily associated with employee severance actions in Germany, as well as Europe, Middle East and Africa (“EMEA”) and U.S. regions. Employee separation charges included $56 million associated with an agreement reached with the German Works Council representing employees of certain of Avaya’s German subsidiaries for the elimination of 210 employee positions. Severance and employment benefits payments associated with this program are expected to be completed in fiscal 2012, and include, but are not limited to, social pension fund payments and health care and unemployment insurance costs to be paid to or on behalf of the affected employees. Future rental payments, net of estimated sublease income, related to operating lease obligations for unused space in connection with the closing or consolidation of facilities are expected to continue through fiscal year 2020.

The following table summarizes the components of the fiscal 2011 restructuring program during the three months ended December 31, 2011:

 

In millions

   Employee
Separation
Costs
    Lease
Obligations
    Total  

Balance as of October 1, 2011

   $ 101      $ 24      $ 125   

Cash payments

     (25     (2     (27

Impact of foreign currency fluctuations

     (2     (1     (3
  

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

   $ 74      $ 21      $ 95   
  

 

 

   

 

 

   

 

 

 

Fiscal 2010 Restructuring Program

During fiscal 2010, in response to the global economic climate and in anticipation of the acquisition of NES, the Company began implementing initiatives designed to streamline the operations of the Company and generate cost savings and developed initiatives to eliminate overlapping processes and expenses associated with that acquisition. During the second and third quarters of fiscal 2010, the Company exited certain facilities and separated or relocated certain employees. Restructuring charges recorded during fiscal 2010 included employee separation costs associated with involuntary employee severance actions primarily in EMEA and the U.S., as well as costs associated with closing and consolidating facilities. The payments related to headcount reductions identified in this program are expected to be completed in fiscal 2013. Future rental payments, net of estimated sublease income, related to operating lease obligations for unused space in connection with the closing or consolidation of facilities are expected to continue through fiscal 2020.

The following table summarizes the components of the fiscal 2010 restructuring program during the three months ended December 31, 2011:

 

In millions

   Employee
Separation
Costs
    Lease
Obligations
    Total  

Balance as of October 1, 2011

   $ 5      $ 14      $ 19   

Cash payments

     (3     (2     (5

Adjustments (1)

     1        —          1   

Impact of foreign currency fluctuations

     1        —          1   
  

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

   $ 4      $ 12      $ 16   
  

 

 

   

 

 

   

 

 

 

 

(1) Included in adjustments are changes in estimates, whereby all increases and decreases in costs related to the fiscal 2010 restructuring program are recorded to the restructuring charges line item in operating expenses in the period of the adjustment.

 

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Fiscal 2009 Restructuring Program

During fiscal 2009, as a response to the global economic downturn, the Company began implementing initiatives designed to streamline the operations of the Company and generate cost savings, which include exiting facilities and separating or relocating employees. Restructuring charges recorded during fiscal 2009 associated with these initiatives included employee separation costs primarily associated with involuntary personnel reductions in Germany, as well as in the EMEA and U.S. regions. The payments related to headcount reductions identified in this program are expected to be completed in fiscal 2013. Future rental payments, net of estimated sublease income, related to operating lease obligations for unused space in connection with the closing or consolidation of facilities are expected to continue through fiscal 2020.

The following table summarizes the components of the fiscal 2009 restructuring program during the three months ended December 31, 2011:

 

In millions

   Employee
Separation
Costs
    Lease
Obligations
    Total  

Balance as of October 1, 2011

   $ 3      $ 3      $ 6   

Cash payments

     (1     (1     (2

Adjustments (1)

     1        —          1   

Impact of foreign currency fluctuations

     (1     —          (1
  

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

   $ 2      $ 2      $ 4   
  

 

 

   

 

 

   

 

 

 

 

(1) Included in adjustments are changes in estimates, whereby all increases and decreases in costs related to the fiscal 2009 restructuring program are recorded to the restructuring charges line item in operating expenses in the period of the adjustment.

Fiscal 2008 Restructuring Reserve

In connection with the Merger, Avaya’s management and board of directors developed various plans and initiatives designed to streamline the operations of the Company and generate cost savings, which included exiting facilities and separating or relocating employees. As a result, the Company recorded $251 million of liabilities associated with involuntary employee severance actions and $79 million established for future lease payments on properties expected to be closed or consolidated as part of these initiatives. These amounts include the remaining payments associated with the restructuring reserves of periods prior to the Merger. The payments related to the headcount reductions associated with this restructuring reserve are expected to be completed in fiscal 2017. Cash payments associated with the lease obligations, net of sub-lease income, are expected to continue through 2020.

The following table summarizes the components of this reserve during the three months ended December 31, 2011:

 

In millions

   Employee
Separation
Costs
    Lease
Obligations
    Total  

Balance as of October 1, 2011

   $ 6      $ 30      $ 36   

Cash payments

     —          (1     (1

Adjustments (1)

     —          (2     (2

Impact of foreign currency fluctuations

     (1     —          (1
  

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2011

   $ 5      $ 27      $ 32   
  

 

 

   

 

 

   

 

 

 

 

(1) Included in adjustments are changes in estimates, whereby all increases in costs related to the fiscal 2008 restructuring program are recorded to the restructuring charges line item in operating expenses in the period of the adjustment and decreases in costs are recorded as adjustments to goodwill, as these reserves relate to actions taken prior to the Company’s adoption of ASC 805, “Business Combinations.”

 

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7. Financing Arrangements

In connection with the Merger, on October 26, 2007, the Company entered into financing arrangements consisting of a senior secured credit facility, a senior unsecured credit facility, which later became senior unsecured notes, and a senior secured multi-currency asset-based revolving credit facility. On February 11, 2011, the Company amended and extended its senior secured credit facility and issued senior secured notes, the proceeds of which were used to repay the senior secured incremental term B-2 loans in full under the Company’s senior secured credit facility and related fees and expenses. Long-term debt consists of the following:

 

In millions

   December 31,
2011
    September 30,
2011
 

Senior secured term B-1 loans

   $ 1,445      $ 1,449   

Senior secured term B-3 loans

     2,160        2,165   

Senior secured notes

     1,009        1,009   

9.75% senior unsecured cash pay notes due 2015

     700        700   

10.125%/10.875% senior unsecured PIK toggle notes due 2015

     834        834   
  

 

 

   

 

 

 
     6,148        6,157   

Debt maturing within one year

     (37     (37
  

 

 

   

 

 

 

Long-term debt

   $ 6,111      $ 6,120   
  

 

 

   

 

 

 

Senior Secured Credit Facility

Prior to refinancing on February 11, 2011, the senior secured credit facility consisted of (a) a senior secured multi-currency revolver allowing for borrowings of up to $200 million, (b) a $3,800 million senior secured term loan (the “term B-1 loans”), which was drawn in full on the closing date of the Merger, and (c) a $1,000 million incremental senior secured term loan (the “incremental term B-2 loans”), which was drawn in full at an original issue discount of 20.0% on December 18, 2009, the date of the Acquisition.

On February 11, 2011, the Company amended and restated the senior secured credit facility to reflect modifications to certain provisions thereof. The modified terms of the senior secured credit facility include (1) an amendment which allowed the Company to extend the maturity of a portion of the term B-1 loans representing outstanding principal amounts of $2.2 billion from October 26, 2014 to October 26, 2017 (potentially springing to July 26, 2015, under the circumstances described below) by converting such loans into a new tranche of senior secured B-3 loans (the “term B-3 loans”); (2) permission, at the election of the Company, to apply prepayments of term loans to the incremental term B-2 loans prior to the term B-1 loans and term B-3 loans and thereafter to the class of term loans with the next earliest maturity; (3) permission to issue indebtedness (including the senior secured notes described below) to refinance a portion of the term loans under the senior secured credit facility and to secure such indebtedness (including the senior secured notes) on a pari passu basis with the obligations under the senior secured credit facility, (4) permission for future refinancing of the term loans under the senior secured credit facility, and (5) permission for future extensions of the term loans and revolving credit commitments (including, in the case of the revolving credit commitments, by obtaining new revolving credit commitments) under the senior secured credit facility.

The new tranche of term B-3 loans bears interest at a rate per annum equal to either a base rate or a LIBOR rate, in each case plus an applicable margin. The base rate is determined by reference to the higher of (1) the prime rate of Citibank, N.A. and (2) the federal funds effective rate plus  1/2 of 1%. The applicable margin for borrowings of term B-3 loans is 3.50% per annum with respect to base rate borrowings and 4.50% per annum with respect to LIBOR borrowings. No changes were made to the maturity date or interest rates payable with respect to the non-extended term B-1 loans described above.

 

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The maturity of the term B-3 loans will automatically become due July 26, 2015 unless (i) the total net leverage ratio as tested on that date based upon the most recent financial statements provided to the lenders under the senior secured credit facility is no greater than 5.0 to 1.0 or (ii) on or prior to such date, either (x) an initial public offering of Parent shall have occurred or (y) at least $750 million in aggregate principal amount of the Company’s senior unsecured cash-pay notes and/or senior unsecured paid-in-kind (“PIK”) toggle notes have been repaid or refinanced or their maturity has been extended to a date no earlier than 91 days after October 26, 2017.

The amendment and restatement of the senior secured credit facility represents a debt modification for accounting purposes. Accordingly, third party expenses of $9 million incurred in connection with the transaction were expensed as incurred and included in other income, net during the three months ended March 31, 2011. Avaya’s financing sources that held term B-1 loans and/or revolving credit commitments under the senior secured credit facility and consented to the amendment and restatement of the senior secured credit facility received in aggregate a consent fee of $10 million. Fees paid to or on behalf of the creditors in connection with the modification were recorded as a discount to the face value of the debt and are being accreted over the term of the debt as interest expense.

Additionally, as discussed more fully below, on February 11, 2011, the Company completed a private placement of $1,009 million of senior secured notes, the proceeds of which were used to repay in full the incremental term B-2 loans outstanding under the Company’s senior secured credit facility.

Funds affiliated with Silver Lake and TPG were holders of incremental term B-2 loans. Similar to other holders of senior secured incremental term B-2 loans, those senior secured incremental term B-2 loans held by affiliates of TPG and Silver Lake were repaid in connection with the issuance of the senior secured notes.

The senior secured multi-currency revolver, which allows for borrowings of up to $200 million, was not impacted by the refinancing. The senior secured multi-currency revolver includes capacity available for letters of credit and for short-term borrowings, and is available in euros in addition to dollars. Borrowings are guaranteed by Parent and substantially all of the Company’s U.S. subsidiaries. The senior secured facility, consisting of the term loans and the senior secured multi-currency revolver referenced above, is secured by substantially all assets of Parent, the Company and the subsidiary guarantors.

On August 8, 2011, the Company amended the terms of the senior secured multi-currency revolver to extend the final maturity from October 26, 2013 to October 26, 2016. All other terms and conditions of the senior secured credit facility remain unchanged. As of December 31, 2011 there were no amounts outstanding under the senior secured multi-currency revolver.

As a result of the refinancing transaction, the term loans outstanding under the senior secured credit facility include term B-1 loans and term B-3 loans with remaining face values as of December 31, 2011 (after all principal payments to date) of $1,445 million and $2,169 million, respectively. The Company is required to make scheduled quarterly principal payments under the term B-1 loans and the term B-3 loans, equal to $10 million in the aggregate.

As of December 31, 2011 affiliates of Silver Lake held $54 million and $123 million in outstanding principal amounts of term B-1 loans and term B-3 loans, respectively. As of September 30, 2011 affiliates of Silver Lake held $54 million and $123 million in outstanding principal amounts of term B-1 loans and term B-3 loans, respectively.

As of December 31, 2011 affiliates of TPG held $118 million in outstanding principal amounts of term B-1 loans. As of September 30, 2011 affiliates of TPG held $119 million in outstanding principal amounts of term B-1 loans.

 

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Senior Unsecured Notes

The Company has issued $700 million of senior unsecured cash-pay notes and $750 million of senior unsecured PIK toggle notes, each due November 1, 2015. The interest rate for the cash-pay notes is fixed at 9.75% and the interest rates for the cash interest and PIK interest portions of the PIK-toggle notes are fixed at 10.125% and 10.875%, respectively. The Company may prepay the senior unsecured notes commencing November 1, 2011 at 104.875% of the cash pay note and at 105.0625% of PIK toggle note principal amount, which decreases to 102.4375% and 102.5313%, respectively, on November 1, 2012 and to 100% of each on or after November 1, 2013.

Substantially all of the Company’s U.S. 100%-owned subsidiaries are guarantors of the senior unsecured notes. For the periods May 1, 2009 through October 31, 2009 and November 1, 2009 through April 30, 2010, the Company elected to pay interest in kind on its senior PIK toggle notes. PIK interest of $41 million and $43 million was added, for these periods, respectively, to the principal amount of the senior unsecured notes effective November 1, 2009 and May 1, 2010, respectively, and will be payable when the senior unsecured notes become due. For the periods of May 1, 2010 through October 31, 2010, November 1, 2010 through April 30, 2011, and May 1, 2011 to October 31, 2011 the Company has elected to make such payments in cash interest. Under the terms of these notes, after November 1, 2011 the Company is required to make all interest payments on the senior unsecured PIK toggle notes entirely in cash.

Senior Secured Asset-Based Credit Facility

The Company’s senior secured multi-currency asset-based revolving credit facility allows for borrowings of up to $335 million, subject to availability under a borrowing base, of which $150 million may be in the form of letters of credit. The borrowing base at any time equals the sum of 85% of eligible accounts receivable plus 85% of the net orderly liquidation value of eligible inventory, subject to certain reserves and other adjustments. The Company and substantially all of its U.S. subsidiaries are borrowers under this facility, and borrowings are guaranteed by Parent, the Company and substantially all of the Company’s U.S. subsidiaries. The facility is secured by substantially all assets of Parent, the Company and the subsidiary guarantors. The senior secured multi-currency asset- based revolving credit facility also provides the Company with the right to request up to $100 million of additional commitments under this facility.

