10-Q 1 avaya-2013630x10q.htm 10-Q AVAYA-2013.6.30-10Q

 
 
 
 
 
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 June 30, 2013
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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  ¨
 
Accelerated filer  ¨
 
Non-accelerated filer  x
 
Smaller Reporting Company  ¨
 
 
 
 
(Do not check if a smaller
reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No  x
As of August 9, 2013, 100 shares of Common Stock, $.01 par value, of the registrant were outstanding.
 
 
 
 
 


TABLE OF CONTENTS
 

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


PART I—FINANCIAL INFORMATION
 
Item 1.
Financial Statements.

\

Avaya Inc.
Consolidated Statements of Operations (Unaudited)
(In millions)
 
 
Three months ended June 30,
 
Nine months ended June 30,
 
2013
 
2012
 
2013
 
2012
REVENUE
 
 
 
 
 
 
 
Products
$
560

 
$
634

 
$
1,720

 
$
2,020

Services
590

 
616

 
1,788

 
1,874

 
1,150

 
1,250

 
3,508

 
3,894

COSTS
 
 
 
 
 
 
 
Products:
 
 
 
 
 
 
 
Costs (exclusive of amortization of technology intangible assets)
234

 
271

 
731

 
862

Amortization of technology intangible assets
13

 
47

 
49

 
146

Services
276

 
309

 
849

 
946

 
523

 
627

 
1,629

 
1,954

GROSS PROFIT
627

 
623

 
1,879

 
1,940

OPERATING EXPENSES
 
 
 
 
 
 
 
Selling, general and administrative
380

 
405

 
1,145

 
1,252

Research and development
112

 
116

 
343

 
344

Amortization of intangible assets
57

 
57

 
171

 
169

Goodwill impairment
—

 
—

 
89

 
—

Restructuring and impairment charges, net
63

 
21

 
165

 
132

Acquisition-related costs
1

 
1

 
1

 
4

 
613

 
600

 
1,914

 
1,901

OPERATING INCOME (LOSS)
14

 
23

 
(35
)
 
39

Interest expense
(122
)
 
(107
)
 
(346
)
 
(324
)
Loss on extinguishment of debt
—

 
—

 
(6
)
 
—

Other (expense) income, net
(5
)
 
6

 
(9
)
 
(7
)
LOSS BEFORE INCOME TAXES
(113
)
 
(78
)
 
(396
)
 
(292
)
Benefit from (provision for) income taxes
3

 
(88
)
 
9

 
(62
)
NET LOSS
$
(110
)
 
$
(166
)
 
$
(387
)
 
$
(354
)

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

1

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

 
Three months ended June 30,
 
Nine months ended June 30,
 
2013
 
2012
 
2013
 
2012
Net loss
$
(110
)
 
$
(166
)
 
$
(387
)
 
$
(354
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Pension, postretirement and postemployment benefit-related items, net of tax of $29 and $47 for the three and nine months ended June 30, 2013 and tax benefit of $(18) and $0 for the three and nine months ended June 30, 2012, respectively
43

 
(103
)
 
71

 
(75
)
Cumulative translation adjustment
(21
)
 
13

 
(40
)
 
28

Change in interest rate swaps, net of tax of $1 and $4 for the three and nine months ended June 30, 2013 and tax benefit of $0 and $(4) for the three and nine months ended June 30, 2012, respectively
1

 
9

 
6

 
15

Income tax benefit reclassified into earnings upon the expiration of certain interest rate swaps
—

 
—

 
(17
)
 
—

Unrealized loss on investments reclassified into earnings, net of tax of $0 for the three and nine months ended June 30, 2012, respectively
—

 
2

 
—

 
2

Unrealized (loss) gain on investments, net of tax of $0 for the three and nine months ended June 30, 2012, respectively
—

 
(1
)
 
—

 
2

Other comprehensive income (loss)
23

 
(80
)
 
20

 
(28
)
Comprehensive loss
$
(87
)
 
$
(246
)
 
$
(367
)
 
$
(382
)


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)
 
 
June 30,
2013
 
September 30,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
271

 
$
337

Accounts receivable, net
662

 
782

Inventory
256

 
255

Deferred income taxes, net
17

 
18

Other current assets
267

 
252

TOTAL CURRENT ASSETS
1,473

 
1,644

Property, plant and equipment, net
354

 
364

Deferred income taxes, net
48

 
43

Intangible assets, net
1,554

 
1,775

Goodwill
4,092

 
4,188

Other assets
181

 
180

TOTAL ASSETS
$
7,702

 
$
8,194

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Debt maturing within one year
$
35

 
$
37

Accounts payable
410

 
438

Payroll and benefit obligations
232

 
262

Deferred revenue
663

 
616

Business restructuring reserve, current portion
119

 
84

Other current liabilities
272

 
302

TOTAL CURRENT LIABILITIES
1,731

 
1,739

Long-term debt
6,059

 
6,084

Pension obligations
1,648

 
1,763

Other postretirement obligations
325

 
360

Deferred income taxes, net
218

 
204

Business restructuring reserve, non-current portion
62

 
51

Other liabilities
456

 
429

TOTAL NON-CURRENT LIABILITIES
8,768

 
8,891

Commitments and contingencies

 

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

 
—

Additional paid-in capital
2,932

 
2,926

Accumulated deficit
(4,623
)
 
(4,236
)
Accumulated other comprehensive loss
(1,106
)
 
(1,126
)
TOTAL DEFICIENCY
(2,797
)
 
(2,436
)
TOTAL LIABILITIES AND DEFICIENCY
$
7,702

 
$
8,194


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)
 
Nine months ended June 30,
 
2013
 
2012
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(387
)
 
$
(354
)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
 
 
 
Depreciation and amortization
331

 
426

Share-based compensation
7

 
7

Amortization of debt issuance costs
14

 
16

Accretion of debt discount
2

 
1

Non-cash charge for debt issuance costs upon redemption of term loans
5

 
—

Third-party fees expensed in connection with the debt modification
18

 
—

Premium on issuance of senior secured term B-5 loans
3

 
—

Provision for uncollectible receivables
2

 
4

Deferred income taxes, net
(12
)
 
7

(Gain) loss on sale of investments and long-lived assets, net
(1
)
 
3

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

 
4

Goodwill impairment
89

 
—

Impairment of long-lived assets
1

 
2

Pension curtailment
(6
)
 
5

Unrealized (gain) loss on foreign currency exchange
(25
)
 
3

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
120

 
48

Inventory
(2
)
 
3

Accounts payable
(27
)
 
(23
)
Payroll and benefit obligations
(58
)
 
(87
)
Business restructuring reserve
52

 
(16
)
Deferred revenue
65

 
(56
)
Other assets and liabilities
(92
)
 
(53
)
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
99

 
(60
)
INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(78
)
 
(60
)
Capitalized software development costs
(12
)
 
(30
)
Acquisition of businesses, net of cash acquired
(1
)
 
(212
)
Proceeds from sale of long-lived assets
12

 
2

Proceeds from sale of investments
1

 
73

Advance to Parent
(10
)
 
(8
)
Other investing activities, net
(1
)
 
(2
)
NET CASH USED FOR INVESTING ACTIVITIES
(89
)
 
(237
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from 9% senior secured notes
290

 
—

Repayment of term B-5 loans
(284
)
 
—

Proceeds from term B-5 loans
589

 
—

Repayment of term B-1 loans
(584
)
 
—

Debt issuance and third-party debt modification costs
(49
)
 
—

Repayment of long-term debt
(28
)
 
(28
)
Capital contribution from Parent
—

 
196

Borrowings under revolving credit facility
—

 
60

Repayments of borrowings under revolving credit facility
—

 
(60
)
Other financing activities, net
(2
)
 
(1
)
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
(68
)
 
167

Effect of exchange rate changes on cash and cash equivalents
(8
)
 
1

NET DECREASE IN CASH AND CASH EQUIVALENTS
(66
)
 
(129
)
Cash and cash equivalents at beginning of period
337

 
400

Cash and cash equivalents at end of period
$
271

 
$
271

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 global provider of real-time business collaboration and communications solutions. The Company's solutions are designed to enable business users to work together more effectively internally and with their customers and suppliers, to accelerate decision-making and achieve business outcomes.
Avaya 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's solutions and services are aimed at large enterprises, small- and mid-sized businesses and government organizations. The Company offers solutions in three key business collaboration and communications categories:
•
Real-Time Collaboration, Video and Unified Communications Software, Infrastructure and Endpoints;
•
Customer Experience Interaction Management, including Contact Center applications; and
•
Networking.
These three categories are supported by Avaya’s portfolio of services including product support, integration, and professional and managed services. These services enable customers to optimize and manage their communications networks worldwide and achieve enhanced business results.
Avaya sells solutions directly through its worldwide sales force and through its global network of channel partners. As of June 30, 2013, Avaya had approximately 10,400 channel partners worldwide, including distributors, service providers, dealers, value-added resellers, system integrators, service providers and business partners that provide sales and service support.
Merger
On June 4, 2007, Avaya entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Avaya Holdings Corp. (formerly Sierra Holdings Corp.), a Delaware corporation (“Parent”), and Sierra Merger Corp., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub was merged with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent (the “Merger”). Parent was formed by affiliates of two private equity firms, Silver Lake Partners (“Silver Lake”) and TPG Capital (“TPG”) (collectively, the “Sponsors”), solely for the purpose of entering into the Merger Agreement and consummating the Merger. The Merger Agreement provided for a purchase price of $8.4 billion for Avaya’s common stock and was completed on October 26, 2007 pursuant to the terms of the Merger Agreement.
Acquisition of the Enterprise Solutions Business of Nortel Networks Corporation
On December 18, 2009, Avaya acquired certain assets and assumed certain liabilities of the enterprise solutions business (“NES”) of Nortel Networks Corporation (“Nortel”), including all the shares of Nortel Government Solutions Incorporated, for $943 million in cash consideration. The Company and Nortel were required to determine the final purchase price post-closing based upon the various purchase price adjustments included in the acquisition agreements. During the first quarter of fiscal 2011, the Company and Nortel agreed on a final purchase price of $933 million. 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”) for $230 million in cash. Radvision is a global provider of videoconferencing and telepresence technologies over internet protocol (“IP”) and wireless networks. These unaudited consolidated financial statements include the operating results of Radvision since June 5, 2012.
Basis of Presentation
The consolidated financial statements include the accounts of Avaya Inc. and its subsidiaries. The accompanying unaudited interim consolidated financial statements as of June 30, 2013 and for the three and nine months ended June 30, 2013 and 2012 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

5

be read in conjunction with the consolidated financial statements and other financial information for the fiscal year ended September 30, 2012, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on December 12, 2012. The Consolidated Balance Sheet as of September 30, 2012 was derived from the Company’s audited consolidated financial statements. The significant accounting policies used in preparing these unaudited interim consolidated financial statements are the same as those described in Note 2 to those audited consolidated financial statements except for recently adopted accounting guidance as discussed in Note 2 “Recent Accounting Pronouncements” of these unaudited interim consolidated financial statements. In management’s opinion, these unaudited interim consolidated financial statements reflect all adjustments, consisting of 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
Presentation of Comprehensive Income
In the first quarter of fiscal 2013, the Company adopted new guidance on the presentation of comprehensive income and its components in the financial statements. This guidance eliminated the option to report other comprehensive income and its components in the statement of changes in equity and instead requires presentation either in a single continuous statement or in two separate, but consecutive statements. The relevant presentation and disclosures have been applied retrospectively for all periods presented.
Goodwill Impairment Test
In September 2011, the Financial Accounting Standards Board ("FASB") issued revised guidance intended to simplify how an entity tests goodwill for impairment. As a result of the guidance, an entity will be allowed to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The accounting guidance became effective for the Company beginning in fiscal year 2013 and did not have an impact on the consolidated financial statements or financial statement disclosures.
Indefinite-lived Intangible Asset Impairment Test
In July 2012, the FASB issued revised guidance intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment. As a result of the guidance, an entity will be allowed to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An entity will not be required to perform the quantitative impairment test unless the entity determines, based on a qualitative assessment, that it is more likely than not that the indefinite-lived asset is impaired. The accounting guidance became effective for the Company beginning in fiscal year 2013 and did not have an impact on the consolidated financial statements or financial statement disclosures.
Recent Accounting Guidance Not Yet Effective
In February 2013, the FASB issued Accounting Standards Update No. 2013-02 "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income".  The standard requires that companies present, either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification.  This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2014 and is only expected to impact the presentation of the Company's consolidated financial statements and related financial statement disclosures.
In July 2013, the FASB issued Accounting Standards Update No. 2013-11 "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists". The standard requires the netting of unrecognized tax benefits (“UTBs”) against a deferred tax asset for a loss or other carryforward that would apply in settlement of the uncertain tax positions. UTBs are required to be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. This accounting guidance is effective for the Company beginning in the first quarter of fiscal 2015.  The Company is currently evaluating the impact the adoption of this accounting guidance may have on its consolidated financial statements.

6

3.
Business Combinations
RADVISION Ltd.
On June 5, 2012, Avaya acquired Radvision for $230 million in cash. The purchase price was funded with (i) a capital contribution to Avaya from Parent in the amount of $196 million from the Parent's issuance of Series B preferred stock and warrants to purchase common stock of Parent, and (ii) approximately $34 million of Avaya's cash. The acquisition of Radvision has been accounted for under the acquisition method, which requires an allocation of the purchase price of the acquired entity to the assets acquired and liabilities assumed based on their estimated fair values from a market-participant perspective at the date of acquisition.
Other Acquisitions
During the nine months ended June 30, 2013 and 2012, the Company completed other acquisitions primarily to enhance the Company’s technology portfolio. The aggregate purchase price of acquisitions completed by the Company and Parent was $1 million and $36 million during the nine months ended June 30, 2013 and 2012, respectively. The other acquisitions have been accounted for under the acquisition method. The acquired technologies and other intangible assets associated with these acquisitions were not material.
These unaudited consolidated financial statements include the operating results of the acquired entities since their respective acquisition dates. The revenues and expenses specific to these businesses and their pro forma results are not material to these unaudited consolidated financial statements.
4.
Goodwill and Intangible Assets
Goodwill
Goodwill is not amortized but is subject to periodic testing for impairment in accordance with GAAP at the reporting unit level which is one level below the Company’s operating segments.
The test for impairment is conducted annually each September 30th or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
March 31, 2013
During the three months ended March 31, 2013 the Company's IT professional services ("ITPS") reporting unit, which provides specialized information technology services exclusively to government customers in the U.S., experienced a decline in revenues as a result of reduced government spending in anticipation of sequestration and budget cuts. Additionally, there is uncertainty regarding how the sequestration cuts will be implemented and the impact they will have on contractors supporting the government. As a result of these events, the Company determined that an interim impairment test of the reporting unit's goodwill should be performed.
The impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of the reporting unit with its carrying amount, including the goodwill allocated to that reporting unit. The Company estimated the fair value of the ITPS reporting unit using an income approach which values the unit based on the future cash flows expected from that reporting unit. Future cash flows are based on forward-looking information regarding market share and costs for the reporting unit and are discounted using an appropriate discount rate. Future discounted cash flows can be affected by changes in industry or market conditions or the rate and extent to which cost savings are realized. In step one of the test, a market approach was considered but was not used in the final determination of fair value.
The discounted cash flows model used in the Company’s income approach relies on assumptions regarding revenue growth rates, gross margin, projected working capital needs, selling, general and administrative expenses, research and development expenses, business restructuring costs, capital expenditures, income tax rates, discount rates and terminal growth rates. To estimate fair value, the Company discounts the expected cash flows of the reporting unit. The discount rate Avaya uses represents the estimated weighted average cost of capital, which reflects the overall level of inherent risk involved in the reporting unit's operations and the rate of return an outside investor would expect to earn. To estimate cash flows beyond the final year of its model, Avaya uses a terminal value approach. Under this approach, Avaya uses the estimated cash flows in the final year of its model, applies a perpetuity growth assumption and discounts by a perpetuity discount factor to determine the terminal value. Avaya incorporates the present value of the resulting terminal value into its estimate of fair value.
The Company forecasted cash flows for the ITPS reporting unit and took into consideration current economic conditions and trends, estimated future operating results, Avaya’s view of growth rates and anticipated future economic conditions applicable to the ITPS reporting unit. Revenue growth rates inherent in this forecast are based on input from internal and external market

7

intelligence research sources. Macro economic factors such as changes in economies, product evolutions, industry consolidations and other changes beyond Avaya’s control could have a positive or negative impact on ITPS achieving its targets.
The results of step one of the goodwill impairment test indicated that the estimated fair value of the ITPS reporting unit was less than the respective carrying value of its net assets (including goodwill) and as such, the Company performed step two of the impairment test. The second step of the impairment test compares the implied fair value of the reporting unit's goodwill with the carrying value of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. This allocation is performed only for purposes of assessing goodwill for impairment; accordingly Avaya did not adjust the net book value of the assets and liabilities on its Consolidated Balance Sheets other than goodwill as a result of this process.
As a result of the application of step two of the goodwill impairment test, the Company estimated the implied fair value of the goodwill to be $44 million as compared with a carrying value of $133 million and recorded an impairment to goodwill of $89 million associated with the ITPS reporting unit within the Avaya Global Services segment.
The impairment was primarily the result of the continued budgetary constraints, sequestration and uncertainty regarding spending on the part of the U.S. government. The reduced valuation of the reporting unit reflects additional market risks and lower sales forecasts for the reporting unit, which is consistent with economic trends at that time.
The Company determined that no events occurred or circumstances changed during the six months ended March 31, 2013 that would more likely than not reduce the fair value of its other reporting units below their respective carrying amounts.
March 31, 2012
During the three months ended March 31, 2012, the Company experienced a decline in revenue as compared to the same period of the prior year and sequential quarters. This revenue decline impacted the Company's forecasts for the remainder of fiscal 2012. As a result of these events, the Company determined that an interim impairment test of its long-lived assets and goodwill should be performed.
The estimated fair value of each reporting unit at March 31, 2012 reflected the additional market risks, lower discount rates and the updated sales forecasts for the Company’s reporting units based off recent results. Using the revised valuations at March 31, 2012 the results of step one of the goodwill impairment test indicated that although the estimated fair values of each reporting unit were lower at March 31, 2012 when compared to September 30, 2011, their respective book values did not exceed their estimated fair values and therefore no impairment existed.
June 30, 2013 and 2012
The Company determined that no events occurred or circumstances changed during the three months ended June 30, 2013 and 2012 that would more likely than not reduce the fair value of any of the Company's reporting units below their respective carrying amounts. However, if market conditions deteriorate, it may be necessary to record impairment charges in the future.
Intangible Assets
Intangible assets include acquired technology, customer relationships, trademarks and trade-names and other intangibles. Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from five years to fifteen years.
Acquired technology and patents do not include capitalized software development costs. Unamortized capitalized software developments costs of $38 million at June 30, 2013 and $51 million at September 30, 2012 are included in other assets in the Company's Consolidated Balance Sheets.
Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Intangible assets determined to have indefinite useful lives are not amortized but are tested for impairment annually, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.
Certain of the Company’s trademarks and trade names are expected to generate cash flow indefinitely. Consequently, these assets are classified as indefinite-lived intangibles.

8

March 31, 2013
Prior to the goodwill testing discussed above, the Company tested the intangible assets and other long-lived assets of the ITPS reporting unit for impairment during the six months ended March 31, 2013 and no impairment was identified. The Company determined that no events had occurred or circumstances changed during the six months ended March 31, 2013 that would indicate that the intangible assets and long-lived assets of its other reporting units may not be recoverable.
March 31, 2012
Prior to the goodwill testing discussed above, the Company tested its intangible assets with indefinite lives and other long-lived assets as of March 31, 2012. Using the revised forecasts as of March 31, 2012, the Company performed step one of the impairment test of long-lived assets with finite lives and determined that the carrying amount of these assets was recoverable and, therefore, no impairment was identified. GAAP requires that the fair value of intangible assets with indefinite lives be compared to the carrying value of those assets. In situations where the carrying value exceeds the fair value of the intangible asset, an impairment loss equal to the difference is recognized. The Company estimates the fair value of its indefinite-lived intangible assets using an income approach; specifically, based on discounted cash flows. Although the estimated fair values of the Company’s tradenames and trademarks were lower at March 31, 2012 when compared to September 30, 2011, their respective book values did not exceed their estimated fair values and therefore no impairment existed.
June 30, 2013 and 2012
The Company determined that no events had occurred or circumstances changed during the three months ended June 30, 2013 and 2012 that would indicate that its long-lived assets, including intangible assets with finite lives, may not be recoverable or that it is more likely than not that its intangible assets with indefinite lives are impaired. However, if market conditions deteriorate, it may be necessary to record impairment charges in the future.
5.
Supplementary Financial Information
Consolidated Statements of Operations Information
  
Three months ended June 30,
 
Nine months ended June 30,
In millions
2013
 
2012
 
2013
 
2012
OTHER (EXPENSE) INCOME, NET
 
 
 
 
 
 
 
Interest income
$
1

 
$
1

 
$
2

 
$
3

(Loss) gain on foreign currency transactions
(5
)
 
5

 
10

 
(7
)
Third party fees incurred in connection with debt modifications
—

 
—

 
(18
)
 
—

Venezuela hyperinflationary and devaluation charges
—

 
—

 
(1
)
 
—

Other, net
(1
)
 
—

 
(2
)
 
(3
)
Total other (expense) income, net
$
(5
)
 
$
6

 
$
(9
)
 
$
(7
)
6.
Business Restructuring Reserve and Programs
Fiscal 2013 Restructuring Program
The Company continued to identify opportunities to streamline operations and generate cost savings which included exiting facilities and eliminating employee positions. During the nine months ended June 30, 2013, the Company recognized restructuring charges of $165 million, net. These charges included employee separation costs of $129 million primarily associated with employee severance actions in Europe, the Middle East and Africa (“EMEA”) and the U.S. The EMEA approved plan provides for the elimination of 234 positions and resulted in a charge of $46 million. The elimination of employee positions identified in this action and the related payments are expected to be completed in fiscal 2015. 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 impacted employees. Enhanced separation plans were offered to certain management employees in the U.S. in the first and third quarters of fiscal 2013 and resulted in the elimination of 195 and 456 positions, respectively and restructuring charges of $9 million and $21 million, respectively for which the related payments are expected to be completed in fiscal 2014.
Restructuring charges also include $31 million of lease obligations and includes the future lease obligations associated with a discrete portion of a facility in Germany vacated by the Company that resulted in a charge of $14 million. The Company plans to continue to vacate the facility through the fourth quarter of fiscal 2013 which will result in additional restructuring charges. The Company also has recorded restructuring charges related to vacating facilities in the United Kingdom and the U.S. The

9

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 during fiscal 2013 are expected to continue through fiscal 2021.
As the Company continues to evaluate and identify additional operational synergies, additional cost saving opportunities may be identified.
The following table summarizes the components of the fiscal 2013 restructuring program during the nine months ended June 30, 2013:
In millions
Employee
Separation
Costs
 
Lease
Obligations
 
Total
2013 restructuring charges
$
129

 
$
31

 
$
160

Cash payments
(43
)
 
(3
)
 
(46
)
Impact of foreign currency fluctuations
(1
)
 
—

 
(1
)
Balance as of June 30, 2013
$
85

 
$
28

 
$
113

Fiscal 2012 Restructuring Program
During fiscal 2012, the Company identified opportunities to streamline operations and generate cost savings which include exiting facilities and eliminating employee positions. Restructuring charges associated with these initiatives include employee separation costs primarily associated with employee severance actions in Germany, as well as the US, EMEA excluding Germany, and Canada. Employee separation charges included $70 million related to an agreement reached with the works council representing employees of certain of Avaya's German subsidiaries for the elimination of 327 positions. The headcount reductions identified in this action are expected to be completed in fiscal 2013 with the related payments to be completed in fiscal 2014. The payments 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 payments related to the headcount reductions for the other actions taken, globally, excluding Germany, are expected to be completed in fiscal 2014.
The Company initiated a plan to dispose of an owned facility in Germany and relocate to a new facility.  Accordingly, the Company wrote the value of this asset down to its net realizable value of $3 million and had reclassified this asset as held for sale.  During the first quarter of fiscal 2013, the Company sold this facility for its net realizable value.
The following table summarizes the components of the fiscal 2012 restructuring program during the nine months ended June 30, 2013:
In millions
Employee
Separation
Costs
 
Lease
Obligations
 
Total
Balance as of October 1, 2012
$
58

 
$
12

 
$
70

Cash payments
(45
)
 
(3
)
 
(48
)
Adjustments (1)
(2
)
 
2

 
—

Impact of foreign currency fluctuations
1

 
—

 
1

Balance as of June 30, 2013
$
12

 
$
11

 
$
23

(1) 
Included in adjustments are changes in estimates, whereby all increases and decreases in costs related to the fiscal 2012 restructuring programs are recorded to the restructuring charges line item in operating expenses in the period of the adjustment.
Fiscal 2008 through 2011 Restructuring Programs
During fiscal years 2008 through 2011, the Company identified opportunities to streamline operations and generate cost savings which included exiting facilities and eliminating employee positions. The payments related to the headcount reductions identified in those programs are expected to be completed in fiscal 2018. 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 2021.

