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EX-32.1 - EXHIBIT 32.1 - AVAYA INCavaya-ex321_20151231x10q.htm
EX-31.1 - EXHIBIT 31.1 - AVAYA INCavaya-ex311_20151231x10q.htm
EX-32.2 - EXHIBIT 32.2 - AVAYA INCavaya-ex322_20151231x10q.htm
EX-31.2 - EXHIBIT 31.2 - AVAYA INCavaya-ex312_20151231x10q.htm
EX-10.6 - EXHIBIT 10.6 - AVAYA INCex106-indemnificationagree.htm
 
 
 
 
 
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, 2015
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.)
 
 
 
4655 Great America Parkway
Santa Clara, California
 
95054
(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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” 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 9, 2016, 100 shares of Common Stock, $.01 par value, of the registrant were outstanding.
 
 
 
 
 



TABLE OF CONTENTS
 

When we use the terms “we,” “us,” “our,” “Avaya” or the “Company,” we mean Avaya Inc., a Delaware corporation, and its consolidated subsidiaries taken as a whole, unless the context otherwise indicates.
This Quarterly Report on Form 10-Q contains the registered and unregistered Avaya Aura®, Avaya Scopia® and other trademarks or service marks of Avaya and are the property of Avaya Inc. and/or its affiliates. This Quarterly Report on Form 10-Q also contains additional tradenames, trademarks or service marks belonging to us and to other companies. We do not intend our use or display of other parties’ trademarks, tradenames or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.





PART I—FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited).

Avaya Inc.
Consolidated Statements of Operations (Unaudited)
(In millions)
 
 
Three months ended December 31,
 
2015
 
2014
REVENUE
 
 
 
Products
$
464

 
$
549

Services
494

 
530

 
958

 
1,079

COSTS
 
 
 
Products:
 
 
 
Costs (exclusive of amortization of acquired technology
intangible assets)
164

 
203

Amortization of acquired technology intangible assets
8

 
9

Services
207

 
229

 
379

 
441

GROSS PROFIT
579

 
638

OPERATING EXPENSES
 
 
 
Selling, general and administrative
333

 
374

Research and development
75

 
88

Amortization of acquired intangible assets
57

 
57

Restructuring charges, net
23

 
15

 
488

 
534

OPERATING INCOME
91

 
104

Interest expense
(118
)
 
(112
)
Other income, net
4

 
14

(LOSS) INCOME BEFORE INCOME TAXES
(23
)
 
6

Provision for income taxes
(4
)
 
(3
)
NET (LOSS) INCOME
$
(27
)
 
$
3


The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

1


Avaya Inc.
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
(In millions)

 
Three months ended December 31,
 
2015
 
2014
Net (loss) income
$
(27
)
 
$
3

Other comprehensive income:
 
 
 
Pension, postretirement and postemployment benefit-related items, net of provision for income taxes of $0 and $1 for the three months ended December 31, 2015 and 2014, respectively
15

 
17

Cumulative translation adjustment
9

 
10

Other comprehensive income
24

 
27

Comprehensive (loss) income
$
(3
)
 
$
30


The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.



2



Avaya Inc.
Consolidated Balance Sheets (Unaudited)
(In millions, except per share and shares amounts)
 
 
December 31,
2015
 
September 30,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
344

 
$
323

Accounts receivable, net
628

 
678

Inventory
172

 
174

Deferred income taxes, net
31

 
26

Other current assets
204

 
171

TOTAL CURRENT ASSETS
1,379

 
1,372

Property, plant and equipment, net
280

 
282

Deferred income taxes, net
32

 
34

Acquired intangible assets, net
904

 
970

Goodwill
4,073

 
4,074

Other assets
124

 
130

TOTAL ASSETS
$
6,792

 
$
6,862

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Debt maturing within one year
$
25

 
$
7

Accounts payable
372

 
379

Payroll and benefit obligations
200

 
229

Deferred revenue
665

 
665

Business restructuring reserve, current portion
87

 
90

Other current liabilities
293

 
282

TOTAL CURRENT LIABILITIES
1,642

 
1,652

Long-term debt
5,956

 
5,960

Pension obligations
1,642

 
1,690

Other postretirement obligations
183

 
194

Deferred income taxes, net
265

 
262

Business restructuring reserve, non-current portion
64

 
67

Other liabilities
417

 
415

TOTAL NON-CURRENT LIABILITIES
8,527

 
8,588

Commitments and contingencies

 

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

 

Additional paid-in capital
2,985

 
2,981

Accumulated deficit
(5,002
)
 
(4,975
)
Accumulated other comprehensive loss
(1,360
)
 
(1,384
)
TOTAL STOCKHOLDER'S DEFICIENCY
(3,377
)
 
(3,378
)
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIENCY
$
6,792

 
$
6,862


The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

3


Avaya Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In millions)
 
Three months ended December 31,
 
2015
 
2014
OPERATING ACTIVITIES:
 
 
 
Net (loss) income
$
(27
)
 
$
3

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
93

 
94

Share-based compensation
4

 
7

Amortization of debt issuance costs
3

 
3

Accretion of debt discount
2

 
1

Deferred income taxes, net
(4
)
 
(6
)
Unrealized gain on foreign currency exchange
(5
)
 
(13
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
50

 
42

Inventory
2

 
3

Accounts payable
(5
)
 
(3
)
Payroll and benefit obligations
(56
)
 
(35
)
Business restructuring reserve
(2
)
 
(3
)
Deferred revenue
7

 
(1
)
Other assets and liabilities
(7
)
 
(28
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
55

 
64

INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(26
)
 
(33
)
Acquisition of businesses, net of cash acquired
(7
)
 
(3
)
Proceeds from sale of long-lived assets
2

 

Proceeds from sale-leaseback transactions

 
12

Other investing activities, net
(1
)
 
(2
)
NET CASH USED FOR INVESTING ACTIVITIES
(32
)
 
(26
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from Domestic ABL
70

 

Repayment of Domestic ABL
(55
)
 

Proceeds from borrowings on revolving loans under the Senior Secured Credit Agreement

 
20

Repayments of borrowings on revolving loans under the Senior Secured Credit Agreement

 
(30
)
Repayment of long-term debt
(6
)
 
(9
)
Payments related to sale-leaseback transactions
(2
)
 
(2
)
Other financing activities, net
(1
)
 
(1
)
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
6

 
(22
)
Effect of exchange rate changes on cash and cash equivalents
(8
)
 
(10
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
21

 
6

Cash and cash equivalents at beginning of period
323

 
322

Cash and cash equivalents at end of period
$
344

 
$
328

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

4


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 provider of contact center, unified communications and networking products and services. The Company's products and services portfolio spans software, hardware, networking technology and professional services. The Company conducts its business operations in three segments. Two of those segments, Global Communications Solutions and Avaya Networking, make up Avaya's Enterprise Collaboration Solutions product portfolio. The third segment contains Avaya’s services portfolio and is called Avaya Global Services.
The Company sells directly through its worldwide sales force and through its global network of channel partners including distributors, service providers, dealers, value-added resellers, system integrators 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.
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 out of bankruptcy court proceedings, for an adjusted purchase price of $933 million. The terms of the acquisition did not include any significant contingent consideration arrangements.
Acquisition of RADVISION Ltd.
On June 5, 2012, Avaya acquired RADVISION Ltd. (“Radvision”), a global provider of videoconferencing and telepresence technologies over internet protocol (“IP”) and wireless networks for $230 million in cash.
Basis of Presentation
The accompanying unaudited interim Consolidated Financial Statements as of December 31, 2015 and for the three months ended December 31, 2015 and 2014 include the accounts of Avaya Inc. and its subsidiaries and 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, 2015, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on November 23, 2015. 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 only 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
In the first quarter of fiscal 2016, the Company adopted Accounting Standards Update ("ASU") No. 2015-01 "Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items." The standard eliminated the concept of

5


extraordinary items. The adoption of this standard did not have a material effect on the Company's Consolidated Financial Statements.
Recent Accounting Guidance Not Yet Effective
In November 2015, the Financial Accounting Standards Board ("FASB") issued ASU No. 2015-17 "Income Taxes: Balance Sheet Classification of Deferred Taxes." The standard simplifies the Balance Sheet presentation of deferred income tax assets and liabilities requiring them to be classified as noncurrent. This accounting guidance is effective for the Company in the first quarter of fiscal 2018 with early adoption permitted. The ASU may be applied retrospectively to each reporting period presented or prospectively in the year of adoption. The Company is currently evaluating the method of adoption and the impact that the adoption of this accounting guidance may have on its Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-1 "Financial Instruments: Recognition and Measurement of Financial Assets and Financial Liabilities." The standard requires that all equity securities with readily determinable fair values, except for those accounted for under the equity method, be measured at fair value with changes reported in net income. This standard is effective for the Company by means of a cumulative adjustment to the balance sheet in the first quarter of fiscal 2019 and is not expected to have a material effect on its Consolidated Financial Statements.
3.
Supplementary Financial Information
Supplemental Operations Information
  
Three months ended December 31,
In millions
2015
 
2014
OTHER INCOME, NET
 
 
 
Foreign currency gains, net
$
6

 
$
6

Change in certain tax indemnifications

 
9

Other, net
(2
)
 
(1
)
Total other income, net
$
4

 
$
14

Supplemental Cash Flow Information
  
Three months ended December 31,
In millions
2015
 
2014
NON-CASH INVESTING ACTIVITY
 
 
 
Acquisition of equipment under capital lease
$
3

 
$

4.
Business Restructuring Reserve and Programs
Fiscal 2016 Restructuring Program
During fiscal 2016, the Company is continuing to identify opportunities to streamline operations and generate costs savings which included eliminating employee positions. During the three months ended December 31, 2015, the Company recognized restructuring charges of $23 million, net of adjustments to the restructuring programs of prior fiscal years. These charges are primarily for employee separation costs associated with fiscal 2016 employee severance actions in Europe, Middle East and Africa ("EMEA"), for which the related payments are expected to be completed in fiscal 2020. The separation charges 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. As the Company continues to evaluate opportunities to streamline its operations, it may identify cost savings globally and take additional restructuring actions in the future and the costs of those actions could be material.

6


The following table summarizes the components of the fiscal 2016 restructuring program during the three months ended December 31, 2015:
In millions
Employee
Separation
Costs
 
Lease
Obligations
 
Total
Fiscal 2016 restructuring program charges
$
23

 
$

 
$
23

Cash payments
(3
)
 

 
(3
)
Impact of foreign currency fluctuations
1

 

 
1

Balance as of December 31, 2015
$
21

 
$

 
$
21

Fiscal 2015 Restructuring Program
During fiscal 2015, the Company continued to identify opportunities to streamline operations and generate costs savings which included eliminating employee positions. Restructuring charges recorded during fiscal 2015 associated with these initiatives, net of adjustments to previous periods, were $62 million. These charges included employee separation costs of $52 million primarily associated with employee severance actions in the U.S. and EMEA for which the related payments are expected to be completed in fiscal 2019. The separation charges 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.
The following table summarizes the components of the fiscal 2015 restructuring program during the three months ended December 31, 2015:
In millions
Employee
Separation
Costs
 
Lease
Obligations
 
Total
Balance as of October 1, 2015
$
31

 
$
2

 
$
33

Cash payments
(10
)
 

 
(10
)
Adjustments (1)
(1
)
 

 
(1
)
Balance as of December 31, 2015
$
20

 
$
2

 
$
22

(1) 
Included in adjustments are changes in estimates, whereby all increases and decreases in costs related to the fiscal 2015 restructuring program were recorded to the restructuring charges line item in operating expenses in the period of the adjustment.
Fiscal 2008 through 2014 Restructuring Programs
During fiscal years 2008 through 2014, the Company identified opportunities to streamline operations and generate cost savings which included exiting facilities and eliminating employee positions. The remaining obligation for employee separation costs are primarily associated with EMEA plans approved in the third and fourth quarters of fiscal 2014 for which the related payments are expected to be completed in fiscal 2019. The EMEA plans include, but are not limited to, social pension fund payments and healthcare 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 2022. These remaining obligations are primarily associated with the Frankfurt, Germany facility vacated during fiscal 2014, as well as facilities vacated in the United Kingdom and the U.S.
The following table aggregates the remaining components of the fiscal 2008 through 2014 restructuring programs during the three months ended December 31, 2015:
In millions
Employee
Separation
Costs
 
Lease
Obligations
 
Total
Balance as of October 1, 2015
$
64

 
$
60

 
$
124

Cash payments
(8
)
 
(5
)
 
(13
)
Adjustments (1)

 
1

 
1

Impact of foreign currency fluctuations
(2
)
 
(2
)
 
(4
)
Balance as of December 31, 2015
$
54

 
$
54

 
$
108

 
(1) 
Included in adjustments are changes in estimates, whereby all increases and decreases in costs related to the fiscal 2009 through 2014 restructuring programs were recorded to the restructuring charges line item in operating expenses