On August 8, 2011, the Company amended the terms of its senior secured multi-currency asset-based revolving credit facility to extend its final maturity from October 26, 2013 to October 25, 2016. All other terms and conditions of the senior secured multi-currency asset-based revolving credit facility remain unchanged.

At December 31, 2011 and September 30, 2011, there were no borrowings under this facility. At December 31, 2011 and September 30, 2011 there were $73 million and $75 million, respectively, of letters of credit issued in the ordinary course of business under the senior secured asset-based credit facility resulting in remaining availability of $262 million and $252 million, respectively.

Senior Secured Notes

On February 11, 2011, the Company completed a private placement of $1,009 million of senior secured notes. The senior secured notes were issued at par, bear interest at a rate of 7% per annum and mature on April 1, 2019. The senior secured notes were sold through a private placement to qualified institutional buyers pursuant to Rule 144A (and outside the United States in reliance on Regulation S) under the Securities Act of 1933, as amended (the “Securities Act”) and have not been, and will not be, registered under the Securities Act or applicable state securities laws.

The Company may redeem the senior secured notes commencing April 1, 2015 at 103.5% of the principal amount redeemed, which decreases to 101.75% on April 1, 2016 and to 100% on or after April 1, 2017. The Company may redeem all or part of the notes at any time prior to April 1, 2015 at 100% of the principal amount

 

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redeemed plus a “make-whole” premium. In addition, the Company may redeem up to 35% of the original aggregate principal balance of the senior secured notes at any time prior to April 1, 2014 with the net proceeds of certain equity offerings at 107% of the aggregate principal amount of senior secured notes redeemed. Upon the occurrence of specific kinds of changes of control, the Company will be required to make an offer to purchase the senior secured notes at 101% of their principal amount. If the Company or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances the Company will be required to use the net proceeds to make an offer to purchase the senior secured notes at 100% of their principal amount.

Substantially all of the Company’s U.S. 100%-owned subsidiaries are guarantors of the senior secured notes. The senior secured notes are secured by substantially all of the assets of the Company and the subsidiary guarantors.

The proceeds from the senior secured notes were used to repay in full the senior secured incremental term B-2 loans outstanding under the Company’s senior secured credit facility (representing $988 million in aggregate principal amount and $12 million in accrued and unpaid interest) and to pay related fees and expenses.

The issuance of the senior secured notes and repayment of the incremental term B-2 loans was accounted for as an extinguishment of the incremental term B-2 loans and issuance of new debt. Accordingly, the difference between the reacquisition price of the incremental term B-2 loans (including consent fees paid by Avaya to the holders of the incremental term B-2 loans that consented to the amendment and restatement of the senior secured credit facility of $1 million) and the carrying value of the incremental term B-2 loans (including unamortized debt discount and debt issue costs) of $246 million was recognized as a loss upon debt extinguishment during the three months ended March 31, 2011. In connection with the issuance of the senior secured notes, the Company capitalized financing costs of $23 million during fiscal 2011 and is amortizing these costs over the term of the senior secured notes.

The Company’s senior secured credit facility, senior secured multi-currency asset-based revolving credit facility, and indentures governing our senior secured notes, senior unsecured cash-pay notes and senior unsecured PIK toggle notes contain a number of covenants that, among other things and subject to certain exceptions, restrict the Company’s ability and the ability of certain of its subsidiaries to: (a) incur or guarantee additional debt and issue or sell certain preferred stock; (b) pay dividends on, redeem or repurchase capital stock; (c) make certain acquisitions or investments; (d) incur or assume certain liens; (e) enter into transactions with affiliates; (f) merge or consolidate with another company; (g) transfer or otherwise dispose of assets; (h) redeem subordinated debt; (i) incur obligations that restrict the ability of the Company’s subsidiaries to make dividends or other payments to the Company or Parent; and (j) create or designate unrestricted subsidiaries. They also contain customary affirmative covenants and events of default.

As of December 31, 2011 and September 30, 2011, the Company was not in default under its senior secured credit facility, the indenture governing its senior secured notes, the indenture governing its senior unsecured notes or its senior secured multi-currency asset-based revolving credit facility.

The weighted average interest rate of the Company’s outstanding debt as of December 31, 2011 was 6.2% excluding the impact of the interest rate swaps described in Note 8, “Derivatives and Other Financial Instruments”.

Annual maturities of long-term debt for the next five years ending September 30 and thereafter consist of:

 

In millions

      

Remainder of fiscal 2012

   $ 29   

2013

     38   

2014

     38   

2015

     1,442   

2016

     1,542   

2017 and thereafter

     3,068   
  

 

 

 

Total

   $ 6,157   
  

 

 

 

 

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Capital Lease Obligations

Included in other liabilities at December 31, 2011 is $22 million of capital lease obligations, primarily associated with an office facility assumed in the acquisition of NES.

8. Derivatives and Other Financial Instruments

Interest Rate Swaps

The Company uses interest rate swaps to manage the amount of its floating rate debt in order to reduce its exposure to variable rate interest payments associated with certain borrowings under the senior secured credit facility. The interest rate swaps presented below are designated as cash flow hedges. The fair value of each interest rate swap is reflected as an asset or liability in the Consolidated Balance Sheets, reported as a component of other comprehensive income (loss) and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on derivative instruments representing hedge ineffectiveness are recognized in current earnings. The fair value of each interest rate swap is estimated as the net present value of their projected cash flows at the balance sheet date.

The details of these swaps are as follows:

 

In millions

   Effective Date      Maturity Date      Notional
Amount
     Floating Rate
Received by Avaya
     Fixed Rate
Paid by Avaya
 

5-year swap

     November 26, 2007         November 26, 2012       $ 300         3-month LIBOR         4.591

3-year swap

     August 26, 2010         August 26, 2013         750         3-month LIBOR         1.160

3-year swap

     August 26, 2010         August 26, 2013         750         3-month LIBOR         1.135
        

 

 

       

Notional amount—Total

  

   $ 1,800         
        

 

 

       

The following table summarizes the (gains) and losses of the interest rate contracts qualifying and designated as cash flow hedging instruments:

 

     Three months  ended
December 31,
 

In millions

       2011             2010      

(Gain) loss on interest rate swaps

    

Recognized in other comprehensive loss

   $ (10   $ (22
  

 

 

   

 

 

 

Reclassified from accumulated other comprehensive income (loss) into interest expense

   $ 8      $ 16   
  

 

 

   

 

 

 

Recognized in operations (ineffective portion)

   $ —        $ —     
  

 

 

   

 

 

 

The Company expects to reclassify approximately $18 million from accumulated other comprehensive loss into expense in the next twelve months related to the Company’s interest rate swaps based on the projected borrowing rates as of December 31, 2011.

Foreign Currency Forward Contracts

The Company utilizes foreign currency forward contracts primarily to manage short-term exchange rate exposures on certain receivables, payables and intercompany loans residing on foreign subsidiaries’ books, which are denominated in currencies other than the subsidiary’s functional currency. When those items are revalued into the subsidiaries’ functional currencies at the month-end exchange rates, the fluctuations in the exchange rates are recognized in the Consolidated Statements of Operations as other income (expense), net. Changes in the fair value of the Company’s foreign currency forward contracts used to offset these exposed items are also recognized in the Consolidated Statements of Operations as other income (expense), net in the period in which the exchange rates change.

 

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The gains and (losses) of the foreign currency forward contracts included in other income (expense), net were ($5) million and $8 million for the three months ended December 31, 2011 and 2010, respectively.

The following table summarizes the estimated fair value of derivatives:

 

In millions

   December 31, 2011     September 30, 2011  

Balance Sheet Location

   Total     Foreign
Currency
Forward
Contracts
    Interest
Rate
Swaps
    Total     Foreign
Currency
Forward
Contracts
    Interest
Rate
Swaps
 

Other current assets

   $ —        $ —        $ —        $ 1      $ 1      $ —     

Other current liabilities

     (20     (1     (19     (26     (2     (24

Other non-current liabilities

     (4     —          (4     (10     —          (10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Liability

   $ (24   $ (1   $ (23   $ (35   $ (1   $ (34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

9. Fair Value Measures

Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

Fair Value Hierarchy

The accounting guidance for fair value measurement also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The inputs are prioritized into three levels that may be used to measure fair value:

Level 1: Inputs that reflect quoted prices for identical assets or liabilities in active markets that are observable.

Level 2: Inputs that reflect quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3: Inputs that are unobservable to the extent that observable inputs are not available for the asset or liability at the measurement date.

 

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Asset and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 and September 30, 2011 were as follows:

 

     December 31, 2011  
     Fair Value Measurements Using  

In millions

   Total      Quoted Prices
in Active  Markets
for Identical
Instruments

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Other Non-Current Assets:

           

Investments

   $ 10       $ 8       $ 2       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Current Liabilities:

           

Foreign currency forward contracts

   $ 1       $ —         $ 1       $ —     

Interest rate swaps

     19         —           19         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 20       $ —         $ 20       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Non-Current Liabilities:

           

Interest rate swaps

   $ 4       $ —         $ 4       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 30, 2011  
     Fair Value Measurements Using  

In millions

   Total      Quoted Prices
in Active Markets
for Identical
Instruments
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Other Current Assets:

           

Foreign currency forward contracts

   $ 1       $ —         $ 1       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Non-Current Assets:

           

Investments

   $ 11       $ 9       $ 2       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Current Liabilities:

           

Foreign currency forward contracts

   $ 2       $ —         $ 2       $ —     

Interest rate swaps

     24         —           24         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26       $ —         $ 26       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Non-Current Liabilities:

           

Interest rate swaps

   $ 10       $ —         $ 10       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest Rate Swaps

Interest rate swaps classified as Level 2 assets and liabilities are priced using non-binding market prices that are corroborated by observable market data, or discounted cash flow techniques. Significant inputs to the discounted cash flow model include projected future cash flows based on projected 3-month LIBOR rates, and the average margin for companies with similar credit ratings and similar maturities. These are classified as Level 2 as they are not actively traded and are valued using pricing models that use observable market inputs.

Foreign Currency Forward Contracts

Foreign currency forward contracts classified as Level 2 assets and liabilities are priced using quoted market prices for similar assets or liabilities in active markets.

 

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Investments

Investments classified as Level 2 assets and liabilities are priced using quoted market prices in markets with insufficient volume.

Fair Value of Financial Instruments

The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, to the extent the underlying liability will be settled in cash, approximate carrying values because of the short-term nature of these instruments.

In connection with an acquisition completed by Parent in October 2011, the Company advanced $8 million to Parent in exchange for a note receivable. The note receivable is due October 2014 with interest at 1.63% per annum and is included in other assets in the Company’s Consolidated Balance Sheet. The estimated fair value of the note receivable at December 31, 2011 was $6 million and was determined based on a Level 2 input using discounted cash flow techniques.

The estimated fair values of the amounts borrowed under the Company’s financing arrangements at December 31, 2011 and September 30, 2011 were estimated based on a Level 2 input using quoted market prices in markets with insufficient volume.

The estimated fair values of the amounts borrowed under the Company’s credit agreements at December 31, 2011 and September 30, 2011 are as follows:

 

     December 31, 2011      September 30, 2011  

In millions

   Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Senior secured term B-1 loans

   $ 1,445       $ 1,377       $ 1,449       $ 1,298   

Senior secured term B-3 loans

     2,160         1,970         2,165         1,833   

Senior secured notes

     1,009         965         1,009         854   

9.75% senior unsecured cash pay notes due 2015

     700         632         700         511   

10.125%/10.875% senior unsecured PIK toggle notes due 2015

     834         758         834         612   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,148       $ 5,702       $ 6,157       $ 5,108   
  

 

 

    

 

 

    

 

 

    

 

 

 

10. Income Taxes

The benefit for income taxes for the three months ended December 31, 2011 was $2 million, as compared to the provision for income taxes of $22 million for the three months ended December 31, 2010. The effective rate for the three months ended December 31, 2011 was 7.1% as compared to the effective tax rate of 13.9% for the three months ended December 31, 2010, and differs from the U.S. Federal tax rate primarily due to the effect of taxable income in non-U.S. jurisdictions and due to the valuation allowance established against the Company’s U.S. deferred tax assets.

11. Benefit Obligations

The Company sponsors non-contributory defined benefit pension plans covering a portion of its U.S. employees and retirees, and postretirement benefit plans for U.S. retirees that include healthcare benefits and life insurance coverage. The Company froze benefit accruals and additional participation in the pension and postretirement plan for its U.S. management employees effective December 31, 2003. Effective October 12, 2011 and November 18, 2011, the Company entered into a two-year contract extension of 2009 agreement with the Communications Workers of America (“CWA”) and the International Brotherhood of Electrical Workers (“IBEW”), respectively. With the contract extension, the contracts with the CWA and IBEW now terminate on June 7, 2014. The contract extension did not affect the level of pension and postretirement benefits available to U.S. employees of the Company who are represented by the CWA or IBEW (“represented employees”).

 

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Certain non-U.S. operations have various retirement benefit programs covering substantially all of their employees. Some of these programs are considered to be defined benefit pension plans for accounting purposes.

The components of the pension and postretirement net periodic benefit cost for the three months ended December 31, 2011 and 2010 are provided in the table below:

 

    Pension Benefits -
U.S.
    Pension Benefits -
Non-U.S.
    Postretirement
Benefits - U.S.
 