10

The following table aggregates the remaining components of the fiscal 2008 through 2011 restructuring programs during the nine months ended June 30, 2013:
In millions
Employee
Separation
Costs
 
Lease
Obligations
 
Total
Balance as of October 1, 2012
$
13

 
$
52

 
$
65

Cash payments
(8
)
 
(10
)
 
(18
)
Adjustments (1)
(1
)
 
1

 
—

Impact of foreign currency fluctuations
—

 
(2
)
 
(2
)
Balance as of June 30, 2013
$
4

 
$
41

 
$
45

 
(1) 
Included in adjustments are changes in estimates, whereby all increases and decreases in costs related to the fiscal 2009 through 2011 restructuring programs are recorded to the restructuring charges line item in operating expenses in the period of the adjustment. Included in adjustments are 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 are recorded as adjustments to goodwill.
As a result of the restructuring programs noted above and cost savings initiatives to consolidate facilities, the Company has entered into an agreement to sell one of its U.S. facilities. The Company expects to lease a portion of this facility under a separate agreement upon the closing of the sale. The Company has changed its estimate of the salvage value and the useful life of the building to reflect the expected sales price and closing date for the sale, respectively. The changes to the estimated salvage value and the useful life resulted in $3 million of additional depreciation expense for the three and nine months ended June 30, 2013, which is included in selling, general and administrative expenses.
7.
Financing Arrangements
In connection with the Merger, on October 26, 2007, the Company entered into financing arrangements consisting of a senior secured credit facility, a senior unsecured credit facility, which later became senior unsecured notes, and a senior secured multi-currency asset-based revolving credit facility, certain of which arrangements were amended on December 18, 2009 in connection with the acquisition of NES and amended on February 11, 2011 in connection with a debt refinancing. During the nine months ended June 30, 2013, the Company completed a series of transactions which allowed the Company to refinance term loans under its senior secured credit facility that originally matured October 26, 2014 and to refinance $1,384 million of senior unsecured notes that originally matured on November 1, 2015.
During the three months ended December 31, 2012, the Company completed three transactions to refinance $848 million of term loans under its senior secured credit facility, which were (1) an amendment and restatement of the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility on October 29, 2012 along with the extension of the maturity date of $135 million aggregate principal amount of senior secured term B-1 loans (the "term B-1 loans") by converting such loans into a new tranche of senior secured term B-4 loans (the "term B-4 loans"), (2) an amendment and restatement of the senior secured credit facility on December 21, 2012 along with the extension of the maturity date of $713 million aggregate principal amount of term B-1 loans and $134 million aggregate principal amount of term B-4 loans, in each case, by converting such loans into a new tranche of senior secured term B-5 loans (the "term B-5 loans") and (3) the issuance on December 21, 2012 of $290 million of 9% senior secured notes due April 2019, the net proceeds of which were used to repay $284 million of term B-5 loans.
During the three months ended March 31, 2013, the Company refinanced the remaining $584 million of term B-1 loans outstanding under its senior secured credit facility with cash proceeds from the issuance of $589 million aggregate principal amount of term B-5 loans under the senior secured credit facility.
Additionally, during the three months ended March 31, 2013, the Company refinanced $1,384 million of senior unsecured notes, through (1) amendments to the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility permitting the refinancing of the 9.75% senior unsecured notes due 2015 and 10.125%/10.875% senior unsecured paid-in-kind ("PIK") toggle notes due 2015 (collectively, the “Old Notes”) with indebtedness secured by a lien on certain collateral on a junior-priority basis and (2) the exchange of $1,384 million of Old Notes for $1,384 million of 10.50% senior secured notes due 2021.

11

Long-term debt consists of the following:
In millions
June 30,
2013
 
September 30,
2012
Senior secured term B-1 loans due October 26, 2014
$
—

 
$
1,434

Senior secured term B-3 loans due October 26, 2017
2,133

 
2,152

Senior secured term B-4 loans due October 26, 2017
1

 
—

Senior secured term B-5 loans due March 31, 2018
1,144

 
—

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

 
1,009

9% senior secured notes due April 1, 2019
290

 
—

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

 
—

9.75% senior unsecured cash pay notes due November 1, 2015
58

 
700

10.125%/10.875% senior unsecured PIK toggle notes due November 1, 2015
92

 
834

Unaccreted discount
(17
)
 
(8
)
 
6,094

 
6,121

Debt maturing within one year
(35
)
 
(37
)
Long-term debt
$
6,059

 
$
6,084

Senior Secured Credit Facility
Prior to the fiscal 2013 refinancing transactions, the senior secured credit facility consisted of (a) a senior secured multi-currency revolver allowing for borrowings of up to $200 million, (b) term B-1 loans with an outstanding principal amount as of September 30, 2012 of $1,434 million, and (c) senior secured term B-3 loans (the "term B-3 loans") with an outstanding principal amount as of September 30, 2012 of $2,152 million.
On October 29, 2012, Avaya Inc., Citibank, N.A. and the lenders party thereto entered into Amendment No. 4 to Credit Agreement pursuant to which the senior secured credit facility was amended and restated in its entirety (as so amended and restated, the "Cash Flow Credit Agreement"). The modified terms of the Cash Flow Credit Agreement included (1) an amendment which allowed the Company to extend the maturity of a portion of the term B-1 loans representing outstanding principal amounts of $135 million from October 26, 2014 to October 26, 2017 by converting such loans into a new tranche of term B-4 loans, (2) permission to issue Incremental Replacement Secured Notes and Junior Secured Debt as described below under the heading “Senior Secured Asset-Based Credit Facility” (except, pursuant to the Cash Flow Credit Agreement, such Incremental Replacement Secured Notes and Junior Secured Debt must be secured by a lien on the Collateral (as defined in the Cash Flow Credit Agreement) ranking junior to the lien securing the obligations under the Cash Flow Credit Agreement) and (3) permission to issue indebtedness to refinance a portion of the term loans outstanding under the Cash Flow Credit Agreement and to secure such indebtedness by a lien on the Collateral (as defined in the Cash Flow Credit Agreement) ranking junior to the lien securing the obligations under the Cash Flow Credit Agreement, subject to certain other conditions and limitations set forth in the Cash Flow Credit Agreement.
On December 21, 2012, Avaya Inc., Citibank, N.A. and the lenders party thereto entered into Amendment No. 5 to Credit Agreement, pursuant to which the Cash Flow Credit Agreement was amended and restated in its entirety. The modified terms of the Cash Flow Credit Agreement included (1) an amendment which allowed the Company to extend the maturity of $713 million aggregate principal amount of the outstanding term B-1 loans from October 26, 2014 to March 31, 2018 and $134 million aggregate principal amount of the outstanding term B-4 loans from October 26, 2017 to March 31, 2018, in each case, by converting such loans into a new tranche of term B-5 loans; and (2) permission to apply net proceeds from Credit Agreement Refinancing Indebtedness (as defined in the Cash Flow Credit Agreement) incurred or issued on December 21, 2012 to refinance, at the Company's election, any class or classes of senior secured term loans, including the new term B-5 loans.
Additionally, as discussed more fully below, on December 21, 2012, the Company completed a private placement of $290 million of senior secured notes, the net proceeds of which were used to repay $284 million of term B-5 loans outstanding under the Cash Flow Credit Agreement. Funds affiliated with TPG were holders of $22 million of term B-5 loans repaid with the proceeds of the senior secured notes.
On February 13, 2013, Avaya Inc. and Citibank, N.A. and the lenders party thereto entered into Amendment No. 6 to Credit Agreement pursuant to which the Cash Flow Credit Agreement was amended. The modified terms of the Cash Flow Credit Agreement permitted the Company to refinance all of the Company's outstanding Old Notes with indebtedness secured by a lien on the Collateral (as defined in the Cash Flow Credit Agreement) ranking junior to the lien on the Collateral securing the

12

obligations under the Cash Flow Credit Agreement, subject to certain other conditions and limitations set forth in the Cash Flow Credit Agreement.
On March 12, 2013, Avaya Inc., Citibank, N.A. and the lenders party thereto entered into Amendment No. 7 to Credit Agreement pursuant to which the Cash Flow Credit Agreement was amended. Pursuant to the amendment, the Company refinanced in full all the outstanding term B-1 loans with the cash proceeds from the issuance of $589 million aggregate principal amount of term B-5 loans under the Cash Flow Credit Agreement.
Subsequent to the fiscal 2013 refinancing transactions, the Cash Flow Credit Agreement consists of (a) a senior secured multi-currency revolver allowing for borrowings of up to $200 million, (b) term B-3 loans with an outstanding principal amount as of June 30, 2013 of $2,133 million, (c) term B-4 loans with an outstanding principal amount as of June 30, 2013 of $1 million, and (d) term B-5 loans with an outstanding principal amount as of June 30, 2013 of $1,144 million.
The term B-3 loans, term B-4 loans, and term B-5 loans each bear interest at a rate per annum equal to either a base rate (subject to a floor of 2.25% in the case of the term B-4 loans and term B-5 loans) or a LIBOR rate (subject to a floor of 1.25% in the case of the term B-4 loans and term B-5 loans), in each case plus an applicable margin. Subject to the floor described in the immediately preceding sentence the base rate is determined by reference to the higher of (1) the prime rate of Citibank, N.A. and (2) the federal funds effective rate plus 1/2 of 1%. The applicable margin for borrowings of term B-3 loans, term B-4 loans, and term B-5 loans is 3.50%, 5.25%, and 5.75%, respectively per annum with respect to base rate borrowings and 4.50%, 6.25%, and 6.75%, respectively per annum with respect to LIBOR borrowings. The applicable margin on the term B-4 loans and term B-5 loans is subject to increase pursuant to the Cash Flow Credit Agreement in connection with the making of certain refinancing, extended or replacement term loans under the Cash Flow Credit Agreement with an Effective Yield (as defined in the Cash Flow Credit Agreement) greater than the applicable Effective Yield payable in respect of the applicable loans at such time plus 50 basis points.
The October 29, 2012, December 21, 2012, and February 13, 2013 amendments and restatements of the Cash Flow Credit Agreement represent debt modifications for accounting purposes. Accordingly, third party expenses of $6 million incurred in connection with the transactions were expensed as incurred and included in other income, net during the nine months ended June 30, 2013. Avaya’s financing sources that held term B-1 loans, term B-3 loans, term B-5 loans and/or revolving credit commitments under the Cash Flow Credit Agreement and consented to each amendment and restatement of the Cash Flow Credit Agreement received in aggregate a consent fee of $15 million. Fees paid to or on behalf of the holders of term loans in connection with the modification were recorded as a discount to the face value of the respective debt and are being accreted over the term of the debt as interest expense. Fees paid to or on behalf of the holders of the revolving credit commitments in connection with the modification were recorded as deferred debt issuance costs and are being amortized over the term of the debt as interest expense.
The March 12, 2013 amendment and restatement of the Cash Flow Credit Agreement was accounted for as a modification of debt to the extent the existing term B-1 loans were refinanced with term B-5 loans issued to the same creditor and an extinguishment of debt to the extent refinanced with term B-5 loans issued to a different creditor. Accordingly, for the portion accounted for as a debt extinguishment the difference between the reacquisition price and the carrying value of the term B-1 loans (including any unamortized discount and debt issue costs) of $3 million was recognized as a loss upon debt extinguishment during fiscal 2013. Third party expenses of $5 million associated with the issuance of the new term B-5 loans were capitalized and are being amortized over the term of the term B-5 loans. Third party expenses of $3 million associated with the modification of debt were expensed as incurred and included in other income, net.
The senior secured multi-currency revolver allows for borrowings of up to $200 million and has a final maturity of October 26, 2016. The senior secured multi-currency revolver includes capacity available for letters of credit and for short-term borrowings, and is available in euros in addition to dollars. Borrowings are guaranteed by Parent and substantially all of the Company’s U.S. subsidiaries. The Cash Flow Credit Agreement, consisting of the term loans and the senior secured multi-currency revolver, is secured by substantially all assets of Parent, the Company and the subsidiary guarantors.
As of June 30, 2013 affiliates of Silver Lake held no outstanding principal amounts of term loans under the Cash Flow Credit Agreement. As of September 30, 2012 affiliates of Silver Lake held $45 million and $122 million in outstanding principal amounts of term B-1 loans and term B-3 loans, respectively.
As of June 30, 2013 affiliates of TPG held no outstanding principal amounts of term loans under the Cash Flow Credit Agreement. As of September 30, 2012 affiliates of TPG held $44 million in outstanding principal amounts of term B-1 loans.
Senior Unsecured Notes
The Company has issued senior unsecured cash-pay notes and senior unsecured PIK toggle notes, each due November 1, 2015. The interest rate for the cash-pay notes is fixed at 9.75% and the interest rates for the cash interest and PIK interest portions of the PIK-toggle notes are fixed at 10.125% and 10.875%, respectively. The Company may prepay the senior unsecured notes at

13

102.4375% of the cash-pay note and 102.5313% of the PIK-toggle note principal amount redeemed on November 1, 2012 which decreases to 100% of each on or after November 1, 2013. Upon the occurrence of specific kinds of changes of control, the Company will be required to make an offer to purchase the senior unsecured notes at 101% of their principal amount. If the Company or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances the Company will be required to use the net proceeds to make an offer to purchase the senior unsecured notes at 100% of their principal amount. Substantially all of the Company’s U.S. 100%-owned subsidiaries are guarantors of the senior unsecured notes. Prior to March 7, 2013, the Company had $700 million and $750 million of cash-pay and PIK-toggle notes, respectively.
For the periods May 1, 2009 through October 31, 2009 and November 1, 2009 through April 30, 2010, the Company elected to pay interest in kind on its senior unsecured PIK toggle notes. PIK interest of $41 million and $43 million was added, for these periods, respectively, to the principal amount of the senior unsecured notes effective November 1, 2009 and May 1, 2010, respectively. For the periods from May 1, 2010 to October 31, 2011 the Company elected to make such payments in cash interest. Under the terms of these notes, after November 1, 2011 the Company is required to make all interest payments on the senior unsecured PIK toggle notes entirely in cash.
As discussed more fully below, on March 7, 2013, the Company completed an exchange offer (the “Exchange Offer”) in which $1,384 million of Old Notes (including $642 million of senior unsecured cash-pay notes and $742 million of senior unsecured PIK toggle notes) were exchanged for 10.50% senior secured notes due 2021. The Exchange Offer represents a debt modification for accounting purposes. Accordingly, third party expenses of $9 million incurred in connection with the transaction were expensed as incurred and included in other income, net during the nine months ended June 30, 2013. Avaya's financing sources that held the Old Notes that elected to exchange received a consent fee in aggregate of $4 million. Fees paid to or on behalf of the holders of the Old Notes in connection with the modification were recorded as a discount to the face value of the 10.50% senior secured notes due 2021 and are being accreted over the term of the debt as interest expense.
Senior Secured Asset-Based Credit Facility
The Company’s senior secured multi-currency asset-based revolving credit facility allows for borrowings of up to $335 million, subject to availability under a borrowing base, of which $150 million may be in the form of letters of credit. The borrowing base at any time equals the sum of 85% of eligible accounts receivable plus 85% of the net orderly liquidation value of eligible inventory, subject to certain reserves and other adjustments. The Company and substantially all of its U.S. subsidiaries are borrowers under this facility, and borrowings are guaranteed by Parent, the Company and substantially all of the Company’s U.S. subsidiaries. The facility is secured by substantially all assets of Parent, the Company and the subsidiary guarantors. The senior secured multi-currency asset-based revolving credit facility also provides the Company with the right to request up to $100 million of additional commitments under this facility.
On October 29, 2012 Avaya Inc., the several subsidiary borrowers (the “Subsidiary Borrowers”) party thereto, Citicorp USA, Inc. and the lenders party thereto entered into Amendment No. 2 to Credit Agreement, pursuant to which the senior secured multi-currency asset-based revolving credit facility was amended and restated in its entirety (as so amended and restated, the “ABL Credit Agreement”).
The modified terms of the ABL Credit Agreement include permission to issue or incur, as applicable, secured indebtedness in the form of (1) one or more series of secured notes in lieu of any Revolving Commitment Increases (as defined in the ABL Credit Agreement) in an aggregate principal amount not to exceed $100 million, plus the amount by which unused Commitments (as defined in the ABL Credit Agreement) have been previously reduced pursuant to the ABL Credit Agreement, less the amount of all Revolving Commitment Increases effected at or prior to the time of issuance of such notes (“Incremental Replacement Secured Notes”), and (2) one or more series of secured notes or secured loans in an aggregate principal amount not to exceed $750 million (“Junior Secured Debt”). Any such Incremental Replacement Secured Notes or Junior Secured Debt (a) must be (x) issued or incurred, as applicable, in connection with a modification, refinancing, refunding, renewal, replacement, exchange or extension of senior unsecured indebtedness and (y) secured by a lien on the Collateral (as defined in the ABL Credit Agreement) ranking junior to the lien securing the obligations under the ABL Credit Agreement and (b) will be subject to certain other conditions and limitations set forth in the ABL Credit Agreement.
On February 13, 2013, Avaya Inc., the Subsidiary Borrowers, Citicorp USA, Inc. and the lenders party thereto entered into Amendment No. 3 to Credit Agreement pursuant to which the ABL Credit Agreement was amended. The modified terms of the ABL Credit Agreement permitted the Company to refinance all of the Company's outstanding Old Notes with indebtedness secured by a lien on the Collateral (as defined in the ABL Credit Agreement) ranking junior to the lien on the Collateral securing the obligations under the ABL Credit Agreement, subject to certain other conditions and limitations set forth in the ABL Credit Agreement. Further, the terms of the amendment permit certain other obligations of the Company and certain of its subsidiaries to be secured by the ABL Priority Collateral (as defined in the ABL Credit Agreement) on a junior-priority basis.