7


in the period of the adjustments. Included in adjustments were changes in estimates whereby all increases in costs related to the fiscal 2008 restructuring reserve are recorded in the restructuring charges line item in operating expenses in the period of the adjustments and decreases in costs were recorded as adjustments to goodwill.
5.
Financing Arrangements
In connection with the Merger, on October 26, 2007, the Company entered into financing arrangements consisting of (a) a senior secured credit facility (the "Senior Secured Credit Agreement"), (b) a senior unsecured credit facility, which later became senior unsecured notes, and (c) a senior secured asset-based revolving credit facility (the "Domestic ABL"). The Senior Secured Credit Agreement consists of senior secured term loans and a senior secured multi-currency revolver. The financing arrangements were subsequently amended through a series of refinancing transactions and in connection with the acquisition of NES discussed in Note 1, "Background, Merger and Basis of Presentation". During fiscal 2015, the Company entered into several refinancing transactions which extended the maturity dates of certain existing debt and provided for a new senior secured foreign asset-based revolving credit facility.
On May 29, 2015, Avaya Inc. entered into Amendment No. 9 to the Senior Secured Credit Agreement pursuant to which the Company refinanced a portion of the senior secured term B-3 loans ("term B-3 loans"), senior secured term B-4 loans ("term B-4 loans") and senior secured term B-6 loans ("term B-6 loans") in exchange for and with the proceeds from the issuance of $2,125 million in principal amount of senior secured term B-7 loans ("term B-7 loans") maturing May 29, 2020.
On June 4, 2015, Avaya Inc. entered into Amendment No. 4 to the Domestic ABL which, among other things: (i) extended the stated maturity of the facility from October 26, 2016 to June 4, 2020 (subject to certain conditions specified in the Domestic ABL), (ii) increased the sublimit for letter of credit issuances under the Domestic ABL from $150 million to $200 million, and (iii) amended certain covenants and other provisions of the existing agreement. At the same time, Avaya Inc. and certain foreign subsidiaries of the Company (the "Foreign Borrowers") entered into a new senior secured foreign asset-based revolving credit facility (the "Foreign ABL") which matures June 4, 2020 (subject to certain conditions specified in the Foreign ABL). Available credit under the Domestic ABL remains $335 million subject to availability under the borrowing base. Available credit under the Foreign ABL is $150 million subject to availability under the respective borrowing bases of the Foreign Borrowers.
At December 31, 2015 and September 30, 2015, the Company had aggregate outstanding borrowings of $70 million and $55 million, in addition to $114 million and $119 million of issued and outstanding letters of credit with aggregate remaining revolver availability of $108 million and $83 million, respectively, under the Domestic ABL.
At December 31, 2015 and September 30, 2015, the Company had aggregate outstanding borrowings of $20 million and $20 million, in addition to $22 million and $22 million of issued and outstanding letters of credit with aggregate remaining revolver availability of $88 million and $101 million, respectively, under the Foreign ABL.
On June 5, 2015, the Company permanently reduced the senior secured multi-currency revolver from $200 million to $18 million and all letters of credit under the Senior Secured Credit Agreement were transferred to the Domestic ABL. At December 31, 2015 and September 30, 2015, the Company had aggregate outstanding borrowings of $18 million and $18 million, respectively, under the senior secured multi-currency revolver.
The weighted average contractual interest rate of the Company’s outstanding debt as of December 31, 2015 and September 30, 2015 was 7.3% and 7.3%, respectively. The effective interest rate of each obligation is not materially different than its contractual interest rate.

8


Principal amounts of long term debt and long term debt net of discounts and issuance costs consisted of the following:
 
December 31, 2015
 
September 30, 2015
In millions
Principal Amount
 
Net of Discounts and Issuance Costs
 
Principal Amount
 
Net of Discounts and Issuance Costs
Variable rate revolving loans under the Senior Secured Credit Agreement due October 26, 2016
$
18

 
$
18

 
$
18

 
$
18

Variable rate revolving loans under the Domestic ABL due June 4, 2020
70

 
70

 
55

 
55

Variable rate revolving loans under the Foreign ABL due June 4, 2020
20

 
20

 
20

 
20

Variable rate term B-3 loans due October 26, 2017
616

 
612

 
616

 
611

Variable rate term B-4 loans due October 26, 2017
1

 
1

 
1

 
1

Variable rate term B-6 loans due March 31, 2018
537

 
533

 
537

 
532

Variable rate term B-7 loans due May 29, 2020
2,106

 
2,073

 
2,112

 
2,077

7% senior secured notes due April 1, 2019
1,009

 
1,000

 
1,009

 
999

9% senior secured notes due April 1, 2019
290

 
286

 
290

 
286

10.50% senior secured notes due March 1, 2021
1,384

 
1,368

 
1,384

 
1,368

Total debt
$
6,051

 
5,981

 
$
6,042

 
5,967

Debt maturing within one year
 
 
(25
)
 
 
 
(7
)
Non-current portion of long-term debt
 
 
$
5,956

 
 
 
$
5,960

Annual maturities of the principal amounts of our long-term debt for the next five years ending September 30 and thereafter consist of:
In millions
 
Remainder of fiscal 2016
$
19

2017
43

2018
1,179

2019
1,324

2020
2,102

2021 and thereafter
1,384

Total
$
6,051

Capital Lease Obligations
Included in other liabilities is $61 million and $61 million of capital lease obligations, net of imputed interest as of December 31, 2015 and September 30, 2015, respectively, which includes assets under a sale-leaseback arrangement and an office facility.
On August 20, 2014, the Company entered into an agreement to outsource certain delivery services associated with the Avaya Private Cloud Services business. That agreement also included the sale of specified assets owned by the Company which are being leased-back by Avaya and accounted for as a capital lease. Under the terms of the agreement, additional financing is also available to Avaya and its subsidiaries of up to $24 million per year for the sale of equipment used in the performance of services under the agreement, provided that no material adverse change with respect to the Company has occurred or is continuing as of the date any such financing is requested. During the three months ended December 31, 2014, the Company received proceeds of $12 million in connection with the sale of equipment used in the performance of services under this agreement. As of December 31, 2015 and September 30, 2015, capital lease obligations associated with this agreement were $46 million and $48 million, respectively.
6.
Foreign Currency Forward Contracts
The Company utilizes foreign currency forward contracts primarily to hedge fluctuations associated with certain monetary assets and liabilities, including accounts receivable, accounts payable, and certain intercompany obligations. These foreign currency forward contracts are not designated for hedge accounting treatment. Changes in fair value of these contracts are recorded as a component of other income, net to offset the change in the value of the underlying foreign currency denominated assets and liabilities.

9


The gains and (losses) of the foreign currency forward contracts included in other income, net were $3 million and $(4) million for the three months ended December 31, 2015 and 2014, respectively.
7.
Fair Value Measures
Pursuant to the accounting guidance for fair value measurements, 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 measurements 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 that are not active; 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.
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, 2015 and September 30, 2015 were as follows:
 
December 31, 2015
 
September 30, 2015
 
Fair Value Measurements Using
 
Fair Value Measurements Using
In millions
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
Other Non-Current Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments
$
1

 
$
1

 
$

 
$

 
$
1

 
$
1

 
$

 
$

Other Current Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
$

 
$

 
$

 
$

 
$
1

 
$

 
$
1

 
$

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.
Investments
Investments classified as Level 1 assets and liabilities are priced using quoted market prices for identical assets in active markets that are observable.
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.
The estimated fair values of the amounts borrowed under the Company's revolving credit facilities were estimated based on a Level 2 input using discounted cash flow techniques. Significant inputs to the discounted cash flow model include projected future cash flows based on projected LIBOR rates, and the average margin for companies with similar credit ratings and similar maturities. The estimated fair values of all other amounts borrowed under the Company’s financing arrangements at December 31, 2015 and September 30, 2015 were estimated based on a Level 2 input using quoted market prices for the Company’s debt which is subject to infrequent transactions (i.e. a less active market).

10


The estimated fair values of the Company’s debt at December 31, 2015 and September 30, 2015 were as follows:
 
December 31, 2015
 
September 30, 2015
In millions
Principal
Amount
 
Fair
Value
 
Principal
Amount
 
Fair
Value
Variable rate revolving loans under the Senior Secured Credit Agreement due October 26, 2016
$
18

 
$
16

 
$
18

 
$
17

Variable rate revolving loans under the Domestic ABL due June 4, 2020
70

 
62

 
55

 
42

Variable rate revolving loans under the Foreign ABL due June 4, 2020
20

 
17

 
20

 
15

Variable rate term B-3 loans due October 26, 2017
616

 
478

 
616

 
532

Variable rate term B-4 loans due October 26, 2017
1

 
1

 
1

 
1

Variable rate term B-6 loans due March 31, 2018
537

 
408

 
537

 
461

Variable rate term B-7 loans due May 29, 2020
2,106

 
1,488

 
2,112

 
1,666

7% senior secured notes due April 1, 2019
1,009

 
759

 
1,009

 
800

9% senior secured notes due April 1, 2019
290

 
221

 
290

 
242

10.50% senior secured notes due March 1, 2021
1,384

 
474

 
1,384

 
644

Total
$
6,051

 
$
3,924

 
$
6,042

 
$
4,420

8.
Income Taxes
The provision for income taxes for the three months ended December 31, 2015 and 2014 was $4 million and $3 million, respectively.
The effective income tax rate for the three months ended December 31, 2015 differs from the statutory U.S. Federal income tax rate primarily due to (1) the effect of tax rate differentials on foreign income/loss, (2) changes in the valuation allowance established against the Company’s deferred tax assets, and (3) net increases due to tax positions taken during the current period offset by reductions for unrecognized tax benefits resulting from the lapse of statute of limitations.
The effective income tax rate for the three months ended December 31, 2014 differs from the statutory U.S. federal income tax rate primarily due to (1) the effect of tax rate differentials on foreign income/loss, (2) changes in the valuation allowance established against the Company’s deferred tax assets, (3) reductions in the Company's unrecognized tax benefits resulting from the settlement of certain international tax exams, (4) recognition of a $1 million income tax benefit as a result of net gains in other comprehensive income, and (5) recognition of a $6 million income tax benefit related to the correction of prior period valuation allowance on deferred tax assets.
During the three months ended December 31, 2014, the Company recorded a correction to the prior period valuation allowance on deferred tax assets which decreased the provision for income taxes by $6 million. Prior to this adjustment the Company's provision for income taxes was $9 million for the three months ended December 31, 2014. The Company evaluated the correction in relation to the three months ended December 31, 2014, the full year results for fiscal 2014, as well as the periods in which the adjustment originated, and concluded that the adjustment is not material to this period or any prior quarter or year.
For interim financial statement purposes, GAAP income tax expense related to ordinary income is determined by applying an estimated annual effective income tax rate against the Company's ordinary income. Income tax expense/benefit related to items not characterized as ordinary income is recognized as a discrete item when incurred. The estimation of the Company's annual effective income tax rate requires the use of management forecasts and other estimates, a projection of jurisdictional taxable income and losses, application of statutory income tax rates, and an evaluation of valuation allowances. The Company's estimated annual effective income tax rate may be revised, if necessary, in each interim period during the fiscal year.
9.
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 covering a portion of its U.S. retirees that include healthcare benefits and life insurance coverage. 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 Company froze benefit accruals and additional participation in the pension and postretirement plans for its U.S.
management employees effective December 31, 2003. The Company also subsequently amended the postretirement benefit plan for its U.S. management employees as follows: effective January 1, 2013, to terminate retiree dental coverage, and to cease providing medical and prescription drug coverage to a retiree, dependent, or lawful spouse who has attained age 65; effective January 1, 2015, to reduce the Company's maximum contribution toward the cost of providing benefits under the plan;

11


and effective January 1, 2016, to replace coverage through the Company’s group plan with coverage through the private insurance marketplace. The latest amendment will allow retirees to choose insurance from the marketplace while still receiving financial support from the Company toward the cost of coverage through a Health Reimbursement Arrangement.
Effective November 25, 2013 and January 31, 2014, the Company entered into a two-year contract extension with the Communications Workers of America (“CWA”) and the International Brotherhood of Electrical Workers (“IBEW”), respectively. With the contract extension, the contract with the CWA and the contract with the IBEW now terminate on June 13, 2016. The contract extensions did not affect the Company's obligation for pension and postretirement benefits available to U.S. employees of the Company who are represented by the CWA or IBEW ("represented employees").
Effective October 1, 2015, the Company changed its estimate of the service and interest cost components of net periodic benefit cost for its U.S. pension and other postretirement benefit plans. Previously, the Company estimated the service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. The new estimate utilizes a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. The new estimate provides a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows and their corresponding spot rates. The change does not affect the measurement of the Company’s U.S. pension and postretirement benefit obligations and it is accounted for as a change in accounting estimate, which is applied prospectively. For fiscal 2016, the change in estimate is expected to reduce U.S. pension and postretirement net periodic benefit plan cost by $30 million to $35 million when compared to the prior estimate.
The components of the pension and postretirement net periodic benefit cost (credit) for the three months ended December 31, 2015 and 2014 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
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Components of net periodic benefit cost (credit)
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
1

 
$
1

 
$
1

 
$
2

 
$

 
$

Interest cost
28

 
34

 
3

 
4

 
3

 
5

Expected return on plan assets
(46
)
 
(44
)
 

 
(1
)
 
(2
)
 
(2
)
Amortization of unrecognized prior service cost

 

 

 

 
(5
)
 
(3
)
Amortization of previously unrecognized net actuarial loss
22

 
24

 
2

 
2

 
1

 
1

Net periodic benefit cost (credit)
$
5

 
$
15

 
$
6

 
$
7

 
$
(3
)
 
$
1

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, 2015, the Company made contributions of $18 million to satisfy minimum statutory funding requirements. Estimated payments to satisfy minimum statutory funding requirements for the remainder of fiscal 2016 are $70 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, 2015, the Company made payments for these U.S. and non-U.S. pension benefits totaling $2 million and $3 million, respectively. Estimated payments for these U.S. and non-U.S. pension benefits for the remainder of fiscal 2016 are $5 million and $23 million, respectively.
During the three months ended December 31, 2015, the Company contributed $8 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 13, 2016. Estimated contributions under the terms of the 2009 agreements are $26 million for the remainder of fiscal 2016.
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 months ended December 31, 2015, the Company made payments totaling $2 million for these retiree medical benefits. Estimated payments for these retiree medical benefits for the remainder of fiscal 2016 are $2 million.