    Three months
ended December 31,
    Three months
ended December 31,
    Three months
ended December 31,
 

In millions

      2011             2010             2011             2010             2011             2010      

Components of Net Periodic Benefit Cost

           

Service cost

  $ 2      $ 2      $ 2      $ 2      $ 1      $ 1   

Interest cost

    37        38        6        6        8        8   

Expected return on plan assets

    (43     (44     (1     —          (3     (3

Amortization of unrecognized prior service cost

    —          —          —          —          —          1   

Amortization of previously unrecognized net actuarial loss

    25        16        —          —          2        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

  $ 21      $ 12      $ 7      $ 8      $ 8      $ 7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s general funding policy with respect to its U.S. qualified pension plans is to contribute amounts at least sufficient to satisfy the minimum amount required by applicable law and regulations. For the three month period ended December 31, 2011, the Company made contributions of $15 million to satisfy minimum statutory funding requirements. Estimated payments to satisfy minimum statutory funding requirements for the remainder of fiscal 2012 are $75 million.

The Company provides certain pension benefits for U.S. employees, which are not pre-funded, and certain pension benefits for non-U.S. employees, the majority of which are not pre-funded. Consequently, the Company makes payments as these benefits are disbursed or premiums are paid. For the three month period ended December 31, 2011, the Company made payments for these U.S. and non-U.S. pension benefits totaling $2 million and $4 million, respectively. Estimated payments for these U.S. and non-U.S. pension benefits for the remainder of fiscal 2012 are $5 million and $22 million, respectively.

During the first quarter of fiscal 2012, the Company contributed $12 million to the represented employees’ post-retirement health trust to fund current benefit claims and costs of administration in compliance with the terms of the 2009 agreements between the Company and the CWA and IBEW, as extended through June 7, 2014. Estimated contributions under the terms of the agreements are $38 million for the remainder of fiscal 2012.

The Company also provides certain retiree medical benefits for U.S. employees, which are not pre-funded. Consequently, the Company makes payments as these benefits are disbursed. For the three month period ended December 31, 2011, the Company made payments totaling $2 million for these retiree medical benefits. Estimated payments for these retiree medical benefits for the remainder of fiscal 2012 are $10 million.

12. Share-based Compensation

Avaya Holdings Corp.’s Amended and Restated 2007 Equity Incentive Plan (“2007 Plan”) governs the issuance of equity awards, including restricted stock units (“RSUs”) and stock options, to eligible plan participants. Key employees, directors, and consultants of the Company may be eligible to receive awards under the 2007 Plan. Each stock option, when vested and exercised, and each RSU, when vested, entitles the holder to receive one share of Parent’s common stock, subject to certain restrictions on their transfer and sale as defined in the 2007 Plan and related award agreements. As of December 31, 2011, Parent had authorized the issuance of up to 49,848,157 shares of its common stock under the 2007 Plan, in addition to 2,924,125 shares of common stock underlying certain continuation awards that were permitted to be issued at the time of the Merger. There remained 3,837,143 shares available for grant under the 2007 Plan as of December 31, 2011.

 

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Option Awards

During the three months ended December 31, 2011, 1,317,714 time-based and 709,539 multiple-of-money options were granted in the ordinary course of business. All of the options have an exercise price of $4.40 per share and expire ten years from the date of grant or upon cessation of employment, in which event there are limited exercise provisions allowed for vested options.

Time-based options granted during the three months ended December 31, 2011 vest over their performance periods, generally four years. Compensation expense equal to the fair value of the option measured on the grant date is recognized utilizing graded attribution over the requisite service period.

Multiple-of-money options vest upon the achievement of defined returns on the Sponsors’ initial investment in Parent. Because vesting of the multiple-of-money market-based options is outside the control of the Company and the award recipients, compensation expense relative to the multiple-of-money options must be recognized upon the occurrence of a triggering event (e.g., sale or initial public offering of Parent).

The fair value of option awards is determined at the date of grant utilizing the Cox-Ross Rubinstein (“CRR”) binomial option pricing model which is affected by the fair value of Parent’s common stock as well as a number of complex and subjective assumptions. Expected volatility is based primarily on a combination of the Company’s peer group’s historical volatility and estimates of implied volatility of the Company’s peer group. The risk-free interest rate assumption was derived from reference to the U.S. Treasury Spot rates for the expected term of the stock options. The dividend yield assumption is based on Parent’s current intent not to issue a dividend under its dividend policy. The expected holding period assumption was estimated based on the Company’s historical experience.

For the three months ended December 31, 2011 and 2010, the Company recognized share-based compensation associated with options issued under the 2007 Plan of $2 million and $3 million, respectively, which is included in costs and operating expenses.

Restricted Stock Units

The Company has issued RSUs each of which represents the right to receive one share of Parent’s common stock when fully vested. The fair value of the RSUs is estimated by the Board of Directors on the respective dates of grant.

During the three months ended December 31, 2011, 685,000 RSUs were awarded in the ordinary course of business. The fair market value (as defined in the 2007 Plan) of these awards at the date of grant was $4.40 per share.

In addition, in December 2011, Parent and the Company appointed Mr. Gary Smith as an independent director to serve on their respective boards of directors and on Parent’s Audit and Compensation Committees. Upon his election, he received an initial grant of 79,546 RSUs, representing an inaugural grant of 45,455 RSUs and an annual equity grant of 34,091 RSUs. In addition, of his total annual retainer worth $120,000, based on his service on the board and his appointment as a member of the Audit and Compensation Committees, Mr. Smith elected to receive that retainer $60,000 in cash and $60,000 in RSUs (equaling 13,636 RSUs). All RSUs were awarded to Mr. Smith based upon the fair market value of Parent’s common stock on December 6, 2011, the date of grant, which was $4.40 per share. The RSUs were granted pursuant to the terms of the 2007 Plan and were fully vested on the date of grant. The shares underlying the RSUs will not be distributed to him until he ceases to serve on the board of directors.

On December 5, 2011, the Compensation Committee approved a plan to provide incentives to certain executive officers of the Company to continue to grow revenue in fiscal year 2012 (the “2012 Sales Incentive Program”). Under the terms of the 2012 Sales Incentive Program, effective December 6, 2011 the committee approved a

 

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grant to each program participant of the conditional right to receive a number of RSUs under Parent’s 2007 Plan upon the achievement of certain revenue objectives. All RSUs awarded under the 2012 Sales Incentive Program will be based upon the fair market value of Parent’s common stock on the date of grant.

The number of RSUs that a participating employee in the 2012 Sales Incentive Program will have the right to receive (subject to vesting requirements and the other terms and conditions of the applicable award agreement) will be determined based upon achievement of both of the following: (i) revenue targets for specific sales territories/divisions/product units (each, a “Performance Gateway”) and (ii) an overall revenue target for the Company. Achievement of targets under the 2012 Sales Incentive Program will be measured twice in fiscal year 2012, with a participating employee being able to earn half of his total opportunity based on results for the first half of fiscal year 2012 and the second half of his total opportunity based on results for the second half of fiscal year 2012. All RSU awards granted under the 2012 Sales Incentive Program will vest on December 6, 2013 for each program participant who achieves the performance objectives.

At December 31, 2011, there were 2,288,182 awarded RSUs outstanding under the 2007 Plan, of which 965,000 were fully vested. For the three months ended December 31, 2011 and 2010, the Company recognized share-based compensation associated with RSUs granted under the 2007 Plan of $1 million and less than $1 million, respectively.

13. Reportable Segments

Avaya conducts its business operations in three segments. Two of those segments, Global Communications Solutions (“GCS”) and Avaya Networking (“Networking”), make up Avaya’s product portfolio. The third segment contains Avaya’s services portfolio and is called Avaya Global Services (“AGS”).

The GCS segment primarily develops, markets, and sells unified communications and contact center solutions by integrating multiple forms of communications, including telephone, e-mail, instant messaging and video. Avaya’s Networking segment’s portfolio of products offers integrated networking solutions which are scalable across customer enterprises. The AGS segment develops, markets and sells comprehensive end-to-end global service offerings that allow customers to evaluate, plan, design, implement, monitor, manage and optimize complex enterprise communications networks.

For internal reporting purposes the Company’s chief operating decision maker makes financial decisions and allocates resources based on segment margin information obtained from the Company’s internal management systems. Management does not include in its segment measures of profitability selling, general, and administrative expenses, research and development expenses, amortization of intangible assets, and certain discrete items, such as charges relating to restructuring actions, impairment charges, and merger-related costs as these costs are not core to the measurement of segment management’s performance, but rather are controlled at the corporate level.

 

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Summarized financial information relating to the Company’s reportable segments is shown in the following table:

 

     Three months ended
December 31,
 

In millions

       2011             2010      

REVENUE

    

Global Communications Solutions

   $ 667      $ 645   

Avaya Networking

     82        78   

Avaya Global Services

     638        645   

Unallocated Amounts (1)

     —          (2
  

 

 

   

 

 

 
   $ 1,387      $ 1,366   
  

 

 

   

 

 

 

GROSS MARGIN

    

Global Communications Solutions

   $ 400      $ 358   

Avaya Networking

     37        31   

Avaya Global Services

     313        303   

Unallocated Amounts (1)

     (46     (73
  

 

 

   

 

 

 
     704        619   

OPERATING EXPENSES

    

Selling, general and administrative

     433        461   

Research and development

     111        115   

Amortization of intangible assets

     56        56   

Restructuring charges, net

     21        22   

Acquisition-related costs

     1        4   
  

 

 

   

 

 

 
     622        658   
  

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     82        (39

INTEREST EXPENSE AND OTHER INCOME, NET

     (110     (119
  

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

   $ (28   $ (158
  

 

 

   

 

 

 

 

(1) Unallocated Amounts in Gross Margin include the amortization of technology intangible assets that are not identified with a specific segment. Unallocated Amounts in Revenue and Gross Margin also include the impacts of certain fair value adjustments recorded in purchase accounting in connection with the Merger.

14. Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations and proceedings, including, but not limited to, those identified below, relating to intellectual property, commercial, securities, employment, employee benefits, environmental and regulatory matters.

Other than as described below, the Company believes there is no litigation pending or environmental and regulatory matters against the Company that could have, individually or in the aggregate, a material adverse effect on the Company’s financial position, results of operations or cash flows.

Antitrust Litigation

In 2006, the Company instituted an action in the U.S. District Court, District of New Jersey, against defendants Telecom Labs, Inc., TeamTLI.com Corp. and Continuant Technologies, Inc. and subsequently amended its complaint to include certain individual officers of these companies as defendants. Defendants purportedly provide maintenance services to customers who have purchased or leased the Company’s communications equipment. The Company asserts in its amended complaint that, among other things, defendants, or each of them, have engaged in tortious conduct and/or violated federal intellectual property laws by improperly accessing and utilizing the Company’s proprietary software, including passwords, logins and maintenance service permissions,

 

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to perform certain maintenance services on the Company’s customers’ equipment. Defendants have filed counterclaims against the Company, alleging a number of tort claims and alleging that the Company has violated the Sherman Act’s prohibitions against anticompetitive conduct through the manner in which the Company sells its products and services. Defendants seek to recover the profits they claim they would have earned from maintaining Avaya’s products, and ask for injunctive relief prohibiting the conduct they claim is anticompetitive. Under the federal antitrust laws, defendants would be entitled to three times the amount of any actual damages awarded for lost profits plus attorney’s fees and costs. The parties have engaged in extensive discovery and motion practice to, among other things, amend and dismiss pleadings and compel and oppose discovery requests. A trial date originally set for September 2011 has been adjourned and no new date has been set by the court. In November 2011, defendant’s motion to dismiss Avaya’s Digital Millennium Copyright Act claims was granted in part and denied in part. In January 2011, Avaya’s motions to dismiss defendants’ counterclaims were granted in part and denied in part. At this point in the proceeding, expert discovery on the Company’s claims and the defendants’ surviving counter-claims continues. Therefore, at this time an outcome cannot be predicted and, as a result, the Company cannot be assured that this case will not have a material adverse effect on the manner in which it does business, its financial position, results of operations or cash flows.

Intellectual Property

In the ordinary course of business, the Company is involved in litigation alleging it has infringed upon third parties’ intellectual property rights, including patents; some litigation may involve claims for infringement against customers by third parties relating to the use of Avaya’s products, as to which the Company may provide indemnifications of varying scope to certain customers. These matters are on-going and the outcomes are subject to inherent uncertainties. As a result, the Company cannot be assured that any such matter will not have a material adverse effect on its financial position, results of operations or cash flows. However, management does provide for estimated losses if and when it believes the facts and circumstances indicate that a loss is probable and the loss can be reasonably estimated. While it is not possible at this time to determine with certainty the ultimate outcome of these cases, the Company believes there are no such infringement matters that could have, individually or in aggregate, a material adverse effect on the Company’s financial position, results of operations or cash flows.

Other

In October 2009, a former supplier in France, Combel, made a claim for improper termination of the Company’s relationship under French law seeking damages of at least €10 million and a provisional (interim) indemnity by the Company of €5 million. The Company disputes that Combel is entitled to any such damages and that it has not improperly terminated the relationship. In December 2010, the court rejected all claims of Combel based on the allegedly improper termination of the commercial relationship and only a claim with respect to the buyback of inventory remains open. To assess the value of the remaining inventory, the court appointed an expert. Combel filed an appeal against the Court decision. In November 2011, the Court of Appeals affirmed the lower court decision denying Combel’s improper termination claim and ordered Avaya to pay Combel an amount for the inventory buy back. The amount ordered is not material to Avaya’s financial position, results of operations or cash flows. At this time it is unclear whether either party will appeal the decision, and an outcome cannot be predicted. Therefore the Company cannot be assured that this case will not have a material adverse effect on its financial position, results of operations or cash flows.