14

Borrowings under the ABL Credit Agreement 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%. Any principal amount outstanding under this facility is payable in full on October 26, 2016.
At June 30, 2013 and September 30, 2012, there were no borrowings under this facility. At June 30, 2013 and September 30, 2012 there were $76 million and $77 million, respectively, of letters of credit issued in the ordinary course of business under the ABL Credit Agreement resulting in remaining availability of $210 million and $258 million, respectively.
7% Senior Secured Notes
On February 11, 2011, the Company completed a private placement of $1,009 million of senior secured notes (the "7% Senior Secured Notes"). The 7% Senior Secured Notes bear interest at a rate of 7% per annum, mature on April 1, 2019 and were sold at par through a private placement to qualified institutional buyers pursuant to Rule 144A (and outside the United States in reliance on Regulation S) under the Securities Act of 1933, as amended (the “Securities Act”) and have not been, and will not be, registered under the Securities Act or applicable state or foreign securities laws.
The Company may redeem the 7% Senior Secured Notes commencing April 1, 2015 at 103.5% of the principal amount redeemed, which decreases to 101.75% on April 1, 2016 and to 100% on or after April 1, 2017. The Company may redeem all or part of the notes at any time prior to April 1, 2015 at 100% of the principal amount redeemed plus a “make-whole” premium. In addition, the Company may redeem up to 35% of the original aggregate principal balance of the 7% Senior Secured Notes at any time prior to April 1, 2014 with the net proceeds of certain equity offerings at 107% of the aggregate principal amount of 7% Senior Secured Notes redeemed. Upon the occurrence of specific kinds of changes of control, the Company will be required to make an offer to purchase the 7% Senior Secured Notes at 101% of their principal amount. If the Company or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances the Company will be required to use the net proceeds to make an offer to purchase the 7% Senior Secured Notes at 100% of their principal amount.
Substantially all of the Company’s U.S. 100%-owned subsidiaries are guarantors of the 7% Senior Secured Notes. The 7% Senior Secured Notes are secured by substantially all of the assets of the Company and the subsidiary guarantors (other than with respect to real estate). The notes and the guarantees are secured equally and ratably with the Cash Flow Credit Agreement and any future first lien obligations by (i) a first-priority lien on substantially all of the Company’s and the guarantors’ assets, other than (x) any real estate and (y) collateral that secures the ABL Credit Agreement on a first-priority basis (the “ABL Priority Collateral”), and (ii) a second-priority lien on the ABL Priority Collateral, in each case, subject to certain customary exceptions.
9% Senior Secured Notes
On December 21, 2012, the Company completed a private placement of $290 million of senior secured notes (the "9% Senior Secured Notes"). The 9% Senior Secured Notes bear interest at a rate of 9% per annum, mature on April 1, 2019, and were sold at par through a private placement to qualified institutional buyers pursuant to Rule 144A (and outside the United States in reliance on Regulation S) under the Securities Act. The 9% Senior Secured Notes have not been, and will not be, registered under the Securities Act or applicable state or foreign securities laws and may not be offered or sold absent registration under the Securities Act or applicable state or foreign securities laws or applicable exemptions from registration requirements.
The 9% Senior Secured Notes are redeemable commencing April 1, 2015 at 104.5% of the principal amount redeemed, which decreases to 102.25% on April 1, 2016 and to 100% on or after April 1, 2017. The Company may redeem all or part of the notes at any time prior to April 1, 2015 at 100% of the principal amount redeemed plus a “make-whole” premium, as defined in the indenture governing the 9% Senior Secured Notes. In addition, the Company may redeem up to 35% of the original aggregate principal balance of the 9% Senior Secured Notes at any time prior to April 1, 2015 with the net proceeds of certain equity offerings at 109% of the aggregate principal amount redeemed. Upon the occurrence of specific kinds of changes of control, the Company will be required to make an offer to purchase the 9% Senior Secured Notes at 101% of their principal amount. If the Company or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances the Company will be required to use the net proceeds to make an offer to purchase the 9% Senior Secured Notes at 100% of their principal amount.
The 9% Senior Secured Notes are secured by substantially all of the assets of the Company and substantially all of the Company’s U.S. 100%-owned subsidiaries (other than with respect to real estate). The notes and the guarantees are secured equally and ratably with the Cash Flow Credit Agreement, the 7% Senior Secured Notes due 2019 and any future first lien obligations by (i) a first-priority lien on substantially all of the Company’s and the guarantors’ assets, other than (x) any real estate and (y) collateral that secures the ABL Credit Agreement on a first-priority basis (the “ABL Priority Collateral”), and (ii) a second-priority lien on the ABL Priority Collateral, in each case, subject to certain customary exceptions.
The proceeds from the 9% Senior Secured Notes were used to repay $284 million aggregate principal amount of term B-5 loans and to pay related fees and expenses. In connection with the issuance of the 9% Senior Secured Notes, the Company

15

capitalized financing costs of $7 million during fiscal 2013 and is amortizing these costs over the term of the 9% Senior Secured Notes.
The repayment of the term B-5 loans was accounted for as an extinguishment of debt. Accordingly the difference between the reacquisition price and the carrying value of the term B-5 loans (including unamortized debt issue costs) of $3 million was recognized as a loss upon debt extinguishment during fiscal 2013.
10.50% Senior Secured Notes
On March 7, 2013, the Company completed an Exchange Offer in which $1,384 million of Old Notes were exchanged for $1,384 million of senior secured notes due 2021 (the “10.50% Senior Secured Notes”). The 10.50% Senior Secured Notes were issued at par, bear interest at a rate of 10.50% per annum and mature on March 1, 2021. The 10.50% Senior Secured Notes have not been, and will not be, registered under the Securities Act or applicable state or foreign securities laws and may not be offered or sold absent registration under the Securities Act or applicable state or foreign securities laws or applicable exemptions from registration requirements.
The 10.50% Senior Secured Notes are redeemable commencing March 1, 2017 at 107.875% of the principal amount redeemed, which decreases to 105.250% on March 1, 2018, to 102.625% on March 1, 2019 and to 100% on or after March 1, 2020. The Company may redeem all or part of the notes at any time prior to March 1, 2017 at 100% of the principal amount redeemed plus a “make-whole” premium. In addition, the Company may redeem up to 35% of the original aggregate principal balance of the notes at any time prior to March 1, 2016 with the net proceeds of certain equity offerings at 110.50% of the aggregate principal amount redeemed. Upon the occurrence of specific kinds of changes of control, the Company will be required to make an offer to purchase the 10.50% Senior Secured Notes at 101% of their principal amount. If the Company or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances the Company will be required to use the net proceeds to make an offer to purchase the 10.50% Senior Secured Notes at 100% of their principal amount.
The 10.50% Senior Secured Notes are secured by substantially all of the assets of the Company and substantially all of the Company's U.S. 100%-owned subsidiaries (other than with respect to real estate). The notes and the corresponding guarantees are secured on a junior priority basis to the Company's ABL Credit Agreement, the Company's Cash Flow Credit Agreement, the Company's existing 7% Senior Secured Notes due 2019, the Company's existing 9% Senior Secured Notes due 2019 and any future senior obligations by a junior priority lien on substantially all of the Company's and the guarantors' assets, other than any real estate.
The Company’s Cash Flow Credit Agreement, ABL Credit Agreement, and indentures governing its notes contain a number of covenants that, among other things and subject to certain exceptions, restrict the Company’s ability and the ability of certain of its subsidiaries to: (a) incur or guarantee additional debt and issue or sell certain preferred stock; (b) pay dividends on, redeem or repurchase capital stock; (c) make certain acquisitions or investments; (d) incur or assume certain liens; (e) enter into transactions with affiliates; (f) merge or consolidate with another company; (g) transfer or otherwise dispose of assets; (h) redeem subordinated debt; (i) incur obligations that restrict the ability of the Company’s subsidiaries to make dividends or other payments to the Company or Parent; and (j) create or designate unrestricted subsidiaries. They also contain customary affirmative covenants and events of default. As of June 30, 2013 and September 30, 2012, the Company was not in default under any of these agreements.
The weighted average interest rate of the Company’s outstanding debt as of June 30, 2013 was 7.4% excluding the impact of the interest rate swaps described in Note 8, “Derivatives and Other Financial Instruments."
Annual maturities of long-term debt for the next five years ending September 30 and thereafter consist of:
In millions
 
Remainder of fiscal 2013
$
9

2014
38

2015
53

2016
174

2017
38

2018 and thereafter
5,799

Total
$
6,111

Capital Lease Obligations
Included in other liabilities at June 30, 2013 is $22 million of capital lease obligations, primarily associated with an office facility.

16

8.
Derivatives and Other Financial Instruments
Interest Rate Swaps
The Company uses interest rate swaps to manage the amount of its floating rate debt in order to reduce its exposure to variable rate interest payments associated with certain borrowings under the Cash Flow Credit Agreement. The interest rate swaps presented below are designated as cash flow hedges. The fair value of each interest rate swap is reflected as an asset or liability in the Consolidated Balance Sheets, reported as a component of other comprehensive loss and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on derivative instruments representing hedge ineffectiveness are recognized in current earnings. The fair value of each interest rate swap is estimated as the net present value of their projected cash flows at the balance sheet date.
The details of these swaps are as follows:
In millions
 
Effective Date
 
Maturity Date
 
Notional
Amount
 
Floating Rate
Received by Avaya
 
Fixed Rate
Paid by Avaya
3-year swap
 
August 26, 2010
 
August 26, 2013
 
$
750

 
3-month LIBOR
 
1.160
%
3-year swap
 
August 26, 2010
 
August 26, 2013
 
750

 
3-month LIBOR
 
1.135
%
Notional amount—Total
 
 
 
$
1,500

 
 
 
 
The following table summarizes the (gains) and losses of the interest rate contracts qualifying and designated as cash flow hedging instruments:
  
Three months ended June 30,
 
Nine months ended June 30,
In millions
2013
 
2012
 
2013
 
2012
(Gain) Loss on interest rate swaps
 
 
 
 
 
 
 
Recognized in other comprehensive loss
$
(2
)
 
$
(5
)
 
$
(10
)
 
$
(15
)
Reclassified from accumulated other comprehensive loss into interest expense
$
3

 
$
6

 
$
11

 
$
19

Recognized in operations (ineffective portion)
$
—

 
$
—

 
$
—

 
$
—

The Company expects to reclassify approximately $2 million from accumulated other comprehensive loss into expense in the next twelve months related to the Company’s interest rate swaps based on the projected borrowing rates as of June 30, 2013.
Foreign Currency Forward Contracts
The Company utilizes foreign currency forward contracts primarily to manage short-term exchange rate exposures on certain receivables, payables and intercompany loans residing on foreign subsidiaries’ books, which are denominated in currencies other than the subsidiary’s functional currency. When those items are revalued into the subsidiaries’ functional currencies at the month-end exchange rates, the fluctuations in the exchange rates are recognized in the Consolidated Statements of Operations as other income (expense), net. Changes in the fair value of the Company’s foreign currency forward contracts used to offset these exposed items are also recognized in the Consolidated Statements of Operations as other income (expense), net in the period in which the exchange rates change.
The gains and (losses) of the foreign currency forward contracts included in other income (expense), net were $(3) million and $(2) million for the three months ended June 30, 2013 and 2012, respectively, and $(10) million and $(7) million for the nine months ended June 30, 2013 and 2012, respectively.
The following table summarizes the estimated fair value of derivatives:
In millions
June 30, 2013
 
September 30, 2012
Balance Sheet Location
Total
 
Foreign
Currency
Forward
Contracts
 
Interest
Rate
Swaps
 
Total
 
Foreign
Currency
Forward
Contracts
 
Interest
Rate
Swaps
Other current assets
$
—

 
$
—

 
$
—

 
$
2

 
$
2

 
$
—

Other current liabilities
(4
)
 
(1
)
 
(3
)
 
(15
)
 
—

 
(15
)
Net Liability
$
(4
)
 
$
(1
)
 
$
(3
)
 
$
(13
)
 
$
2

 
$
(15
)

17

9.
Fair Value Measures
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Fair Value Hierarchy
The accounting guidance for fair value 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 June 30, 2013 and September 30, 2012 were as follows:
 
June 30, 2013
 
Fair Value Measurements Using
In millions
Total
 
Quoted Prices in 
Active Markets
for Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Other Non-Current Assets:
 
 
 
 
 
 
 
Investments
$
2

 
$
1

 
$
1

 
$
—

Other Current Liabilities:
 
 
 
 
 
 
 
Foreign currency forward contracts
$
1

 
$
—

 
$
1

 
$
—

Interest rate swaps
3

 
—

 
3

 
—

 
$
4

 
$
—

 
$
4

 
$
—

 
September 30, 2012
 
Fair Value Measurements Using
In millions
Total
 
Quoted Prices in
Active Markets
for Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Other Current Assets:
 
 
 
 
 
 
 
Foreign currency forward contracts
$
2

 
$
—

 
$
2

 
$
—

Investments
1

 
1

 
—

 
—

 
$
3

 
$
1

 
$
2

 
$
—

Other Non-Current Assets:
 
 
 
 
 
 
 
Investments
$
4

 
$
2

 
$
2

 
$
—

Other Current Liabilities:
 
 
 
 
 
 
 
Interest rate swaps
$
15

 
$
—

 
$
15

 
$
—


18

Interest Rate Swaps
Interest rate swaps classified as Level 2 assets and liabilities are priced using discounted cash flow techniques which are corroborated by using non-binding market prices. Significant inputs to the discounted cash flow model include projected future cash flows based on projected 3-month LIBOR rates, and the average margin for companies with similar credit ratings and similar maturities. These are classified as Level 2 as they are not actively traded and are valued using pricing models that use observable market inputs.
Foreign Currency Forward Contracts
Foreign currency forward contracts classified as Level 2 assets and liabilities are priced using quoted market prices for similar assets or liabilities in active markets.
Investments
Investments classified as Level 2 assets and liabilities are priced using quoted market prices for identical assets which are subject to infrequent transactions (i.e. a less active market).
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company's assets and liabilities that are measured at fair value on a nonrecurring basis include goodwill, which is recognized at fair value when it is considered to be impaired.
The fair value of goodwill for the ITPS reporting unit measured on a nonrecurring basis during the three months ended March 31, 2013 was as follows:
 
March 31, 2013
 
 
 
Fair Value Measurements Using
 
 
In millions
Total
 
Quoted Prices in 
Active Markets
for Identical
Instruments
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Loss
Goodwill of ITPS reporting unit:
$
44

 
$
—

 
$
—

 
$
44

 
$
89

During the three months ended March 31, 2013, the Company performed an impairment test of goodwill for the ITPS reporting unit. Using level 3 inputs, the Company estimated the implied fair value of its goodwill to be $44 million as compared with a carrying value of $133 million and recorded an impairment to goodwill of $89 million. See Note 4 “Goodwill and Intangible Assets.”
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.
On October 3, 2011 and October 3, 2012, the Company advanced $8 million and $10 million, respectively, to Parent in exchange for a note receivable. The proceeds of such notes were used by Parent to fund, in part, an acquisition of all outstanding shares of a unified communications solutions provider. Immediately upon completing the acquisition, Parent merged the acquired entity with and into Avaya Inc., with Avaya Inc. surviving the merger.
The principal amount of these notes plus any accrued and unpaid interest are due in full October 3, 2014 and October 3, 2015 with interest at the rate of 1.63% and 0.93% per annum, respectively. These notes are included in other assets in the Company's Consolidated Balance Sheets. The estimated fair value of the $8 million note receivable was $7 million and $6 million at June 30, 2013 and September 30, 2012, respectively. The estimated fair value of the $10 million note receivable was $8 million at June 30, 2013. The estimated fair value of each note was determined based on a Level 2 input using discounted cash flow techniques.
The estimated fair values of the amounts borrowed under the Company’s financing arrangements at June 30, 2013 and September 30, 2012 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).

19

The estimated fair values of the amounts borrowed under the Company’s credit agreements at June 30, 2013 and September 30, 2012 are as follows:
 
June 30, 2013
 
September 30, 2012
In millions
Principal
Amount
 
Fair
Value
 
Principal
Amount
 
Fair
Value
Senior secured term B-1 loans
$
—

 
$
—

 
$
1,434

 
$
1,392

Senior secured term B-3 loans
2,133

 
1,868

 
2,152

 
1,960

Senior secured term B-4 loans
1

 
1

 
—

 
—

Senior secured term B-5 loans
1,144

 
1,071

 
—

 
—

7% Senior secured notes
1,009

 
909

 
1,009

 
938

9% Senior secured notes
290

 
277

 
—

 
—

10.50% Senior secured notes
1,384

 
1,041

 
—

 
—

9.75% senior unsecured cash pay notes due 2015
58

 
57

 
700

 
622

10.125%/10.875% senior unsecured PIK toggle notes due 2015
92

 
91

 
834

 
749

Total
$
6,111

 
$
5,315

 
$
6,129

 
$
5,661

10.
Income Taxes
The benefit from income taxes for the nine months ended June 30, 2013 was $9 million, as compared to the provision for income taxes of $62 million for the nine months ended June 30, 2012.
The effective rate for the nine months ended June 30, 2013 differs 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, (3) $17 million of income tax benefit recognized upon the expiration of certain interest rate swaps, and (4) the release of $43 million of valuation allowance associated with net gains in other comprehensive income.
During the nine months ended June 30, 2013, the Company recognized $17 million of income tax benefit related to the elimination of the tax effect of certain interest rate swaps in other comprehensive income. The tax effect of such interest rate swaps was recognized in other comprehensive income prior to the establishment of a valuation allowance against the Company's U.S. net deferred tax assets and was eliminated following the expiration of the final interest rate swap upon which the tax effect was established.
During the nine months ended June 30, 2013, the Company recorded a tax charge of $43 million to other comprehensive income primarily relating to pension benefits. The charge to other comprehensive income and decrease in related deferred tax assets resulted in an income tax benefit in the Consolidated Statements of Operations related to the release of the corresponding valuation allowance.
The effective income tax rate for the nine months ended June 30, 2012 differs from the statutory U.S. Federal income tax rate primarily due to (1) the effect of tax rate differentials on foreign income/loss and (2) changes in the valuation allowance established against the Company’s deferred tax assets.
For interim financial statement purposes, U.S. 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 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, projection of jurisdictional taxable income and losses, statutory income tax rates, and valuation allowances. The Company's estimated annual effective income tax rate may be revised, if necessary, in each interim period during the fiscal year.
11.
Benefit Obligations
The Company sponsors non-contributory defined benefit pension plans covering a portion of its U.S. employees and retirees, and postretirement benefit plans 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. In addition, the Company amended the postretirement plan for its U.S.

20

management employees 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 October 12, 2011 and November 18, 2011, 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 contracts with the CWA and IBEW now terminate on June 7, 2014. The contract extension did not affect the level of pension and postretirement benefits available to U.S. employees of the Company who are represented by the CWA or IBEW (“represented employees”).

The components of the pension and postretirement net periodic benefit cost for the three and nine months ended June 30, 2013 and 2012 are provided in the table below:
 
Pension Benefits -
U.S.
 
Pension Benefits -
Non-U.S.
 
Postretirement
Benefits - U.S.
 
Three months ended June 30,
 
Three months ended June 30,
 
Three months ended June 30,
In millions
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
1

 
$
1

 
$
1

 
$
2

 
$
1

 
$
1

Interest cost
34

 
37

 
5

 
5

 
6

 
8

Expected return on plan assets
(41
)
 
(42
)
 
—

 
—

 
(3
)
 
(3
)
Amortization of unrecognized prior service cost
1

 
—

 
—

 
—

 
(4
)
 
1

Amortization of previously unrecognized net actuarial loss
30

 
25

 
1

 
—

 
1

 
2

Curtailment
2

 
2

 
—

 
3

 
(8
)
 
—

Net periodic benefit cost
$
27

 
$
23

 
$
7

 
$
10

 
$
(7
)
 
$
9


 
Pension Benefits -
U.S.
 
Pension Benefits -
Non-U.S.
 
Postretirement
Benefits - U.S.
 
Nine months ended June 30,
 
Nine months ended June 30,
 
Nine months ended June 30,
In millions
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
4

 
$
4

 
$
5

 
$
5

 
$
2

 
$
2

Interest cost
102

 
112

 
15

 
17

 
16

 
23

Expected return on plan assets
(121
)
 
(128
)
 
(1
)
 
(1
)
 
(8
)
 
(8
)
Amortization of unrecognized prior service cost
1

 
1

 
—

 
—

 
(11
)
 
2

Amortization of previously unrecognized net actuarial loss
94

 
74

 
3

 
—

 
5

 
6

Curtailment
2

 
2

 
—

 
3

 
(8
)
 
—

Net periodic benefit cost
$
82

 
$
65

 
$
22

 
$
24

 
$
(4
)
 
$
25

As a result of business restructuring initiatives, certain U.S. pension and postretirement plans experienced a curtailment during the quarter ended June 30, 2013. The curtailment of the U.S. pension plan resulted in a curtailment loss of $2 million, which was recognized immediately. The curtailment of the U.S. postretirement plan resulted in an estimated curtailment gain of $12 million, $8 million of which was recognized during the quarter ended June 30, 2013 associated with the terminations that occurred as of that date. The remaining curtailment gain will be recognized in the fourth quarter of fiscal 2013 when the remaining terminations occur.
As a result of business restructuring initiatives, certain U.S. pension and postretirement plans and certain non-U.S. pension plans experienced a curtailment during the quarter ended June 30, 2012, which resulted in curtailment charges of $2 million and $3 million, respectively.
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 laws and regulations. For the nine month period ended June 30, 2013, the

21

Company made contributions of $57 million to satisfy minimum statutory funding requirements. Estimated payments to satisfy minimum statutory funding requirements for the remainder of fiscal 2013 are $45 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 nine month period ended June 30, 2013, the Company made payments for these U.S. and non-U.S. pension benefits totaling $5 million and $22 million, respectively. Estimated payments for these U.S. and non-U.S. pension benefits for the remainder of fiscal 2013 are $2 million and $5 million, respectively.
During the nine months ended June 30, 2013, the Company contributed $32 million to the represented employees’ post-retirement health trust to fund current benefit claims and costs of administration in compliance with the terms of the 2009 agreements between the Company and the CWA and IBEW, as extended through June 7, 2014. Estimated contributions under the terms of the 2009 agreements are $11 million for the remainder of fiscal 2013.
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 nine month period ended June 30, 2013, the Company made payments totaling $7 million for these retiree medical benefits. Estimated payments for these retiree medical benefits for the remainder of fiscal 2013 are $2 million.
12.
Share-based Compensation
Parent’s Amended and Restated 2007 Equity Incentive Plan (“2007 Plan”) governs the issuance of equity awards, including restricted stock units (“RSUs”) and stock options, to eligible plan participants. Key employees, directors, and consultants of the Company may be eligible to receive awards under the 2007 Plan. Each stock option, when vested and exercised, and each RSU, when vested, entitles the holder to receive one share of Parent’s common stock, subject to certain restrictions on their transfer and sale as defined in the 2007 Plan and related award agreements. As of June 30, 2013, Parent had authorized the issuance of up to 49,848,157 shares of its common stock under the 2007 Plan, in addition to 2,924,125 shares of common stock underlying certain continuation awards that were permitted to be issued at the time of the Merger. There remained 17,730,799 shares available for grant under the 2007 Plan as of June 30, 2013.
On February 25, 2013, the Compensation Committee of Parent's board of directors approved a stock option exchange program through which individuals holding market-based "multiple-of-money" and performance-based "EBITDA" stock options could exchange them on a three-for-one basis for RSUs. The replacement RSUs will vest in full in December 2013. The tender offer was closed on April 30, 2013 and 45,500 EBITDA and 10,159,189 multiple-of-money options were tendered for exchange. In connection with the exchange offer, 3,401,654 replacement RSUs were granted which have an effective grant date of May 6, 2013.
Option Awards
During the nine months ended June 30, 2013, 2,405,000 time-based and 185,500 multiple-of-money options were granted in the ordinary course of business. All of the options expire ten years from the date of grant or upon cessation of employment, in which event there are limited exercise provisions allowed for vested options. Options granted between October 1, 2012 and November 30, 2012 have an exercise price of $4.00 per share, between December 1, 2012 and March 31, 2013 have an exercise price of $3.00 per share, and between April 1, 2013 and June 30, 2013 have an exercise price of $2.25 per share.
Time-based options granted during the nine months ended June 30, 2013 vest over their performance periods, generally four years. Compensation expense equal to the fair value of the option measured on the grant date is recognized utilizing graded attribution over the requisite service period.
Multiple-of-money options granted during the nine months ended June 30, 2013 vest upon the achievement of defined returns on the Sponsors’ initial investment in Parent. Because vesting of the multiple-of-money market-based options is outside the control of the Company and the award recipients, compensation expense relative to the multiple-of-money options must be recognized upon the occurrence of a triggering event (e.g., sale or initial public offering of Parent).
The fair value of option awards is determined at the date of grant utilizing the Cox-Ross Rubinstein (“CRR”) binomial option pricing model which is affected by the fair value of Parent’s common stock as well as a number of complex and subjective assumptions. Expected volatility is based primarily on a combination of the Company’s peer group’s historical volatility and estimates of implied volatility of the Company’s peer group. The risk-free interest rate assumption was derived from reference to the U.S. Treasury Spot rates for the expected term of the stock options. The dividend yield assumption is based on Parent’s current intent not to issue a dividend under its dividend policy. The expected holding period assumption was estimated based on the Company’s historical experience.