12


10.
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 Enterprise Collaboration Solutions (“ECS”) product portfolio. The third segment contains Avaya’s services portfolio and is called Avaya Global Services (“AGS”).
The GCS segment develops, markets, and sells unified communications and contact center products by integrating multiple forms of communications, including telephony, e-mail, instant messaging and video. The Networking segment’s portfolio of products offers integrated networking products which are scalable across customer enterprises. The AGS segment develops, markets and sells comprehensive end-to-end cloud and managed 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 profit 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.
Summarized financial information relating to the Company’s reportable segments is shown in the following table:
  
Three months ended December 31,
In millions
2015
 
2014
REVENUE
 
 
 
Global Communications Solutions
$
414

 
$
481

Avaya Networking
50

 
68

Enterprise Collaboration Solutions
464

 
549

Avaya Global Services
494

 
530

 
$
958

 
$
1,079

GROSS PROFIT
 
 
 
Global Communications Solutions
$
283

 
$
314

Avaya Networking
16

 
32

Enterprise Collaboration Solutions
299

 
346

Avaya Global Services
288

 
302

Unallocated Amounts (1)
(8
)
 
(10
)
 
579

 
638

OPERATING EXPENSES
 
 
 
Selling, general and administrative
333

 
374

Research and development
75

 
88

Amortization of intangible assets
57

 
57

Restructuring charges, net
23

 
15

 
488

 
534

OPERATING INCOME
91

 
104

INTEREST EXPENSE AND OTHER INCOME, NET
(114
)
 
(98
)
(LOSS) INCOME BEFORE INCOME TAXES
$
(23
)
 
$
6

(1) 
Unallocated Amounts in Gross Profit include the effect of the amortization of acquired technology intangibles and costs that are not core to the measurement of segment management’s performance, but rather are controlled at the corporate level.

13


11.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss as of December 31, 2015 and 2014 are summarized as follows:
In millions
Change in unamortized pension, postretirement and postemployment benefit-related items
 
Foreign Currency Translation
 
Other
 
Accumulated Other Comprehensive Loss
Balance as of October 1, 2015
$
(1,368
)
 
$
(15
)
 
$
(1
)
 
$
(1,384
)
Other comprehensive income before reclassifications

 
9

 

 
9

Amounts reclassified to earnings
15

 

 

 
15

Balance as of December 31, 2015
$
(1,353
)
 
$
(6
)
 
$
(1
)
 
$
(1,360
)
In millions
Change in unamortized pension, postretirement and postemployment benefit-related items
 
Foreign Currency Translation
 
Other
 
Accumulated Other Comprehensive Loss
Balance as of October 1, 2014
$
(1,150
)
 
$
(49
)
 
$
(1
)
 
$
(1,200
)
Other comprehensive income before reclassifications

 
10

 

 
10

Amounts reclassified to earnings
18

 

 

 
18

Provision for income taxes
(1
)
 

 

 
(1
)
Balance as of December 31, 2014
$
(1,133
)
 
$
(39
)
 
$
(1
)
 
$
(1,173
)
The amounts reclassified out of accumulated other comprehensive loss into the Consolidated Statements of Operations prior to the impact of income taxes, with line item locations, during the three months ended December 31, 2015 and 2014 were as follows:
 
Three months ended December 31,
 
 
In millions
2015
 
2014
 
Line item in Statements of Operations
Change in unamortized pension, postretirement and postemployment benefit-related items
$
4

 
$
5

 
Costs - Products
 
4

 
5

 
Costs - Services
 
6

 
7

 
Selling, general and administrative
 
1

 
1

 
Research and development
Total amounts reclassified to operations
$
15

 
$
18

 
 
12.
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, employment, environmental and regulatory matters.
The Company believes that it has meritorious defenses in connection with its current lawsuits and material claims and disputes, and intends to vigorously contest each of them.
Based on the Company's experience, management believes that the damages amounts claimed in a case are not a meaningful indicator of the potential liability. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of cases.
Other than as described below, in the opinion of the Company's management based upon information currently available to the Company, while the outcome of these lawsuits, claims and disputes is uncertain, the likely results of these lawsuits, claims and disputes are not expected, either individually or in the aggregate, to have a material adverse effect on the Company's financial position, results of operations or cash flows, although the effect could be material to the Company's results of operations or cash flows for any interim reporting period.

14


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. (“TLI/Continuant”) 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 asserted in its amended complaint that, among other things, defendants, or each of them, engaged in tortious conduct by improperly accessing and utilizing the Company's proprietary software, including passwords, logins and maintenance service permissions, to perform certain maintenance services on the Company's customers' equipment. TLI/Continuant filed counterclaims against the Company 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. TLI/Continuant sought to recover the profits they claim they would have earned from maintaining Avaya's products, and asked for injunctive relief prohibiting the conduct they claim is anticompetitive. 
The trial commenced on September 9, 2013. On January 8, 2014, the Court issued an opinion dismissing the Company's affirmative claims. With respect to TLI/Continuant’s counterclaims, on March 27, 2014, a jury found against the Company on two of eight claims and awarded damages of $20 million. Under the federal antitrust laws, the jury’s award is subject to automatic trebling, or $60 million.
Following the jury verdict, TLI/Continuant sought an injunction regarding the Company’s ongoing business operations. On June 30, 2014, a federal judge rejected the demands of TLI/Continuant’s proposed injunction and stated that “only a narrow injunction is appropriate.” Instead, the judge issued an order relating to customers who purchased an Avaya PBX system between January 1, 1990 and April 30, 2008 only. Those customers and their agents will have free access to the on demand maintenance commands that were installed on their systems at the time of the purchase transaction. The court specified that this right “does not extend to access on a system purchased after April 30, 2008.” Consequently, the injunction affects only systems sold prior to April 30, 2008. The judge denied all other requests TLI/Continuant made in its injunction filing. The Company is complying with the injunction.
The Company and TLI/Continuant filed post-trial motions seeking to overturn the jury’s verdict, which motions were denied. In September 2014, the Court entered judgment in the amount of $63 million, which included the jury's award of $20 million, subject to automatic trebling, or $60 million, plus prejudgment interest in the amount of $3 million. On October 10, 2014, the Company filed a Notice of Appeal, and on October 23, 2014, TLI/Continuant filed a Notice of Conditional Cross-Appeal. On October 23, 2014, the Company filed its supersedeas bond with the Court in the amount of $63 million, which includes an amount for post-judgment interest and stays execution of the judgment while the matter is on appeal. The Company secured posting of the bond through the issuance of a letter of credit under its existing credit facilities.
On November 10, 2014, TLI/Continuant made an initial application for attorney's fees, expenses and costs, which the Company is contesting. TLI/Continuant’s current application for attorneys’ fees, expenses and costs is approximately $71 million and represents activity through February 28, 2015. The Company expects that TLI/Continuant will make a supplemental application for activity beyond February 28, 2015 at some point in the future. Once required, and in order to stay the enforcement of any award for attorney’s fees, expenses and costs, on appeal or otherwise, the Company will post a bond in the amount of the award for attorney’s fees, expenses and costs, plus interest. The Company expects to secure posting of the bond through existing resources and may use any or a combination of the issuance of one or more letters of credit under its existing credit facilities and cash on hand. As an interim matter, on or before February 25, 2016, the Company expects to post a bond in the amount of $8 million in connection with the pending attorneys' fees application.
The Company continues to believe that TLI/Continuant's claims are without merit and unsupported by the facts and law, and the Company intends to defend this matter, including by filing its appeal to the United States Court of Appeals for the Third Circuit. The Company filed its initial appellate brief with the Third Circuit on June 12, 2015 and briefing by the parties is now complete. Oral argument took place before the Third Circuit on January 19, 2016, and the Company is now awaiting a decision. No loss reserve has been provided for this matter.
In the event TLI/Continuant ultimately succeed on appeal, any potential loss could be material. 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 and Commercial Disputes
In the ordinary course of business, the Company is involved in litigation alleging it has infringed upon third parties’ intellectual property rights, including patents and copyrights; some litigation may involve claims for infringement against customers, distributors and resellers by third parties relating to the use of Avaya’s products, as to which the Company may provide indemnifications of varying scope to certain parties. The Company is also involved in litigation pertaining to general commercial disputes with customers, suppliers, vendors and other third parties including royalty disputes. These matters are on-

15


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.
SNMP Research International, Inc. and SNMP Research, Inc. (collectively, “SNMP-RI”) brought a complaint, on November 2, 2011, against Avaya and Nortel Networks, Inc. (“Nortel”) (and others) in the Nortel Chapter 11 bankruptcy proceeding. In the complaint, SNMP-RI alleges that Avaya is liable to SNMP-RI for copyright and trade secret infringement with respect to Nortel products acquired by Avaya that incorporate SNMP-RI products. No trial date has been set. In a separate case pending in the United States District Court for the District of Delaware, SNMP-RI alleged that (i) Avaya either underreported or failed to report royalties owed to SNMP-RI under a license agreement and (ii) Avaya’s use of SNMP-RI software in certain ways constitutes copyright and trade secret infringement. Trial of this matter is currently scheduled to begin May 9, 2016.
In late 2014 SNMP-RI also brought two separate complaints against several of Avaya’s resellers or distributors, alleging essentially the same facts as in the matters described above; these two cases are now stayed following motions filed by Avaya.
Avaya believes it has meritorious defenses but 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.
Other
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.  In light of the Louisiana Supreme Court’s holding in another hearing loss case (“Graphic Packaging”), in which the Court held that noise induced hearing loss qualifies as an occupational injury or disease subject to Workers’ Compensation claims, in October 2015, Avaya filed dispositive motions seeking dismissal of this matter. In January 2016, the Court granted the Company’s motion to dismiss except as to one unrepresented plaintiff whose claim, for procedural reasons, will be dismissed once service has been effected.
At this time an outcome cannot be predicted however, because the amounts of the claims individually and in the aggregate are not material, the Company believes the outcome of this matter will not have a material adverse effect on the manner in which it does business, its financial position, results of operations, or cash flows.
General
The Company records accruals for legal contingencies to the extent that it has concluded 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 and non-current liabilities in the Consolidated Balance Sheets, for actual experience.
In millions
 
Balance as of October 1, 2015
$
9

Reductions for payments and costs to satisfy claims
(3
)
Accruals for warranties issued during the period
2

Balance as of December 31, 2015
$
8


16


Guarantees of Indebtedness and Other Off-Balance Sheet Arrangements
Letters of Credit
As of December 31, 2015, the Company had $136 million of outstanding letters of credit which ensure the Company's performance or payment to third parties.  Included in this amount is $114 million and $22 million of letters of credit issued under the Domestic ABL and Foreign ABL, respectively.
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. Some of these bonds, including the $63 million supersedeas bond filed with the Court in the TLI/Continuant matter discussed above, are guaranteed by $71 million of the $114 million of letters of credit issued under the Domestic ABL. If the Company fails to perform under its obligations, the maximum potential payment under all of these surety bonds was $77 million as of December 31, 2015.
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 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.
The Company’s outsourcing agreements with its most significant contract manufacturers automatically renew in July and September 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.
Long-Term Cash Incentive Bonus Plan
Parent has established a long-term incentive cash bonus plan (“LTIP”). Under the LTIP, 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”). Parent has authorized LTIP awards covering a total of $60 million, of which $22 million in awards were outstanding as of December 31, 2015. 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, 2015, no compensation expense associated with the LTIP has been recognized.
Credit Facility Indemnification
In connection with its obligations under the credit facilities described in Note 5, “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. As of December 31, 2015, no amounts have been accrued pursuant to this indemnity.
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

17


determine the maximum potential amount of other future payments, if any, that it could be required to make under this agreement.
In addition, in connection with the distribution, the Company and Lucent entered into a Tax Sharing Agreement that 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.