In October 2009, a group of former employees of Avaya’s former Shreveport, Louisiana manufacturing facility brought suit in Louisiana state court, naming as defendants Alcatel-Lucent USA, Inc., Lucent Technologies Services Company, Inc., and AT&T Technologies, Inc. The former employees allege hearing loss due to hazardous noise exposure from the facility dating back over forty years, and stipulate that the total amount of each individual’s damages does not exceed fifty thousand dollars. In February 2010 plaintiffs amended their complaint to add the Company as a named defendant. There are 101 plaintiffs in the case. Defendants’ motion to dismiss plaintiffs’ complaint is pending. This matter is in the early phases of discovery. The Company cannot determine if this matter will have an effect on our business, or, if it does, whether its outcome will have a material adverse effect on our financial position, results of operations or cash flows.

 

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General

We record accruals for legal contingencies to the extent that we conclude it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described above because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes.

Product Warranties

The Company recognizes a liability for the estimated costs that may be incurred to remedy certain deficiencies of quality or performance of the Company’s products. These product warranties extend over a specified period of time generally ranging up to two years from the date of sale depending upon the product subject to the warranty. The Company accrues a provision for estimated future warranty costs based upon the historical relationship of warranty claims to sales. The Company periodically reviews the adequacy of its product warranties and adjusts, if necessary, the warranty percentage and accrued warranty reserve, which is included in other current liabilities in the Consolidated Balance Sheets, for actual experience.

 

In millions

      

Balance as of September 30, 2011

   $ 24   

Reductions for payments and costs to satisfy claims

     (5

Accruals for warranties issued during the period

     1   
  

 

 

 

Balance as of December 31, 2011

   $ 20   
  

 

 

 

Guarantees of Indebtedness and Other Off-Balance Sheet Arrangements

Letters of Credit

The Company has uncommitted credit facilities that vary in term totaling $46 million, of which the Company had entered into letters of credit totaling $44 million, as of December 31, 2011 for the purpose of obtaining third party financial guarantees, such as letters of credit which ensure the Company’s performance or payment to third parties. As of December 31, 2011, the Company had outstanding an aggregate of $117 million in irrevocable letters of credit under its committed and uncommitted credit facilities (including $73 million under its $535 million committed revolving credit facilities).

Surety Bonds

The Company arranges for the issuance of various types of surety bonds, such as license, permit, bid and performance bonds, which are agreements under which the surety company guarantees that the Company will perform in accordance with contractual or legal obligations. These bonds vary in duration although most are issued and outstanding from three months to three years. These bonds are backed by $12 million of the Company’s letters of credit. If the Company fails to perform under its obligations, the maximum potential payment under these surety bonds is $21 million as of December 31, 2011. Historically, no surety bonds have been drawn upon.

Purchase Commitments and Termination Fees

The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and to help assure adequate component supply, the Company enters into agreements with contract manufacturers and suppliers that allow them to produce and procure inventory based upon forecasted requirements provided by the Company. If the Company does not meet these specified purchase

 

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commitments, it could be required to purchase the inventory, or in the case of certain agreements, pay an early termination fee. Historically, the Company has not been required to pay a charge for not meeting its designated purchase commitments with these suppliers, but has been obligated to purchase certain excess inventory levels from its outsourced manufacturers due to actual sales of product varying from forecast and due to transition of manufacturing from one vendor to another. As of December 31, 2011, the maximum potential payment under these commitments was approximately $107 million.

The Company’s outsourcing agreements with its two most significant contract manufacturers expire in July and September 2013. After the initial term, the outsourcing agreements are automatically renewed for successive periods of twelve months each, subject to specific termination rights for the Company and the contract manufacturers. All manufacturing of the Company’s products is performed in accordance with either detailed requirements or specifications and product designs furnished by the Company, and is subject to rigorous quality control standards.

Product Financing Arrangements

The Company sells products to various resellers that may obtain financing from certain unaffiliated third-party lending institutions. For the Company’s product financing arrangement with resellers outside the U.S., in the event participating resellers default on their payment obligations to the lending institution, the Company is obligated under certain circumstances to guarantee repayment to the lending institution. The repayment amount fluctuates with the level of product financing activity. The guaranteed repayment amount was approximately $3 million as of December 31, 2011. The Company reviews and sets the maximum credit limit for each reseller participating in this financing arrangement. Historically, there have not been any guarantee repayments by the Company. The Company has estimated the fair value of this guarantee as of December 31, 2011, and has determined that it is not significant. There can be no assurance that the Company will not be obligated to repurchase inventory under this arrangement in the future.

Long-Term Cash Incentive Bonus Plan

The Parent has established a long-term incentive cash bonus plan (“LTIP”). Under the LTIP, the Parent will make cash awards available to compensate certain key employees upon the achievement of defined returns on the Sponsors’ initial investment in the Parent (a “triggering event”). The Parent has authorized LTIP awards covering a total of $60 million, of which $46 million in awards were outstanding as of December 31, 2011. The Company will begin to recognize compensation expense relative to the LTIP awards upon the occurrence of a triggering event (e.g., a sale or initial public offering). As of December 31, 2011, no compensation expense associated with the LTIP has been recognized.

Performance Guarantee

In connection with the sales of certain businesses, the Company has assigned its rights and obligations under several real estate leases to the acquiring companies (the “assignees”). The remaining terms of these leases vary from one year to four years. While the Company is no longer the primary obligor under these leases, the lessors have not completely released the Company from its obligations, and hold it secondarily liable in the event that the assignees default on these leases. The maximum potential future payments the Company could be required to make, if all of the assignees were to default as of December 31, 2011, would be approximately $1 million. The Company has assessed the probability of default by the assignees and has determined it to be remote.

Credit Facility Indemnification

In connection with its obligations under the credit facilities described in Note 7, “Financing Arrangements,” the Company has agreed to indemnify the third-party lending institutions for costs incurred by the institutions related to changes in tax law or other legal requirements. While there have been no amounts paid to the lenders pursuant to this indemnity in the past, there can be no assurance that the Company will not be obligated to indemnify the lenders under this arrangement in the future.

 

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Transactions with Alcatel-Lucent

Pursuant to the Contribution and Distribution Agreement effective October 1, 2000, Lucent Technologies, Inc. (now Alcatel-Lucent) contributed to the Company substantially all of the assets, liabilities and operations associated with its enterprise networking businesses (the “Company’s Businesses”) and distributed the Company’s stock pro-rata to the shareholders of Lucent (“distribution”). The Contribution and Distribution Agreement, among other things, provides that, in general, the Company will indemnify Alcatel-Lucent for all liabilities including certain pre-distribution tax obligations of Alcatel-Lucent relating to the Company’s Businesses and all contingent liabilities primarily relating to the Company’s Businesses or otherwise assigned to the Company. In addition, the Contribution and Distribution Agreement provides that certain contingent liabilities not allocated to one of the parties will be shared by Alcatel-Lucent and the Company in prescribed percentages. The Contribution and Distribution Agreement also provides that each party will share specified portions of contingent liabilities based upon agreed percentages related to the business of the other party that exceed $50 million. The Company is unable to determine the maximum potential amount of other future payments, if any, that it could be required to make under this agreement.

The Tax Sharing Agreement governs Alcatel-Lucent’s and the Company’s respective rights, responsibilities and obligations after the distribution with respect to taxes for the periods ending on or before the distribution. Generally, pre-distribution taxes or benefits that are clearly attributable to the business of one party will be borne solely by that party, and other pre-distribution taxes or benefits will be shared by the parties based on a formula set forth in the Tax Sharing Agreement. The Company may be subject to additional taxes or benefits pursuant to the Tax Sharing Agreement related to future settlements of audits by state and local and foreign taxing authorities for the periods prior to the Company’s separation from Alcatel-Lucent.

15. Guarantor—Non Guarantor financial information

Borrowings by Avaya Inc. under the senior secured credit facility are jointly and severally, fully, and unconditionally guaranteed (subject to certain customary release provisions) by substantially all wholly owned U.S. subsidiaries of Avaya Inc. (collectively, the “Guarantors”) and Parent. The senior secured notes, the senior unsecured cash-pay notes and the senior unsecured PIK toggle notes issued by Avaya Inc. are jointly and severally, fully and unconditionally guaranteed by the Guarantors. None of the other subsidiaries of Avaya Inc., either directly or indirectly, guarantees the senior secured credit facility, the senior secured notes, the senior unsecured cash-pay notes or the senior unsecured PIK toggle notes (“Non-Guarantors”).

Avaya Inc. and each of the Guarantors are authorized to borrow under the senior secured asset-based credit facility. Borrowings under that facility are jointly and severally, fully, and unconditionally guaranteed by Avaya Inc. and the Guarantors (subject to certain customary release provisions). Additionally these borrowings are fully and unconditionally guaranteed by Parent.

The senior secured notes and the related guarantees are secured equally and ratably (other than with respect to real estate) with the senior secured credit facility and any future first lien obligations by (i) a first-priority lien on substantially all of the Avaya Inc.’s and the Guarantors’ assets, other than (x) any real estate and (y) collateral that secures the senior secured multi-currency asset based revolving credit facility on a first-priority basis (the “ABL Priority Collateral”), and (ii) a second-priority lien on the ABL Priority Collateral, subject to certain limited exceptions.

The following tables present the financial position, results of operations and cash flows of Avaya Inc., the Guarantors, the Non-Guarantors and Eliminations as of December 31, 2011 and 2010, and for the three months ended December 31, 2011 and 2010 to arrive at the information for Avaya Inc. on a consolidated basis.

 

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Supplemental Condensed Consolidating Schedule of Operations

 

     Three months ended December 31, 2011  

In millions

   Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

REVENUE

   $ 791      $ 96      $ 645      $ (145   $ 1,387   

COST

     376        67        385        (145     683   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GROSS MARGIN

     415        29        260        —          704   

OPERATING EXPENSES

          

Selling, general and administrative

     199        23        211        —          433   

Research and development

     62        4        45        —          111   

Amortization of intangible assets

     51        1        4        —          56   

Restructuring charges, net

     7        —          14        —          21   

Acquistion-related costs

     1        —          —          —          1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     320        28        274        —          622   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME (LOSS)

     95        1        (14     —          82   

Interest expense

     (105     (3     (1     —          (109

Other income (expense), net

     1        —          (2     —          (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (9     (2     (17     —          (28

Provision for (benefit from) income taxes

     1        —          (3     —          (2

Equity in net loss of consolidated subsidiaries

     (16     —          —          16        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

   $ (26   $ (2   $ (14   $ 16      $ (26
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Supplemental Condensed Consolidating Schedule of Operations

 

     Three months ended December 31, 2010  

In millions

   Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

REVENUE

   $ 746      $ 110      $ 611      $ (101   $ 1,366   

COST

     424        98        326        (101     747   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GROSS MARGIN

     322        12        285        —          619   

OPERATING EXPENSES

          

Selling, general and administrative

     208        23        230        —          461   

Research and development

     69        3        43        —          115   

Amortization of intangible assets

     51        1        4        —          56   

Restructuring charges, net

     7        —          15        —          22   

Acquistion-related costs

     1        —          3        —          4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     336        27        295        —          658   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING LOSS

     (14     (15     (10     —          (39

Interest expense

     (123     (5     —          1        (127

Other (expense) income, net

     (5     1        13        (1     8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(LOSS) INCOME BEFORE INCOME TAXES

     (142     (19     3        —          (158

Provision for income taxes

     6        —          16        —          22   

Equity in net loss of consolidated subsidiaries

     (32     —          —          32        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

   $ (180   $ (19   $ (13   $ 32      $ (180
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

Supplemental Condensed Consolidating Balance Sheet

 

     December 31, 2011  

In millions

   Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 120      $ 25      $ 200      $ —        $ 345   

Accounts receivable, net—external

     322        32        395        —          749   

Accounts receivable—internal

     752        160        130        (1,042     —     

Inventory

     149        4        126        —          279   

Deferred income taxes, net

     —          —          7        —          7   

Other current assets

     105        59        112        —          276   

Internal notes receivable, current

     1,413        32        (16     (1,429     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     2,861        312        954        (2,471     1,656   

Property, plant and equipment, net

     235        25        120        —          380   

Deferred income taxes, net

     —          —          26        —          26   

Intangible assets, net

     1,806        35        188        —          2,029   

Goodwill

     4,096        —          10        —          4,106   

Other assets

     174        7        21        —          202   

Investment in consolidated subsidiaries

     (1,901     (2     27        1,876        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 7,271      $ 377      $ 1,346      $ (595   $ 8,399   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES

          

Current liabilities:

          

Debt maturing within one year—external

   $ 37      $ —        $ —        $ —        $ 37   

Debt maturing within one year—internal

     35        367        1,027        (1,429     —     

Accounts payable—external

     272        20        188        —          480   

Accounts payable—internal

     183        52        807        (1,042     —     

Payroll and benefit obligations

     123        10        138        —          271   

Deferred revenue

     518        30        78        —          626   

Business restructuring reserve, current portion

     14        4        96        —          114   

Other current liabilities

     168        5        100        —          273   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     1,350        488        2,434        (2,471     1,801   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

     6,111        —          —          —          6,111   

Pension obligations

     1,199        —          405        —          1,604   

Other postretirement obligations

     495        —          —          —          495   

Deferred income taxes, net

     171        —          1        —          172   

Business restructuring reserve, non-current portion

     16        4        28        —          48   

Other liabilities

     263        21        218        —          502   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL NON-CURRENT LIABILITIES

     8,255        25        652        —          8,932   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL DEFICIENCY

     (2,334     (136     (1,740     1,876        (2,334
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND DEFICIENCY

   $ 7,271      $ 377      $ 1,346      $ (595   $ 8,399   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Supplemental Condensed Consolidating Balance Sheet

 

     September 30, 2011  

In millions

   Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 149      $ 12      $ 239      $ —        $ 400   