22

For the three months ended June 30, 2013 and 2012, the Company recognized share-based compensation associated with options issued under the 2007 Plan of $1 million and less than $1 million, respectively, which is included in costs and operating expenses. For the nine months ended June 30, 2013 and 2012, the Company recognized share-based compensation associated with options issued under the 2007 Plan of $3 million and $4 million, respectively, which is included in costs and operating expenses.
Restricted Stock Units
The Company has issued RSUs each of which represents the right to receive one share of Parent’s common stock when fully vested. The fair value of the RSUs is estimated by the Board of Directors on the respective dates of grant.
During the nine months ended June 30, 2013, 793,896 RSUs were awarded. The fair market value (as defined in the 2007 Plan) of these awards at the date of grant was $4.00 per share for RSUs awarded between October 1, 2012 and November 30, 2012, $3.00 per share for RSUs awarded between December 1, 2012 and March 31, 2013, and $2.25 per share for RSUs awarded between April 1, 2013 and June 30, 2013.
At June 30, 2013, there were 6,217,189 awarded RSUs outstanding under the 2007 Plan, of which 1,415,016 were fully vested. For the three months ended June 30, 2013 and 2012, the Company recognized share-based compensation associated with RSUs granted under the 2007 Plan of $3 million and $1 million, respectively. For the nine months ended June 30, 2013 and 2012, the Company recognized share-based compensation associated with RSUs granted under the 2007 Plan of $4 million and $3 million, respectively.
13.
Reportable Segments
Avaya conducts its business operations in three segments. Two of those segments, Global Communications Solutions (“GCS”) and Avaya Networking (“Networking”), make up Avaya’s Enterprise Collaboration Solutions (“ECS”) product portfolio. The third segment contains Avaya’s services portfolio and is called Avaya Global Services (“AGS”).
The GCS segment primarily develops, markets, and sells unified communications and contact center solutions by integrating multiple forms of communications, including telephone, e-mail, instant messaging and video. Avaya’s Networking segment’s portfolio of products offers integrated networking solutions which are scalable across customer enterprises. The AGS segment develops, markets and sells comprehensive end-to-end global service offerings that allow customers to evaluate, plan, design, implement, monitor, manage and optimize complex enterprise communications networks.
For internal reporting purposes, the Company’s chief operating decision maker makes financial decisions and allocates resources based on segment 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.

23

Summarized financial information relating to the Company’s reportable segments is shown in the following table:
  
Three months ended June 30,
 
Nine months ended June 30,
In millions
2013
 
2012
 
2013
 
2012
REVENUE
 
 
 
 
 
 
 
Global Communications Solutions
$
497

 
$
561

 
$
1,543

 
$
1,802

Avaya Networking
64

 
74

 
178

 
220

Enterprise Collaboration Solutions
561

 
635

 
1,721

 
2,022

Avaya Global Services
590

 
616

 
1,788

 
1,874

Unallocated Amounts (1)
(1
)
 
(1
)
 
(1
)
 
(2
)
 
$
1,150

 
$
1,250

 
$
3,508

 
$
3,894

GROSS PROFIT
 
 
 
 
 
 
 
Global Communications Solutions
$
298

 
$
329

 
$
917

 
$
1,047

Avaya Networking
28

 
29

 
73

 
93

Enterprise Collaboration Solutions
326

 
358

 
990

 
1,140

Avaya Global Services
314

 
300

 
940

 
909

Unallocated Amounts (1)
(13
)
 
(35
)
 
(51
)
 
(109
)
 
627

 
623

 
1,879

 
1,940

OPERATING EXPENSES
 
 
 
 
 
 
 
Selling, general and administrative
380


405


1,145


1,252

Research and development
112


116


343


344

Amortization of intangible assets
57


57


171


169

Goodwill impairment
—

 
—

 
89

 
—

Restructuring and impairment charges, net
63


21


165


132

Acquisition-related costs
1


1


1


4

 
613

 
600

 
1,914

 
1,901

OPERATING INCOME (LOSS)
14

 
23

 
(35
)
 
39

INTEREST EXPENSE, LOSS ON EXTINGUISHMENT OF DEBT AND OTHER (EXPENSE) INCOME, NET
(127
)
 
(101
)
 
(361
)
 
(331
)
LOSS BEFORE INCOME TAXES
$
(113
)
 
$
(78
)
 
$
(396
)
 
$
(292
)
 
(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. Unallocated Amounts in Revenue and Gross Profit also include the impacts of certain fair value adjustments recorded in purchase accounting in connection with the Merger.
14.
Commitments and Contingencies
Legal Proceedings
In the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations and proceedings, including, but not limited to, those identified below, relating to intellectual property, commercial, employment, environmental and regulatory matters.
Other than as described below, the Company believes there is no litigation pending or environmental and regulatory matters against the Company that could have, individually or in the aggregate, a material adverse effect on the Company’s financial position, results of operations or cash flows.
Antitrust Litigation
In 2006, the Company instituted an action in the U.S. District Court, District of New Jersey, against defendants Telecom Labs, Inc., TeamTLI.com Corp. and Continuant Technologies, Inc. and subsequently amended its complaint to include certain individual officers of these companies as defendants. Defendants purportedly provide maintenance services to customers who have purchased or leased the Company's communications equipment. The Company asserts in its amended complaint that,

24

among other things, defendants, or each of them, have engaged in tortious conduct and/or violated federal intellectual property laws by improperly accessing and utilizing the Company's proprietary software, including passwords, logins and maintenance service permissions, to perform certain maintenance services on the Company's customers' equipment. Defendants have filed counterclaims against the Company, alleging a number of tort claims and alleging that the Company has violated the Sherman Act's prohibitions against anticompetitive conduct through the manner in which the Company sells its products and services. Defendants seek to recover the profits they claim they would have earned from maintaining Avaya's products, and ask for injunctive relief prohibiting the conduct they claim is anticompetitive. 
The parties have engaged in extensive discovery and motion practice to, among other things, amend and dismiss pleadings and compel and oppose discovery requests. In January 2012, Avaya's motions to dismiss defendants' counterclaims were granted in part and denied in part. In February 2012, the parties filed motions for reconsideration of certain aspects of the Court's ruling and Avaya filed a motion for certification of an interlocutory appeal. The parties' motions were denied on April 26, 2012. Expert discovery on the Company's claims and the defendants' surviving counter-claims is completed, and in July 2012 the parties filed motions to exclude the opinion testimony of certain of each others' experts, which were denied without prejudice on August 28, 2012.  On August 17, 2012, defendants filed motions for partial summary judgment, seeking to dismiss the Company's claims for tortious interference with contractual relations and misappropriation of trade secrets, which were denied on October 26, 2012. The trial has been scheduled for September 9, 2013. With respect to Defendants' counterclaims, the Company cannot estimate the possible loss or range of possible loss, if any, as there are significant legal and factual issues to be resolved.   In the event Defendants ultimately succeed at trial and in subsequent appeals, any potential loss could be material as Defendants are claiming substantial damages.  Under the federal antitrust laws, defendants will be entitled to three times the amount of any actual damages awarded for lost profits, plus attorneys' fees and costs.  Defendants allege lost profit damages of up to $144 million before trebling, excluding attorneys' fees and costs.  The Company believes Defendants' counterclaims, including its damages calculations, are without merit and unsupported by the facts.  At this time an outcome cannot be predicted and, as a result, the Company cannot be assured that this case will not have a material adverse effect on the manner in which it does business, its financial position, results of operations, or cash flows.
Intellectual Property
In the ordinary course of business, the Company is involved in litigation alleging it has infringed upon third parties’ intellectual property rights, including patents; some litigation may involve claims for infringement against customers by third parties relating to the use of Avaya’s products, as to which the Company may provide indemnifications of varying scope to certain customers. These matters are on-going and the outcomes are subject to inherent uncertainties. As a result, the Company cannot be assured that any such matter will not have a material adverse effect on its financial position, results of operations or cash flows.
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. Defendants’ motion to dismiss plaintiffs’ complaint was denied on April 30, 2012. 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.

25

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, 2012
$
16

Reductions for payments and costs to satisfy claims
(12
)
Accruals for warranties issued during the period
12

Balance as of June 30, 2013
$
16

Guarantees of Indebtedness and Other Off-Balance Sheet Arrangements
Letters of Credit
As of June 30, 2013, the Company had outstanding an aggregate of $121 million in irrevocable letters of credit which ensure the Company's performance or payment to third parties.  Included in this amount is $76 million issued under its $535 million committed revolving credit facilities, which facilities are available through October 26, 2016.  Also included is $45 million of letters of credit issued under uncommitted facilities.
Surety Bonds
The Company arranges for the issuance of various types of surety bonds, such as license, permit, bid and performance bonds, which are agreements under which the surety company guarantees that the Company will perform in accordance with contractual or legal obligations. These bonds vary in duration although most are issued and outstanding from 3 months to 3 years. These bonds are backed by $12 million of the Company’s letters of credit. If the Company fails to perform under its obligations, the maximum potential payment under these surety bonds is $11 million as of June 30, 2013. Historically, no surety bonds have been drawn upon.
Purchase Commitments and Termination Fees
The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and to help assure adequate component supply, the Company enters into agreements with contract manufacturers and suppliers that allow them to produce and procure inventory based upon forecasted requirements provided by the Company. If the Company does not meet these specified purchase 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 expire in July and August of 2014. After the initial term, the outsourcing agreements are automatically renewed for successive periods of twelve months each, subject to specific termination rights for the Company and the contract manufacturers. All manufacturing of the Company’s products is performed in accordance with either detailed requirements or specifications and product designs furnished by the Company, and is subject to rigorous quality control standards.
Product Financing Arrangements
The Company sells products to various resellers that may obtain financing from certain unaffiliated third-party lending institutions. For the Company’s product financing arrangement with resellers outside the U.S., in the event participating resellers default on their payment obligations to the lending institution, the Company is obligated under certain circumstances to guarantee repayment to the lending institution. The repayment amount fluctuates with the level of product financing activity. The guaranteed repayment amount was approximately $3 million as of June 30, 2013. The Company reviews and sets the maximum credit limit for each reseller participating in this financing arrangement. Historically, there have not been any guarantee repayments by the Company. The Company has estimated the fair value of this guarantee as of June 30, 2013, and has determined that it is not significant. There can be no assurance that the Company will not be obligated to repurchase inventory under this arrangement in the future.

26

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 $41 million in awards were outstanding as of June 30, 2013. 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 June 30, 2013, 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 7, “Financing Arrangements,” the Company has agreed to indemnify the third-party lending institutions for costs incurred by the institutions related to changes in tax law or other legal requirements. While there have been no amounts paid to the lenders pursuant to this indemnity in the past, there can be no assurance that the Company will not be obligated to indemnify the lenders under this arrangement in the future. As of June 30, 2013, 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 determine the maximum potential amount of other future payments, if any, that it could be required to make under this agreement.
The Tax Sharing Agreement governs Alcatel-Lucent’s and the Company’s respective rights, responsibilities and obligations after the distribution with respect to taxes for the periods ending on or before the distribution. Generally, pre-distribution taxes or benefits that are clearly attributable to the business of one party will be borne solely by that party, and other pre-distribution taxes or benefits will be shared by the parties based on a formula set forth in the Tax Sharing Agreement. The Company may be subject to additional taxes or benefits pursuant to the Tax Sharing Agreement related to future settlements of audits by state and local and foreign taxing authorities for the periods prior to the Company’s separation from Alcatel-Lucent.

27

15.
Guarantor—Non Guarantor financial information
Borrowings by Avaya Inc. under the Cash Flow Credit Agreement are jointly and severally, fully, and unconditionally guaranteed (subject to certain customary release provisions) by substantially all wholly owned U.S. subsidiaries of Avaya Inc. (collectively, the “Guarantor Subsidiaries”) and Parent. Each of the Guarantor Subsidiaries is 100% owned, directly or indirectly by Avaya Inc. The 7% Senior Secured Notes, the 9% Senior Secured Notes, the 10.50% Senior Secured Notes and the senior unsecured notes issued by Avaya Inc. are jointly and severally, fully and unconditionally guaranteed by the Guarantor Subsidiaries. None of the other subsidiaries of Avaya Inc., either directly or indirectly, guarantees the Cash Flow Credit Agreement, the 7% Senior Secured Notes, the 9% Senior Secured Notes, the 10.50% Senior Secured Notes and the senior unsecured notes (“Non-Guarantor Subsidiaries”).
Avaya Inc. and each of the Guarantor Subsidiaries are authorized to borrow under the Cash Flow Credit Agreement. Borrowings under that facility are jointly and severally, fully, and unconditionally guaranteed by Avaya Inc. and the Guarantor Subsidiaries (subject to certain customary release provisions). Additionally, these borrowings are fully and unconditionally guaranteed by Parent.
The 7% Senior Secured Notes, the 9% Senior Secured Notes and the related guarantees are secured equally and ratably (other than with respect to real estate) with the Cash Flow Credit Agreement and any future first lien obligations by (i) a first-priority lien on substantially all of Avaya Inc.’s and the Guarantor Subsidiaries’ assets, other than (x) any real estate and (y) collateral that secures the senior secured multi-currency asset based revolving credit facility on a first-priority basis (the “ABL Priority Collateral”), and (ii) a second-priority lien on the ABL Priority Collateral, subject to certain limited exceptions.
The 10.50% Senior Secured Notes and the related guarantees are secured equally and ratably on a junior priority basis to the ABL Credit Agreement, the Cash Flow Credit Agreement, the 7% Senior Secured Notes, the 9% Senior Secured Notes and any future senior obligations by a junior priority lien on substantially all of the Company's and the Guarantor Subsidiaries' assets, other than real estate.
The following tables present for Avaya Inc., the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and Intercompany Eliminations the results of operations and comprehensive income (loss) for the three and nine months ended June 30, 2013 and 2012, financial position as of June 30, 2013 and September 30, 2012 and cash flows for the nine months ended June 30, 2013 and 2012 to arrive at the information for Avaya Inc. on a consolidated basis.

28

Supplemental Condensed Consolidating Schedule of Operations and Comprehensive (Loss) Income

 
Three Months Ended June 30, 2013
In millions
Avaya
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
REVENUE
$
646

 
$
82

 
$
530

 
$
(108
)
 
$
1,150

COST
289

 
53

 
289

 
(108
)
 
523

GROSS PROFIT
357

 
29

 
241

 
—

 
627

OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
Selling, general and administrative
152

 
13

 
215

 
—

 
380

Research and development
63

 
2

 
47

 
—

 
112

Amortization of intangible assets
52

 
1

 
4

 
—

 
57

Restructuring and impairment charges, net
28

 
—

 
35

 
—

 
63

Acquisition-related costs
1

 
—

 
—

 
—

 
1

 
296

 
16

 
301

 
—

 
613

OPERATING INCOME (LOSS)
61

 
13

 
(60
)
 
—

 
14

Interest expense
(122
)
 
—

 
—

 
—

 
(122
)
Other income (expense), net
2

 
1

 
(8
)
 
—

 
(5
)
(LOSS) INCOME BEFORE INCOME TAXES
(59
)
 
14

 
(68
)
 
—

 
(113
)
Benefit from (provision for) income taxes
22

 
—

 
(19
)
 
—

 
3

Equity in net income (loss) of consolidated subsidiaries
(73
)
 
—

 
—

 
73

 
—

NET (LOSS) INCOME
$
(110
)
 
$
14

 
$
(87
)
 
$
73

 
$
(110
)
Comprehensive (loss) income
$
(87
)
 
$
14

 
$
(106
)
 
$
92

 
$
(87
)

29

Supplemental Condensed Consolidating Schedule of Operations and Comprehensive Loss

 
Three Months Ended June 30, 2012
In millions
Avaya
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
REVENUE
$
663

 
$
96

 
$
615

 
$
(124
)
 
$
1,250

COST
358

 
68

 
325

 
(124
)
 
627

GROSS PROFIT
305

 
28

 
290

 
—

 
623

OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
Selling, general and administrative
153

 
22

 
230

 
—

 
405

Research and development
63

 
3

 
50

 
—

 
116

Amortization of intangible assets
52

 
1

 
4

 
—

 
57

Restructuring and impairment charges, net
9

 
1

 
11

 
—

 
21

Acquisition-related costs
1

 
—

 
—

 
—

 
1

 
278

 
27

 
295

 
—

 
600

OPERATING INCOME (LOSS)
27

 
1

 
(5
)
 
—

 
23

Interest expense
(103
)
 
(4
)
 
—

 
—

 
(107
)
Other (expense) income, net
(5
)
 
—

 
11

 
—

 
6

(LOSS) INCOME BEFORE INCOME TAXES
(81
)
 
(3
)
 
6

 
—

 
(78
)
Provision for income taxes
(13
)
 
—

 
(75
)
 
—

 
(88
)
Equity in net loss of consolidated subsidiaries
(72
)
 
—

 
—

 
72

 
—

NET LOSS
$
(166
)
 
$
(3
)
 
$
(69
)
 
$
72

 
$
(166
)
Comprehensive loss
$
(246
)
 
$
(3
)
 
$
(56
)
 
$
59

 
$
(246
)


30

Supplemental Condensed Consolidating Schedule of Operations and Comprehensive (Loss) Income
 
 
Nine Months Ended June 30, 2013
In millions
Avaya
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
REVENUE
$
1,924

 
$
246

 
$
1,698

 
$
(360
)
 
$
3,508

COST
940

 
162

 
887

 
(360
)
 
1,629

GROSS PROFIT
984

 
84

 
811

 
—

 
1,879

OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
Selling, general and administrative
437

 
62

 
646

 
—

 
1,145

Research and development
193

 
5

 
145

 
—

 
343

Amortization of intangible assets
156

 
3

 
12

 
—

 
171

Goodwill impairment
89

 
—

 
—

 
—

 
89

Restructuring and impairment charges, net
51

 
3

 
111

 
—

 
165

Acquisition-related costs
1

 
—

 
—

 
—

 
1

 
927

 
73

 
914

 
—

 
1,914

OPERATING INCOME (LOSS)
57

 
11

 
(103
)
 
—

 
(35
)
Interest expense
(337
)
 
(9
)
 
—

 
—

 
(346
)
Loss on extinguishment of debt
(6
)
 
—

 
—

 
—

 
(6
)
Other (expense) income, net
(16
)
 
—

 
7

 
—

 
(9
)
(LOSS) INCOME BEFORE INCOME TAXES
(302
)
 
2

 
(96
)
 
—

 
(396
)
Benefit from (provision for) income taxes
49

 
—

 
(40
)
 
—

 
9

Equity in net income (loss) of consolidated subsidiaries
(134
)
 
—

 
—

 
134

 
—

NET LOSS
$
(387
)
 
$
2

 
$
(136
)
 
$
134

 
$
(387
)
Comprehensive (loss) income
$
(367
)
 
$
2

 
$
(174
)
 
$
172

 
$
(367
)

31

Supplemental Condensed Consolidating Schedule of Operations and Comprehensive Loss
 
 
Nine Months Ended June 30, 2012
In millions
Avaya
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
REVENUE
$
2,160

 
$
294

 
$
1,947

 
$
(507
)
 
$
3,894

COST
1,184

 
199

 
1,078

 
(507
)
 
1,954

GROSS PROFIT
976

 
95

 
869

 
—

 
1,940

OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
Selling, general and administrative
499

 
71

 
682

 
—

 
1,252

Research and development
189

 
10

 
145

 
—

 
344

Amortization of intangible assets
155

 
3

 
11

 
—

 
169

Restructuring charges, net
25

 
2

 
105

 
—

 
132

Acquisition-related costs
4

 
—

 
—

 
—

 
4

 
872

 
86

 
943

 
—

 
1,901

OPERATING INCOME (LOSS)
104

 
9

 
(74
)
 
—

 
39

Interest expense
(309
)
 
(14
)
 
(1
)
 
—

 
(324
)
Other expense, net
(5
)
 
—

 
(2
)
 
—

 
(7
)
LOSS BEFORE INCOME TAXES
(210
)
 
(5
)
 
(77
)
 
—

 
(292
)
Provision for income taxes
(11
)
 
—

 
(51
)
 
—

 
(62
)
Equity in net loss of consolidated subsidiaries
(133
)
 
—

 
—

 
133

 
—

NET LOSS
$
(354
)
 
$
(5
)
 
$
(128
)
 
$
133

 
$
(354
)
Comprehensive loss
$
(382
)
 
$
(5
)
 
$
(100
)
 
$
105

 
$
(382
)


32

Supplemental Condensed Consolidating Balance Sheet
 
 
June 30, 2013
In millions
Avaya
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
51

 
$
16

 
$
204

 
$
—

 
$
271

Accounts receivable, net—external
274

 
32

 
356

 
—

 
662

Accounts receivable—internal
865

 
29

 
121

 
(1,015
)
 
—

Inventory
126

 
5

 
125

 
—

 
256

Deferred income taxes, net
—

 
—

 
17

 
—

 
17

Other current assets
91

 
33

 
143

 
—

 
267

Internal notes receivable, current
1,498

 
167

 
—

 
(1,665
)
 
—

TOTAL CURRENT ASSETS
2,905

 
282

 
966

 
(2,680
)
 
1,473

Property, plant and equipment, net
212

 
20

 
122

 
—

 
354

Deferred income taxes, net
1

 
—

 
47

 
—

 
48

Intangible assets, net
1,354

 
30

 
170

 
—

 
1,554

Goodwill
3,988

 
—

 
104

 
—

 
4,092

Other assets
155

 
4

 
22

 
—

 
181

Investment in consolidated subsidiaries
—

 
2

 
30

 
(32
)
 
—

TOTAL ASSETS
$
8,615

 
$
338

 
$
1,461

 
$
(2,712
)
 
$
7,702

LIABILITIES
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Debt maturing within one year—external
$
35

 
$
—

 
$
—

 
$
—

 
$
35

Debt maturing within one year—internal
175

 
391

 
1,099

 
(1,665
)
 
—

Accounts payable—external
227

 
17

 
166

 
—

 
410

Accounts payable—internal
121

 
7

 
887

 
(1,015
)
 
—

Payroll and benefit obligations
99

 
8

 
125

 
—

 
232

Deferred revenue
523

 
11

 
129

 
—

 
663

Business restructuring reserve, current portion
29

 
3

 
87

 
—

 
119

Other current liabilities
174

 
4

 
94

 
—

 
272

TOTAL CURRENT LIABILITIES
1,383

 
441

 
2,587

 
(2,680
)
 
1,731

Long-term debt
6,059

 
—

 
—

 
—

 
6,059

Pension obligations
1,146

 
—

 
502

 
—

 
1,648

Other postretirement obligations
325

 
—

 
—

 
—

 
325

Deferred income taxes, net
193

 
—

 
25

 
—

 
218

Business restructuring reserve, non-current portion
20

 
1

 
41

 
—

 
62

Other liabilities
182

 
19

 
255

 
—

 
456

Deficiency in consolidated subsidiaries
2,104

 
—

 
—

 
(2,104
)
 
—

TOTAL NON-CURRENT LIABILITIES
10,029

 
20

 
823

 
(2,104
)
 
8,768

TOTAL DEFICIENCY
(2,797
)
 
(123
)
 
(1,949
)
 
2,072

 
(2,797
)
TOTAL LIABILITIES AND DEFICIENCY
$
8,615

 
$
338

 
$
1,461

 
$
(2,712
)
 
$
7,702


33

Supplemental Condensed Consolidating Balance Sheet
 
 
September 30, 2012
In millions
Avaya
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
101