18


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 “Cautionary Note Regarding Forward-Looking Statements” at the end of this discussion.
Our accompanying unaudited interim Consolidated Financial Statements as of December 31, 2015 and for the three months ended December 31, 2015 and 2014 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 (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, 2015, which were included in our Annual Report on Form 10-K filed with the SEC on November 23, 2015. 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.
Overview
We are a leading provider of contact center, unified communications and networking products and services designed to help enterprise and midmarket businesses increase workforce productivity, customer engagement, and customer lifetime value, with the ultimate objective of higher revenue and profitability for our customers.
Our products and services portfolio spans software, hardware, professional and support services, and cloud services. These fall under three reporting segments:
Global Communications Solutions ("GCS") encompass all of our real-time collaboration, contact center and unified communications software and hardware. Unified communications integrates real-time communication services including telephony, e-mail, instant messaging and video. Examples in GCS include audio conferencing systems; mobile video software, software that runs contact center operations such as multimedia contact routing; software that enables mobile access to the company network for employees; and hardware such as phones, gateways, and servers. We enable these unified communication and real-time collaboration tools to also be embedded inside the applications businesses use every day to keep employees and customers connected, productive and effective. This reporting segment also includes a development platform, which allows our customers and third parties to adapt our technology by creating custom applications, automated workflows, and engagement environments for their unique needs and allows them to integrate Avaya’s capabilities into their existing infrastructure. GCS also includes cloud-supporting software and hardware products, which make it possible to use our contact center and unified communications products via the Cloud.
Avaya Networking ("Networking") includes our advanced fabric networking technology which offers a unique end-to-end virtualized architecture designed to be simple to deploy, agile and resilient. This reporting segment also includes products such as Ethernet switches, wireless networking, access control, and unified management and orchestration solutions, which provides network and device management.
Avaya Global Services ("AGS") includes professional and support services designed to help our customers maximize the benefits of using our products and technology. Our services include support for implementation, deployment, monitoring, troubleshooting, optimization, and more. This reporting segment also includes our Cloud and managed services, which enable customers to take advantage of our technology in a private, hybrid, or public cloud environment. The majority of our revenue in this reporting segment is recurring in nature, based on multi-year services contracts.
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 December 22, 2015, Parent filed with the SEC an amended registration statement on Form S-1 (the “registration statement”) relating to a proposed initial public offering of its common stock. As contemplated in the registration statement, Parent intends to use the net proceeds received in connection with this offering to pay certain amounts in connection with the termination of our management services agreement with affiliates of our Sponsors. Parent intends to use the remainder of the net proceeds for working capital and other general corporate purposes, including repayment of a portion of Avaya Inc.'s long-

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term indebtedness, the potential redemption of some or all of Parent's Series A Preferred Stock and supporting the strategic growth opportunities of Avaya Inc. in the future. 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 or other jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State or other jurisdiction. 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.
See discussion in Note 1, "Background, Merger and Basis of Presentation" to our unaudited interim Consolidated Financial Statements.
Our Products and Services
The majority of Avaya’s product portfolio is represented by software products that reside on either a client or on a server. With our products and services, packaged as solutions, we can address the needs of a diverse range of customers, including large multinational enterprises, small and medium-sized businesses, and government organizations. Our customers operate in a broad range of industries, including financial services, manufacturing, retail, transportation, energy, media and communications, healthcare, education and government.
As enterprise and midmarket businesses increasingly seek to improve customer experience through the quality and efficiency of contact center and unified communications, they are confronted with several industry trends presenting emerging and varied challenges. We believe the most forceful among these trends are:
the increasing mobility of the workforce;
shifting priorities of C-level business decision makers, including an increased preference for software-defined networking ("SDN", or "network virtualization"), cloud delivery of applications, and management of multiple and varied devices, all of which must be handled with the security the business demands;
increasing demand for IT purchases under operating expense models over capital expense models; and
the rise of omni-channel customer service involving multiple modes of communications.
We aim to be the leader in our industry in addressing the customer needs and priorities resulting from recent trends and emerging challenges. We have invested in open, mobile enterprise communication and collaboration platforms and are well poised to serve a broad range of needs, from servicing old phone systems to deploying leading edge call center technology via the cloud. While we remain committed to our legacy capabilities and the customers who rely on them, in the past several years we have also responded to the emerging landscape by evolving our market and product approach in three important ways.
We have invested in research and development and new technologies to develop and provide more comprehensive contact center, unified communications, and networking products and services, continuing our focus on the enterprise while expanding the value we can provide to midmarket customers.
We have evolved our product design philosophy, anticipating demand for products that are cloud and mobile enabled. We also design our products to be flexible, extensible, secure and reliable. This allows our customers to transition from old communications and collaboration technology to newer technology in a way that is manageable and cost-effective.
We have increased our focus on packaging our products and services into “solutions” including Customer Engagement Solutions, Team Engagement Solutions, and Networking Solutions. These solutions address the challenges faced by our customers and offer the advantage of being customizable where necessary to meet customer needs. We design and build these solutions for engagement of the customers and employees of our customers.
We define “engagement” as the set of tangible outcomes that a business experiences through improved team and customer communications and collaboration. These tangible benefits include higher employee productivity; higher customer satisfaction; higher customer lifetime value; and, ultimately, higher profitability.
Customer Engagement Solutions
Our Customer Engagement Solutions are designed to facilitate long-lasting and successful relationships between companies and their customers. The objective is to increase customer lifetime value, revenue, and profitability for our customers - even as they evolve to integrate more communications channels and mobile devices into their customer service strategies. These solutions are predominately made up of our contact center products and services, and supported by our networking technology and development environment. Some of the benefits of Avaya Customer Engagement Solutions include:

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Improved customer experience: As businesses increasingly compete on customer experience, we offer products and services designed to incorporate multiple channels of communication; improve customer satisfaction and retention; increase referrals and customer acquisition; and increase cross-sell and upsell opportunities. For example, our intelligent routing and multi-modal integration software can help an enterprise or midmarket business deliver a seamless ongoing conversation with a customer, even if that conversation includes interactions by phone, chat, email, and social media. Our products and services are designed to drive consistency and increased satisfaction across touch points and enable better measurement of customer experience data for dispersion to other business units.
Contact center efficiency: We believe the contact center is at the heart of a successful customer engagement solution because it is a primary channel of communication between the customer and businesses, even as modes of contact expand to include social media, chat, and mobile apps. Our products and services are designed to help our customers achieve contact center efficiency through automation, by reducing operational costs and staffing impacts, eliminating resource constraints caused by repetitive requests and manual processes, and ensuring service level agreements as well as compliance requirements. For example, we might deploy our contact center platform with intelligent call routing and contact flow analytics software to help a customer better manage volume fluctuations and better match contact center resources to customer needs in real-time.
Revenue growth: Our solutions are designed to help our customers increase revenue through stronger and longer lasting customer relationships. We believe our solutions address this challenge by reducing complexity within the contact center and facilitating better sell-through, sell-in and sell-up performance. For example, we might deploy our Avaya Customer Experience Portal with software for proactive consumer outreach, to help a customer increase the efficiency and effectiveness of increasing repeat purchases and order sizes, while allowing the customer’s end-consumer to use his or her preferred communications channel for the interaction.
Team Engagement Solutions
Avaya Team Engagement Solutions are designed to offer businesses the simplicity of a single solution to address workforce communication and collaboration needs, including via mobile devices. These solutions are made up predominately of our real-time collaboration and unified communications products and services, and supported by our networking technology and development environment. Some of the benefits of Avaya Team Engagement Solutions include:
Communications modernization: Avaya helps modernize communications ecosystems by centralizing, consolidating and virtualizing underlying technology infrastructures and making applications available via the cloud. This model is designed to account for mobile device usage, reduce total cost of ownership ("TCO") for the entire collaboration environment and allow businesses to transition from a capital expenditure to operating expenditure model. For example, an Avaya private cloud solution can be implemented to integrate virtualized voice, email, video, messaging, chat and conferencing capabilities. This enables cloud access to communications tools for desk-based and remote workers and improves security, delivering TCO efficiencies and rapid payback.
Worker productivity: Our conferencing, messaging, and other unified communications products and services are designed to help our customers integrate products that equally support desk-workers, teleworkers, and frequent business travelers, thereby increasing the mobility and productivity of their workforce. Our customers are increasingly demanding that individual workers be able to communicate across device types, channels and geographic locations knowing that their devices, data and connections are reliable and secure. For example, our customers using the Avaya Session Border Control can securely extend the corporate unified communications capabilities to a remote user on a mobile device and to desk phones in their remote and home offices.
Team productivity: Our unified communications products and services are designed to help our customers improve team productivity by diminishing the complexity of team collaboration channels, enabling off-the-shelf and customizable application integration, providing omni-channel conferencing across audio, web, and video for room, desktop, and mobile platforms. It also provides the opportunity to simplify and expand by moving conferencing services into the cloud. For example, the Avaya Scopia platform can enable employees or remote workers to collaborate using high-definition, secure video conferencing accessed through on-premise conference rooms, desktop systems, and mobile devices.
Examples of GCS products that may be part of a Customer or Team Engagement solution include, but are not limited to:
Avaya Aura Conferencing: A combination of hardware and software that provides simple access to multi-media collaboration. In the same application users can use voice, video, chat, and web conferencing. Based on the Avaya Aura architecture, Avaya Aura Conferencing is distributed and scalable to thousands of users. Its modular conception allows the system to be dimensioned appropriately in terms of video or web content servers or voice communications manager. The complementary Avaya Video Conferencing infrastructure includes Avaya Scopia Elite Multipoint Conferencing Units ("MCUs"). These are reliable and highly scalable multi-party video conferencing platforms for enterprise and service provider environments. They offer advanced and easy-to-use multi-party infrastructure for video conferencing and are at the core of a

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high definition deployment. In addition, the infrastructure includes gateways for Microsoft Lync and Session Initiation Protocol ("SIP") provide connectivity and interoperability with unified communications products to standards-based video conferencing systems and infrastructure.
Avaya Aura Core: A next-generation architecture powering our customers’ communications and collaboration services. Based on IMS, an industry standard defined by 3GPP, this core (a blend of hardware and software) provides a flat communications control and management function using SIP methods. Unlike point-to-point SIP, or even standard client server SIP approaches used by most of our competitors, the Avaya Aura Core uses the SIP-ISC, or IMS Service Control, signaling standard to allow multiple independent applications to serve communication sessions. Avaya Aura can scale to hundreds of thousands of users, serving the small enterprise through the largest enterprise customers in the world.
Avaya Aura Contact Center: Avaya Aura Contact Center lets customers connect with a company in ways beyond phone calls, including via text, instant messenger, and email. The omni-channel contact center solution gives agents the context (real-time and historical) to deliver a differentiated customer experience. It is designed to provide a unified, efficient, and highly personalized experience that builds brand and customer loyalty.
Avaya Aura Call Center Elite: With intelligent routing and resource selection features, Avaya Aura Call Center Elite allows a business to determine if its customers should be served by the least busy agent, the first available agent, or the agent with skills that best match the customer’s needs. Calls can be routed across a pool of agents regardless of physical location.
Avaya IP Office: Avaya IP Office is a unified communications set of hardware and software products designed specifically for midmarket-sized customers. Avaya IP Office can be deployed on-premise or in the cloud. It was designed to simplify processes and streamline information exchange within companies. Communications capabilities can be added as needed. The latest version of Avaya IP Office (9.1) gives midmarket customers features and functions that large enterprises use, but at a scale that is efficient and affordable for them. Avaya IP Office delivers a seamless collaboration experience across voice, video, and mobility for up to 3,000 users.
IP Office Contact Center: A contact center software solution designed specifically for midmarket business needs. It enables seamless conversations for hundreds of agents across multiple modes of communication, including voice, email, chat, text, and fax.
Avaya Contact Center Select: This advanced software provides enterprise-level contact center capabilities to midmarket clients on the Avaya IP Office platform. It provides, among other things, omni-channel support (voice, email, chat, SMS, and fax) scalability for 30 - 250 agents and skills-based routing.
Avaya Scopia: A standards-based portfolio of hardware and software products that includes conference room systems, desktop and mobile video conferencing, infrastructure and management. Available extensions include HD (high-definition) video-conference rooms, and mobile applications for video conferencing, control, and management on mobile devices.
AvayaLive Connect and AvayaLive Video: AvayaLive Connect is a low-cost, no-contract suite of collaboration services for small business communications. AvayaLive Video is a conference room in the cloud, based on Avaya Scopia Video.
Avaya Phones: Avaya’s range of desk phones and portable technologies include IP and digital desk phones, digital enhanced cordless telecommunications ("DECT") handsets, wireless phones, docking stations for bring-your-own-device ("BYOD"), and conference room phones. Avaya phones offer capabilities including touch screen and applications such as integration to corporate calendar, directory and presence, enhanced audio quality for a “you-are-there” experience, customization and soft keys, and multiple lines appearances.
The Avaya Engagement Development Platform: The Avaya Engagement Development Platform is a software platform that simplifies embedding robust communications and collaboration capabilities into business applications, such as CRM or Enterprise Resources Planning ("ERP"). This platform allows customers, third parties, and Avaya to create customized engagement applications and environments to meet unique needs. Customers and third parties can integrate business applications with unified communications technology and contact center capabilities including voice, short message service ("SMS") and email.
Networking Products
Fabric Connect, our advanced fabric networking technology, based on open industry standards, is designed to deliver a unique end-to-end virtualized architecture that is simple to deploy, agile to operate, and resilient. With companies layering additional technologies on top of 25+ year old protocols to address the diverse and unprecedented amount of applications on networks, complexity is impeding IT and slowing the business. Avaya’s unique end-to-end fabric and SDN architecture eliminates the need for additional layers and gives customers the ability to run their networks at business speed.