Accounts receivable, net—external

     303        33        419        —          755   

Accounts receivable—internal

     646        179        103        (928     —     

Inventory

     150        4        126        —          280   

Deferred income taxes, net

     —          —          8        —          8   

Other current assets

     98        68        108        —          274   

Internal notes receivable, current

     1,488        31        (16     (1,503     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     2,834        327        987        (2,431     1,717   

Property, plant and equipment, net

     243        26        128        —          397   

Deferred income taxes, net

     —          —          28        —          28   

Intangible assets, net

     1,893        36        200        —          2,129   

Goodwill

     4,072        —          7        —          4,079   

Other assets

     170        8        18        —          196   

Investment in consolidated subsidiaries

     (1,898     (9     25        1,882        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL ASSETS

   $ 7,314      $ 388      $ 1,393      $ (549   $ 8,546   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES

          

Current liabilities:

          

Debt maturing within one year—external

   $ 37      $ —        $ —        $ —        $ 37   

Debt maturing within one year—internal

     34        364        1,105        (1,503     —     

Accounts payable—external

     260        20        185        —          465   

Accounts payable—internal

     178        66        684        (928     —     

Payroll and benefit obligations

     123        14        186        —          323   

Deferred revenue

     528        31        80        —          639   

Business restructuring reserve, current portion

     13        4        113        —          130   

Other current liabilities

     244        4        104        —          352   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     1,417        503        2,457        (2,431     1,946   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

     6,120        —          —          —          6,120   

Pension obligations

     1,219        —          417        —          1,636   

Other postretirement obligations

     502        —          —          —          502   

Deferred income taxes, net

     167        —          1        —          168   

Business restructuring reserve, non-current portion

     20        5        31        —          56   

Other liabilities

     247        22        227        —          496   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL NON-CURRENT LIABILITIES

     8,275        27        676        —          8,978   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL DEFICIENCY

     (2,378     (142     (1,740     1,882        (2,378
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL LIABILITIES AND DEFICIENCY

   $ 7,314      $ 388      $ 1,393      $ (549   $ 8,546   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Supplemental Condensed Consolidating Schedule of Cash Flows

 

    Three months ended December 31, 2011  

In millions

  Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

OPERATING ACTIVITIES:

         

Net loss

  $ (26   $ (2   $ (14   $ 16      $ (26

Adjustments to reconcile net loss to net cash (used for) provided by operating activities

    125        3        29        —          157   

Changes in operating assets and liabilities

    (187     11        35        —          (141

Equity in net loss of consolidated subsidiaries

    16        —          —          (16     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES

    (72     12        50        —          (10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES:

         

Capital expenditures

    (5     —          (9     —          (14

Capitalized software development costs

    (12     —          —          —          (12

Acquisition of businesses, net of cash acquired

    (1     —          (3     —          (4

Proceeds from sale of long-lived assets and investments

    4        —          —          —          4   

Restricted cash

    (1     —          —          —          (1

Advance to Parent

    (8     —          —          —          (8

Other investing activities, net

    (1     —          —          —          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH USED FOR INVESTING ACTIVITIES

    (24     —          (12     —          (36
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES:

         

Repayment of long-term debt

    (9     —          —          —          (9

Net borrowings (repayments) of intercompany debt

    76        2        (78     —          —     

Other financing activities, net

    —          (1     —          —          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES

    67        1        (78     —          (10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    —          —          1        —          1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

    (29     13        (39     —          (55

Cash and cash equivalents at beginning of period

    149        12        239        —          400   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 120      $ 25      $ 200      $ —        $ 345   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Supplemental Condensed Consolidating Schedule of Cash Flows

 

    Three months ended December 31, 2010  

In millions

  Avaya
Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

OPERATING ACTIVITIES:

         

Net loss

  $ (180   $ (19   $ (13   $ 32      $ (180

Adjustments to reconcile net loss to net cash (used for) provided by operating activities

    152        3        6        —          161   

Changes in operating assets and liabilities

    (42     19        (45     —          (68

Equity in net loss of consolidated subsidiaries

    32        —          —          (32     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES

    (38     3        (52     —          (87
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES:

         

Capital expenditures

    (9     —          (9     —          (18

Capitalized software development costs

    (7     (1     —          —          (8

Return of funds held in escrow from the NES acquisition

    6        —          —          —          6   

Proceeds from sale of long-lived assets

    —          —          1        —          1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH USED FOR INVESTING ACTIVITIES

    (10     (1     (8     —          (19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES:

         

Repayment of long-term debt

    (12     —          —          —          (12

Net (repayments) borrowings of intercompany debt

    (97     8        89        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES

    (109     8        89        —          (12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    —          —          (1     —          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

    (157     10        28        —          (119

Cash and cash equivalents at beginning of period

    348        26        205        —          579   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 191      $ 36      $ 233      $ —        $ 460   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

16. Restructuring Activities

On February 13, 2012, the Company presented the works council representing employees of certain of the Company’s German subsidiaries a proposal to eliminate approximately 320 positions. The proposal as presented would result in incremental costs of up to $72 million which consist of severance and employment benefits payments and includes, but is not limited to, social pension fund payments and health care and unemployment insurance costs to be paid to or on behalf of the affected employees. Additionally in connection with this proposal, the Company expects to re-measure certain pension benefit plans and determine whether or not a curtailment charge should be recognized. The Company continues to evaluate opportunities to streamline its operations and identify cost savings globally and may take additional restructuring actions in the future and the costs of those actions could be material.

 

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

Unless the context otherwise indicates, as used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the terms “we,” “us,” “our,” “the Company,” “Avaya” and similar terms refer to Avaya Inc. and its subsidiaries. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the unaudited interim consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. The matters discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See “Forward Looking Statements” at the end of this discussion.

Our accompanying unaudited interim consolidated financial statements as of December 31, 2011 and for the three months ended December 31, 2011 and 2010 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission, or the SEC, for interim financial statements, and should be read in conjunction with our consolidated financial statements and other financial information for the fiscal year ended September 30, 2011, which were included in our Annual Report on Form 10-K filed with the SEC on December 9, 2011. In our opinion, the unaudited interim consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated.

Certain prior period amounts have been reclassified to conform to the current interim period presentation. The consolidated results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire fiscal year.

Overview

We are a leading global provider of next-generation business collaboration and communications solutions that bring people together with the right information at the right time in the right context, enabling business users to improve their efficiency and quickly solve critical business challenges. Our solutions are designed to enable business users to work together more effectively as a team internally or with their customers and suppliers, increasing innovation, improving productivity and accelerating decision-making and business outcomes.

We develop software and hardware products and offer related services that we market and sell directly and through our channel partners as part of our collaboration and communications solutions for large enterprises, small- and mid-sized businesses and government organizations. Our software delivers rich value-added applications for enterprise collaboration and communications, including messaging, telephony, voice, video and web conferencing, mobility and customer service. These applications operate on our own hardware, which includes a broad range of desk phones, servers and gateways, and LAN/WAN switching wireless access points and gateways, as well as on third-party devices, including desk phones, tablets and desktop PCs. In addition, our award-winning portfolio of services supports our products to help customers achieve enhanced business results both directly and indirectly through partners. We have a long track record of innovation and our customers historically have relied on us to deliver mission critical communications solutions. Market opportunities associated with our business collaboration and communications solutions include spending on unified communications (which includes, among others, enterprise telephony and messaging), contact center applications and data networking equipment, as well as spending on support and maintenance services to implement and support these tools, which were estimated to be a $78 billion market in 2011 in the aggregate.

We are highly focused on and structured to serve our core business collaboration and communications markets with fit-for-purpose products, targeted sales coverage, and distributed software services and support models. We offer solutions in five key business collaboration and communications product categories:

 

   

Unified Communications Software, Infrastructure and Endpoints;

 

   

Real Time Video Collaboration;

 

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Table of Contents
   

Contact Center;

 

   

Data Networking; and

 

   

Applications, including their Integration and Enablement.

Initial Registration Statement of Parent

Avaya is a wholly owned subsidiary of Avaya Holdings Corp., a Delaware corporation (“Parent”). Parent was formed by affiliates of two private equity firms, Silver Lake Partners (“Silver Lake”) and TPG Capital (“TPG”) (collectively, the “Sponsors”). Silver Lake and TPG, through Parent, acquired Avaya in a transaction that was completed on October 26, 2007 (the “Merger”).

On June 9, 2011, Parent filed with the SEC a registration statement on Form S-1 (as it may be amended from time to time, the “registration statement”) relating to a proposed initial public offering of its common stock. As contemplated in the registration statement, the net proceeds of the proposed offering are expected to be used to repay a portion of our long-term indebtedness, redeem Parent’s Series A preferred stock and pay certain amounts in connection with the termination of our management services agreement with affiliates of our Sponsors pursuant to its terms. The registration statement remains under review by the SEC and shares of common stock registered thereunder may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Form 10-Q and the pending registration statement shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of those securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Further, there is no way to predict whether or not Parent will be successful in completing the offering as contemplated and if it is successful, we cannot be certain if, or how much of, the net proceeds will be used for the purposes identified above.

Refinancing of Debt

On February 11, 2011, we successfully completed a debt refinancing that deferred the maturity of $3.18 billion of senior secured loans. As part of the transaction, $2.2 billion outstanding par value of the senior secured term B-1 loans were converted into a new tranche of senior secured term B-3 loans, essentially extending the maturity of that indebtedness from October 26, 2014 to October 25, 2017, and $988 million par value of senior secured incremental term B-2 loans were repaid with the proceeds from a private placement of $1,009 million of senior secured notes, essentially extending the maturity of that indebtedness from October 26, 2014 to April 1, 2019.

On August 8, 2011, the Company amended the terms of the multi-currency revolvers available under its senior secured credit facility and its senior secured multi-currency asset-based revolving credit facility to extend the final maturity of each from October 26, 2013 to October 26, 2016. All other terms and conditions of the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility remain unchanged.

Major Business Areas

Avaya conducts its business operations in three segments. Two of those segments, Global Communications Solutions (“GCS”) and Avaya Networking (“Networking”) (formerly known as Data Networking or Data), make up Avaya’s product portfolio. The third segment contains Avaya’s services portfolio and is called Avaya Global Services (“AGS”).

Our Products

Our products portfolio includes our infrastructure, unified communications applications, contact center applications and networking portfolios. These portfolios span a broad range of unified communications, collaboration, customer service, video and networking products designed to meet the diverse needs of small and mid-size businesses, as well as large enterprises. The majority of our portfolio comprises software products that

 

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reside on either a client or server. Client software resides on both our own and third-party devices, including desk phones, tablets, desktop PCs and mobile phones. Server-side software controls communication and collaboration for the enterprise, and delivers rich value-added applications such as messaging, telephony, voice, video and web conferencing, mobility and customer service. Hardware includes a broad range of desk phones, servers and gateways and LAN/WAN switching wireless access points and gateways. Highlights of our portfolio include:

Avaya Aura

At the core of our next-generation collaboration solutions is Avaya Aura, our SIP-based software suite of collaboration applications, including voice, video, messaging, presence, web applications and more. Avaya Aura is part of our infrastructure solutions portfolio. The Avaya Aura architecture simplifies complex communications networks and reduces infrastructure costs. Using this architecture, organizations are able to rapidly and cost-effectively deploy applications from a centralized data center to users regardless of the device they are using or the network to which they are connected. Avaya Aura provides a simple means of connecting legacy, multi-vendor systems to new open standards SIP-based applications, helping enterprises to reduce costs and increase user productivity and choice simultaneously. We believe Avaya Aura is one of the most reliable, secure and comprehensive offerings in the industry and that our commitment to open, standards-based solutions helps provide our customers with the flexibility to be more efficient and successful.

At the heart of Avaya Aura is Session Manager, which provides multimedia communications control and management. Multi-vendor voice, video and data communications can all be managed and controlled from one centralized software platform. Avaya Aura uses virtualization technology across all applications to reduce the physical number of servers relative to existing offerings, reducing total cost of ownership for medium sized and large enterprises alike. Avaya Aura allows business users to work from any location, on any device, by providing collaboration and communication capabilities on a broad variety of operating systems, devices, desktop, laptop and tablet computers, smart phones, mobile devices and dedicated deskphones.

Highlights of the Avaya Aura portfolio include the following:

 

   

Avaya Aura Messaging, an application which enables migration from traditional voice messaging systems to SIP-based multimedia messaging with enterprise-class features, scalability and reliability.

 

   

Avaya Aura Presence Services, an application which provides contextual information and availability from across multiple devices and applications to users, delivering a richer collaboration experience. These capabilities are leveraged across the entire spectrum of communications applications, ranging from voice calls and instant messaging to customer services and business processes.

 

   

Avaya Aura Conferencing, which offers a rich set of scalable conferencing configurations and delivers audio conferencing, web conferencing, document-based collaboration and video-enabled web conferencing while letting users leverage familiar desktop applications and interfaces for increased conference control.

 

   

Avaya Aura Video Conferencing solutions, a wide suite of high-definition, low-bandwidth, SIP-based video endpoints combined with software applications to enable rich video conferencing to serve individual desktop users and small workgroups as well as large conference rooms.

 

   

Avaya Aura supports communications and collaboration endpoints including telephones, speaker phones, personal video collaboration devices and client software designed to provide enterprise class communications and the Avaya Flare Experience on our own devices as well as laptops, smartphones and tablets.

Avaya Flare Experience

In September 2010, we unveiled the Avaya Flare Experience, a real-time, enterprise video communications and collaboration solution. The Avaya Flare Experience is part of our Unified Communication Applications or UC

 

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Applications solutions portfolio and helps break down the barriers between today’s communications and collaboration tools with a distinctive user interface for quick, easy access to voice and video, social media, presence and instant messaging and audio/video/web conferencing, a consolidated view of multiple directories, context history and more.