 
$
10

 
$
226

 
$
—

 
$
337

Accounts receivable, net—external
326

 
39

 
417

 
—

 
782

Accounts receivable—internal
782

 
66

 
164

 
(1,012
)
 
—

Inventory
131

 
6

 
118

 
—

 
255

Deferred income taxes, net
—

 
—

 
18

 
—

 
18

Other current assets
150

 
30

 
72

 
—

 
252

Internal notes receivable, current
1,467

 
147

 
—

 
(1,614
)
 
—

TOTAL CURRENT ASSETS
2,957

 
298

 
1,015

 
(2,626
)
 
1,644

Property, plant and equipment, net
222

 
24

 
118

 
—

 
364

Deferred income taxes, net
—

 
—

 
43

 
—

 
43

Intangible assets, net
1,546

 
33

 
196

 
—

 
1,775

Goodwill
4,082

 
—

 
106

 
—

 
4,188

Other assets
150

 
5

 
25

 
—

 
180

Investment in consolidated subsidiaries
—

 
—

 
27

 
(27
)
 
—

TOTAL ASSETS
$
8,957

 
$
360

 
$
1,530

 
$
(2,653
)
 
$
8,194

LIABILITIES
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Debt maturing within one year—external
$
37

 
$
—

 
$
—

 
$
—

 
$
37

Debt maturing within one year—internal
151

 
368

 
1,095

 
(1,614
)
 
—

Accounts payable—external
235

 
18

 
185

 
—

 
438

Accounts payable—internal
123

 
49

 
840

 
(1,012
)
 
—

Payroll and benefit obligations
81

 
13

 
168

 
—

 
262

Deferred revenue
523

 
7

 
86

 
—

 
616

Business restructuring reserve, current portion
5

 
4

 
75

 
—

 
84

Other current liabilities
261

 
4

 
37

 
—

 
302

TOTAL CURRENT LIABILITIES
1,416

 
463

 
2,486

 
(2,626
)
 
1,739

Long-term debt
6,084

 
—

 
—

 
—

 
6,084

Pension obligations
1,271

 
—

 
492

 
—

 
1,763

Other postretirement obligations
360

 
—

 
—

 
—

 
360

Deferred income taxes, net
182

 
—

 
22

 
—

 
204

Business restructuring reserve, non-current portion
22

 
1

 
28

 
—

 
51

Other liabilities
137

 
22

 
270

 
—

 
429

Deficiency in consolidated subsidiaries
1,921

 
3

 
—

 
(1,924
)
 
—

TOTAL NON-CURRENT LIABILITIES
9,977

 
26

 
812

 
(1,924
)
 
8,891

TOTAL DEFICIENCY
(2,436
)
 
(129
)
 
(1,768
)
 
1,897

 
(2,436
)
TOTAL LIABILITIES AND DEFICIENCY
$
8,957

 
$
360

 
$
1,530

 
$
(2,653
)
 
$
8,194



34

Supplemental Condensed Consolidating Schedule of Cash Flows
 
 
Nine Months Ended June 30, 2013
In millions
Avaya
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(387
)
 
$
2

 
$
(136
)
 
$
134

 
$
(387
)
Adjustments to reconcile net (loss) income to net cash provided by operating activities
381

 
8

 
39

 
—

 
428

Changes in operating assets and liabilities
(60
)
 
(3
)
 
121

 
—

 
58

Equity in net income (loss) of consolidated subsidiaries
134

 
—

 
—

 
(134
)
 
—

NET CASH PROVIDED BY OPERATING ACTIVITIES
68

 
7

 
24

 
—

 
99

INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Capital expenditures
(31
)
 
—

 
(47
)
 
—

 
(78
)
Capitalized software development costs
(10
)
 
(2
)
 
—

 
—

 
(12
)
Acquisition of businesses, net of cash acquired
(1
)
 
—

 
—

 
—

 
(1
)
Proceeds from sale of long-lived assets
8

 
—

 
4

 
—

 
12

Proceeds from sale of investments
—

 
—

 
1

 
—

 
1

Advance to Parent
(10
)
 
—

 
—

 
—

 
(10
)
Other investing activities, net
(1
)
 
—

 
—

 
—

 
(1
)
NET CASH USED FOR INVESTING ACTIVITIES
(45
)
 
(2
)
 
(42
)
 
—

 
(89
)
FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Proceeds from 9% senior secured notes
290

 
—

 
—

 
—

 
290

Repayment of term B-5 loans
(284
)
 
—

 
—

 
—

 
(284
)
Proceeds from term B-5 loans
589

 
—

 
—

 
—

 
589

Repayment of term B-1 loans
(584
)
 
—

 
—

 
—

 
(584
)
Debt issuance and third-party debt modification costs
(49
)
 
—

 
—

 
—

 
(49
)
Repayment of long-term debt
(28
)
 
—

 
—

 
—

 
(28
)
Net (repayments) borrowings of intercompany debt
(7
)
 
3

 
4

 
—

 
—

Other financing activities, net
—

 
(2
)
 
—

 
—

 
(2
)
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES
(73
)
 
1

 
4

 
—

 
(68
)
Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
(8
)
 
—

 
(8
)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(50
)
 
6

 
(22
)
 
—

 
(66
)
Cash and cash equivalents at beginning of period
101

 
10

 
226

 
—

 
337

Cash and cash equivalents at end of period
$
51

 
$
16

 
$
204

 
$
—

 
$
271


35

Supplemental Condensed Consolidating Schedule of Cash Flows
 
 
Nine Months Ended June 30, 2012
In millions
Avaya
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Intercompany
Eliminations
 
Consolidated
OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Net loss
$
(354
)
 
$
(5
)
 
$
(128
)
 
$
133

 
$
(354
)
Adjustments to reconcile net loss to net cash (used for) provided by operating activities
391

 
9

 
78

 
—

 
478

Changes in operating assets and liabilities
(202
)
 
8

 
10

 
—

 
(184
)
Equity in net loss of consolidated subsidiaries
133

 
—

 
—

 
(133
)
 
—

NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES
(32
)
 
12

 
(40
)
 
—

 
(60
)
INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Capital expenditures
(27
)
 
(1
)
 
(32
)
 
—

 
(60
)
Capitalized software development costs
(30
)
 
—

 
—

 
—

 
(30
)
Acquisition of businesses, net of cash acquired
(1
)
 
—

 
(211
)
 
—

 
(212
)
Proceeds from sale of long-lived assets
2

 
—

 
—

 
—

 
2

Proceeds from sale of investments
7

 
—

 
66

 
—

 
73

Restricted cash
(1
)
 
—

 
1

 
—

 
—

Advance to Parent
(8
)
 
—

 
—

 
—

 
(8
)
Investment in subsidiary
(218
)
 
—

 
—

 
218

 
—

Other investing activities, net
(2
)
 
—

 
—

 
—

 
(2
)
NET CASH USED FOR INVESTING ACTIVITIES
(278
)
 
(1
)
 
(176
)
 
218

 
(237
)
FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
 
Repayment of long-term debt
(28
)
 
—

 
—

 
—

 
(28
)
Capital contribution from Parent
196

 
—

 
—

 
—

 
196

Capital contribution from Avaya Inc.
—

 
—

 
218

 
(218
)
 
—

Borrowings under revolving credit facility
60

 
—

 
—

 
—

 
60

Repayments of borrowings under revolving credit facility
(60
)
 
—

 
—

 
—

 
(60
)
Net borrowings (repayments) of intercompany debt
30

 
(10
)
 
(20
)
 
—

 
—

Other financing activities, net
—

 
(1
)
 
—

 
—

 
(1
)
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES
198

 
(11
)
 
198

 
(218
)
 
167

Effect of exchange rate changes on cash and cash equivalents
—

 
—

 
1

 
—

 
1

NET DECREASE IN CASH AND CASH EQUIVALENTS
(112
)
 
—

 
(17
)
 
—

 
(129
)
Cash and cash equivalents at beginning of period
149

 
12

 
239

 
—

 
400

Cash and cash equivalents at end of period
$
37

 
$
12

 
$
222

 
$
—

 
$
271



36

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 June 30, 2013 and for the three and nine months ended June 30, 2013 and 2012 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission, or the SEC, for interim financial statements, and should be read in conjunction with our consolidated financial statements and other financial information for the fiscal year ended September 30, 2012, which were included in our Annual Report on Form 10-K filed with the SEC on December 12, 2012. In our opinion, the unaudited interim consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated.
Certain prior period amounts have been reclassified to conform to the current interim period presentation. The consolidated results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire fiscal year.

Overview
We are a leading global provider of real-time business collaboration and communications products and services that bring people together with the right information at the right time in the right context, enabling businesses to improve their efficiency and quickly solve critical business challenges. Our products are designed to enable business users to work together more effectively internally and with their customers and suppliers, to accelerate decision-making and achieve business outcomes. These industry leading solutions are also designed to be flexible, reliable and secure, enabling simplified management and cost reduction while providing a platform for next-generation collaboration from Avaya.
We are highly focused on serving our core business collaboration and communications markets with open and unifying, fit-for-purpose solutions and distributed software services and support models. We shape our portfolio to meet the demands of customers today and in the future.
Our products and services are aimed at large enterprises, small- and mid-sized businesses and government organizations. We offer products in three key business collaboration and communications categories:
•
Real-Time Collaboration, Video and Unified Communications Software, Infrastructure and Endpoints for an increasingly mobile workforce;
•
Customer Experience Interaction Management, including Contact Center applications; and
•
Networking for data center, campus, branch, and wireless access to complement our business collaboration, unified communications and contact center portfolios.
These three categories are supported by Avaya’s portfolio of services including product support, integration, and professional and managed services. These services enable customers to optimize and manage their communications networks worldwide and achieve enhanced business results.
Acquisition of RADVISION Ltd.
On June 5, 2012, Avaya acquired RADVISION Ltd. (“Radvision”) for $230 million in cash. Radvision is a global provider of videoconferencing and telepresence technologies over internet protocol (“IP”) and wireless networks.
Through this acquisition, Avaya expands its technology portfolio and provides customers a highly integrated and interoperable suite of cost-effective, easy to use, high-definition video collaboration products, with the ability to inter-operate with multiple mobile devices including Apple iPad and Google Android. We have begun to integrate Radvision’s enterprise video infrastructure and high value endpoints with Avaya’s award winning Avaya Aura® Unified Communications platform to create a compelling and differentiated solution designed to accelerate the adoption of video collaboration. Radvision brings to Avaya a portfolio that includes a full range of videoconferencing products, technologies and expertise serving large enterprises, small businesses, and service providers. It includes standards-based applications, open infrastructure and endpoints for ad-hoc and scheduled videoconferencing with room-based systems, desktop, and mobile consumer devices. The integrated Avaya and

37

Radvision portfolios will extend intra-company business to business and business to consumer video communications, and also support internal “Bring Your Own Device” (“BYOD”) initiatives. See discussion in Note 3, “Business Combinations,” to our unaudited interim consolidated financial statements for further details.

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”). See discussion in Note 1, “Background, Merger and Basis of Presentation - Merger,” to our unaudited interim consolidated financial statements for further details.
On June 9, 2011, Parent filed with the SEC a registration statement on Form S-1 (as it may be amended from time to time, the “registration statement”) relating to a proposed initial public offering of its common stock. As contemplated in the registration statement, the net proceeds of the proposed offering are expected to be used, 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 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.
Refinancing of Debt
During the six months ended March 31, 2013, the Company completed a series of transactions which allowed the Company to refinance (1) all of its senior secured term B-1 loans ("term B-1 loans") outstanding under its senior secured credit facility originally due October 26, 2014, and (2) $642 million of its 9.75% senior unsecured cash-pay notes and $742 million of its senior unsecured paid-in-kind ("PIK") toggle notes each originally due November 1, 2015 (collectively, the "Old Notes").
Long-term debt consists of the following:
In millions
June 30,
2013
 
September 30,
2012
Variable rate senior secured term B-1 loans due October 26, 2014
$
—

 
$
1,434

Variable rate senior secured term B-3 loans due October 26, 2017
2,133

 
2,152

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

 
—

Variable rate senior secured term B-5 loans due March 31, 2018
1,144

 
—

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

 
1,009

9% senior secured notes due April 1, 2019
290

 
—

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

 
—

9.75% senior unsecured cash pay notes due November 1, 2015
58

 
700

10.125%/10.875% senior unsecured PIK toggle notes due November 1, 2015
92

 
834

Unaccreted discount
(17
)
 
(8
)
 
6,094

 
6,121

Debt maturing within one year
(35
)
 
(37
)
Long-term debt
$
6,059

 
$
6,084


During the three months ended December 31, 2012, the Company completed three transactions which allowed the Company to refinance $848 million of its term B-1 loans. On October 29, 2012 the Company completed an amendment and restatement of the senior secured credit facility and senior secured multi-currency asset-based revolving credit facility along with the extension of the maturity date of $135 million aggregate principal amount of term B-1 loans from October 26, 2014 to October 26, 2017 by converting such loans into a new tranche of senior secured term B-4 loans ("term B-4 loans"). On December 21, 2012 the Company completed an amendment and restatement of the senior secured credit facility along with the extension of the maturity date of $713 million aggregate principal amount of term B-1 loans from October 26, 2014 to March 31, 2018 and $134 million aggregate principal amount of term B-4 loans from October 26, 2017 to March 31, 2018 in each case by converting such loans into a new tranche of senior secured term B-5 loans ("term B-5 loans"). On December 21, 2012 the

38

Company issued $290 million of 9% senior secured notes due April 2019 (the "9% Senior Secured Notes"), the proceeds of which were used to repay $284 million principal amount of term B-5 loans and to pay related fees and expenses.
On March 7, 2013, the Company completed an exchange offer in which $1,384 million of Old Notes were exchanged for $1,384 million of senior secured notes due 2021 (the "10.50% Senior Secured Notes"). The 10.50% Senior Secured Notes were issued at par, bear interest at a rate of 10.50% per annum and mature on March 1, 2021.
On March 12, 2013 the Company refinanced the remaining $584 million of its term B-1 loans with the cash proceeds from the issuance of $589 million aggregate principal amount of term B-5 loans due March 31, 2018 under its senior secured credit facility.
In connection with the amendments and restatements of the senior secured credit facility necessary to effectuate the transactions described above, the applicable interest rate for the portion of the term B-1 loans that were converted into term B-4 loans and term B-5 loans was also changed. The weighted average interest rate of the Company's outstanding debt as of September 30, 2012 and June 30, 2013 was 6.1% and 7.4%, respectively excluding the impact of the interest rate swaps described in Note 8, "Derivatives and Other Financial Instruments" to our unaudited interim consolidated financial statements.
The Company incurred $49 million in debt issuance and debt modification costs in connection with the debt refinancing transactions during the nine months ended June 30, 2013, of which $18 million was expensed as incurred and included in Other Income, net and $31 million was deferred and is being amortized over the term of the related debt.
Both the 9% Senior Secured Notes and the 10.50% Senior Secured Notes have not been, and will not be, registered under the Securities Act or applicable State securities laws and may not be offered or sold absent registration under the Securities Act or applicable State securities laws or applicable exemptions from registration requirements.

Annual maturities of debt, based on our debt profile as of June 30, 2013 and September 30, 2012, for the next five years ending September 30th and thereafter consist of:
In millions
June 30, 2013
 
September 30, 2012
2013
$
9

 
$
38

2014
38

 
38

2015
53

 
1,442

2016
174

 
1,542

2017
38

 
23

2018 and thereafter
5,799

 
3,046

Total
$
6,111

 
$
6,129

See Note 7, “Financing Arrangements” to our unaudited interim consolidated financial statements for further details.
Major Business Areas
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”).

Our Products
 
We offer products in three key business collaboration and communications categories:
•
Real-Time Collaboration, Video and Unified Communications Software, Infrastructure and Endpoints for an increasingly mobile workforce;
•
Customer Experience Management, including Contact Center applications; and
•
Networking for data center, campus, branch, and wireless access to complement our business collaboration, unified communications and contact center portfolios.
Our products are designed to meet the diverse needs of small and mid-size businesses, as well as large enterprises and government customers. The majority of our product portfolio is comprised of software products that reside on either a client or server. Client software resides on both our own and third-party devices, including desk phones, tablets, desktop PCs and mobile phones. Server-side software controls communication and collaboration for the enterprise, and delivers rich value-added applications such as messaging, telephony, voice, video and web conferencing, mobility and customer service. Hardware

39

includes a broad range of desk phones, servers and gateways and LAN/WAN switching wireless access points and gateways. A portion of the portfolio has been subjected to rigorous interoperability and security testing and is approved for acquisition by the US Government. Avaya’s portfolio of services includes product support, integration, and professional and managed services that enable customers to optimize and manage their communications networks worldwide and achieve enhanced business results.  We also provide a variety of cloud options for customers across our Unified Communications, Contact Center and Video product offers, enabling them to select the optimal option to meet their business objectives. Our cloud solutions provide flexibility and increase business agility with demand-based scalability and rapid application deployment. Our cloud and managed services also optimize costs, allowing organizations to shift from capital expense models to operating expense models and minimizing cost of upgrades and maintenance. Complexity is reduced with standardization of systems and practices and simplification of upgrades and changes.
Real-Time Collaboration, Video and Unified Communications
Enterprises of all sizes depend on Avaya for unified communications products and technology that help improve efficiency, collaboration and competitiveness. Our people-centric products integrate voice, video and data, enabling users to communicate and collaborate in real-time, in the mode best suited to each interaction. This eliminates inefficiencies in communications to help make organizations more productive and responsive.
Video and Conferencing
Avaya helps enable faster, more effective collaboration inside the enterprise and externally with conferencing products for desktops, meeting rooms and mobile devices.
 
•
Radvision Scopia is a standards-based portfolio of hardware and software products that includes conference room systems, desktop and mobile video conferencing and infrastructure and management (see “—Platforms, Infrastructure and Phones below for more information).
Radvision Scopia High Definition (HD) video conferencing room systems incorporate state-of-the-art video technology with capabilities required to support today’s room system deployments. The Radvision Scopia XT5000 is ideal for large conference rooms, while the Radvision Scopia XT4200 is specifically designed for the needs of smaller and mid-sized conference rooms. We also offer desktop clients from the software Radvision Scopia Desktop to the Radvision Scopia XT Executive 240. These advanced HD personal video conferencing endpoints are cost effective for expanding the reach of the video deployment beyond the conference room.
Radvision Scopia Mobile extends the Radvision Scopia product to the latest mobile devices providing applications for video conferencing, control and management via smartphones and tablets supporting Apple iOS and Google Android. Radvision Scopia products are used by institutions, enterprises and service providers to create high quality, easy-to-use voice, video, and data collaboration environments, regardless of the communication network—IP, session initiation protocol (SIP), 3G, 4G, H.323, integrated services digital networks (ISDN) or next generation integrated messaging systems (IMS). 
•
Avaya Aura Conferencing gives users one-touch control over collaboration. With it they can drag and drop contacts to start a conference, without dialing, switch between IM, email, voice, and video in one window and in one application, scroll and click on contacts with the ability to send invitations that automatically contain conference information and links, share content and desktops with a click of the “collaborate” button, and see who is in the conference, who just arrived and who is presenting.
•
The Avaya Flare Experience is an easy-to-use interface with one-click access to real-time, enterprise-wide audio, video, and web collaboration. The intuitive drag-and-drop experience integrates directories, contextual history, and more. During a conference, a user can manage everything with built-in controls, including the ability to click an icon to escalate from an audio call to point-to-point, or multi-party video, or start web collaboration, access contacts, enterprise directories, and preferences via the contact fan, share desktops, applications, or the whiteboard and take notes and minutes. The Avaya Flare Experience can be downloaded onto many consumer devices including Apple iPad, Apple iPhone and Windows-based PCs.
Communication and Messaging
Avaya applications deliver advanced enterprise communication and messaging tools to end users on their device of choice. Among others, Avaya offers Avaya one-X Unified Communications clients, which deliver software-based user experiences for consistent, enterprise-wide mobility and collaboration. Users can work from anywhere, using virtually any device, including desktop and laptop computers, tablets and smartphones—helping enterprises lower expenses, increase productivity, enhance business continuity, and streamline customer support.