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We believe Fabric Connect is currently capable of delivering many of the core benefits that are promised in future implementations of SDN and is the best foundation for delivering advanced SDN capabilities in the data center and network edge. Our fabric technology integrates with and enhances all components of our networking portfolio:
Ethernet Switches: deliver the fabric foundation with a range of ethernet switches, and supporting software for data center, core, edge and branch applications;
Wireless Networking: extends the reach of users with fabric auto-configuration and advanced application management;
Access Control: delivers intelligence to the fabric and enforces role- and policy-based access control to the network; and
Unified Management and Orchestration: provides simplified traditional and fabric utilities for network-wide management and orchestration, which provides network and device management.
Avaya Global Services
Avaya Global Services consult, enable, support, manage, optimize and even outsource enterprise communications products (applications and networks) to help customers achieve enhanced business results both directly and through partners. Avaya’s portfolio of services is designed to enable customers to mitigate risk, reduce TCO, and optimize communication products. Avaya Global Services is supported by patented design and management tools, and by network operations and technical support centers around the world.
Avaya’s Global Services portfolio is divided into Avaya Professional Services and Avaya Client Services.
Avaya Professional Services ("APS")
APS helps organizations leverage technologies effectively to meet their business objectives. Our strategic and technical consulting, as well as deployment and customization services, help customers accelerate business performance and deliver an improved customer experience. Whether deploying new products or optimizing existing capabilities, APS leverages its specialists globally across three core areas:
Enablement Services: Provide access to expertise and resources for planning, defining and deploying Avaya products to maximize technology potential, simplify customers' business processes, increase security, and minimize risk. Avaya integrates and tests equipment, trains employees, and deploys a plan to help ensure success.
Optimization Services: Help drive increased value and greater business results by leveraging customers’ existing technology. Avaya consultants and product architects analyze a communications environment in the context of customer business priorities and strategies, working to increase customers’ ROI by implementing proven best practices, enabling operational improvements, and stress testing products and services.
Innovation Services: Help identify improved methods for using communications and collaboration to increase business productivity, employee efficiency and customer service levels. Our consultative approach, deep industry experience, and custom application services, from business planning through to execution and product integration, is designed to create alignment with customer’s specific business objectives.
Avaya Client Services ("ACS")
ACS is a market-leading organization offering support, management and optimization of enterprise communications networks to help customers mitigate risk, reduce TCO, and optimize product performance. ACS is supported by patented design and management tools, and by network operations and technical support centers around the world. The contracts for these services range from one to multiple- years, with three year terms being the most common. Custom or complex services contracts are typically five years in length. The portfolio of ACS services includes:
Global Support Services ("GSS"): Provides a comprehensive suite of support options both directly and through partners to proactively resolve issues and improve uptime. Support offers and capabilities include:
24x7 remote support
proactive remote monitoring
sophisticated diagnostic tools
parts replacement
onsite response
Recent innovations include our Avaya Support Web site that quickly connects customers to advanced Avaya technicians via live chat, voice or video. The web site also provides access to “Ava,” an interactive virtual chat agent based on Avaya Automated Chat that quickly searches our knowledge base and a wide range of “how-to” videos to answer customer support questions. Ava learns with each customer interaction and can make the decision to transition the chat to an Avaya technician - often without the customer realizing the change is taking place.

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All new support solutions are published to the web by our engineers, generally within 30 minutes of finding a resolution, adding value for customers by providing known solutions for potential issues rapidly. Most of our customers also benefit from Avaya EXPERT Systems, which provides real-time monitoring of diagnostic and system status. This proactively identifies potential issues to improve reliability, uptime, and faster issue resolution.
Avaya Private Cloud and Managed Services ("APCS"): Provides the IT Infrastructure Library ("ITIL"), aligned, multivendor managed and outsourcing services for customers’ communications environments. Managed and private cloud services can be procured in standard packages or in fully custom arrangements that include on-premise or private Cloud options, Service Level Agreements ("SLAs"), billing and reporting.
Avaya can manage existing infrastructure of any age and from any communications vendor, and many customers leverage this model as a way to manage complex existing environments while they upgrade their entire communication network to the latest technology. This provides customers with the option of a recurring operational expense, rather than a one-time capital expenditure, for upgrading to the latest technology. In these types of deals, the underlying products and infrastructure are owned by the equipment vendor, or managed services/Cloud provider, and are often included in the managed services pricing/revenue.
In addition, APCS can take the form of one of three Cloud models offered by Avaya:
Avaya Partner Cloud Service, a model that supports public and private products offered by service providers and system integrators;
Avaya Branded Cloud Service, an Avaya-hosted multi-customer public cloud option; and
Private Cloud, a private cloud model for individual customers.
We sometimes refer to the foregoing products and services as “flagship,” “legacy,” and “core” as follows:
Flagship includes products and services which reflect the expertise and innovation in some of the newest enhancements to our product portfolio. We believe these products and services offer the highest potential to contribute to revenue growth. The Flagship category includes Video, Avaya Aura, IP Office, contact center, Wireless LAN, SBC, ethernet/fabric switching, Avaya professional services, Avaya Cloud and Avaya managed services.
Core includes products and services which are foundational components of our technology solutions. The Core category includes certain phone models, gateways, servers, core contact center, and other Cloud and managed and maintenance support services.
Legacy includes certain products and services we acquired in our acquisitions of Tenovis and the enterprise solutions business ("NES") of Nortel Networks Corporation, but does not include NES networking products.
Our Technology
Technology enhances the way people communicate and collaborate, enabling team and customer engagement. We leverage critical technology and open standards across our portfolio to our customers’ advantage. One of these standards is SIP, and Avaya is a leading innovator in leveraging its use for business collaboration. By allowing application flexibility and cost reduction, SIP has become the protocol of choice for real-time communications and will continue to expand in the industry. We distinguish ourselves from competition by exploiting advanced SIP capabilities as opposed to only exploiting basic features. Avaya shifts communications from having to coordinate multiple, independent media and communications systems toward session management based environments, where multiple media and resources can flexibly be brought into a seamless experience. This fundamental difference supports more fluid, effective and persistent collaboration across media such as voice, video and text and modes of communications such as calls or conferences.
To adapt to our customers’ needs in light of the industry trends, we have shifted our design philosophy over the past few years, anticipating increased demand for our unified communications and contact center products to be available via cloud delivery. While our products have traditionally been deployed on a customer’s premise, many can now also be deployed in public, private and hybrid cloud models. Further, through comprehensive monitoring technologies, these products and services can also be deployed as Cloud and managed services.
Multimedia Session Management
At the core of our architecture, SIP based Avaya Aura Session Manager centralizes communications control and application integration. Applications are decoupled from the network and can be deployed to individual users based on their need, rather than by where they work or the capabilities of the system to which they are connected. This allows for extreme scalability, with the Avaya Aura Session Manager currently capable of handling up to 350,000 devices per system.
Unique End User Experiences
Avaya one-X Communicator and Avaya one-X Mobile software clients leverage the Avaya Aura technology and allow users to perform all unified communications and conferencing functions, via voice, video and text. In addition, users can access

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Microsoft Exchange services, such as e-mail, contacts and calendar and exchange instant message and presence information with Microsoft Lync users (i.e., Microsoft Communicator clients).
The Avaya Engagement Development platform is software that abstracts the core Avaya Aura system and allows developers with common web and JAVA programming skills to develop innovative applications that embed communications. For example a customer escalation registered in an insurance claims application could start an Avaya Engagement Development platform workflow that would automatically find and join the customer, the claims adjuster and claims manager via email or SMS and bring them into a video conferencing session. This ability to invoke and combine communications functions allows our customers to generate more business value from their Avaya products.
Management and Orchestration
Simple and consistent management and operations are essential to customers. We believe our management products facilitate efficient operations and better overall performance. They cover a wide range of functions, from initial provisioning to monitoring and orchestration of components to enable networking of communications services.
Advanced Routing and Switching Protocols
Avaya offers routing switches and wireless products that embed advanced protocols such as shortest path bridging ("SPB") at the forefront of the networking industry. SPB simplifies networking by provisioning services at the edge rather than on every node; as a consequence, administration is simpler and recovery from incidents can be up to 2,500 times faster than in conventional data networks. As an example, we believe this type of infrastructure is able to support applications such as multicasting large numbers of video streams or network isolation, delivering lower cost and better performance. Our continued investment in this domain contributes to our differentiation in the networking space.
Additional Technologies
In addition to Session Management, we use technologies including:
Messaging and Presence via SIP/SIMPLE and XMPP: The Avaya Aura Presence Services collects, aggregates and disseminates rich presence and enables instant messaging including using SIP/SIMPLE and XMPP, providing interoperability with systems from other vendors, such as Microsoft and IBM.
Virtualization and Cross Operating System ("OS") Support: Our software applications run on a broad range of operating systems including, but not limited to, Microsoft Windows, Apple MAC OS and Google Android. We also support virtualization to not only reduce the physical server footprint using hypervisor technology to run multiple applications concurrently on a single physical platform, but also facilitate certain tasks such as system expansion or recovery.
High Quality/Low Bandwidth Video: Avaya’s Video products and services are able to deliver high quality video while minimizing bandwidth consumption and responding to adverse network conditions such as congestion or packet loss. We use H.264 High Profile for bandwidth efficiency and cascading media to optimize bandwidth between sites and H.264 Scalable Video Coding ("SVC").
Virtualization is used in our Avaya Aura portfolio to decrease the supporting hardware cost and also to enable operations resilience and facilitate scalability.
WebRTC is a newly evolving technology that Avaya is leveraging to develop a new generation of Unified Communications. WebRTC allows for communication clients to be supported directly from HTML 5 browsers. Voice and video are embedded in web applications, allowing access to these media to be much more ubiquitous.
Big Data: By leveraging the power of large unstructured data stores, important information streams from multi-vendor systems and customer support infrastructure can be aggregated. This allows Avaya to create a next generation of contact centers, where customer service or sales representative assignment is made based on real-time business insights.
Refinancing of Debt
During fiscal 2015, the Company entered into several refinancing transactions which extended the maturity dates of certain debt and provided for a new senior secured foreign asset-based revolving credit facility.
On May 29, 2015, the Company completed Amendment No. 9 to the Senior Secured Credit Agreement pursuant to which the Company refinanced $2,058 million in aggregate principal amounts of senior secured term B-3 loans (“term B-3 loans”), senior secured term B-4 loans (“term B-4 loans”), and senior secured term B-6 loans (“term B-6 loans”) and repaid $32 million of revolving loans outstanding under its senior secured credit facility dated October 27, 2007 ("Senior Secured Credit Agreement") in exchange for and with the proceeds from the issuance of $2,125 million in principal amount of senior secured term B-7 loans ("term B-7 loans") maturing May 29, 2020.

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On June 4, 2015, the Company completed Amendment No. 4 to the senior secured asset-based revolving credit facility (the "Domestic ABL") which, among other things: (i) extended the stated maturity of the facility from October 26, 2016 to June 4, 2020 (subject to certain conditions specified in the Domestic ABL), (ii) increased the sublimit for letter of credit issuances under the Domestic ABL from $150 million to $200 million, and (iii) amended certain covenants and other provisions of the existing agreement. At the same time, certain foreign subsidiaries of the Company (the "Foreign Borrowers") entered into a new senior secured foreign asset-based revolving credit facility (the "Foreign ABL") which matures June 4, 2020 (subject to certain conditions specified in the Foreign ABL). Available credit under the Domestic ABL remains $335 million subject to availability under the borrowing base. Available credit under the Foreign ABL is $150 million subject to availability under the respective borrowing bases of the Foreign Borrowers.
On June 5, 2015, the Company permanently reduced the revolving credit commitments under its Senior Secured Credit Agreement from $200 million to $18 million and transferred all letters of credit outstanding under the Senior Secured Credit Agreement to the Domestic ABL.
See Note 5, “Financing Arrangements” to our unaudited interim Consolidated Financial Statements and “Management's Discussion and Analysis - Liquidity and Capital Resources: Credit Facilities” for further details.
Principal amounts of long term debt and long term debt net of discounts and issuance costs as of December 31, 2015 consisted of the following:
In millions
Principal Amount
 
Net of Discounts and Issuance Costs
Variable rate revolving loans under the Senior Secured Credit Agreement due October 26, 2016
$
18

 
$
18

Variable rate revolving loans under the Domestic ABL due June 4, 2020
70

 
70

Variable rate revolving loans under the Foreign ABL due June 4, 2020
20

 
20

Variable rate term B-3 loans due October 26, 2017
616

 
612

Variable rate term B-4 loans due October 26, 2017
1

 
1

Variable rate term B-6 loans due March 31, 2018
537

 
533

Variable rate term B-7 loans due May 29, 2020
2,106

 
2,073

7% senior secured notes due April 1, 2019
1,009

 
1,000

9% senior secured notes due April 1, 2019
290

 
286

10.50% senior secured notes due March 1, 2021
1,384

 
1,368

Total debt
$
6,051

 
5,981

Debt maturing within one year
 
 
(25
)
Non-current portion of long-term debt
 
 
$
5,956

The weighted average contractual interest rate of the Company's outstanding debt as of December 31, 2015 and September 30, 2015 was 7.3% and 7.3%, respectively.
The table below sets forth the annual maturities of the principal amounts of our long term debt as of December 31, 2015 for the next five years ending September 30th and thereafter:
In millions
 
Remainder of fiscal 2016
$
19

2017
43

2018
1,179

2019
1,324

2020
2,102

2021 and thereafter
1,384

Total
$
6,051

Financial Results Summary
Our revenue for the three months ended December 31, 2015 and 2014 was $958 million and $1,079 million, respectively, a decrease of $121 million or 11%. Revenues were affected by declines in sales of our core and legacy product lines and the service revenues associated with those product lines as well as the unfavorable impact of foreign currencies particularly in