The Avaya Flare Experience features a central spotlight that highlights active or in-progress collaboration sessions. Initiating a communication session is as easy as moving one or more contacts from the directory into the spotlight. For text messages, a pop-up keyboard appears when a user taps a text-based icon under a contact’s photo. The Avaya Flare Experience combines contacts from multiple sources into a single “fan,” synchronizes email/calendars with Microsoft ActiveSync and integrates collaboration activity into a common interaction history, providing context to any session. We believe these capabilities deliver a simpler, more compelling experience to end-users using video, voice and text.

Currently, the Avaya Flare Experience runs on the Avaya Desktop Video Device, an Android-based, video-enabled desktop collaboration endpoint for executive desktops or power communicators that can also perform as a customer kiosk. In addition, in January 2012 we announced the availability of Avaya Flare Communicator for iPad tablets. We are adapting the Avaya Flare software for other devices and operating systems such as Google Android tablets, Windows laptops and other consumer device classes and platforms. Overall, we believe our software-centric solutions are helping to enable customers to be more productive and compete more effectively by changing the way users collaborate.

Avaya Agile Communication Environment (ACE)

Avaya ACE is a multi-vendor application enablement framework that allows developers to integrate communications and collaboration applications into other business applications (such as CRM, ERP, BPM and social application frameworks). Avaya ACE is part of our infrastructure solutions portfolio and includes pre-packaged applications (such as integrations with mobile devices, click to call from web-based applications and real-time response applications to streamline time-dependent business processes), SOA-oriented web services and toolkits to enable rapid development of custom applications, which helps reduce costs and increase flexibility for enterprises. Programmers with limited communications expertise can readily embed real-time communications in business applications and workflows, expanding both the ability and opportunity to use Avaya collaboration capabilities. Avaya ACE provides a versatile platform for the members of DevConnect to build applications.

Avaya IP Office

Avaya IP Office is our award-winning global flagship Small and Medium Enterprises, or SME communications, solution specially designed to meet communications challenges facing small and medium enterprises. Avaya IP Office is part of our infrastructure solutions portfolio. IP Office provides solutions that help simplify processes and streamline information exchange within systems. Communications capabilities can be added as needed, and IP Office connects to both traditional and the latest IP lines—to give growing companies flexibility and the ability to retain and leverage their existing investment. We recently unveiled the latest version of our communications solution for this market—Avaya IP Office 8.0—which introduces a range of advancements for improving collaboration, and which we believe will drive improved savings, user experiences and collaboration for a new generation of entrepreneurs, early-stage companies and mid-size firms.

Avaya Contact Centers

We have been a leader in the contact center market since our founding over a decade ago with our Avaya Call Center Elite solution, and have recently significantly expanded beyond our large call center origins. We have developed a highly reliable, scalable, communications-centric applications suite focused on enabling companies to optimize sales and service delivery across their entire value chain from small and medium businesses to large, global enterprises. Our Avaya Aura Contact Center, a SIP-based multimedia solution that forms the core of our

 

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SIP contact center application solutions portfolio, leverages session management to create a single integrated customer queue, regardless of the type of media or modality, including voice, video, email, chat or social media, and delivers a highly personalized customer experience. The tight integration of our contact center applications with Avaya Aura has allowed us to change the nature of a contact center from the previous approach of routing customers to agents and self-service applications, often with a loss of customer information or context, to a model where we use session management to bring customer service people and applications from around the enterprise to the customer. We believe this leads to a much better customer experience than traditionally seen, where customers are transferred around the enterprise and asked frequently to re-confirm their identity and other personal information. The capabilities of our contact center solutions include:

 

   

Assisted and Automated Experience Management, which provides intelligent routing of voice and multimedia contacts and a variety of applications for customer service agents, as well as outbound and self-service applications to manage collaboration and workflow between an enterprise and its customers;

 

   

Workforce Optimization, which includes call recording, quality monitoring and workforce management applications; and

 

   

Performance Management, which provides contact center reporting, analytics and operations performance management solutions, as well as agent performance management and scheduling to ensure optimal use of resources and improve customer satisfaction.

We believe these capabilities are imperative given, among other things, the adoption of social media, smartphones and cloud-based applications. For example, our solutions are designed to allow a social network post to be picked up by the enterprise, combined with intelligence about account history and previous conversations, and finished in an audio or video call from the customer’s browser to the contact center. This solution enables agents to respond to their customers’ feedback in a highly personal and efficient manner. This ability to meet a customer’s need, in the manner that is relevant to that customer at any given time, is critical to our customers’ success. Providing this type of multi-modal, multi-channel customer experience management capability allows us to deliver a unique experience for our customers’ end clients.

Avaya web.alive

Avaya web.alive is a unique online, immersive conferencing and social collaboration environment that lets users collaborate as though they were face to face. Avaya web.alive is part of our UC Applications solutions portfolio and replicates real life interactions using personalized avatars, which users control to navigate through an online, three-dimensional environment, with the ability to talk, chat, share, collaborate and present in real-time. Key to the experience is Avaya web.alive’s spatial audio technology, which lets participants talk interactively and hear each other based on their relative position and distance, creating a more realistic and natural experience than traditional conference calls. A cloud-based solution requiring only a web browser plug-in, the product allows collaboration between users from any browser, inside or outside of the enterprise. The service can be purchased with standard templated environments through e-commerce and automatically provisioned, or customized environments can be created for larger customers. Avaya web.alive has been used in various business use cases, including training, e-commerce, product launches and virtual tradeshows.

Avaya Networking

In support of our data communications strategy, our data networking product portfolio is designed to address and surpass competitors’ products with respect to three key requirements: resiliency, efficiency and performance.

Our data networking portfolio is complementary to our business collaboration, unified communications and contact center portfolios based on the Avaya Aura architecture. We believe that customers today benefit from end-to-end solution design, testing and support. Over time we expect customers to benefit from development work in integrated provisioning, system management, quality of experience and bandwidth utilization.

 

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Our data networking portfolio includes:

 

   

Ethernet Switching—a range of Local Area Network switches for data center, core, edge and branch applications;

 

   

Unified Branch—a range of routers and Virtual Private Network appliances that provide a secure connection for branches;

 

   

Wireless Networking—a cost-effective and scalable solution enabling enterprises to deploy wireless coverage;

 

   

Access Control—solutions that provide policy decision to enforce role-based access control to the network;

 

   

Unified Management—providing support for data and voice networks by simplifying the requirements associated across functional areas; and

 

   

Avaya VENA—an end-to-end virtualization strategy and architecture that helps simplify data center and campus networking and optimizes business applications and service deployments in and between data centers and campuses, while helping to reduce costs and improve time to service.

We sell our portfolio of data networking products globally into enterprises of all types, with particular strength in healthcare, education, hospitality, financial services and local and state government.

Our Services

AGS evaluates, plans, designs, implements, supports, manages and optimizes enterprise communications networks to help customers achieve enhanced business results both directly and through partners. Our award-winning portfolio of services includes product support, integration and professional and managed services that enable customers to optimize and manage their converged communications networks worldwide and achieve enhanced business results. AGS is supported by patented design and management tools and network operations and technical support centers around the world.

The portfolio of AGS services includes:

 

   

Avaya Client Services—We monitor and improve customers’ communications network performance, helping to ensure network availability and keeping communications networks current with the latest software releases. This includes our managed and operations services in which we manage complex multi-vendor, multi-technology networks, help optimize network performance and manage customers’ communications environments and related assets.

 

   

Professional Services—Our planning, design and integration specialists and communications consultants provide solutions that help reduce costs and enhance business agility. We also provide vertical solutions designed to leverage existing product environments, contact centers and unified communications networks.

Avaya Client Services contracts tend to be longer term in nature. For example, contracts for support services typically have terms that range from one to five years. Contracts for operations services typically have terms that range from one to seven years.

Financial Results Summary

Our revenues for the three months ended December 31, 2011 increased 2% as compared to the three months of the corresponding period in the prior year, primarily as a result of greater demand for our contact center solutions, unified communications products and our new product offerings in data networking, partially offset by lower revenues resulting from customers reducing spending on maintenance contracts.

 

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We earned operating income for the three months ended December 31, 2011 of $82 million as compared to an operating loss of $39 million for the three months ended December 31, 2010, an increase of $121 million. In addition to an increase in revenue, as described above, results include the continued benefit from cost savings initiatives in gross margin and the substantial completion of the integration of the operations of Avaya and NES.

Operating income (loss) for the three months ended December 31, 2011 and 2010 includes non-cash expenses for depreciation and amortization of $143 million and $168 million, respectively, and share-based compensation of $3 million for each of the periods. Operating income before non-cash depreciation and amortization and share-based compensation was $228 million and $132 million for the three months ended December 31, 2011 and 2010, respectively.

Our net loss for the three months ended December 31, 2011 and 2010 was $26 million and $180 million, respectively. The decrease in our net loss is primarily attributable to an increase in operating income as described above, as well as a decrease in income taxes and interest expense, for the three months ended December 31, 2011 as compared to the three months ended December 31, 2010.

Results From Operations

Three Months Ended December 31, 2011 Compared with Three Months Ended December 31, 2010

Revenue

Our revenue for the three months ended December 31, 2011 and 2010 was $1,387 million and $1,366 million, respectively, an increase of $21 million or 2%. The following table sets forth a comparison of revenue by portfolio:

 

     Three months ended December 31,  
      2011      2010     Mix     Yr. to  Yr.
Percent

Change
    Yr. to Yr. Percent
Change, net of Foreign
Currency Impact
 

Dollars in millions

        2011     2010      

GCS

   $ 667       $ 645        48     47     3     4

Purchase accounting adjustments

     —           (1     0     0          (1)           (1) 

Networking

     82         78        6     6     5     5
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total product revenue

     749         722        54     53     4     4

AGS

     638         645        46     47     -1     -1

Purchase accounting adjustments

     —           (1     0     0          (1)           (1) 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total service revenue

     638         644        46     47     -1     0
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 1,387       $ 1,366        100     100     2     2
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Not meaningful

GCS revenue for the three months ended December 31, 2011 and 2010 was $667 million and $645 million, respectively. GCS revenue increased $22 million or 3% primarily due to an increase in sales volume associated with new product offerings within our contact center applications and infrastructure solutions portfolios. The new product offerings in our infrastructure solutions portfolio are predominantly attributable to the additional functionality created by our Avaya Aura technology. These increases were partially offset by the decrease in revenues to small and medium-sized businesses.

Networking revenue for the three months ended December 31, 2011 and 2010 was $82 million and $78 million, respectively, an increase of $4 million or 5%. The increase is primarily a result of an increase in demand for our new product offerings, primarily in EMEA. This increase was partially offset by a decrease in sales of our ethernet switching product in the U.S.

 

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AGS revenue for the three months ended December 31, 2011 and 2010 was $638 million and $645 million, respectively. AGS revenue decreased $7 million or 1% primarily due to a decrease in sales of maintenance contracts, partially offset by an increase in professional and implementation services. As a result of the increase in product revenues, associated revenues for certain product support and professional services have increased.

The following table sets forth a comparison of revenue by location:

 

     Three months ended December 31,  
      2011      2010      Mix     Yr. to  Yr.
Percent
Change
    Yr. to Yr. Percent
Change, net of Foreign

Currency Impact
 

Dollars in millions

         2011     2010      

U.S.

   $ 748       $ 754         54     55     -1     -1

International:

              

Germany

     133         132         9     10     1     2

EMEA (excluding Germany)

     232         233         17     17     0     0
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total EMEA

     365         365         26     27     0     1

APAC—Asia Pacific

     126         117         9     9     8     7

Americas International—Canada and

              

Latin America

     148         130         11     9     14     16
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total International

     639         612         46     45     4     5
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 1,387       $ 1,366         100     100     2     2
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Revenue in the U.S. for the three months ended December 31, 2011 and 2010 was $748 million and $754 million, respectively, a decrease of $6 million or 1%. The decrease was primarily due to lower support services revenues and lower sales of our data networking products, partially offset by higher sales associated with contact center applications. The decreases were particularly noticeable in the government sector, as the U.S. government spending was affected as the federal government budget negotiations continued. Revenue in EMEA for the three months ended December 31, 2011 remained flat as compared to results for the three months ended December 31, 2010 primarily as a result of an increase in sales of our new data networking product offerings, offset by lower sales to small and medium-sized businesses and of phone devices. Within EMEA, revenue in Germany remained relatively flat due to an increase in our infrastructure solutions portfolio, partially offset by a decline in our rental base as lease renewals are typically at lower rates, which is expected to continue for the remainder of fiscal year 2012. Revenue in APAC for the three months ended December 31, 2011 and 2010 was $126 million and $117 million, respectively, an increase of $9 million or 8%. The increase is attributable to higher revenue related to maintenance contracts and sales of unified communications products. Revenue in Americas International for the three months ended December 31, 2011 and 2010 was $148 million and $130 million, respectively, an increase of $18 million or 14%. The increase is attributable to an increase in sales volume across our product lines including data networking, as well as an increase in revenue related to support services.

We continue to expand our market coverage by investing in the indirect channel, which includes our partners worldwide, consisting of system integrators, service providers, value-added resellers and business partners that provide sales and services support.

The following table sets forth a comparison of revenue from sales of products by channel:

 

     Three months ended December 31,  
      2011      2010      Mix     Yr. to Yr.
Percent
Change
    Yr. to Yr. Percent
Change, net of Foreign
Currency Impact
 

Dollars in millions

         2011     2010      

Direct

   $ 167       $ 174         22     24     -4     -4

Indirect

     582         548         78     76     6     6
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total sales of products

   $ 749       $ 722         100     100     4     4
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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The percentage of product sales through the indirect channel increased by 2 percentage points to 78% in the first quarter of fiscal 2012 as compared to 76% in the corresponding period in fiscal 2011. Due to higher volume discounts, sales through the indirect channel generally generate lower gross margins than direct sales. However, our use of the indirect channel lowers selling expenses and allows us to reach more end users.