40

•
Avaya one-X Communicator is ideal for users who communicate frequently, manage multiple calls, set up ad-hoc conferencing and need to be highly reachable. Avaya one-X Communicator provides users with access to unified communications capabilities including voice calling, audio conferencing, instant messaging and presence, corporate directories and communication logs. This software client can be deployed on desktop or laptop computers running either Microsoft Windows or Apple Mac operating systems, and is supported over Virtual Desktop Infrastructure (VDI) connections.
•
Avaya one-X Mobile enables users to access enterprise communications from a wide selection of mobile devices, including high-end smart phones and tablets. A choice of one-X Mobile clients is available for popular platforms including Apple iPhone, Google Android and RIM BlackBerry. Through integration with Avaya one-X Client Enablement Services, Avaya one-X Mobile users have access to a broad range of unified communications capabilities such as visual voicemail, corporate directory, aggregated presence, VIP lists and synchronized call logs and contacts. Avaya one-X Mobile gives users single number/single identity for both inbound and outbound calls, even when using personal devices.
•
Avaya Client Applications provide access to Avaya voice and video services from business applications such as Microsoft Lync, Microsoft Office Communications Server, Microsoft Outlook, Microsoft Office, IBM Sametime, and customer relationship management (CRM) applications such as Salesforce.com and Microsoft Dynamics.
In addition to the above, Avaya’s standards-based, IP unified messaging portfolio provides features such as call answering, voice messaging, and speech capabilities, each supporting specific business and end user needs.
Platforms, Infrastructure and Phones
Avaya’s feature-rich applications have at their foundation platforms and infrastructure products designed to support and strengthen them. In addition, Avaya’s product portfolio includes phones and other endpoints that are designed to showcase the benefits those applications provide to their users.
•
The Avaya Aura platform is at the core of many of our next-generation collaboration and communications products. Using this architecture, organizations can rapidly and cost-effectively deploy applications from a centralized data center to users on nearly any device or network. The Avaya Aura platform provides a simple means of connecting legacy, multi-vendor systems to new open standards SIP-based applications, helping enterprises to reduce costs and increase user productivity and choice simultaneously. We believe our Avaya Aura platform is one of the most reliable, secure and comprehensive offerings in the industry and that our commitment to open, standards-based products helps provide customers with the flexibility to be more efficient and successful.
The Avaya Aura platform uses virtualization technology across all applications to reduce the physical number of servers relative to existing offerings, reducing total cost of ownership for medium sized and large enterprises alike. The Avaya Aura portfolio provides collaboration and communication capabilities on a broad variety of operating systems, devices, desktop, laptop and tablet computers, smart phones, mobile devices and dedicated deskphones.
•
Avaya IP Office is our award-winning, flagship product for Small and Medium Enterprises, or SME, communications. Avaya IP Office simplifies processes and streamlines information exchange within systems. Communications capabilities can be added as needed. Avaya IP Office connects to both traditional and the latest IP lines to give growing companies flexibility and the ability to retain and leverage their existing investment. The latest version of Avaya IP Office (8.1) adds innovative capabilities to tap the full potential of next-generation collaboration, including new mobility, management and security features, as well increased scalability, which help SMEs efficiently and securely take advantage of BYOD environments and advanced mobility.
•
Avaya Aura Messaging gives users a rich set of features that increase their reachability, add new message notification options, and provide more ways to access and receive messages--all controlled using an intuitive web portal. Avaya Aura Messaging adapts to enterprise environments with flexible per-user message storage options, resiliency options and deployment options for consolidation, centralization and scale. Avaya Aura Messaging helps to enable smooth migrations from legacy voicemail systems, with choice of telephone user interface (TUI), and tools for migrations.
•
Avaya Agile Communication Environment (ACE) offers a rich set of web application programming interfaces, or APIs, that enable developers to integrate communications into other business applications (such as CRM, enterprise resource planning (ERP), business process management (BPM) and social application frameworks) and business processes (such as dynamic team formation, business continuity planning and customer engagements). For more policy-based style customization on enterprise communications, the Avaya ACE Foundation Toolkit offers Java application programming interfaces (APIs) to allow customers to build Java feature sets to influence the treatment of incoming and/or outbound communications leveraging the SIP architecture. These capabilities enable rapid development of custom applications, which helps reduce costs and increases flexibility for enterprises. Programmers with limited communications expertise can readily embed real-time communications in business applications and workflows,

41

expanding both the ability and opportunity to use Avaya collaboration capabilities. Avaya ACE provides a versatile platform for the members of Avaya DevConnect, our developer ecosystem, to build applications.
•
Avaya Session Border Controller (SBC) for Enterprise provides enhanced security for mobile collaboration allowing remote users to securely connect to the enterprise without the need of a virtual private network (VPN) connection, and protects SIP trunks from multiple threats.
•
Radvision Video Conferencing infrastructure includes Radvision Scopia Elite Multipoint Conferencing Units (MCUs), which 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 high definition deployment. In addition, gateways for Microsoft Lync and SIP provide connectivity and interoperability with unified communications products to standards-based video conferencing systems and infrastructure. Radvision Scopia Gateways are ideal for connecting IP video networks with ISDN and public switched telephone networks (PSTN) providing connectivity to ISDN endpoints and telephones.
In addition to the above, Radvision Scopia Management provides a comprehensive management product for voice and video collaboration, while Radvision Scopia ECS Gatekeeper is a high-performance, H.323 ECS (Enhanced Communication Server) Gatekeeper that provides intelligent, advanced backbone management for IP telephony and multimedia communication networks. Finally, Radvision’s eVident monitoring product helps enable enterprises and service providers to ensure network readiness before and after voice and video applications are deployed.
•
Endpoints are sold in a range of models that suit employees at every level, including IP and digital deskphones, digital enhanced cordless telecommunications (DECT) handsets, wireless phones, conference phones and the Avaya Desktop Video Device (ADVD).
Avaya Contact Center and Customer Experience Management
Avaya is a leader in the contact center market. The contact center portfolio provides a foundation for managing voice interactions that has been extended to include multiple channels supporting instant messaging, video, email and social media. Based on client engagements globally, we understand how to deliver world-class customer experience management to establish rich and informed relationships with customers. Our approach is based on two core principles:
•
Awareness, which is the application of relevant available contextual information for each customer; and
•
Persistent conversation, which connects all interactions with a customer into a seamless experience.
Avaya believes there are five components to effective Customer Experience Management. Each component delivers value to an organization, and, when combined, they help improve customer acquisition, increase customer retention, and growth, deliver high quality experiences and help enable efficient management. Avaya Contact Center products align along these five components:
•
Interaction, which involves connecting an enterprise with its end customers over their preferred media and modes such as web, social, mobile, voice and video. This also includes the desktop element that provides relevant information to agents and knowledge workers and facilitates collaboration across all the resources involved in delivering the customer experience. It includes products such as Customer Connections Mobile, Customer Connections Web, Social Media Manager, Automated Chat, One Touch Video, Avaya one-X Agent and Avaya Aura Agent Desktop.
•
Experience includes leveraging real-time awareness of customer needs, business policies and resource availability to determine the next best action and best resource to address the customer needs at the right time based on the target customer experience the organization wants to deliver. It also integrates inbound and outbound self service, agent selection and workflows with back-office processes and operations to enable this holistic customer experience. It includes products such as Intelligent Customer Routing, Dynamic Routing, Avaya Aura Call Center Elite Multichannel, Avaya Aura Contact Center, Avaya Interaction Center, Avaya Aura Experience Portal, Media Processing Server, Proactive Contact, Proactive Outreach Manager and Callback Assist.
•
Performance encompasses the collection, consolidation and analysis of data and information in order to gain insight into the customer experience and business performance. It includes reporting and analytics tools for improving overall workforce management, skills, efficiency and effectiveness. It includes products such as Avaya Call Management System, Avaya IQ, Avaya Operational Analyst, Speech Analytics, Call Recording, Quality Monitoring, Workforce Management, e-Learning and e-Coaching, Customer Feedback and Avaya Aura Performance Center.
•
Design includes open, standards-based tools for creating and managing applications and workflows that are integrated into back office processes, third party applications and customer databases. It includes products such as Avaya Aura Orchestration Designer and Application Enablement Services.
•
Management means enabling centralized management and administration for all the above systems, applications and resources within the framework as well as the ability to identify potential issues and perform root-cause analysis to

42

prevent system outages and performance degradation. It includes products such as Avaya Contact Center Control Manager.
Avaya Networking
In support of our data communications strategy, our networking product portfolio is designed to address and compete on the basis of three key requirements: resiliency, efficiency and performance.
Our networking portfolio is complementary to our unified communications and contact center portfolios based on the Avaya Aura architecture. We believe that customers today benefit from end-to-end product design, testing and support. Over time we expect customers to benefit from development work in integrated provisioning, system management, quality of experience and bandwidth utilization.
Our networking products focus on data center, campus, branch and wireless access networking, and we believe these products provide better support for real-time collaboration. Our networking portfolio includes:
•
Ethernet Switching-a range of Ethernet Switches for data center, core, edge and branch applications;
•
Unified Branch-a range of routers and virtual private network appliances that provide a secure connection for branches;
•
Wireless Networking-cost-effective and scalable products that enable enterprises to support wireless connectivity and services;
•
Access Control-products that enforce role- and policy-based access control to the network; and
•
Unified Management-providing support for data and voice networks by simplifying the requirements associated across functional areas.
Avaya leverages these hardware platforms to deliver a range of next-generation networking capabilities that are collectively offered under the Virtual Enterprise Network Architecture (VENA) banner. An end-to-end strategic framework, VENA helps simplify data center and campus networking and optimizes business applications and service deployments, while helping to reduce costs, improve time-to-service and enhance business agility.
We sell our portfolio of data networking products globally into enterprises of all types, with particular strength in healthcare, education, hospitality, financial services and local and state government.
Our Services
Avaya Global Services consult, enable, support, manage, optimize and even outsource enterprise communications services (applications and networks) to help customers achieve enhanced business results both directly and
through partners. Avaya’s award-winning portfolio of services enables customers to mitigate risk, reduce total cost of ownership, and optimize communication products for performance worldwide. Avaya Global Services is supported by patented design and management tools and network operations and technical support centers around the world. 
Avaya’s Global Services portfolio spans three types of services, Avaya Professional Services, Avaya Global Support Services, and Avaya Managed Services. Avaya Client Services is a business unit that encompasses both Avaya Global Support Services and Avaya Managed Services offers.
•
Avaya Professional Services (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, Avaya leverages 1,500 Avaya specialists in 37 countries, with over 1,000 industry certifications and an average of 15 to 20 years of experience. Avaya Professional Services executes more than 2,000 projects per month, in three core areas:
•
Enablement Services, providing access to expertise and resources for defining and deploying Avaya products that maximize technology potential and help assure they work as designed. Avaya Professional Services strives to exceed customers’ expectations by providing the greatest possible benefit for their investment.
•
Optimization Services, to help drive increased value and greater business results from customers’ existing technology. Leveraging best practices, Avaya consultants and solution architects analyze a communications environment in the context of customer business priorities and strategies, helping develop a communications business case, expected results and technical considerations.
•
Innovation Services, to help an organization leverage communications to reach new levels of business potential and market competiveness. Focused on leading technology and advanced services delivery, we offer a forward-thinking perspective to drive new business productivity, employee efficiency and superior levels of service. Our consultative approach and custom application services, from business planning through to execution and product integration, creates alignment with the customer’s specific business objectives.

43

•
Avaya Client Services (ACS) is a market-leading organization that supports, manages and optimizes enterprise communications networks to help customers mitigate risk, reduce total cost of ownership, and optimize product performance. ACS is supported by patented 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 provides a comprehensive suite of support options both directly and through partners to proactively resolve issues and improve uptime. Support offers and capabilities include, but are not limited to, 24x7 remote support, proactive remote monitoring, parts replacement and onsite response. Recent innovations include our new 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 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. All new support solutions are published to the web by our engineers, generally within 90 minutes of finding a resolution, adding value for customers by providing known solutions for potential issues rapidly. Most of our customers also benefit from real-time monitoring of diagnostic and system status to proactively identify potential issues to improves reliability, uptime and faster issue resolution.
•
Avaya Cloud and Managed Services, which provides IT Infrastructure Library (ITIL)-aligned, multivendor managed and outsourcing services for customers’ communications environments. Avaya can globally manage complex multi-vendor, multi-technology and aging networks with Service Level Agreements (SLAs) to help optimize network performance. With Avaya Managed services, Avaya can manage a customer’s mixed environment and gain the opportunity to upgrade it over time to the latest technology, at the pace and in an operational expense model that makes sense for the customer. Managed services can be procured in standard packages or in fully custom arrangements that include tailored SLAs, billing, and reporting and includes on-premises and other private cloud options.
Our Technology
We believe that technology enhances the way in which people collaborate. At Avaya, we work with customers, industry groups and technical bodies to foster innovation. Across our portfolio we leverage critical technology to our customers’ advantage. Avaya is a leading innovator in leveraging the use of SIP for business collaboration. This open-standards based protocol 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 fully-integrated, session-based interaction. This fundamental difference supports more fluid, effective and persistent collaboration across multiple media and modes of communications.
Centralized SIP-Based Architecture
At the core of our architecture, SIP based Avaya Aura Session Manager centralizes communications control and application integration. Avaya Aura Session Manager orchestrates a wide array of communication and collaboration applications and systems by decoupling them from the network. Applications 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. Avaya Aura Session Manager reduces complexity and provides the foundation for broader unified communications and collaboration strategies.
Unique SIP-Based Experiences
The Avaya Flare Experience leverages the Avaya Aura technology and its session control and management, presence, unified communications features and services, application creation and enablement capabilities. Social network interfaces to services, such as Facebook, allow for integrated directories across platforms. Users can access Microsoft Exchange services, such as e-mail, contacts and calendar, directly from a user’s contact card and, via the Avaya Aura Presence Services, can exchange instant message and presence information with Microsoft Lync users (i.e., Microsoft Communicator clients). Point-to-point video calls do not require a separate video conferencing server, and multi-party conferencing is enabled by Avaya Aura Conferencing.
 
Flexible Deployment Options
While Avaya’s unified communication offerings, including its comprehensive video portfolio and Avaya’s contact center solutions, have traditionally been deployed on a customer’s premise, the underlying distributed architecture enables a broader range of deployment options. Supporting customers looking to shift all or a portion of their communication and collaboration investment from capital expense to operating expense, Avaya’s unified communications and contact center solutions can be deployed in public, private, hybrid and managed cloud models by small to large enterprises and by cloud service providers. Further, through comprehensive monitoring technologies, these solutions can also be deployed as managed services.

44

Additional Technologies
In addition to SIP, we use technologies including:
•
SIP/SIMPLE and XMPP: the Avaya Aura Presence Services collects, publishes, aggregates and federates rich presence and enables instant messaging using SIP/SIMPLE and XMPP standards, providing interoperability with systems from other vendors, including but not limited to Microsoft, IBM and Google;
•
Platform Services: Avaya’s products are designed for extensibility, allowing customers, systems integrators, and independent software vendors (ISVs) using industry standard protocols and interfaces to develop new applications and to seamlessly integrate with the underlying capabilities of the communication and collaboration infrastructure;
•
Operating System, or OS, Support: our software applications run on a broad range of operating systems including, but not limited to, Microsoft Windows, Apple MAC OS, Google Android and RIM Blackberry;
•
High Quality/Low Bandwidth Video: Avaya’s Video solutions are able to deliver high quality video while minimizing bandwidth consumption and responding to adverse network conditions through the use of dual 1080p/60fps video channels, H.264 High Profile for bandwidth efficiency and cascading media to optimize bandwidth between sites and H.264 Scalable Video Coding (SVC) technology to maintain quality video during times of intermittent network congestion;
•
Virtualization Technology is used in our core Avaya Aura portfolio to reduce the physical server footprint using hypervisor technology to run multiple applications concurrently on a single physical platform;
•
Resilient data networking: our data portfolio provides highly resilient IPv4 and IPv6 routing services, with redundant hardware components, forwarding and restart capabilities that minimize interruptions, including one of the industry’s few sub second failover capabilities; and
•
Avaya believes that as WebRTC (web based real-time communication) standards continue to mature, WebRTC will be a key component of both unified communications and contact center solutions enabling broader access and simpler deployment models. Avaya has dedicated resources developing extensions to existing products and exploring new uses of this emerging technology.
Financial Results Summary
Our revenues for the nine months ended June 30, 2013 decreased 10% as compared to the corresponding period in the prior year. The decrease is primarily the result of lower customer spend on unified communications, contact center, and networking products in a cautious spending environment. During the nine months ended June 30, 2013, these factors impacting our product revenues also contributed to lower maintenance and professional services revenues. Further, the reduction in spending by government customers in the U.S. as a result of sequestration and budget cuts has also negatively impacted our product and services revenues.
During the nine months ended June 30, 2013, we experienced lower sales of our unified communications products, particularly gateways and legacy Nortel phones and platforms. We believe these declines are primarily attributable to customers delaying systems upgrades in a cautious spending environment. The decline in gateway sales may be in part impacted by better utilization of SIP technology, which enables our customers to do more with less hardware. We believe the decrease in our contact center product revenues is in part due to pricing pressures of the increasing competition in the marketplace as well as a growing market trend around Cloud consumption preferences with more customers exploring operating expense models as opposed to capital expense models for procuring services. We believe the market trend toward Cloud models will continue as customers seek ways of reducing their overhead and other costs.
The Company continues to identify opportunities to streamline its operations and generate cost savings which includes consolidating and exiting facilities and eliminating employee positions. During the nine months ended June 30, 2013, the Company incurred restructuring charges of $165 million which includes actions to eliminate employee positions primarily in EMEA and the U.S. and the future rental payments related to operating lease obligations associated with the unused space of our Frankfurt, Germany and certain other facilities. 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 loss for the nine months ended June 30, 2013 was $35 million as compared to operating income of $39 million for the nine months ended June 30, 2012, a decrease of $74 million. The decrease in operating income is primarily attributable to the decrease in revenues described above, the impact of an impairment charge to goodwill of $89 million and an increase in restructuring charges partially offset by the continued benefit from cost savings initiatives.
Operating (loss) income for the nine months ended June 30, 2013 and 2012 includes non-cash expenses for depreciation and amortization of $331 million and $426 million, goodwill impairment of $89 million and $0 and share-based compensation of $7 million and $7 million for each of the periods, respectively.

45

Net loss for the nine months ended June 30, 2013 and 2012 was $387 million and $354 million, respectively. The increase in our net loss is primarily attributable to the decrease in operating income as described above and costs incurred in connection with the modifications to certain credit facilities, partially offset by the impact of income taxes and higher foreign currency transaction gains for the nine months ended June 30, 2013 as compared to the nine months ended June 30, 2012.
Results From Operations
Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012
Revenue
Our revenue for the three months ended June 30, 2013 and 2012 was $1,150 million and $1,250 million, respectively, a decrease of $100 million or 8%. Incremental revenue from the Radvision business for three months ended June 30, 2013 and the period June 5, 2012 through June 30, 2012 was $16 million and $11 million, respectively. The following table sets forth a comparison of revenue by portfolio:
 
 
Three months ended June 30,
  
2013
 
2012
 
Percentage of Total Revenue
 
Yr. to Yr.
Percentage
Change
 
Yr. to Yr. Percentage
Change, net of Foreign
Currency Impact
Dollars in millions
2013
 
2012
 
GCS
$
497

 
$
561

 
43
%
 
45
%
 
-11
 %
 
-11
 %
Purchase accounting adjustments
(1
)
 
(1
)
 
0
%
 
0
%
 
(1) 

 
(1) 

Networking
64

 
74

 
6
%
 
6
%
 
-14
 %
 
-14
 %
Total ECS product revenue
560

 
634

 
49
%
 
51
%
 
-12
 %
 
-12
 %
AGS
590

 
616

 
51
%
 
49
%
 
-4
 %
 
-4
 %
Total revenue
$
1,150

 
$
1,250

 
100
%
 
100
%
 
-8
 %
 
-8
 %

GCS revenue for the three months ended June 30, 2013 and 2012 was $497 million and $561 million, respectively, a decrease of $64 million or 11%. The decrease in GCS revenue was primarily the result of lower customer spend on unified communications and contact center products in a cautious spending environment as discussed above. These decreases were partially offset by the incremental revenue from the Radvision business for the full quarter ended June 30, 2013 as compared to the period June 5, 2012 through June 30, 2012.
Networking revenue for the three months ended June 30, 2013 and 2012 was $64 million and $74 million, respectively, a decrease of $10 million or 14%. The decrease in Networking revenue is primarily a result of lower demand.
AGS revenue for the three months ended June 30, 2013 and 2012 was $590 million and $616 million, respectively, a decrease of $26 million or 4%. The decrease in AGS revenue was primarily due to lower maintenance and professional services revenues as a result of lower product sales particularly in the U.S. These decreases were partially offset by an increase in revenues from cloud and managed services performed under contracts entered into in prior periods.

46

The following table sets forth a comparison of revenue by location:
 
 
Three months ended June 30,
  
2013
 
2012
 
Percentage of
Total Revenue
 
Yr. to Yr.
Percentage
Change
 
Yr. to Yr. Percentage
Change, net of Foreign
Currency Impact
Dollars in millions
2013
 
2012
 
U.S.
$
639

 
$
666

 
56
%
 
53
%
 
-4
 %
 
-4
 %
International:
 
 
 
 
 
 
 
 
 
 
 
EMEA
297

 
330

 
26
%
 
27
%
 
-10
 %
 
-11
 %
APAC - Asia Pacific
105

 
128

 
9
%
 
10
%
 
-18
 %
 
-17
 %
Americas International - Canada and Latin America
109

 
126

 
9
%
 
10
%
 
-13
 %
 
-13
 %
Total International
511

 
584

 
44
%
 
47
%
 
-13
 %
 
-13
 %
Total revenue
$
1,150

 
$
1,250

 
100
%
 
100
%
 
-8
 %
 
-8
 %
Revenue in the U.S. for the three months ended June 30, 2013 and 2012 was $639 million and $666 million, respectively, a decrease of $27 million or 4%. The decrease in U.S. revenue was primarily attributable to lower revenues from maintenance and professional services and lower sales of our unified communication and contact center products, particularly with our U.S. government customers. These decreases in U.S. revenue were partially offset by an increase in sales of network products.  Revenue in EMEA for the three months ended June 30, 2013 and 2012 was $297 million and $330 million, respectively, a decrease of $33 million or 10%. The decrease in EMEA revenue was primarily attributable to lower sales of unified communications products and to a lesser extent our contact center products and professional services, partially offset by a favorable impact of foreign currency. Revenue in APAC for the three months ended June 30, 2013 and 2012 was $105 million and $128 million, respectively. The decrease in APAC revenue is primarily attributable to lower sales of our unified communications and networking products and professional services, as well as an unfavorable impact of foreign currency, partially offset by higher maintenance services. Revenue in Americas International was $109 million and $126 million for the three months ended June 30, 2013 and 2012, respectively, a decrease of $17 million or 13%. The decrease in Americas International revenue was primarily attributable to lower sales of unified communications and contact center products in Canada.
We sell our solutions directly to end users and through an indirect sales channel. The following table sets forth a comparison of revenue from sales of products by channel:
 
 
Three months ended June 30,
  
2013
 
2012

Percentage of Total
ECS Product Revenue

Yr. to Yr.
Percentage
Change

Yr. to Yr. Percentage
Change, net of Foreign
Currency Impact
Dollars in millions
2013
 
2012

Direct
$
139


$
165


25
%

26
%

-16
 %

-16
 %
Indirect
421


469


75
%

74
%

-10
 %

-10
 %
Total ECS product revenue
$
560


$
634


100
%

100
%

-12
 %

-12
 %


47

Gross Profit
The following table sets forth a comparison of gross profit by segment:
 
Three months ended June 30,
 
Gross Profit

Gross Margin

Change
Dollars in millions
2013
 
2012
2013
 
2012
Amount
 
Pct.
GCS
$
298


$
329


60.0
%

58.6
%

$
(31
)

(9
)%
Networking
28


29


43.8
%

39.2
%

(1
)

(3
)%
  ECS
326


358


58.2
%

56.5
%

(32
)

(9
)%
AGS
314


300


53.2
%

48.7
%

14


5
 %
Unallocated amounts
(13
)

(35
)

(1 
) 

(1 
) 

22


(1 
) 
Total
$
627


$
623


54.5
%

49.8
%

$
4


1
 %
(1) 
Not meaningful
Gross profit for the three months ended June 30, 2013 and 2012 was $627 million and $623 million, respectively, an increase of $4 million or 1%. The increase was primarily attributable to the success of our gross margin improvement initiatives and the impact of lower amortization of technology intangible assets, partially offset by a decrease in sales volume. Our gross margin improvement initiatives include exiting facilities, reducing the workforce, relocating positions to lower-cost geographies, productivity improvements, and obtaining better pricing from our contract manufacturers and transportation vendors. As a result of the above factors, gross margin increased to 54.5% for the three months ended June 30, 2013 from 49.8% for the three months ended June 30, 2012.
GCS gross profit for the three months ended June 30, 2013 and 2012 was $298 million and $329 million, respectively, a decrease of $31 million or 9%. The decrease in GCS gross profit is primarily due to the decrease in sales volume partially offset by the success of our gross margin improvement initiatives discussed above. As a result of the above factors, GCS gross margin increased to 60.0% for the three months ended June 30, 2013 compared to 58.6% for the three months ended June 30, 2012.
Networking gross profit for the three months ended June 30, 2013 and 2012 was $28 million and $29 million, respectively, a decrease of $1 million or 3% primarily due to lower revenues. Networking gross margin increased to 43.8% for the three months ended June 30, 2013 from 39.2% for the three months ended June 30, 2012. The increase in Networking gross margin was primarily due to our gross margin improvement initiatives discussed above.
AGS gross profit for the three months ended June 30, 2013 and 2012 was $314 million and $300 million, respectively, an increase of $14 million or 5%. The increase in AGS gross profit is primarily due to the success of our gross margin improvement initiatives discussed above. We have redesigned the Avaya support website and continue to transition our customers from an agent-based support model to a self-service/web-based support model. These improvements have allowed us to reduce the workforce and relocate positions to lower-cost geographies. These increases in AGS gross profit were partially offset by a decrease in services revenue. As a result of the above factors, AGS gross margin increased to 53.2% for the three months ended June 30, 2013 compared to 48.7% for the three months ended June 30, 2012.
Unallocated amounts for the three months ended June 30, 2013 and 2012 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. The decrease in unallocated costs is primarily due to the impact of lower amortization associated with technology intangible assets acquired prior to fiscal 2012.
Operating expenses
 