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Europe, Canada, and Latin America. We also believe macroeconomic factors and uncertainties impacted and will continue to impact our customers’ buying decisions in the foreseeable future.
As we continue to transform Avaya into a software and service-led organization and focus our go-to-market efforts to drive growth in our flagship product lines and services such as Aura, APCS, contact center and IP Office, revenues attributable to our core and legacy product lines and services have declined.  We have worked to migrate customers from legacy products such as the Nortel and Tenovis lines and as a result, sales of our legacy product lines declined. Our core products such as gateways, servers, and phones or other software endpoints are integral components to our flagship and legacy products. Accordingly, sales of our core products have declined. Further, we believe better utilization of SIP technology enables our customers to run their communication networks more efficiently, requiring fewer gateways and servers, which also contributed to lower demand for our core and legacy products. The lower demand for our legacy products has contributed in part to lower maintenance service revenue, which was partially offset by increases in APCS revenue.
As a result of a growing market trend around Cloud consumption preferences more customers are exploring operational expense, or OpEx models, rather than capital expenditure, or CapEx models, for procuring technology. The shift to OpEx models enables customers to manage costs and efficiencies, by paying a subscription fee for business collaboration and communications services rather than purchasing the underlying products and services, infrastructure and personnel, which are owned and managed by the equipment vendor or a managed services or Cloud provider. We believe the market trend toward OpEx models will continue as we see an increasing number of opportunities and requests for proposal based on OpEx models. As the trend towards the OpEx model continues, we have focused our go-to-market strategy on our APCS and flagship product offerings. Since the beginning of fiscal 2014, as part of our go-to-market strategy we have made leadership changes, increased our front-line resources, conducted training, and are now focused on the systems and the accountability required to speed up the rate of execution. Throughout fiscal 2015 and into fiscal 2016, our total contracted value for APCS grew. As of December 31, 2015, we anticipate the total future revenues for these contracts to be in excess of $900 million. The values for these contracts are usually larger than contracts under a CapEx model, but the associated revenues are recognized over a longer period of time, typically three to seven years.
The Company has maintained its focus on profitability levels and investing in future results and continued to implement cost savings programs designed to streamline its operations, generate cost savings, and eliminate overlapping processes and expenses associated with various acquisitions. These cost savings programs have included: (1) reducing headcount, (2) relocating certain job functions to lower cost geographies, including service delivery, customer care, research and development, human resources and finance, (3) eliminating real estate costs associated with unused or under-utilized facilities and (4) implementing gross margin improvement and other cost reduction initiatives. During fiscal 2015, the Company incurred restructuring charges of $62 million, the full benefits of which we have yet to realize in our operating results. 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.
Operating income for the three months ended December 31, 2015 and 2014 was $91 million and $104 million, respectively, a decrease of $13 million. The decrease in operating income reflects the decrease in revenues as discussed above and was offset by the continued benefit from our cost savings initiatives. In addition, our operating results for the three months ended December 31, 2015 as compared to the three months ended December 31, 2014 reflect, among other things:
improvement in gross margin to 60.4% for the three months ended December 31, 2015 as compared to 59.1% for the three months ended December 31, 2014;
lower pension and postretirement expense as a result of the Company changing its estimates of the service and interest components of net periodic benefit costs associated with its U.S. pension and postretirement plans effective October 1, 2015;
increase in restructuring charges as the Company initiated greater cost cutting actions during the three months ended December 31, 2015, particularly in Europe; and
a favorable impact of foreign currency on our operating expenses.
Operating income includes non-cash depreciation and amortization of $93 million and $94 million and share-based compensation of $4 million and $7 million for the three months ended December 31, 2015 and 2014, respectively.
Net (loss) income for the three months ended December 31, 2015 and 2014 was $(27) million and $3 million, respectively. The decrease was primarily attributable to the decrease in our operating income as described above, and greater interest expense as a result of the fiscal 2015 refinancing transactions.

27


Results From Operations
Three Months Ended December 31, 2015 Compared with Three Months Ended December 31, 2014
Revenue
Our revenue for the three months ended December 31, 2015 and 2014 was $958 million and $1,079 million, respectively, a decrease of $121 million or 11%. The following table sets forth a comparison of revenue by portfolio: 
 
Three months ended December 31,
  
2015
 
2014
 
Percentage of Total Revenue
 
Yr. to Yr.
Percentage
Change
 
Yr. to Yr. Percentage
Change, net of Foreign
Currency Impact
In millions
2015
 
2014
 
GCS
$
414

 
$
481

 
43
%
 
45
%
 
(14
)%
 
(12
)%
Networking
50

 
68

 
5
%
 
6
%
 
(26
)%
 
(25
)%
Total ECS product revenue
464

 
549

 
48
%
 
51
%
 
(15
)%
 
(14
)%
AGS
494

 
530

 
52
%
 
49
%
 
(7
)%
 
(3
)%
Total revenue
$
958

 
$
1,079

 
100
%
 
100
%
 
(11
)%
 
(9
)%
GCS revenue for the three months ended December 31, 2015 and 2014 was $414 million and $481 million, respectively, a decrease of $67 million or 14%. The decrease in GCS revenue was primarily attributable to lower demand for our legacy, core and flagship products and the unfavorable impact of foreign currency.
Networking revenue for the three months ended December 31, 2015 and 2014 was $50 million and $68 million, respectively, a decrease of $18 million or 26%. The decrease in Networking revenue was primarily attributable to lower sales associated with our legacy products, higher revenues in fiscal 2015 associated with new product releases just prior to fiscal 2015, and the unfavorable impact of foreign currency.
AGS revenue for the three months ended December 31, 2015 and 2014 was $494 million and $530 million, respectively, a decrease of $36 million or 7%. The decrease in AGS revenue was primarily due to lower maintenance services revenues as a result of lower demand for our legacy and core products, the unfavorable impact of foreign currency, and lower professional services revenue. These decreases in AGS revenue were partially offset by higher revenue from APCS. As previously discussed, revenues associated with APCS contracts are recognized over a longer period of time, typically three to seven years.
The following table sets forth a comparison of revenue by location:
 
 
Three months ended December 31,
  
2015
 
2014
 
Percentage of
Total Revenue
 
Yr. to Yr.
Percentage
Change
 
Yr. to Yr. Percentage
Change, net of Foreign
Currency Impact
In millions
2015
 
2014
 
U.S.
$
528

 
$
572

 
55
%
 
53
%
 
(8
)%
 
(8
)%
International:
 
 
 
 
 
 
 
 
 
 
 
EMEA
239

 
301

 
25
%
 
28
%
 
(21
)%
 
(16
)%
APAC - Asia Pacific
106

 
101

 
11
%
 
9
%
 
5
 %
 
9
 %
Americas International - Canada and Latin America
85

 
105

 
9
%
 
10
%
 
(19
)%
 
(8
)%
Total International
430

 
507

 
45
%
 
47
%
 
(15
)%
 
(10
)%
Total revenue
$
958

 
$
1,079

 
100
%
 
100
%
 
(11
)%
 
(9
)%
Revenue in the U.S. for the three months ended December 31, 2015 and 2014 was $528 million and $572 million, respectively, a decrease of $44 million or 8%. The decrease in U.S. revenue was primarily attributable to lower sales of products and associated maintenance and professional services revenues. Revenue in EMEA for the three months ended December 31, 2015 and 2014 was $239 million and $301 million, respectively, a decrease of $62 million or 21%. The decrease in EMEA revenue was primarily attributable to lower sales of our core and legacy products and associated maintenance, lower sales of networking products, and the unfavorable impact of foreign currency. Revenue in APAC for the three months ended December 31, 2015 and 2014 was $106 million and $101 million, respectively, an increase of $5 million or 5%. The increase in APAC revenue was primarily attributable to higher revenue associated with APCS, higher sales of our core and flagship products and higher

28


professional services revenues. These increases in APAC revenues were partially offset by the unfavorable impact of foreign currency. Revenue in Americas International was $85 million and $105 million for the three months ended December 31, 2015 and 2014, respectively, a decrease of $20 million or 19%. The decrease in Americas International revenue was primarily attributable to the unfavorable impact of foreign currency and lower legacy and flagship products revenues.
We sell our products both directly and through an indirect sales channel. The following table sets forth a comparison of revenue from sales of products by channel:
 
 
Three months ended December 31,
  
2015
 
2014
 
Percentage of Total
ECS Product Revenue
 
Yr. to Yr.
Percentage
Change
 
Yr. to Yr. Percentage
Change, net of Foreign
Currency Impact
In millions
2015
 
2014
 
Direct
$
118

 
$
133

 
25
%
 
24
%
 
(11
)%
 
(8
)%
Indirect
346

 
416

 
75
%
 
76
%
 
(17
)%
 
(15
)%
Total ECS product revenue
$
464

 
$
549

 
100
%
 
100
%
 
(15
)%
 
(14
)%
Gross Profit
The following table sets forth a comparison of gross profit by segment:
 
Three months ended December 31,
 
Gross Profit
 
Gross Margin
 
Change
In millions
2015
 
2014
2015
 
2014
Amount
 
Pct.
GCS
$
283

 
$
314

 
68.4
%
 
65.3
%
 
$
(31
)
 
(10
)%
Networking
16

 
32

 
32.0
%
 
47.1
%
 
(16
)
 
(50
)%
  ECS
299

 
346

 
64.4
%
 
63.0
%
 
(47
)
 
(14
)%
AGS
288

 
302

 
58.3
%
 
57.0
%
 
(14
)
 
(5
)%
Unallocated amounts
(8
)
 
(10
)
 
(1) 

 
(1) 

 
2

 
(1) 

Total
$
579

 
$
638

 
60.4
%
 
59.1
%
 
$
(59
)
 
(9
)%
(1) 
Not meaningful
Gross profit for the three months ended December 31, 2015 and 2014 was $579 million and $638 million, respectively, a decrease of $59 million or 9%. The decrease was primarily attributable to the decrease in sales volume, the unfavorable impact of foreign currency, and higher customer discounts, particularly in Europe. These decreases in gross profit were partially offset by the success of our gross margin improvement initiatives and lower pension and postretirement expense. Our gross margin improvement initiatives included exiting facilities, reducing the workforce, relocating positions to lower-cost geographies, productivity improvements, and obtaining better pricing from our contract manufacturers and transportation vendors. Effective October 1, 2015 the Company changed its estimates of the service and interest components of net periodic benefit costs associated with our U.S. pension and postretirement plans which lowered pension and postretirement expense. See Note 9, “Benefit Obligations” to our unaudited interim Consolidated Financial Statements for further details. As a result of our gross margin improvement initiatives, lower pension and postretirement expense, and higher software sales as a percentage of revenues, which have higher margins, gross margin increased to 60.4% for the three months ended December 31, 2015 from 59.1% for the three months ended December 31, 2014.
GCS gross profit for the three months ended December 31, 2015 and 2014 was $283 million and $314 million, respectively, a decrease of $31 million or 10%. The decrease in GCS gross profit was primarily attributable to lower sales volume, the unfavorable impact of foreign currency, and higher customer discounts, particularly in Europe. These decreases were partially offset by the success of our gross margin improvement initiatives and lower pension and postretirement expense as discussed above. As a result of our gross margin improvement initiatives and lower pension and postretirement expense, GCS gross margin increased to 68.4% for the three months ended December 31, 2015 from 65.3% for the three months ended December 31, 2014.
Networking gross profit for the three months ended December 31, 2015 and 2014 was $16 million and $32 million, a decrease of $16 million or 50%. Networking gross margin for the three months ended December 31, 2015 and 2014 was 32.0% and 47.1%, respectively. The decreases in Networking gross profit and gross margin were primarily attributable to lower sales volume, particularly in EMEA.
AGS gross profit for the three months ended December 31, 2015 and 2014 was $288 million and $302 million, respectively, a decrease of $14 million or 5%. The decrease in AGS gross profit was primarily due to lower services revenue and the

29


unfavorable impact of foreign currency. These decreases in AGS gross profit were partially offset by the continued benefit from our gross margin improvement initiatives and lower pension and postretirement expense as discussed above. We have redesigned the Avaya support website and continue to transition our customers from an agent-based support model to a largely self-service/web-based support model. Our gross margin improvement initiatives have enabled us to reduce the workforce and relocate positions to lower-cost geographies. As a result of our gross margin improvement initiatives, AGS gross margin increased to 58.3% for the three months ended December 31, 2015 compared to 57.0% for the three months ended December 31, 2014.
Unallocated amounts for the three months ended December 31, 2015 and 2014 included the effect of the amortization of acquired technology intangibles and costs that are not core to the measurement of segment management’s performance, but rather are controlled at the corporate level. The decrease in unallocated amounts was primarily attributable to lower amortization associated with technology intangible assets acquired in prior periods.
Operating Expenses
The following table sets forth a comparison of operating expenses:
 
Three months ended December 31,
 
2015
 
2014
 
Percentage of Revenue
 
Change
In millions
2015
 
2014
Amount
 
Pct.
Selling, general and administrative
$
333

 
$
374

 
34.8
%
 
34.7
%
 
$
(41
)
 
(11
)%
Research and development
75

 
88

 
7.8
%
 
8.2
%
 
(13
)
 
(15
)%
Amortization of intangible assets
57

 
57

 
5.9
%
 
5.3
%
 

 
0
 %
Restructuring charges, net
23

 
15

 
2.4
%
 
1.4
%
 
8

 
53
 %
Total operating expenses
$
488

 
$
534

 
50.9
%
 
49.6
%
 
$
(46
)
 
(9
)%
Selling, general and administrative expenses for the three months ended December 31, 2015 and 2014 were $333 million and $374 million, respectively, a decrease of $41 million. The decrease was primarily attributable to the favorable impact of foreign currency, lower selling expenses, lower payroll and payroll related expenses realized from the success of cost savings initiatives executed in prior periods, and lower pension and postretirement expenses as discussed above. Our cost savings initiatives include reductions to the workforce, exiting and consolidating facilities, and relocating positions to lower-cost geographies.
Research and development expenses for the three months ended December 31, 2015 and 2014 were $75 million and $88 million, respectively, a decrease of $13 million. The decrease was primarily due to lower payroll and payroll related expenses realized from the success of cost savings initiatives executed in prior periods and the favorable impact of foreign currency.
Amortization of acquired intangible assets for the three months ended December 31, 2015 and 2014 was $57 million for each of the periods.
Restructuring charges, net, for the three months ended December 31, 2015 and 2014 were $23 million and $15 million, respectively, an increase of $8 million. The Company continued to identify opportunities to streamline its operations and generate cost savings. Restructuring charges recorded during the three months ended December 31, 2015 included employee separation costs of $22 million primarily associated with employee severance actions in EMEA and lease obligations of $1 million primarily related to facilities in the U.S. Restructuring charges recorded during the three months ended December 31, 2014 included employee separation costs of $12 million primarily associated with employee severance actions in EMEA and the U.S. and lease obligations of $3 million primarily related to facilities in the U.S. Employee separation charges included, but were 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. 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.
Operating Income
Operating income for the three months ended December 31, 2015 and 2014 was $91 million and $104 million, respectively.
Operating income for the three months ended December 31, 2015 and 2014 included non-cash expenses for depreciation and amortization of $93 million and $94 million and share-based compensation of $4 million and $7 million, respectively.
Interest Expense
Interest expense for the three months ended December 31, 2015 and 2014 was $118 million and $112 million, respectively. Interest expense included non-cash interest expense of $5 million and $4 million, respectively. Non-cash interest expense for each period included amortization of debt issuance costs and accretion of debt discount. Cash interest expense for the three months ended December 31, 2015 and 2014, was $113 million and $108 million, respectively, an increase of $5 million. The