Gross Margin

The following table sets forth a comparison of gross margin by segment:

 

     Three months ended December 31,  
     2011     2010     Percent of Revenue     Change  

Dollars in millions

       2011     2010    

GCS margin

   $ 400      $ 358        60.0     55.5   $ 42         12

Networking margin

     37        31        45.1     39.7     6         19

AGS margin

     313        303        49.1     47.0     10         3

Amortization of technology intangible assets and the impact of purchase accounting adjustments

     (46     (73     (1 )      (1 )      27         (1 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total gross margin

   $ 704      $ 619        50.8     45.3   $ 85         14
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) 

Not meaningful

Gross margin for the three months ended December 31, 2011 and 2010 was $704 million and $619 million, respectively, an increase of $85 million or 14%. The increase is attributable to increased sales volumes and increased gross margin percentage. The gross margin percentage increased to 50.8% for the three months ended December 31, 2011 from 45.3% for the three months ended December 31, 2010. The increase in gross margin percentage is primarily due to higher gross margin percentages in each of our segments, as well as the impact of lower amortization of technology intangible assets on higher sales volume.

GCS gross margin for the three months ended December 31, 2011 and 2010 was $400 million and $358 million, respectively. GCS gross margin increased $42 million or 12% primarily due to the increase in sales volume driven by new product offerings particularly for our unified communications products and contact center applications, better pricing with our contract manufacturers and the success of our gross margin improvement initiatives which focused on lowering transportation costs, warranty costs and product design costs. The GCS gross margin percentage increased to 60.0% for the three months ended December 31, 2011 from 55.5% for the three months ended December 31, 2010. The increase in gross margin percentage is primarily due to better pricing with our contract manufacturers and the success of our gross margin improvement initiatives.

For the three months ended December 31, 2011 and 2010, Networking gross margin was $37 million and $31 million, and gross margin percentage was 45.1% and 39.7%, respectively. The increases in Networking gross margin and gross margin percentage were due to higher revenues which leveraged our fixed costs, new product offerings which have more favorable gross margin percentages and design cost reductions on existing products.

AGS gross margin for the three months ended December 31, 2011 and 2010 was $313 million and $303 million, and gross margin percentage was 49.1% and 47.0%, respectively. The increases in AGS gross margin and gross margin percentage are primarily due to the continued benefit from cost savings initiatives, which include productivity improvements from reducing the workforce and relocating positions to lower-cost geographies. The increase in AGS gross margin was also due to an increase in professional and implementation services revenue.

Total gross margin for the three months ended December 31, 2011 and 2010 included the effect of the amortization of acquired technology intangibles related to the acquisition of NES and the Merger.

 

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Operating expenses

 

     Three months ended December 31,  
     2011      2010      Percent of
Revenue
    Change  

Dollars in millions

         2011     2010    

Selling, general and administrative

   $ 433       $ 461         31.2     33.7   $ (28     -6

Research and development

     111         115         8.0     8.4     (4     -3

Amortization of intangible assets

     56         56         4.0     4.1     —          0

Restructuring charges, net

     21         22         1.5     1.6     (1     -5

Acquisition-related costs

     1         4         0.1     0.3     (3     -75
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

   $ 622       $ 658         44.8     48.1   $ (36     -5
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

SG&A expenses for the three months ended December 31, 2011 and 2010 were $433 million and $461 million, respectively, a decrease of $28 million. The decrease was primarily due a reduction in integration-related costs related to the acquisition of the NES business. Integration-related costs were $5 million and $34 million for the three months ended December 31, 2011 and 2010, respectively. In fiscal 2011, integration-related costs primarily represent third-party consulting fees and other administrative costs associated with consolidating and coordinating the operations of Avaya and NES. These costs were incurred in connection with, among other things, the on-boarding of NES personnel, developing compatible IT systems and internal processes, and developing and implementing a strategic operating plan to enable a smooth transition with minimal disruption to NES customers. Such costs include fees paid to certain Nortel-controlled entities for logistic and other support functions being performed on a temporary basis pursuant to a transition services agreement which expired in June 2011. For the three months ended December 31, 2011, integration-related costs are primarily associated with continuing to develop compatible IT systems.

R&D expenses for the three months ended December 31, 2011 and 2010 were $111 million and $115 million, respectively, a decrease of $4 million. Although our R&D spend was flat for the three months ended December 31, 2011 and 2010, due to the timing in the development cycles of our product development portfolio, we capitalized a greater portion of our R&D spend during the current period pursuant to authoritative accounting guidance. Capitalized software development costs for the three months ended December 31, 2011 and 2010 were $12 million and $8 million, respectively, an increase of $4 million. Because the projects in our product development portfolio at December 31, 2011 were generally further along in the development cycle than those at December 31, 2010, we capitalized a greater portion of our current period R&D spend. Therefore, although current R&D expense is lower, aggregated R&D expense and capitalized software development costs was $123 million in each of the three months ended December 31, 2011 and 2010.

Amortization of intangible assets was $56 million for the three months ended December 31, 2011 and 2010.

Restructuring charges, net, for the three months ended December 31, 2011 and 2010 were $21 million and $22 million, respectively, a decrease of $1 million. During fiscal 2011 and 2010, we continued our focus on controlling costs. In response to the global economic climate, we began implementing additional initiatives designed to streamline our operations and generate cost savings. These initiatives include exiting facilities and reducing the workforce or relocating positions to lower cost geographies. During the first quarter of fiscal 2012, the Company continued to identify opportunities to streamline operations and generate cost savings which include exiting facilities and eliminating employee positions. Restructuring charges recorded during the three months ended December 31, 2011 include employee separation costs of $20 million and lease obligations of $1 million. Employee separation costs are primarily associated with employee severance actions in the U.S., Germany, the United Kingdom, and Canada. The headcount reduction and related payments identified in these actions are expected to be completed in fiscal 2012. Restructuring charges recorded during the three months ended December 31, 2010 include employee separation costs of $13 million and lease obligations of $9 million and primarily include costs associated with involuntary employee severance actions in EMEA and the U.S. and

 

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facilities vacated during the quarter primarily located in Germany and the U.S. The Company remains focused on its efforts to streamline operations, generate cost savings and eliminate overlapping processes and expenses. For example, on February 13, 2012, the Company presented the works council representing employees of certain of the Company’s German subsidiaries a proposal to eliminate approximately 320 positions. The proposal as presented would result in incremental costs of up to $72 million which consist of severance and employment benefits payments and includes, but is not limited to, social pension fund payments and health care and unemployment insurance costs to be paid to or on behalf of the affected employees. Additionally in connection with this proposal, the Company expects to re-measure certain pension benefit plans and determine whether or not a curtailment charge should be recognized. The Company continues to evaluate opportunities to streamline its operations and identify cost savings globally and may take additional restructuring actions in the future and the costs of those actions could be material.

Acquisition-related costs for the three months ended December 31, 2011 and 2010 were $1 million and $4 million, respectively, and include third-party legal and other costs related to NES and other business acquisitions in fiscal 2012 and 2011.

Operating Income (Loss)

For the three months ended December 31, 2011, operating income was $82 million compared to an operating loss of $39 million for the three months ended December 31, 2010, an increase of $121 million.

Operating income (loss) for the three months ended December 31, 2011 and 2010 includes non-cash expenses for depreciation and amortization of $143 million and $168 million, respectively, and share-based compensation of $3 million for each of the periods. Operating income before non-cash depreciation and amortization and share-based compensation was $228 million and $132 million for the three months ended December 31, 2011 and 2010, respectively.

Interest Expense

Interest expense for the three months ended December 31, 2011 and 2010 was $109 million and $127 million, respectively, which includes non-cash interest expense of $6 million and $18 million, respectively. Non-cash interest expense for the three months ended December 31, 2011 includes (1) amortization of debt issuance costs and (2) accretion of debt discount attributable to our senior secured term B-3 loans which were issued on February 11, 2011 as a result of the modification to certain provisions of the senior secured credit facility. Non-cash interest expense for the three months ended December 31, 2010 includes: (1) amortization of debt issuance costs and (2) accretion of debt discount attributable to our senior secured incremental term B-2 loans issued in connection with the Acquisition.

Cash interest expense for the three months ended December 31, 2011 decreased $6 million. The decrease was a result of the impact of the issuance of the senior secured notes and the related repayment of the senior secured incremental B-2 loans combined with the expiration of certain unfavorable interest rate swap contracts. The senior secured notes bear interest at a lower rate per annum than the previously outstanding senior secured incremental term B-2 loans. This decrease was partially offset by an increase in interest expense due to the impact of the amendment and restatement of the senior secured credit facility. The amendment and restatement of the senior secured credit facility resulted in the creation of a new tranche of senior secured B-3 loans which bear interest at a higher rate per annum than the senior secured term B-1 loans that they replaced. See Note 7, “Financing Arrangements” to our unaudited interim consolidated financial statements for further details on the amendment and extension of the senior secured credit facility and the issuance of the senior secured notes.

Other (Expense) Income, Net

Other expense, net, for the three months ended December 31, 2011 was $1 million as compared to other income, net of $8 million for the three months ended December 31, 2010. This difference primarily represents net foreign currency transaction losses of $1 million during the three months ended December 31, 2011 and net foreign currency transaction gains of $8 million during the three months ended December 31, 2010.

 

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(Benefit from) Provision for Income Taxes

The benefit from income taxes for the three months ended December 31, 2011 was $2 million as compared to a provision for income taxes of $22 million for the three months ended December 31, 2010. The effective rate for the three months ended December 31, 2011 was 7.1% as compared to the effective tax rate of 13.9% for the three months ended December 31, 2010 and differs from the U.S. Federal tax rate primarily due to the effect of taxable income in non-U.S. jurisdictions and due to the valuation allowance established against the Company’s U.S. deferred tax assets.

Liquidity and Capital Resources

Cash and cash equivalents decreased by $55 million to $345 million at December 31, 2011 from $400 million at September 30, 2011. Our existing cash balance generated by operations and borrowings available under our credit facility are our primary sources of short-term liquidity. Based on our current level of operations, we believe these sources will be adequate to meet our liquidity needs for at least the next 12 months. As part of our analysis, we have assessed the implications of recent financial events on our current business and determined that these market conditions have not affected our ability to meet our obligations as they come due in the ordinary course of business and have not had a significant impact on our liquidity as of December 31, 2011. However, we cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available to us under our credit facilities in an amount sufficient to enable us to repay our indebtedness, including the notes, or to fund our other liquidity needs.

Sources and Uses of Cash

A condensed statement of cash flows for the three months ended December 31, 2011 and 2010 follows:

 

     Three months ended
December 31,
 

In millions

       2011             2010      

Net cash (used for) provided by:

    

Net loss

   $ (26   $ (180

Adjustments to net loss for non-cash items

     157        161   

Changes in operating assets and liabilities

     (141     (68
  

 

 

   

 

 

 

Operating activities

     (10     (87

Investing activities

     (36     (19

Financing activities

     (10     (12

Effect of exchange rate changes on cash and cash equivalents

     1        (1
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (55     (119

Cash and cash equivalents at beginning of period

     400        579   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 345      $ 460   
  

 

 

   

 

 

 

 

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Operating Activities

Cash used for operating activities was $10 million and $87 million for the three months ended December 31, 2011 and 2010, respectively. The change in cash used for operating activities was primarily due to improved operating results driven by higher sales, higher gross margins, cost reductions associated with our cost savings initiatives and lower integration costs, partially offset by the changes in our operating assets and liabilities.

The changes in our operating assets and liabilities resulted in a net decrease in cash and cash equivalents of $141 million for the three months ended December 31, 2011. The net decrease was driven by the payment of accrued interest, payments associated with our business restructuring reserves and payments associated with our employee incentive programs.

The changes in our operating assets and liabilities resulted in a net decrease in cash and cash equivalents of $68 million for the three months ended December 31, 2010. The net decrease was primarily driven by the timing of the payment of accrued interest, payments associated with our business restructuring reserves and a decrease in foreign exchange contracts due to the settlement of foreign exchange contracts and changes in foreign currency exchange rates. These decreases in our cash balances were partially offset by improvements in the collections of our accounts receivable combined with increases in cash due to the timing of payment of accounts payable.

Investing Activities

Cash used for investing activities was $36 million and $19 million for the three months ended December 31, 2011 and 2010, respectively. Cash used for investing activities for the three months ended December 31, 2011 included capital expenditures and capitalized software development costs of $14 million and $12 million, respectively. Further, the Company advanced $8 million to Parent in exchange for a note receivable, the proceeds of which were used by Parent to partially fund an acquisition. Once the acquisition was complete, Parent immediately merged the acquired entity with and into the Company, with the Company surviving the merger. Also included in cash used for investing activities is $4 million for other acquisitions, as well as $4 million of cash proceeds for the sale of long-lived assets. Cash used for investing activities for the three months ended December 31, 2010 included capital expenditures and capitalized software development costs of $18 million and $8 million, respectively. Further, during the first quarter of fiscal 2011, the Company and Nortel agreed on a final purchase price of $933 million for the acquisition of NES and we received $6 million representing all remaining amounts due to Avaya from funds held in escrow.

Financing Activities

Net cash used for financing activities was $10 million and $12 million for the three months ended December 31, 2011 and 2010, respectively, which primarily represents payments of long-term debt, as well as capital lease payments.

Future Cash Requirements

Our primary future cash requirements will be to fund debt service, capital expenditures, restructuring payments and benefit obligations. In addition, we may use cash in the future to make strategic acquisitions.