Three months ended June 30,
 
2013
 
2012
 
Percentage of Revenue
 
Change
Dollars in millions
2013
 
2012
Amount
 
Pct.
Selling, general and administrative
$
380

 
$
405

 
33.0
%
 
32.3
%
 
$
(25
)
 
(6
)%
Research and development
112

 
116

 
9.7
%
 
9.3
%
 
(4
)
 
(3
)%
Amortization of intangible assets
57

 
57

 
5.0
%
 
4.6
%
 
—

 
—
 %
Restructuring and impairment charges, net
63

 
21

 
5.5
%
 
1.7
%
 
42

 
200
 %
Acquisition-related costs
1

 
1

 
0.1
%
 
0.1
%
 
—

 
—
 %
Total operating expenses
$
613

 
$
600

 
53.3
%
 
48.0
%
 
$
13

 
2
 %

48

Selling, general and administrative (“SG&A”) expenses for the three months ended June 30, 2013 and 2012 were $380 million and $405 million, respectively, a decrease of $25 million. The decrease was primarily due to lower expenses as a result of our cost savings initiatives and lower selling expenses. Our cost savings initiatives include exiting and consolidating facilities, reducing the workforce and relocating positions to lower-cost geographies. These decreases were partially offset by a $10 million charge recognized in the third quarter of fiscal 2013 based on the resolution of certain legal matters, the incremental expenses associated with the Radvision business for the three months ended June 30, 2013 as compared to the period June 5, 2012 through June 30, 2012 and by $3 million of additional depreciation related to the change in estimate of the salvage value and useful life of one of the Company's U.S. facilities. The Company will recognize additional depreciation of approximately $18 million in the fourth quarter of fiscal 2013 associated with this facility.
Research and development (“R&D”) expenses for the three months ended June 30, 2013 and 2012 were $112 million and $116 million, respectively, a decrease of $4 million. The decrease was primarily due to a decrease in costs of new product development and cost savings initiatives. These decreases were partially offset by the incremental expenses associated with the Radvision business and a lower portion of product development costs that were capitalized in the current period. Capitalized software development costs for the three months ended June 30, 2013 and 2012 were $2 million and $11 million, respectively, a decrease of $9 million. Because the projects in our product development portfolio for the three months ended June 30, 2012 were generally further along in the development cycle than those for the three months ended June 30, 2013, we capitalized a lower portion of our current period R&D spend.
Amortization of intangible assets was $57 million for the three months ended June 30, 2013 and 2012.
Restructuring and impairment charges, net, for the three months ended June 30, 2013 and 2012 were $63 million and $21 million, respectively, an increase of $42 million. The Company continued to identify opportunities to streamline its operations and generate cost savings which included consolidating and exiting facilities and eliminating employee positions. Restructuring charges recorded during the three months ended June 30, 2013 include employee separation costs of $48 million and lease obligations of $15 million. These costs primarily include the payments associated with employee severance actions in the U.S. and the lease obligation associated with the vacated portion of a facility in Germany, which the Company will continue to vacate through the fourth quarter of fiscal 2013. In April 2013, the Company initiated an employee severance program in the U.S. that resulted in the elimination of 456 positions and a charge of $21 million. Restructuring charges recorded during the three months ended June 30, 2012 include employee separation costs of $16 million and lease obligations of $11 million. These costs primarily include the payments associated with employee severance actions in EMEA, the U.S. and Canada and vacating facilities primarily located in the United Kingdom and the U.S. The employee separation costs associated with these actions were partially offset by a $10 million change in estimate associated with the Germany action originally recognized during the three months ended March 31, 2012 to eliminate 327 positions and $80 million in estimated restructuring charges. The change in estimate was based on the actual results of the social selection process which resulted in the actual benefits to be paid to or on behalf of these individuals to be less than originally estimated as the actual age, years of service, and salaries of the employees identified were lower than originally estimated. 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.
During the three months ended June 30, 2012 the Company initiated a plan to dispose of a Company owned facility in Germany and relocate to a new facility. Accordingly, the Company wrote the value of this asset down to its net realizable value and had reclassified this asset to held for sale. Included in restructuring and impairment charges, net in the Statement of Operations is an impairment of $4 million for the three months ended June 30, 2012. During the first quarter of fiscal 2013, the Company sold this facility for its net realizable value.
Acquisition-related costs were $1 million for each of the three months ended June 30, 2013 and 2012 and include third-party legal and other costs related to business acquisitions in fiscal 2013 and 2012.
Operating Income
For the three months ended June 30, 2013, operating income was $14 million compared to $23 million for the three months ended June 30, 2012.
Operating income for the three months ended June 30, 2013 and 2012 includes non-cash expenses for depreciation and amortization of $110 million and $140 million and share-based compensation of $4 million and $2 million for each of the periods, respectively.
Interest Expense
Interest expense for the three months ended June 30, 2013 and 2012 was $122 million and $107 million, respectively, which includes non-cash interest expense of $4 million and $5 million, respectively. Non-cash interest expense for each period includes amortization of debt issuance costs and accretion of debt discount. Cash interest expense for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 increased as a result of certain debt refinancing transactions

49

partially offset by a decrease in interest expense associated with the expiration of certain unfavorable interest rate swap contracts.
During the nine months ended June 30, 2013, the Company completed a series of transactions which allowed the Company to refinance term loans under its senior secured credit facilities that originally matured October 26, 2014 and substantially all of its senior unsecured notes that were scheduled to mature on November 1, 2015. As a result of these debt refinancing transactions, the interest rate associated with the portion of the Company's debt that was refinanced increased. See Note 7, "Financing Arrangements" to our unaudited interim consolidated financial statements for further details.
Other (Expense) Income, Net
Other expense, net for the three months ended June 30, 2013 was $5 million as compared to other income, net of $6 million for the three months ended June 30, 2012. This difference primarily represents net foreign currency transaction losses of $5 million for the three months ended June 30, 2013 as compared to net foreign currency transaction gains of $5 million for the three months ended June 30, 2012.
Benefit from (Provision for) Income Taxes
The benefit from income taxes for the three months ended June 30, 2013 was $3 million, as compared to the provision for income taxes of $88 million for the three months ended June 30, 2012.
The effective rate for the three months ended June 30, 2013 differs 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) the release of $27 million of valuation allowance associated with net gains in other comprehensive income.
During the three months ended June 30, 2013, the Company recorded a tax charge of $27 million to other comprehensive income primarily relating to pension benefits. The charge to other comprehensive income and decrease in related deferred tax assets resulted in an income tax benefit in the Consolidated Statements of Operations related to the release of the corresponding valuation allowance.
The effective income tax rate for the three months ended June 30, 2012 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) a $6 million increase in valuation allowance associated with the tax benefit on net losses in other comprehensive income.
During the three months ended June 30, 2012, the Company recorded a tax benefit of $6 million to other comprehensive income primarily relating to pension benefits. The benefit to other comprehensive income and increase in related deferred tax assets resulted in the recording of an income tax expense in continuing operations related to the increase of the corresponding valuation allowance.
Nine Months Ended June 30, 2013 Compared with Nine Months Ended June 30, 2012
Revenue
Our revenue for the nine months ended June 30, 2013 and 2012 was $3,508 million and $3,894 million, respectively, a decrease of $386 million or 10%. Incremental revenue from the Radvision business for the nine months ended June 30, 2013 and the period June 5, 2012 through June 30, 2012 was $60 million and $11 million, respectively. The following table sets forth a comparison of revenue by portfolio: 
 
Nine months ended June 30,
  
2013
 
2012
 
Percentage of Total Revenue
 
Yr. to Yr.
Percentage
Change
 
Yr. to Yr. Percentage
Change, net of Foreign
Currency Impact
Dollars in millions
2013
 
2012
 
GCS
$
1,543

 
$
1,802

 
44
%
 
46
%
 
-14
 %
 
-14
 %
Purchase accounting adjustments
(1
)
 
(2
)
 
0
%
 
0
%
 
(1) 

 
(1) 

Networking
178

 
220

 
5
%
 
6
%
 
-19
 %
 
-19
 %
Total ECS product revenue
1,720

 
2,020

 
49
%
 
52
%
 
-15
 %
 
-15
 %
AGS
1,788

 
1,874

 
51
%
 
48
%
 
-5
 %
 
-4
 %
Total revenue
$
3,508

 
$
3,894

 
100
%
 
100
%
 
-10
 %
 
-10
 %
(1)
Not meaningful

50

GCS revenue for the nine months ended June 30, 2013 and 2012 was $1,543 million and $1,802 million, respectively, a decrease of $259 million or 14%. The decrease in GCS revenue was primarily the result of lower customer spend on unified communications and contact center products in a cautious spending environment as discussed above. These decreases were partially offset by the incremental revenue from the Radvision business for the nine months ended June 30, 2013 as compared to the period June 5, 2012 through June 30, 2012.
Networking revenue for the nine months ended June 30, 2013 and 2012 was $178 million and $220 million, respectively, a decrease of $42 million or 19%. The decrease in Networking revenue is primarily a result of lower demand.
AGS revenue for the nine months ended June 30, 2013 and 2012 was $1,788 million and $1,874 million, respectively, a decrease of $86 million or 5%. The decrease in AGS revenue was primarily due to lower maintenance and professional services revenues as a result of lower product sales particularly in the U.S. and lower ITPS revenues associated with our U.S. government customers. These decreases were partially offset by an increase in revenues from cloud and managed services performed under contracts entered into in prior periods.
The following table sets forth a comparison of revenue by location:
 
 
Nine months ended June 30,
  
2013
 
2012
 
Percentage of
Total Revenue
 
Yr. to Yr.
Percentage
Change
 
Yr. to Yr. Percentage
Change, net of Foreign
Currency Impact
Dollars in millions
2013
 
2012
 
U.S.
$
1,901

 
$
2,092

 
54
%
 
54
%
 
(9
)%
 
(9
)%
International:
 
 
 
 
 
 
 
 
 
 
 
EMEA
926

 
1,022

 
26
%
 
26
%
 
(9
)%
 
(9
)%
APAC - Asia Pacific
344

 
371

 
10
%
 
9
%
 
(7
)%
 
(7
)%
Americas International - Canada and Latin America
337

 
409

 
10
%
 
11
%
 
(18
)%
 
(17
)%
Total International
1,607

 
1,802

 
46
%
 
46
%
 
(11
)%
 
(10
)%
Total revenue
$
3,508

 
$
3,894

 
100
%
 
100
%
 
(10
)%
 
(10
)%
Revenue in the U.S. for the nine months ended June 30, 2013 and 2012 was $1,901 million and $2,092 million, respectively, a decrease of $191 million or 9%. The decrease in U.S. revenue was primarily attributable to lower sales associated with our unified communications and contact center products, which contributed to lower revenues from maintenance and professional services, particularly with our U.S. Government customers. Revenue in EMEA for the nine months ended June 30, 2013 and 2012 was $926 million and $1,022 million, respectively, a decrease of $96 million or 9%. The decrease in EMEA revenue was primarily attributable to lower sales associated with our unified communications products and to a lesser extent lower sales associated with our contact center and networking products, partially offset by the incremental revenues from the Radvision business. Revenue in APAC for the nine months ended June 30, 2013 and 2012 was $344 million and $371 million, respectively, a decrease of $27 million or 7%. The decrease in APAC revenue is primarily attributable to lower revenues associated with our unified communications and network products and professional services, partially offset by higher maintenance services. Revenue in Americas International was $337 million and $409 million for the nine months ended June 30, 2013 and 2012, respectively, a decrease of $72 million or 18%. The decrease in Americas International revenue was particularly attributable to Canada and Brazil and was associated primarily with our unified communications and contact center products, as well as an unfavorable impact of foreign currency.
We sell our solutions directly to end users and through an indirect sales channel. The following table sets forth a comparison of revenue from sales of products by channel:
 
 
Nine months ended June 30,
  
2013
 
2012
 
Percentage of Total
ECS Product Revenue
 
Yr. to Yr.
Percentage
Change
 
Yr. to Yr. Percentage
Change, net of Foreign
Currency Impact
Dollars in millions
2013
 
2012
 
Direct
$
405

 
$
498

 
24
%
 
25
%
 
(19
)%
 
(18
)%
Indirect
1,315

 
1,522

 
76
%
 
75
%
 
(14
)%
 
(14
)%
Total ECS product revenue
$
1,720

 
$
2,020

 
100
%
 
100
%
 
(15
)%
 
(15
)%


51

Gross Profit
The following table sets forth a comparison of gross profit by segment:
 
Nine months ended June 30,
 
Gross Profit
 
Gross Margin
 
Change
Dollars in millions
2013
 
2012
2013
 
2012
Amount
 
Pct.
GCS
$
917

 
$
1,047

 
59.4
%
 
58.1
%
 
(130
)
 
(12
)%
Networking
73

 
93

 
41.0
%
 
42.3
%
 
(20
)
 
(22
)%
  ECS
990

 
1,140

 
57.6
%
 
56.4
%
 
(150
)
 
(13
)%
AGS
940

 
909

 
52.6
%
 
48.5
%
 
31

 
3
 %
Unallocated amounts
(51
)
 
(109
)
 
(1) 

 
(1) 

 
58

 
(1) 

Total
$
1,879

 
$
1,940

 
53.6
%
 
49.8
%
 
(61
)
 
(3
)%
(1) 
Not meaningful
Gross profit for the nine months ended June 30, 2013 and 2012 was $1,879 million and $1,940 million, respectively, a decrease of $61 million or 3%. The decrease is primarily attributable to a decrease in sales volume and lower pricing as a result of increasing competition in the marketplace partially offset by the success of our gross margin improvement initiatives, the impact of lower amortization of technology intangible assets, and a $5 million benefit associated with our release of a contingent liability reserve related to a labor matter in EMEA following the receipt of a favorable court ruling. Our gross margin improvement initiatives include exiting facilities, reducing the workforce, relocating positions to lower-cost geographies, productivity improvements, and obtaining better pricing from our contract manufacturers and transportation vendors. As a result of the above factors, gross margin increased to 53.6% for the nine months ended June 30, 2013 from 49.8% for the nine months ended June 30, 2012.
GCS gross profit for the nine months ended June 30, 2013 and 2012 was $917 million and $1,047 million, respectively, a decrease of $130 million or 12%. The decrease in GCS gross profit is primarily due to the decrease in sales volume and lower pricing as a result of increasing competition in the marketplace partially offset by the success of our gross margin improvement initiatives discussed above. As a result of the above factors, GCS gross margin increased to 59.4% for the nine months ended June 30, 2013 compared to 58.1% for the nine months ended June 30, 2012.
Networking gross profit for the nine months ended June 30, 2013 and 2012 was $73 million and $93 million, respectively, a decrease of $20 million or 22%. Networking gross margin decreased to 41.0% for the nine months ended June 30, 2013 from 42.3% for the nine months ended June 30, 2012. The decreases in Networking gross profit and margin were due to lower revenues which did not allow us to leverage our fixed costs.
AGS gross profit for the nine months ended June 30, 2013 and 2012 was $940 million and $909 million, respectively, an increase of $31 million or 3%. The increase in AGS gross profit is primarily due to the continued benefit from our gross margin improvement initiatives discussed above, and a $5 million benefit associated with the release of a contingent liability related to a labor matter in EMEA as a result of a favorable court ruling. We have redesigned the Avaya support website and continue to transition our customers from an agent-based support model to a self-service/web-based support model. These improvements have allowed us to reduce the workforce and relocate positions to lower-cost geographies. These increases in AGS gross profit were partially offset by a decrease in services revenue. As a result of the above factors, AGS gross margin increased to 52.6% for the nine months ended June 30, 2013 compared to 48.5% for the nine months ended June 30, 2012.
Unallocated amounts for the nine months ended June 30, 2013 and 2012 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. The decrease in unallocated costs is primarily due to the impact of lower amortization associated with technology intangible assets acquired prior to fiscal 2012.

52

Operating expenses
 
Nine months ended June 30,
 
2013
 
2012
 
Percentage of Revenue
 
Change
Dollars in millions
2013
 
2012
Amount
 
Pct.
Selling, general and administrative
$
1,145

 
$
1,252

 
32.6
%
 
32.2
%
 
$
(107
)
 
(9
)%
Research and development
343

 
344

 
9.8
%
 
8.8
%
 
(1
)
 
0
 %
Amortization of intangible assets
171

 
169

 
4.9
%
 
4.3
%
 
2

 
1
 %
Goodwill impairment
89

 
—

 
2.5
%
 
—
%
 
89

 
-

Restructuring and impairment charges, net
165

 
132

 
4.7
%
 
3.4
%
 
33

 
25
 %
Acquisition-related costs
1

 
4

 
0.0
%
 
0.1
%
 
(3
)
 
(75
)%
Total operating expenses
$
1,914

 
$
1,901

 
54.5
%
 
48.8
%
 
$
13

 
1
 %
SG&A expenses for the nine months ended June 30, 2013 and 2012 were $1,145 million and $1,252 million, respectively, a decrease of $107 million. The decrease was primarily due to lower expenses as a result of our cost savings initiatives, lower selling expenses and a $3 million benefit associated with our release of a contingent liability reserve related to a labor matter in EMEA following the receipt of a favorable court ruling. Our cost savings initiatives include exiting and consolidating facilities, reducing the workforce and relocating positions to lower-cost geographies. These decreases were partially offset by the incremental expenses associated with the Radvision business for the full nine months ended June 30, 2013 versus the period June 5, 2012 through June 30, 2012, a $10 million charge recognized in the third quarter of fiscal 2013 based on the resolution of certain legal matters and by $3 million of additional depreciation related to the change in estimate of the salvage value and useful life of one of the Company's U.S. facilities. The Company will recognize additional depreciation of approximately $18 million in the fourth quarter of fiscal 2013 associated with this facility.
R&D expenses for the nine months ended June 30, 2013 and 2012 were $343 million and $344 million, respectively, a decrease of $1 million. The decrease was primarily due to lower expenses associated with our cost savings initiatives discussed above partially offset by the incremental expenses associated with the Radvision business and a lower portion of product development costs that were capitalized in the current period. Capitalized software development costs for the nine months ended June 30, 2013 and 2012 were $12 million and $30 million, respectively, a decrease of $18 million. Because the projects in our product development portfolio for the nine months ended June 30, 2012 were generally further along in the development cycle than those for the nine months ended June 30, 2013, we capitalized a lower portion of our current period R&D spend.
Amortization of intangible assets was $171 million and $169 million for the nine months ended June 30, 2013 and 2012, respectively.
Goodwill impairment associated with our ITPS reporting unit for the nine months ended June 30, 2013 was $89 million. The ITPS reporting unit provides specialized information technology services exclusively to U.S. government customers and has experienced a decline in revenues as compared to previous periods and a reduction in its forecasts for the remainder of fiscal 2013. The reporting unit was impacted by reduced government spending in anticipation of sequestration and general budget cuts. Additionally, there is much uncertainty regarding how sequestration cuts will be implemented and the impact they will have on contractors supporting the government. As a result of these events, the Company determined that an interim impairment test of the reporting unit's goodwill should be performed.
Based on our performance of step one of the goodwill impairment test, we determined that the estimated fair value of the ITPS reporting unit was less than the carrying value of its net assets (including goodwill). Based on the second step of the goodwill impairment test, we determined that the book value of the reporting unit's goodwill exceeded its implied fair value. Accordingly, we wrote down the goodwill balance by $89 million. The impairment was primarily the result of budgetary constraints, sequestration and uncertainty regarding spending on the part of the U.S. government. The reduced valuation of the reporting unit reflects additional market risks and lower sales forecasts for the reporting unit, which is consistent with economic trends at that time.
During the nine months ended June 30, 2012, the Company tested goodwill for impairment and determined that no impairment existed.
Restructuring and impairment charges, net, for the nine months ended June 30, 2013 and 2012 were $165 million and $132 million, respectively, an increase of $33 million. The Company continued to identify opportunities to streamline its operations and generate cost savings which included consolidating and exiting facilities and eliminating employee positions. Restructuring charges recorded during the nine months ended June 30, 2013 include employee separation costs of $127 million and lease obligations of $38 million. These costs primarily include the payments associated with employee severance actions in EMEA

53

and the U.S. and lease obligations associated with the vacated portion of a facility in Germany, which the Company will continue to vacate through the fourth quarter of fiscal 2013, and facilities in the United Kingdom and the U.S. The severance actions in EMEA provided for the elimination of 234 positions and resulted in a charge of $46 million. 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. Enhanced severance plans were offered to certain management employees in the U.S. in the first and third quarter of fiscal 2013 and resulted in the elimination of 195 and 456 positions and restructuring charges of $9 million and $21 million, respectively, for which the related payments are expected to be completed in fiscal 2013. Restructuring charges recorded during the nine months ended June 30, 2012 include employee separation costs of $113 million and lease obligations of $15 million. Employee separation costs for the period include $70 million associated with a plan presented to the works council on February 13, 2012 representing employees of certain of the Company's German subsidiaries to eliminate 327 positions. In addition to the restructuring charges related to Germany, the Company had employee separation costs in the U.S., Canada, and EMEA, excluding Germany. Costs related to lease obligations include facilities partially or totally vacated during the period primarily located in the United Kingdom and the U.S. 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.
During the nine months ended June 30, 2012 the Company initiated a plan to dispose of a Company owned facility in Germany and relocate to a new facility. Accordingly, the Company wrote the value of this asset down to its net realizable value and had reclassified this asset to held for sale. Included in restructuring and impairment charges, net in the Statement of Operations is an impairment of $4 million for the nine months ended June 30, 2012. During the first quarter of fiscal 2013, the Company sold this facility for its net realizable value.
Acquisition-related costs were $1 million for the nine months ended June 30, 2013 and include third-party legal and other costs related to business acquisitions in fiscal 2013. Acquisition-related costs for the nine months ended June 30, 2012 were $4 million and include third-party legal and other costs related to business acquisitions in fiscal 2012.
Operating (Loss) Income
For the nine months ended June 30, 2013, operating loss was $35 million compared to operating income of $39 million for the nine months ended June 30, 2012.
Operating (loss) income for the nine months ended June 30, 2013 and 2012 includes non-cash expenses for depreciation and amortization of $331 million and $426 million, goodwill impairment of $89 million and $0, and share-based compensation of $7 million and $7 million for each of the periods, respectively.
Interest Expense
Interest expense for the nine months ended June 30, 2013 and 2012 was $346 million and $324 million, respectively, which includes non-cash interest expense of $16 million and $17 million, respectively. Non-cash interest expense for each period includes amortization of debt issuance costs and accretion of debt discount. Cash interest expense for the nine months ended June 30, 2013 compared to the nine months ended June 30, 2012 increased as a result of certain debt refinancing transactions partially offset by a decrease in interest expense as a result of the expiration of certain unfavorable interest rate swap contracts.
During the nine months ended June 30, 2013, the Company completed a series of transactions which allowed the Company to refinance term loans under its senior secured credit facilities that originally matured October 26, 2014 and substantially all of its senior unsecured notes that were scheduled to mature on November 1, 2015. As a result of these debt refinancing transactions, the interest rate associated with the portion of the Company's debt that was refinanced increased. See Note 7, "Financing Arrangements" to our unaudited interim consolidated financial statements for further details.
Loss on Extinguishment of Debt
In connection with (1) the issuance of our 9% Senior Secured Notes and the payment of $284 million of our term B-5 loans and (2) the refinancing of $584 million of outstanding term B-1 loans, we recognized a loss on extinguishment of debt for the nine months ended June 30, 2013 of $6 million. The loss represents the difference between the reacquisition price and the carrying value (including unamortized discount and debt issue costs) of the debt. See Note 7, "Financing Arrangements" to our unaudited interim consolidated financial statements for further details.
Other Expense, Net
Other expense, net, for the nine months ended June 30, 2013 was $9 million as compared to $7 million for the nine months ended June 30, 2012. Other expense, net, for the current period includes third party fees incurred in connection with debt modifications of $18 million, partially offset by net foreign currency transaction gains of $10 million. Also included in other expense, net for the nine months ended June 30, 2013 is a $1 million translation loss recognized in connection with the devaluation of the bolivar by the Venezuela government in February 2013. Other expense, net for the nine months ended June 30, 2012 includes net foreign currency transaction losses of $7 million.