30


increase in cash interest expense was the result of certain debt refinancing transactions that occurred during fiscal 2015. See Note 5, “Financing Arrangements” to our unaudited interim Consolidated Financial Statements for further details.
Other Income, Net
Other income, net for the three months ended December 31, 2015 and 2014 was $4 million and $14 million, respectively. Other income, net, for the three months ended December 31, 2015 included $6 million of net foreign currency gains. Other income, net, for the three months ended December 31, 2014 included $6 million of net foreign currency gains and $9 million from the release of a reserve related to a tax indemnification liability.
Provision for Income Taxes
The provision for income taxes for the three months ended December 31, 2015 and 2014 was $4 million and $3 million, respectively.
The Company's effective income tax rate for the three months ended December 31, 2015 differed from the statutory U.S. Federal income tax rate primarily due to (1) the effect of tax rate differentials on foreign income/loss in the Consolidated Statements of Operations, (2) changes in the valuation allowance established against the Company’s deferred tax assets, and (3) net increases due to tax positions taken during the current period offset by reductions for unrecognized tax benefits resulting from the lapse of statute of limitations.
The Company's effective income tax rate for the three months ended December 31, 2014 differed from the statutory U.S. federal income tax rate primarily due to (1) the effect of tax rate differentials on foreign income/loss in the Consolidated Statement of Operations, (2) changes in the valuation allowance established against the Company’s deferred tax assets, (3) reductions in the Company's unrecognized tax benefits resulting from the settlement of certain international tax exams, (4) recognition of an $1 million income tax benefit as a result of net gains in other comprehensive income, and (5) recognition of a $6 million income tax benefit related to the correction of prior period valuation allowance on deferred tax assets.
Liquidity and Capital Resources
We expect our existing cash balance, cash generated by operations and borrowings available under our credit facilities to be our primary sources of short-term liquidity. Based on our current level of operations, we believe these sources will be sufficient to meet our liquidity needs for at least the next twelve 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. 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 resulted in an inability to meet our obligations as they come due in the ordinary course of business over the next twelve months and have not had a significant impact on our liquidity as of December 31, 2015. However, there can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our credit facilities to enable us to repay our debt, or to fund other liquidity needs.
The Company has variable rate term B-3 loans due October 26, 2017 in the amount of $616 million and variable rate term B-6 loans due March 31, 2018 in the amount of $537 million. While we have been successful in the past to access the capital markets on terms and in amounts adequate to meet our objectives, there can be no certainty that such funding will be available in needed quantities or on terms favorable to us due to market conditions or other occurrences.

31


Sources and Uses of Cash
The following table provides the condensed statements of cash flows for the periods indicated:
 
Three months ended December 31,
In millions
2015
 
2014
Net cash (used for) provided by:
 
 
 
Net (loss) income
$
(27
)
 
$
3

Adjustments to net loss for non-cash items
93

 
86

Changes in operating assets and liabilities
(11
)
 
(25
)
Operating activities
55

 
64

Investing activities
(32
)
 
(26
)
Financing activities
6

 
(22
)
Effect of exchange rate changes on cash and cash equivalents
(8
)
 
(10
)
Net increase in cash and cash equivalents
21

 
6

Cash and cash equivalents at beginning of period
323

 
322

Cash and cash equivalents at end of period
$
344

 
$
328

Operating Activities
Cash provided by operating activities was $55 million and $64 million for the three months ended December 31, 2015 and 2014, respectively.
Adjustments to reconcile net loss to net cash provided by operations for the three months ended December 31, 2015 and 2014 were $93 million and $86 million, and primarily consisted of depreciation and amortization of $93 million and $94 million, deferred income taxes of $(4) million and $(6) million, unrealized loss on foreign currency exchange of $(5) million and $(13) million, non-cash interest expense of $5 million and $4 million, and share based compensation of $4 million and $7 million, respectively.
During the three months ended December 31, 2015, changes in our operating assets and liabilities resulted in a net decrease in cash and cash equivalents of $11 million. The net decrease was driven by payments associated with our employee incentive programs, the timing of payments to our vendors, and payments associated with business restructuring reserves established in previous periods. These decreases were partially offset by increases in deferred revenues and collection of accounts receivable.
During the three months ended December 31, 2014, changes in our operating assets and liabilities resulted in a net decrease in cash and cash equivalents of $25 million. The net decrease was driven by payments associated with our employee incentive programs, accrued interest, the timing of payments to our vendors and business restructuring reserves established in previous periods. These decreases were partially offset by collection of accounts receivable.
Investing Activities
Cash used for investing activities was $32 million and $26 million for the three months ended December 31, 2015 and 2014, and included capital expenditures of $26 million and $33 million and scheduled payments for businesses acquired to enhance our technology portfolio in prior periods of $7 million and $3 million, respectively. During the three months ended December 31, 2015, cash used for investing activities was partially offset by $2 million in proceeds from the sale of real estate. During the three months ended December 31, 2014, cash used for investing activities was partially offset by $12 million in proceeds received in connection with financing the use of equipment for the performance of services under our agreement with HP Enterprise Services, LLC ("HP").
Financing Activities
Cash provided by (used for) financing activities was $6 million and $(22) million for the three months ended December 31, 2015 and 2014, respectively. Cash provided by financing activities during the three months ended December 31, 2015 included $15 million of borrowings in excess of repayments under our revolving credit facilities. Cash used for financing activities during the three months ended December 31, 2014 included $10 million of repayments in excess of borrowings under our revolving credit facilities. During the three months ended December 31, 2015 and 2014, scheduled debt repayments were $6 million and $9 million, respectively.

32


Credit Facilities
We have entered into borrowing arrangements with several financial institutions in connection with the Merger on October 26, 2007 and the acquisition of NES in December 2009. The Company has refinanced and amended these arrangements in order to enhance the Company's capital structure, including several refinancing transactions during fiscal 2015 which extended the maturity dates of certain existing debt and provided for the Foreign ABL.
On May 29, 2015, the Company entered into Amendment No. 9 to the Senior Secured Credit Agreement pursuant to which the Company issued $2,125 million of term B-7 loans maturing May 29, 2020, the proceeds of which were used to: (a) repay $1,473 million in principal amounts of term B-3 loans maturing October 26, 2017, $0.4 million in principal amounts of term B-4 loans maturing October 26, 2017, and $581 million of term B-6 loans maturing March 31, 2018, (b) repay $32 million of revolving loans outstanding under its Senior Secured Credit Agreement, (c) fund $33 million in original issue discounts, fees and expenses incurred in connection with the refinancing transaction, and (d) pay $1 million for interest accrued on the refinanced term and revolving credit loans through the date of the refinancing transaction. The term B-7 loans bear interest at a rate per annum equal to either a base rate (subject to a floor of 2.00%) or a LIBOR rate (subject to a floor of 1.00%), in each case plus an applicable margin. The base rate is determined by reference to the higher of (1) the prime rate of Citibank and (2) the federal funds effective rate plus one half of 1%. The applicable margin for borrowings of term B-7 loans is 4.25% per annum with respect to base rate borrowings and 5.25% per annum with respect to LIBOR borrowings, in each case, subject to increase pursuant to the terms of the Senior Secured Credit Agreement.
On June 4, 2015, the Company completed Amendment No. 4 to the Domestic ABL which, among other things: (i) extended the stated maturity of the facility from October 26, 2016 to June 4, 2020 (subject to certain conditions specified in the Domestic ABL), (ii) increased the sublimit for letter of credit issuances under the Domestic ABL from $150 million to $200 million, and (iii) amended certain covenants and other provisions of the existing agreement. At the same time, the Company entered into the Foreign ABL which matures June 4, 2020 (subject to certain conditions specified in the Foreign ABL). Available credit under the Domestic ABL remains $335 million subject to availability under the borrowing base. Available credit under the Foreign ABL is $150 million subject to availability under the respective borrowing bases of the Foreign Borrowers.
Borrowings under the Domestic ABL bear interest at a rate per annum equal to, at the Company's option, either (a) a LIBOR rate plus a margin of 1.75% or (b) a base rate plus a margin of 0.75%.
The Foreign ABL provides senior secured financing of up to $150 million, subject to availability under the respective borrowing bases of the Foreign Borrowers. The total borrowing base for all Foreign Borrowers at any time equals the sum of (i) 85% of eligible accounts receivable of the Foreign Borrowers, plus (ii) 85% of the net orderly liquidation value of eligible inventory of the Canadian Foreign Borrower and Irish Foreign Borrower, subject to certain reserves and other adjustments. The Foreign ABL includes borrowing capacity available for letters of credit and for Canadian or European swingline loans, and is available in Euros, Canadian dollars and British pound sterling in addition to U.S. dollars.
Under the Foreign ABL the Foreign Borrowers have the right to request up to $30 million of additional commitments. The lenders under the Foreign ABL are not under any obligation to provide any such additional commitments, any increase in commitments is subject to certain conditions precedent and any borrowing in respect of such increased commitments would be subject to the borrowing base under the Foreign ABL at such time.
Borrowings under the Foreign ABL bear interest at a rate per annum equal to, at the Foreign Borrowers’ option depending upon the currency and type of the applicable borrowing, (a) a base rate determined by reference to the highest of (1) the prime rate of Citibank, N.A., (2) the federal funds effective rate plus 0.50% and (3) the sum of 1.00% plus the LIBOR rate for a thirty day interest period as determined on such day, (b) a Canadian prime rate determined by reference to the higher of (1) the base rate of Citibank, N.A., Canadian branch, and (2) the sum of 1.00% plus the CDOR rate for a thirty day interest period as determined on such day, (c) a LIBOR rate, (d) a CDOR Rate, (e) a EURIBOR rate or (f) an overnight LIBOR rate, in each case plus an applicable margin. The initial applicable margin for borrowings under the Foreign ABL on June 4, 2015 is equal to (1) 0.75% per annum with respect to base rate and Canadian prime rate borrowings and (2) 1.75% per annum with respect to LIBOR, CDOR or EURIBOR borrowings. The applicable margin for borrowings under the Foreign ABL is subject to a step down based on average historical excess availability under the Foreign ABL. As of December 31, 2015 the applicable margin with respect to LIBOR, CDOR or EURIBOR borrowings changed to 1.50%. Swingline loans bear interest at a rate per annum equal to, in the case of swingline loans to the Canadian Foreign Borrower, the base rate if denominated in U.S. Dollars or the Canadian prime rate if denominated in Canadian dollars and, in the case of swingline loans to the UK Foreign Borrower, the Irish Foreign Borrower or the German Foreign Borrowers, the base rate if denominated in U.S. Dollars or the overnight LIBOR rate if denominated in Euros or British pound sterling. In addition to paying interest on outstanding principal under the Foreign ABL, the Foreign Borrowers are required to pay a commitment fee of 0.25% per annum in respect of the unutilized commitments thereunder. The Foreign Borrowers must also pay customary letter of credit fees equal to the applicable margin on LIBOR, CDOR and EURIBOR loans and agency fees.

33


On June 5, 2015, the Company permanently reduced the revolving credit commitments under its Senior Secured Credit Agreement from $200 million to $18 million and transferred all letters of credit outstanding under the Senior Secured Credit Agreement to the Domestic ABL.
The Company regularly evaluates market conditions, its liquidity profile, and various financing alternatives for opportunities to enhance its capital structure. If opportunities are favorable, the Company may refinance existing debt or issue additional debt securities.
As of December 31, 2015, the Company was not in default under any of its debt agreements.
See Note 5, “Financing Arrangements” to our unaudited interim Consolidated Financial Statements for further details.
Future Cash Requirements
A substantial portion of our future cash requirements are for the payment of principal and interest on our indebtedness which historically has been in excess of 70% of our cash flows from operations. Our other future cash requirements relate to working capital, capital expenditures, restructuring payments, and benefit obligations. In addition, we may use cash in the future to make strategic acquisitions.
In addition to our working capital requirements, we expect our primary cash requirements for the remainder of fiscal 2016 to be as follows:
Debt service—We expect to make payments of $364 million during the remainder of fiscal 2016 in principal and interest associated with long-term debt and interest associated with our three revolving credit facilities, although we may elect to make additional principal payments under certain circumstances. The expected payments are exclusive of repayments we have made or may make under our revolving credit facilities. In the ordinary course of business, we may from time to time borrow and repay amounts under our revolving credit facilities to meet business needs.
Restructuring payments—We expect to make payments of $70 million to $80 million during the remainder of fiscal 2016 for employee separation costs and lease termination obligations associated with restructuring actions we have taken through December 31, 2015 and additional actions we may take in fiscal 2016 as the Company continues to evaluate opportunities to streamline its operations and identify additional cost savings globally.
Capital expenditures—We expect to spend $75 million to $90 million for capital expenditures during the remainder of fiscal 2016.
Benefit obligations—We expect to make payments under our pension and postretirement obligations of $126 million during the remainder of fiscal 2016. These payments include: $70 million to satisfy the minimum statutory funding requirements of our U.S. qualified plans, $5 million of payments under our U.S. benefit plans that are not pre-funded, $23 million under our non-U.S. benefit plans that are predominately not pre-funded, $26 million under our U.S. retiree medical benefit plan that is not pre-funded and $2 million under the agreements for represented retirees to post-retirement health trusts. See discussion in Note 9, “Benefit Obligations” to our unaudited interim Consolidated Financial Statements for further details of our benefit obligations.
On October 23, 2014, in connection with a litigation matter, the Company filed a supersedeas bond with the Court in the amount of $63 million to stay execution of a judgment against it while the matter is on appeal. The Company secured posting of the bond through the issuance of a letter of credit under its credit facilities. In connection with this proceeding, an application was also filed seeking attorneys' fees, expenses and costs, which the Company is contesting. The current application for attorneys’ fees, expenses and costs is approximately $71 million and represents activity through February 28, 2015.
The Company expects that a supplemental application will be filed for activity beyond February 28, 2015 at some point in the future. Once required, and in order to stay the enforcement of any award for attorney’s fees, expenses and costs, on appeal or otherwise, the Company will post a bond in the amount of the award for attorneys' fees, expenses and costs, plus interest. The Company expects to secure posting of the bond through existing resources and may use any or a combination of the issuance of one or more letters of credit under its existing credit facilities and cash on hand. As an interim matter, on or before February 25, 2016, the Company expects to post a bond in the amount of $8 million in connection with the pending attorneys' fees application. See Note 12, "Commitments and Contingencies - Antitrust Litigation" to our unaudited interim Consolidated Financial Statements for additional details regarding this litigation matter.
We and our subsidiaries, affiliates, our Parent and/or significant stockholders of our Parent 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.