Specifically, we expect our primary cash requirements for the remainder of fiscal 2012 to be as follows:

 

   

Debt service—We expect to make payments of $278 million during the remainder of fiscal 2012 for principal and interest associated with our long-term debt, as refinanced. We will also make payments associated with our interest rate swaps used to reduce the Company’s exposure to variable-rate interest payments. Currently, we do not foresee the need to repatriate earnings of foreign subsidiaries in order to make our scheduled debt payments. The maturity of the senior secured term B-3 loans will automatically become due July 26, 2015 unless (i) the total net leverage ratio as tested on such date

 

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based upon the most recent financial statements provided to the lenders under the senior secured credit facility is no greater than 5.0 to 1.0 or (ii) on or prior to such date, either (x) an initial public offering shall have occurred or (y) at least $750 million in aggregate principal amount of Avaya Inc.’s existing senior unsecured cash-pay notes and/or senior unsecured PIK toggle notes have been repaid or refinanced or their maturity has been extended to a date no earlier than 91 days after October 26, 2017.

 

   

Capital expenditures—We expect to spend approximately $123 million for capital expenditures and capitalized software development costs during the remainder of fiscal 2012.

 

   

Restructuring payments—We expect to make payments of approximately $121 million during the remainder of fiscal 2012 for employee separation costs and lease termination obligations associated with restructuring actions we have implemented through December 31, 2011.

 

   

Benefit obligations—We estimate we will make payments under our pension and postretirement obligations totaling $150 million. These payments include: $75 million to satisfy the minimum statutory funding requirements of our U.S. qualified plans, $5 million of payments under our U.S. benefit plans which are not pre-funded, $22 million under our non-U.S. benefit plans which are predominately not pre-funded, $38 million under our U.S. retiree medical benefit plan which is not pre-funded and $10 million under the 2009 Agreement for represented retirees to post-retirement health trusts. See discussion in Note 11, “Benefit Obligations” to our unaudited interim consolidated financial statements for further details of our benefit obligations.

We and our subsidiaries, affiliates and significant shareholders may from time to time seek to retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Future Sources of Liquidity

We expect our primary source of cash to be positive cash flows provided by operating activities. We expect that profitable revenues and continued focus on accounts receivable, inventory management and cost containment will enable us to generate positive cash from operating activities. Further, we continue to focus on cost reductions and have initiated restructuring plans during fiscal 2012 designed to reduce overhead and provide cash savings.

We are currently party to (a) a senior secured credit facility which consists of both term loans and a senior secured multi-currency revolver allowing for borrowings of up to $200 million, and (b) a multi-currency asset-based revolving credit facility which provides senior secured revolving financing of up to $335 million, subject to availability under a borrowing base (see Note 7, “Financing Arrangements” to our unaudited interim consolidated financial statements). On August 8, 2011, the Company amended the terms of both the multi-currency revolver and the multi-currency asset-based revolving credit facility to extend the final maturity of each from October 26, 2013 to October 26, 2016. All other terms and conditions of the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility remain unchanged.

Our existing cash and cash equivalents and net cash provided by operating activities may be insufficient if we face unanticipated cash needs such as the funding of a future acquisition or other capital investment. Furthermore, if we acquire a business in the future that has existing debt, our debt service requirements may increase.

If we do not generate sufficient cash from operations, face unanticipated cash needs such as the need to fund significant strategic acquisitions or do not otherwise have sufficient cash and cash equivalents, we may need to incur additional debt or issue equity. In order to meet our cash needs we may, from time to time, borrow under our credit facilities or issue long-term or short-term debt or equity, if the market and our credit facilities and indenture governing our senior unsecured notes permit us to do so.

 

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On June 9, 2011, Parent filed with the SEC a registration statement on Form S-1 (as it may be amended from time to time, the “registration statement”) relating to a proposed initial public offering of its common stock. As contemplated in the registration statement, the net proceeds of the proposed offering are expected to be used to repay a portion of our long-term indebtedness, redeem Parent’s Series A preferred stock and pay certain amounts in connection with the termination of our management services agreement with affiliates of our Sponsors pursuant to its terms. The registration statement remains under review by the SEC and shares of common stock registered thereunder may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Form 10-Q and the pending registration statement shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of those securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Further, there is no way to predict whether or not Parent will be successful in completing the offering as contemplated and if it is successful, we cannot be certain if, or how much of, the net proceeds will be used for the purposes identified above.

Based on past performance and current expectations, we believe that our existing cash and cash equivalents of $345 million as of December 31, 2011 and future cash provided by operating activities will be sufficient to meet our future cash requirements for at least the next 12 months. Our ability to meet our cash requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

Debt Ratings

As of December 31, 2011, we had a long-term corporate family rating of B3 with a stable outlook from Moody’s and a corporate credit rating of B- with a stable outlook from Standard & Poor’s. Our ability to obtain additional external financing and the related cost of borrowing may be affected by our debt ratings, which are periodically reviewed by the major credit rating agencies. The ratings are subject to change or withdrawal at any time by the respective credit rating agencies.

Credit Facilities

In connection with the Merger on October 26, 2007, we entered into borrowing arrangements with several financial institutions, certain of which arrangements were amended December 18, 2009 in connection with the Acquisition and amended on February 11, 2011 in connection with the refinancing. Long-term debt under our borrowing arrangements includes a senior secured credit facility consisting of term loans and a revolving credit facility, a senior secured multi-currency asset based revolving credit facility, senior secured notes and senior unsecured notes. On August 8, 2011, the Company amended the terms of the multi-currency revolvers available under its senior secured credit facility and its senior secured multi-currency asset-based revolving credit facility to extend the final maturity of each from October 26, 2013 to October 26, 2016. All other terms and conditions of the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility remain unchanged. We are not in default under the senior secured credit facility, the indentures governing our notes or our senior secured multi-currency asset-based revolving credit facility. See Note 7, “Financing Arrangements,” to our unaudited interim consolidated financial statements for further details.

Critical Accounting Policies and Estimates

Management has reassessed the critical accounting policies as disclosed in our Annual Report on Form 10-K filed with the SEC on December 9, 2011 and determined that there were no significant changes to our critical accounting policies in the three months ended December 31, 2011 except for recently adopted accounting guidance as discussed in Note 2, “Recent Accounting Pronouncements” to our unaudited interim consolidated financial statements. Also, there were no significant changes in our estimates associated with those policies.

 

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New Accounting Pronouncements

See discussion in Note 2, “Recent Accounting Pronouncements” to our unaudited interim consolidated financial statements for further details.

EBITDA and Adjusted EBITDA

EBITDA is defined as net income (loss) before income taxes, interest expense, and depreciation and amortization. EBITDA provides us with a measure of operating performance that excludes items that are outside the control of management, which can differ significantly from company to company depending on capital structure, the tax jurisdictions in which companies operate and capital investments. Under the Company’s debt agreements, the ability to draw down on the revolving credit facilities or engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied in part to ratios based on Adjusted EBITDA. As defined in our debt agreements, Adjusted EBITDA is a non-GAAP measure of EBITDA further adjusted to exclude certain charges and other adjustments permitted in calculating covenant compliance under our debt agreements. We believe that including supplementary information concerning Adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our debt agreements and because it serves as a basis for determining management compensation. In addition, we believe Adjusted EBITDA provides more comparability between our historical results and results that reflect purchase accounting and our new capital structure following the Merger. Accordingly, Adjusted EBITDA measures our financial performance based on operational factors that management can impact in the short-term, namely the Company’s pricing strategies, volume, costs and expenses of the organization.

EBITDA and Adjusted EBITDA have limitations as analytical tools. Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations. In particular, based on our debt agreements the definition of Adjusted EBITDA allows us to add back certain non-cash charges that are deducted in calculating net income (loss). Our debt agreements also allow us to add back restructuring charges, Sponsor monitoring fees and other specific cash costs and expenses as defined in the agreements and that portion of our pension costs, other post-employment benefits costs, and non-retirement post-employment benefits costs representing the amortization of pension service costs and actuarial gain or loss associated these employment benefits. However, these are expenses that may recur, may vary and are difficult to predict. Further, our debt agreements require that Adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.

 

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The unaudited reconciliation of net loss, which is a GAAP measure, to EBITDA and Adjusted EBITDA is presented below:

 

     Three months ended
December 31,
 

(In millions)

       2011             2010      

Net loss

   $ (26   $ (180

Interest expense

     109        127   

Interest income

     (1     (1

(Benefit from) provision for income taxes

     (2     22   

Depreciation and amortization

     143        168   
  

 

 

   

 

 

 

EBITDA

     223        136   

Impact of purchase accounting adjustments (a)

     —          (1

Restructuring charges, net

     21        22   

Sponsors’ fees (b)

     2        2   

Acquisition-related costs (c)

     1        4   

Integration-related costs (d)

     5        48   

Non-cash share-based compensation

     3        3   

Write-down of assets held for sale to net realizable value

     —          1   

Loss on investments and sale of long-lived assets, net

     1        —     

Loss (gain) on foreign currency transactions

     1        (8

Pension/OPEB/nonretirement postemployment benefits and long-term disability costs (e)

     22        15   
  

 

 

   

 

 

 

Adjusted EBITDA

   $ 279      $ 222   
  

 

 

   

 

 

 

 

(a) The impact of purchase accounting adjustments represents the net adjustments to eliminate the impact of certain purchase accounting adjustments recorded as a result of the acquisition of NES and the Merger.
(b) Sponsors’ fees represent monitoring fees payable to affiliates of the Sponsors pursuant to a management services agreement entered into at the time of the Merger.
(c) Acquisition-related costs include legal and other costs related to NES and other acquisitions.
(d) Integration-related costs primarily represent third-party consulting fees and other administrative costs associated with consolidating and coordinating the operations of Avaya and NES. In fiscal 2012, the costs primarily relate to developing compatible IT systems and internal processes. In fiscal 2011, these costs were incurred in connection with, among other things, the on-boarding of NES personnel, developing compatible IT systems and internal processes and developing and implementing a strategic operating plan to help enable a smooth transition with minimal disruption to NES customers. Integration-related costs also include fees paid to certain Nortel-controlled entities for logistics and other support functions being performed on a temporary basis pursuant to a transition services agreement.
(e) Represents that portion of our pension costs, other post-employment benefit costs and non-retirement post-employment benefit costs representing the amortization of prior service costs and net actuarial gains/losses associated with these employment benefits.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements.” All statements other than statements of historical fact are “forward-looking” statements for purposes of the U.S. federal and state securities laws. These statements may be identified by the use of forward looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained in this report under Part II, Item 1A, “Risk Factors,” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements.

We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this report, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:

 

   

our ability to develop and sell advanced communications products and services, including unified communications, data networking solutions and contact center applications;

 

   

the market for our products and services, including unified communications solutions;

 

   

our ability to remain competitive in the markets we serve;

 

   

economic conditions and the willingness of enterprises to make capital investments;

 

   

our reliance on our indirect sales channel;

 

   

the ability to protect our intellectual property and avoid claims of infringement;

 

   

the ability to retain and attract key employees;

 

   

our degree of leverage and its effect on our ability to raise additional capital and to react to changes in the economy or our industry;

 

   

our ability to manage our supply chain and logistics functions;

 

   

liquidity and our access to capital markets;

 

   

risks relating to the transaction of business internationally;

 

   

our ability to effectively integrate acquired businesses into ours;

 

   

an adverse result in any significant litigation, including antitrust, intellectual property or employment litigation;

 

   

our ability to maintain adequate security over our information systems;

 

   

environmental, health and safety laws, regulations, costs and other liabilities;

 

   

climate change; and

 

   

pension and post-retirement healthcare and life insurance liabilities.

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosure About Market Risk” in Avaya’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011 filed with the SEC on December 9, 2011. As of December 31, 2011, there has been no material change in this information.

 

Item 4. Controls and Procedures.

 

a) Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this report, our management, under the supervision and with the participation of the principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)). Based on this evaluation, our principal executive officer and principal financial officer have concluded (1) that the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and (2) that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

b) Changes in Internal Control Over Financial Reporting.

There were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

See Note 14, “Commitments and Contingencies” to the unaudited Consolidated Financial Statements.

 

Item 1A. Risk Factors

There have been no material changes during the quarterly period ended December 31, 2011 to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011.

 

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

None.

 

Item 3. Defaults Upon Senior Securities.

Not Applicable.

 

Item 4. Mine Safety Disclosures

Not Applicable.

 

Item 5. Other Information.

Pursuant to Section 15(d) of the Securities Exchange Act of 1934, the Company’s obligations to file periodic and current reports ended as of October 1, 2010. Nevertheless, the Company continues to file periodic reports and current reports with the SEC voluntarily to comply with the terms of the indentures governing its senior secured notes and senior unsecured notes.

During the period covered by this Form 10-Q, no events took place that were required to be disclosed in a report on Form 8-K, but not reported.

 

Item 6. Exhibits.

 

Exhibit
Number

    
31.1    Certification of Kevin J. Kennedy pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Anthony J. Massetti pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Kevin J. Kennedy pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Anthony J. Massetti pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from Avaya Inc.’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets at December 31, 2011 and September 30, 2011, (ii) Consolidated Statement of Operations for the three months ended December 31, 2011 and 2010 (iii) Consolidated Statements of Cash Flows for the three months ended December 31, 2011 and 2010, and (iv) Notes to Consolidated Financial Statements (Unaudited)*

 

* Pursuant to Rule 406 T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those Sections.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

AVAYA INC.

By:

 

/s/    KEVIN J. MACKAY        

 

Kevin J. MacKay

Vice President, Controller & Chief Accounting Officer

(Principal Accounting Officer)

February 13, 2012

 

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