34


Future Sources of Liquidity
We expect our existing cash balance, cash generated by operations and borrowings available under our credit facilities to be our primary sources of short-term liquidity. We expect that revenues from higher margin products and services and continued focus on accounts receivable, inventory management and cost containment will enable us to generate positive net cash from operating activities. Further, we continue to focus on cost reductions and have initiated restructuring plans designed to reduce overhead and provide cash savings.
The Company currently has three revolving credit facilities providing for borrowings of up to an aggregate of $503 million subject to certain contractual limitations. As discussed above, on June 4, 2015 the Company completed an amendment to the Domestic ABL and entered into a new Foreign ABL. The Domestic ABL and Foreign ABL expire June 4, 2020 (subject to certain conditions specified in the Domestic ABL and Foreign ABL) and provides credit availability up to $335 million and $150 million (subject to availability under the calculated borrowing bases as defined for each facility), respectively, to the Company in the form of loans and letters of credit. On June 5, 2015, the Company permanently reduced the senior secured multi-currency revolver under its Senior Secured Credit Agreement due October 26, 2016 from $200 million to $18 million and all letters of credit outstanding under the Senior Secured Credit Agreement were transferred to the Domestic ABL.
As of December 31, 2015, the Company had $70 million and $20 million of outstanding borrowings, issued and outstanding letters of credit of $114 million and $22 million and remaining revolver availability of $108 million and $88 million under the Domestic ABL and Foreign ABL, respectively. Our revolving credit facilities include customary conditions that, if not complied with, could restrict our availability to borrow. See Note 5, “Financing Arrangements” to our unaudited interim Consolidated Financial Statements.
On August 20, 2014, we signed an agreement with HP pursuant to which the Company has outsourced to HP certain delivery services associated with the APCS business. In connection with that agreement, HP acquired specified assets owned by the Company. HP also agreed to make available one or more additional financings to Avaya and its subsidiaries of up to $24 million per year for the sole purpose of financing the use of equipment for the performance of services under the agreement, provided that no material adverse change with respect to the Company has occurred and is continuing as of the date any such financing is requested. During the three months ended December 31, 2014 we received proceeds of $12 million in connection with the financing of equipment for the performance of services under our agreement with HP.
On December 22, 2015, Parent filed with the SEC an amended registration statement on Form S-1 (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, among other things, to repay a portion of our long-term indebtedness.  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 document 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 or other jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State or other jurisdiction. 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.
As of December 31, 2015 and September 30, 2015, our cash and cash equivalents held outside the U.S. were $124 million and $109 million, respectively. As of December 31, 2015, balances of cash and cash equivalents held outside the U.S. in excess of in-country needs and which could not be distributed to the U.S. without restriction were not material.
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 additional 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 the indentures governing our notes permit us to do so. Furthermore, if we acquire a business in the future that has existing debt, our debt service requirements may increase. We regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure. If market conditions are favorable, we may refinance our existing debt or issue additional securities.
The Company has variable rate term B-3 loans due October 26, 2017 in the amount of $616 million and variable rate term B-6 loans due March 31, 2018 in the amount of $537 million. While we have been successful in the past to access the capital markets on terms and in amounts adequate to meet our objectives, there can be no certainty that such funding will be available in needed quantities or on terms favorable to us due to market conditions or other occurrences.
Based on past performance and current expectations, we believe that our existing cash and cash equivalents of $344 million as of December 31, 2015, future cash provided by operating activities and borrowings available under our credit facilities will be sufficient to meet our future cash requirements described above for at least the next twelve months. Our ability to meet these

35


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, 2015, we had a long-term corporate family rating of B3 with a negative outlook from Moody’s and a corporate credit rating of B- with a stable outlook from Standard & Poor’s for our Company. 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.
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 November 23, 2015 and determined that there were no significant changes to our critical accounting policies in the three months ended December 31, 2015 except for recently adopted accounting guidance as discussed in Note 2, “Recent Accounting Pronouncements - New Accounting Guidance Recently Adopted” to our unaudited interim Consolidated Financial Statements.
New Accounting Pronouncements
See discussion in Note 2, “Recent Accounting Pronouncements” to our unaudited interim Consolidated Financial Statements for further details.

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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. In some cases these statements may be identified by the use of forward looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “our vision,” “plan,” “potential,” “predict,” “should,” “will” or “would” or the negative thereof or other variations thereon or comparable terminology. These statements discuss future expectations, contain projections of results of operations or of financial condition, or state trends and known uncertainties or other forward-looking information. You are cautioned that forward-looking statements are inherently uncertain. Each forward-looking statement contained in this report is subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statement. 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 caution readers not to place considerable reliance on such 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 degree of leverage and its effect on our ability to refinance our existing debt and/or raise additional capital and to react to changes in the economy or our industry;
our liquidity and our access to capital markets;
our ability to develop and sell advanced business collaboration and communications products and services, including unified communications, networking products and contact center products;
our reliance on our indirect sales channel;
our ability to remain competitive in the markets we serve;
the market for our products and services;
fluctuations in foreign currency exchange rates;
risks relating to the transaction of business internationally;
economic conditions and the willingness of enterprises to make technology investments;
the ability to protect our intellectual property and avoid claims of infringement;
our use of software from open source code sources;
our ability to retain and attract key employees;
our ability to manage our supply chain and logistics functions;
our ability to integrate acquired businesses;
our ability to successfully transition toward or integrate the products of acquired businesses into our portfolio;
the ability to protect our intellectual property and avoid claims of infringement;
an adverse result in any significant litigation, including antitrust, intellectual property or employment litigation;
our ability to maintain adequate security over our information systems, products and services;
environmental, health and safety laws, regulations, costs and other liabilities, and climate change risks;
our ability to detect and fix design defects and "bugs";
pension and post-retirement healthcare and life insurance liabilities; and
our ability to realize the benefits we expect from our cost reduction initiatives.
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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EBITDA and Adjusted EBITDA
EBITDA is defined as net income (loss) before income taxes, interest expense, interest income 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 a measure of 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, including one-time charges, permitted in calculating covenant compliance under our debt agreements. 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. Moreover, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.
We also calculate Adjusted EBITDA for purposes other than debt covenant compliance using a different formulation than that allowed in our debt documents. Certain employee and management benefit plans are determined using financial targets based on Adjusted EBITDA. We also believe Adjusted EBITDA is more useful to equity investors than the calculation of debt adjusted EBITDA because the former does not include adjustments for certain items that we believe are indicative of our performance. In addition, we believe Adjusted EBITDA provides more comparability between our historical results and results that reflect purchase accounting and our current capital structure. Accordingly, Adjusted EBITDA measures our financial performance based on operational factors that management can impact in the short-term, such as our pricing strategies, volume, costs and expenses of the organization, and it presents our financial performance in a way that can be more easily compared to prior quarters or fiscal years.
EBITDA and Adjusted EBITDA have limitations as analytical tools. EBITDA measures do not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. While EBITDA 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 excludes the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations. In particular, our formulation of Adjusted EBITDA allows the addition of certain non-cash charges that are deducted in calculating net income (loss), and restructuring charges, Sponsors' fees and other specific cash costs and expenses set forth in the following table 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 with these employment benefits. However, these are expenses that may recur, may vary and are difficult to predict.
The unaudited reconciliation of net (loss) income, which is a GAAP measure, to EBITDA and Adjusted EBITDA is presented below:
 
Three months ended December 31,
In millions
2015
 
2014
Net (loss) income
$
(27
)
 
$
3

Interest expense
118

 
112

Provision for income taxes
4

 
3

Depreciation and amortization
93

 
94

EBITDA
188

 
212

Restructuring charges, net
23

 
15

Sponsors’ fees (a)
2

 
2

Integration-related costs (b)

 
1

Third-party sales transformation costs (c)
2

 

Non-cash share-based compensation
4

 
7

Change in certain tax indemnifications

 
(9
)
Gain on foreign currency transactions
(6
)
 
(6
)
Pension/OPEB/nonretirement postemployment benefits and long-term disability costs (d)
15

 
17

Adjusted EBITDA
$
228

 
$
239


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(a)
Sponsors’ fees represent monitoring fees payable to affiliates of the Sponsors and their designees pursuant to a management services agreement entered into at the time of the Merger.
(b)
Integration-related costs primarily represent third-party consulting fees and other administrative costs and primarily relate to developing compatible IT systems and internal processes with NES and consolidating and coordinating the operations of Avaya with Radvision and other acquisitions.
(c)
Third party sales transformation costs are consulting fees incurred in support of the Company’s sales initiatives and the realignment of its sales organization.
(d)
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.
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, 2015 filed with the SEC on November 23, 2015. As of December 31, 2015, there have been no material changes 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 our 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 our 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 the Company's internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


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PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings.

The information included in Note 12, “Commitments and Contingencies” to the unaudited interim Consolidated Financial Statements is incorporated herein by reference.
Item 1A.
Risk Factors.

There have been no material changes during the quarterly period ended December 31, 2015 to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015.

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 indenture governing its senior secured notes due March 1, 2021.

Subsequent to the quarter ended December 31, 2015, there were no events that took place that are required to be disclosed in a report on Form 8-K that have not yet been reported.



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Item 6.
Exhibits.
Exhibit
Number
  
 
10.1
 
Retention Bonus Letter Agreement by and between Avaya Inc. and James M. Chirico, Jr., dated as of November 20, 2015 (Incorporated by reference to Exhibit 10.59 to Avaya Holding Corp.’s Amendment No. 8 to the Registration Statement on Form S-1 filed with the SEC on December 22, 2015)
10.2
 
Avaya Holdings Corp. Second Amended and Restated 2007 Equity Incentive Plan Restricted Stock Unit Award Agreement (Incorporated by reference to Exhibit 10.77 to Avaya Holding Corp.’s Amendment No. 8 to the Registration Statement on Form S-1 filed with the SEC on December 22, 2015)
10.3
 
Avaya Holdings Corp. Second Amended and Restated 2007 Equity Incentive Plan Non-Statutory Stock Option Award Agreement (Incorporated by reference to Exhibit 10.78 to Avaya Holding Corp.’s Amendment No. 8 to the Registration Statement on Form S-1 filed with the SEC on December 22, 2015)
10.4
 
Avaya Inc. Long-Term Cash Award Agreement (Incorporated by reference to Exhibit 10.79 to Avaya Holding Corp.’s Amendment No. 8 to the Registration Statement on Form S-1 filed with the SEC on December 22, 2015)
10.5
 
Second Amended and Restated Stockholders’ Agreement, by and among TPG Partners V, L.P., TPG FOF V-A, L.P., TPG FOF V-B, L.P., Silver Lake Partners II, L.P., Silver Lake Technology Investors II, L.P., Silver Lake Partners III, L.P., Silver Lake Technology Investors III, L.P., Sierra Co-Invest, LLC, Sierra Co-Invest II, LLC and Avaya Holdings Corp., dated as of May 29, 2012 (Incorporated by reference to Exhibit 10.86 to Avaya Holding Corp.’s Amendment No. 8 to the Registration Statement on Form S-1 filed with the SEC on December 22, 2015)
10.6
 
Form of Indemnification Agreement among Avaya Holdings Corp., Avaya Inc. and directors and officers of Avaya Holdings Corp. and Avaya Inc.
31.1
  
Certification of Kevin J. Kennedy pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
  
Certification of David Vellequette 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 David Vellequette 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, 2015, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets at December 31, 2015 and September 30, 2015, (ii) Consolidated Statement of Operations for the three months ended December 31, 2015 and 2014, (iii) the Consolidated Statement of Comprehensive Income for the three months ended December 31, 2015 and 2014, (iv) Consolidated Statements of Cash Flows for the three months ended December 31, 2015 and 2014, and (v) 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/    L. DAVID DELL'Osso
 
 
L. David Dell'Osso
Vice President, Corporate Controller & Chief Accounting Officer
(Principal Accounting Officer)

February 9, 2016


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