54

Benefit from (Provision for) Income Taxes
The benefit from income taxes for the nine months ended June 30, 2013 was $9 million, as compared to the provision for income taxes of $62 million for the nine months ended June 30, 2012.
The effective rate for the nine months ended June 30, 2013 differs 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, (3) $17 million of income tax benefit recognized upon the expiration of certain interest rate swaps, and (4) the release of $43 million of valuation allowance associated with net gains in other comprehensive income.
During the nine months ended June 30, 2013, the Company recognized $17 million of income tax benefit related to the elimination of the tax effect of certain interest rate swaps in other comprehensive income. The tax effect of such interest rate swaps was recognized in other comprehensive income prior to the establishment of a valuation allowance against the Company's U.S. net deferred tax assets and was eliminated following the expiration of the final interest rate swap upon which the tax effect was established.
During the nine months ended June 30, 2013, the Company recorded a tax charge of $43 million to other comprehensive income primarily relating to pension benefits. The charge to other comprehensive income and decrease in related deferred tax assets resulted in an income tax benefit in the Consolidated Statements of Operations related to the release of the corresponding valuation allowance.
The effective income tax rate for the nine months ended June 30, 2012 differs from the statutory U.S. Federal income tax rate primarily due to (1) the effect of tax rate differentials on foreign income/loss and (2) changes in the valuation allowance established against the Company’s deferred tax assets.
Liquidity and Capital Resources
Cash and cash equivalents decreased by $66 million to $271 million at June 30, 2013 from $337 million at September 30, 2012. Our existing cash balance, cash generated by operations and borrowings available under our credit facilities are our primary sources of short-term liquidity. Based on our current level of operations, we believe these sources will be adequate to meet our liquidity needs for at least the next 12 months. 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 affected our ability to meet our obligations as they come due in the ordinary course of business and have not had a significant impact on our liquidity as of June 30, 2013. However, we cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available to us under our credit facilities in an amount sufficient to enable us to repay our indebtedness or to fund our other liquidity needs.
Sources and Uses of Cash
A condensed statement of cash flows for the nine months ended June 30, 2013 and 2012 follows:
 
 
Nine months ended June 30,
In millions
2013
 
2012
Net cash (used for) provided by:
 
 
 
Net loss
$
(387
)
 
$
(354
)
Adjustments to net loss for non-cash items
428

 
478

Changes in operating assets and liabilities
58

 
(184
)
Operating activities
99

 
(60
)
Investing activities
(89
)
 
(237
)
Financing activities
(68
)
 
167

Effect of exchange rate changes on cash and cash equivalents
(8
)
 
1

Net decrease in cash and cash equivalents
(66
)
 
(129
)
Cash and cash equivalents at beginning of period
337

 
400

Cash and cash equivalents at end of period
$
271

 
$
271


55

Operating Activities
Cash provided by operating activities was $99 million for the nine months ended June 30, 2013 compared to cash used for operating activities of $60 million for the nine months ended June 30, 2012.
Adjustments to reconcile net loss to net cash provided by operations for the nine months ended June 30, 2013 and 2012 were $428 million and $478 million, respectively and primarily consisted of depreciation and amortization of $331 million and $426 million, respectively. Adjustments to reconcile net loss to net cash provided by operations during the nine months ended June 30, 2013 also included goodwill impairment of $89 million and third-party fees expensed in connection with our debt modifications of $18 million, which were partially offset by unrealized gains on foreign currency exchanges of $25 million.
During the nine months ended June 30, 2013, changes in our operating assets and liabilities resulted in a net increase in cash and cash equivalents of $58 million. The net increase was driven by improvements in the collection of receivables, increases in deferred revenues attributable to a number of annual prepaid maintenance contracts closed in January 2013, and the effects of non-cash business restructuring reserves net of cash payments against our reserves. These increases in cash and cash equivalents were partially offset by payment of accrued interest, payments associated with our employee incentive programs and the pay down of accounts payable.
During the nine months ended June 30, 2012, changes in our operating assets and liabilities resulted in a net decrease in cash and cash equivalents of $184 million. The net decrease was primarily driven by the payment of accrued interest, payments associated with our business restructuring reserves and payments associated with our employee incentive programs.
Investing Activities
Cash used for investing activities was $89 million and $237 million for the nine months ended June 30, 2013 and 2012, respectively. The primary use of cash for investing activities for the nine months ended June 30, 2013 was related to capital expenditures and capitalized software development costs of $78 million and $12 million, respectively. These uses of cash for investing activities for the nine months ended June 30, 2013 were partially offset by $12 million of cash proceeds from the sales of long-lived assets. The primary use of cash for investing activities for the nine months ended June 30, 2012 was related to $212 million of payments in connection with acquisitions, net of cash acquired, including the acquisition of Radvision for $208 million (net of cash acquired of $22 million). Cash used for investing activities for the nine months ended June 30, 2012 also included capital expenditures and capitalized software development costs of $60 million and $30 million, respectively. Further, during the nine months ended June 30, 2013 and 2012, the Company advanced to Parent $10 million and $8 million, respectively, in exchange for notes receivable. The principal amount of these notes plus any accrued and unpaid interest are due in full October 3, 2015 and October 3, 2014 with interest at the rate of 0.93% and 1.63% per annum, respectively. The proceeds of these notes were used by Parent to partially fund an acquisition in October 2011. Once the acquisition was complete, Parent immediately merged the acquired entity with and into the Company, with the Company surviving the merger. Cash used for investing activities for the nine months ended June 30, 2012 was partially offset by $73 million of cash proceeds from the sale of investments primarily related to marketable securities which were acquired in connection with the acquisition of Radvision and subsequently sold.
Financing Activities
Net cash used for financing activities was $68 million for the nine months ended June 30, 2013 compared to net cash provided by financing activities of $167 million for the nine months ended June 30, 2012. Cash from financing activities for the nine months ended June 30, 2013 includes proceeds of $589 million from the issuance of senior secured term B-5 loans and proceeds of $290 million from the issuance of 9% Senior Secures Notes. The proceeds from the issuance of the senior secured term B-5 loans were used to repay $584 million principal amount of our senior secured term B-1 loans and the proceeds from the issuance of the 9% Senior Secured Notes were used to repay $284 million principal amount of our term B-5 loans. Cash used for financing activities for the nine months ended June 30, 2013 also includes cash paid for debt issuance and modification costs of $49 million. Cash flows from financing for the nine months ended June 30, 2012 includes a capital contribution to Avaya from Parent in the amount of $196 million from the Parent's issuance of Series B preferred stock and warrants to purchase common stock of Parent. In addition, in connection with the acquisition of Radvision, the Company borrowed $60 million under its senior secured asset-based credit facility during the nine months ended June 30, 2012. Following the completion of the acquisition, all amounts borrowed were repaid in full. Included in cash used for financing activities is $28 million in scheduled debt payments for each of the nine months ended June 30, 2013 and 2012. See Note 7, "Financing Arrangements" to our unaudited consolidated financial statements for further details on the debt refinancing transactions entered into during the nine months ended June 30, 2013.
Credit Facilities
We have entered into borrowing arrangements and further amended the arrangements with several financial institutions in connection with the Merger on October 26, 2007 and the acquisition of the enterprise solutions business of Nortel.

56

During the three months ended December 31, 2012, the Company completed three transactions which allowed the Company to refinance $848 million of term loans under its senior secured credit facilities that were scheduled to mature on October 26, 2014. These transactions were (1) an amendment and restatement of the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility on October 29, 2012 along with the extension of the maturity date of $135 million aggregate principal amount of senior secured term B-1 loans ("term B-1 loans"), (2) an amendment and restatement of the senior secured credit facility on December 21, 2012 along with the extension of the maturity date of $713 million aggregate principal amount of term B-1 loans and $134 million aggregate principal amount of senior secured term B-4 loans, and (3) the issuance on December 21, 2012 of $290 million of 9% senior secured notes due April 2019.
During the three months ended March 31, 2013, the Company refinanced the remaining $584 million of term B-1 loans outstanding under its senior secured credit facility with the cash proceeds of $589 million aggregate principal amount of term B-5 loans under the senior secured credit facility.
Additionally, during the three months ended March 31, 2013, the Company refinanced $1,384 million of senior unsecured notes through (1) amendments to the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility permitting the refinancing of the 9.75% senior unsecured notes due 2015 and 10.125%/10.875% senior unsecured PIK toggle notes due 2015 (collectively, the “Old Notes”) with indebtedness secured by a lien on certain collateral on a junior-priority basis and (2) the exchange of $1,384 million of Old Notes for $1,384 million of 10.50% senior secured notes due 2021.
As of June 30, 2013, term loans outstanding under the Cash Flow Credit Agreement include term B-3 loans, term B-4 loans and term B-5 loans with remaining face values (after all principal payments through June 30, 2013) of $2,133 million, $1 million, and $1,144 million respectively. 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.
In connection with the acquisition of Radvision, the Company borrowed $60 million under its senior secured asset-based credit facility. Following the completion of the acquisition, all amounts borrowed were repaid in full.
See Note 7, “Financing Arrangements,” to our unaudited interim consolidated financial statements for further details.
Future Cash Requirements
Our primary future cash requirements will be to fund benefit obligations, debt service, capital expenditures and restructuring payments. In addition, we may use cash in the future to make strategic acquisitions.
Specifically, we expect our primary cash requirements for the remainder of fiscal 2013 to be as follows:
•
Benefit obligations—We estimate we will make payments under our pension and postretirement obligations totaling $65 million during the remainder of fiscal 2013. These payments include: $45 million to satisfy the minimum statutory funding requirements of our U.S. qualified plans, $2 million of payments under our U.S. benefit plans which are not pre-funded, $5 million under our non-U.S. benefit plans which are predominately not pre-funded, $2 million under our U.S. retiree medical benefit plan which is not pre-funded and $11 million under the agreements for represented retirees to post-retirement health trusts. See discussion in Note 11, “Benefit Obligations” to our unaudited interim consolidated financial statements for further details of our benefit obligations.
•
Debt service—As discussed above and in Note 7, "Financing Arrangements" to our unaudited interim consolidated financial statements, the Company entered into certain refinancing transactions during the nine months ended June 30, 2013. We expect to make payments of $133 million during the remainder of fiscal 2013 for principal and interest associated with our long-term debt, as refinanced. We will also make payments associated with our interest rate swaps used to reduce the Company’s exposure to variable-rate interest payments.
•
Capital expenditures—We expect to spend approximately $32 million for capital expenditures and capitalized software development costs during the remainder of fiscal 2013.
•
Restructuring payments—We expect to make payments of approximately $53 million during the remainder of fiscal 2013 for employee separation costs and lease termination obligations associated with restructuring actions we have implemented through June 30, 2013.


57

As discussed above and in Note 7, "Financing Arrangements" to our unaudited interim consolidated financial statements, the Company entered into certain refinancing transactions during the nine months ended June 30, 2013. Annual maturities of debt, based on our debt profile as of June 30, 2013 and September 30, 2012, for the next five years ending September 30th and thereafter consist of:
In millions
June 30, 2013
 
September 30, 2012
2013
$
9

 
$
38

2014
38

 
38

2015
53

 
1,442

2016
174

 
1,542

2017
38

 
23

2018 and thereafter
5,799

 
3,046

Total
$
6,111

 
$
6,129


We and our subsidiaries, affiliates and significant shareholders may from time to time seek to retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Future Sources of Liquidity
We expect our 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 during fiscal 2013 designed to reduce overhead and provide cash savings.
We are currently party to (a) a senior secured credit facility which consists of both term loans and a senior secured multi-currency revolver allowing for borrowings of up to $200 million, and (b) a multi-currency asset-based revolving credit facility which provides senior secured revolving financing of up to $335 million, subject to availability under a borrowing base - see Note 7, “Financing Arrangements” to our unaudited interim consolidated financial statements.
Our existing cash and cash equivalents and net cash provided by operating activities may be insufficient if we face unanticipated cash needs such as the funding of a future acquisition or other capital investment.
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 opportunities are favorable, we may refinance our existing debt or issue additional securities.
On June 9, 2011, Parent filed with the SEC a registration statement on Form S-1 (as it may be amended from time to time, the “registration statement”) relating to a proposed initial public offering of its common stock. As contemplated in the registration statement, the net proceeds of the proposed offering are expected to be used, 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 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.
During the fourth quarter of fiscal 2012, the Company changed its indefinite reinvestment of undistributed foreign earnings assertion with respect to its non-U.S. subsidiaries. This change in assertion reflects the Company's intention and ability to maintain flexibility with respect to sourcing of funds from non-U.S. locations.

58

Debt Ratings
As of June 30, 2013, 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 negative outlook from Standard & Poor’s. Our ability to obtain additional external financing and the related cost of borrowing may be affected by our debt ratings, which are periodically reviewed by the major credit rating agencies. The ratings are subject to change or withdrawal at any time by the respective credit rating agencies.
Critical Accounting Policies and Estimates
Management has reassessed the critical accounting policies as disclosed in our Annual Report on Form 10-K filed with the SEC on December 9, 2012 and determined that there were no significant changes to our critical accounting policies in the nine months ended June 30, 2013 except for recently adopted accounting guidance as discussed in Note 2, “Recent Accounting Pronouncements” to our unaudited interim consolidated financial statements.
Goodwill, Intangible and Long-lived Assets
March 31, 2013
During the second quarter of fiscal 2013, the Company tested the long-lived assets and goodwill of its ITPS reporting unit for impairment.  The ITPS reporting unit provides specialized information technology services exclusively to government customers in the U.S.  During the three months ended March 31, 2013, ITPS experienced a decline in revenues as a result of reduced government spending in anticipation of sequestration and budget cuts.  Additionally there is uncertainty regarding how the sequestration and budget cuts will be implemented and the impact they will have on contractors supporting the government.  As a result of these events, the Company determined that an interim impairment test of the reporting unit's long-lived assets and goodwill should be performed. 
Using the revised forecasts, the Company tested the intangible assets and other long-lived assets of the ITPS reporting unit for impairment during the three months ended March 31, 2013 and no impairment was identified.
The test of goodwill for impairment began with preparing a valuation of the ITPS reporting unit utilizing our latest near-term and long-term cash flow forecasts.  The valuation was prepared based on a discounted cash flow model, consistent with the methodology used as part of the annual goodwill impairment test.  This valuation reflected additional market risks and lower sales forecasts for the reporting unit, which are consistent with the government events and economic trends at that time.  Specifically, the discounted cash flow model used a discount rate of 13% and did not provide for long-term growth. 
The results of step one of the goodwill impairment test indicated that the estimated fair value of the ITPS reporting unit was less than the carrying value of its net assets (including goodwill) and as such, the Company performed step two of the impairment test.  The second step of the impairment test compares the implied fair value of the reporting unit's goodwill with the carrying value of that goodwill.  If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to that excess.  The implied fair value is determined in the same manner as the amount of goodwill recognized in a business combination.  That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.  This allocation is performed only for purposes of assessing goodwill for impairment; accordingly Avaya did not adjust the net book value of the assets and liabilities on its Consolidated Balance Sheets other than goodwill as a result of this process. 
As a result of the application of step two of the goodwill impairment test, the Company estimated the implied fair value of the goodwill to be $44 million as compared with a carrying value of $133 million and recorded an impairment to goodwill of $89 million.  See discussion in Note 4, “Goodwill and Intangible Assets” to our unaudited consolidated interim financial statements for further details.
The financial forecast utilized for purposes of the impairment analysis is based on estimated future cash flows that a market participant would expect the reporting unit to generate in the future.  While the Company believes the assumptions used in the impairment analysis are reasonable, changes in the projected cash flows, the discount rate, and short-term and long-term growth rates could produce significantly different results for the impairment analysis.  Internal and external factors could result in changes in these assumptions which may result in future impairment tests and charges.  The Company will continue to monitor any changes in circumstances for indicators of impairment.
The Company determined that no events occurred or circumstances changed during the six months ended March 31, 2013 that would more likely than not reduce the fair value of its other reporting units below their respective carrying amounts.  As part of the annual goodwill impairment test at September 30, 2012, the Company applied a hypothetical 10% decrease to the fair value of each reporting unit in order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test.  This hypothetical decrease in the fair value of each reporting unit at September 30, 2012 indicated that no other reporting unit was at risk for failing step one of the goodwill impairment assessment.

59

June 30, 2013
The Company determined that no events had occurred or circumstances changed during the three months ended June 30, 2013 that would indicate that its long-lived assets, including intangible assets with finite lives, may not be recoverable or that it is more likely than not that its intangible assets with indefinite lives are impaired. However, if market conditions deteriorate, it may be necessary to record impairment charges in the future.
New Accounting Pronouncements
See discussion in Note 2, “Recent Accounting Pronouncements” to our unaudited interim consolidated financial statements for further details.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements.” All statements other than statements of historical fact are “forward-looking” statements for purposes of the U.S. federal and state securities laws. These statements may be identified by the use of forward looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained in this report under Part II, Item 1A, “Risk Factors,” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements.
We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this report, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:
•
our ability to develop and sell advanced communications products and services, including unified communications, data networking solutions and contact center applications;
•
the market for our products and services, including unified communications solutions;
•
our ability to remain competitive in the markets we serve;
•
economic conditions and the willingness of enterprises to make capital investments;
•
our reliance on our indirect sales channel;
•
the ability to protect our intellectual property and avoid claims of infringement;
•
the ability to retain and attract key employees;
•
our degree of leverage and its effect on our ability to raise additional capital and to react to changes in the economy or our industry;
•
our ability to manage our supply chain and logistics functions;
•
liquidity and our access to capital markets;
•
risks relating to the transaction of business internationally;
•
our ability to effectively integrate acquired businesses into ours, including Radvision;
•
an adverse result in any significant litigation, including antitrust, intellectual property or employment litigation;
•
our ability to maintain adequate security over our information systems;
•
environmental, health and safety laws, regulations, costs and other liabilities;
•
climate change; and
•
pension and post-retirement healthcare and life insurance liabilities.
We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

60

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 Adjusted EBITDA. As defined in our debt agreements, Adjusted EBITDA is a non-GAAP measure of EBITDA further adjusted to exclude certain charges and other adjustments permitted in calculating covenant compliance under our debt agreements. We believe that including supplementary information concerning Adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our debt agreements and because it serves as a basis for determining management compensation. In addition, we believe Adjusted EBITDA provides more comparability between our historical results and results that reflect purchase accounting and our new capital structure following the Merger. Accordingly, Adjusted EBITDA measures our financial performance based on operational factors that management can impact in the short-term, namely the Company’s pricing strategies, volume, costs and expenses of the organization.
EBITDA and Adjusted EBITDA have limitations as analytical tools. Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations. In particular, based on our debt agreements the definition of Adjusted EBITDA allows us to add back certain non-cash charges that are deducted in calculating net income (loss). Our debt agreements also allow us to add back restructuring charges, Sponsor monitoring fees and other specific cash costs and expenses as defined in the agreements and that portion of our pension costs, other post-employment benefits costs, and non-retirement post-employment benefits costs representing the amortization of pension service costs and actuarial gain or loss associated with these employment benefits. However, these are expenses that may recur, may vary and are difficult to predict. Further, our debt agreements require that Adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.


61

The unaudited reconciliation of net loss, which is a GAAP measure, to EBITDA and Adjusted EBITDA is presented below:
 
Three months ended June 30,
 
Nine months ended June 30,
(In millions)
2013
 
2012
 
2013
 
2012
Net loss
$
(110
)
 
$
(166
)
 
$
(387
)
 
$
(354
)
Interest expense
122

 
107

 
346

 
324

Interest income
(1
)
 
(1
)
 
(2
)
 
(3
)
(Benefit from) provision for income taxes
(3
)
 
88

 
(9
)
 
62

Depreciation and amortization
110

 
140

 
331

 
426

EBITDA
118

 
168

 
279

 
455

Impact of purchase accounting adjustments
1

 
1

 
1

 
2

Restructuring charges, net
63

 
17

 
165

 
128

Sponsors’ fees (a)
1

 
1

 
5

 
5

Acquisition-related costs (b)
1

 
1

 
1

 
4

Integration-related costs (c)
3

 
6

 
12

 
14

Loss on extinguishment of debt (d)
—

 
—

 
6

 
—

Third-party fees expensed in connection with the debt modification (e)
—

 
—

 
18

 
—

Non-cash share-based compensation
4

 
2

 
7

 
7

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

 
4

 
—

 
4

(Gain) loss on investments and sale of long-lived assets, net
(1
)
 
—

 
(1
)
 
3

Goodwill impairment
—

 
—

 
89

 
—

Impairment of long-lived assets
1

 
2

 
1

 
2

Venezuela hyperinflationary and devaluation charges
—

 
—

 
1

 
—

Resolution of legal matters
10

 
—

 
10

 
—

Loss (gain) on foreign currency transactions
5

 
(5
)
 
(10
)
 
7

Pension/OPEB/nonretirement postemployment benefits and long-term disability costs (f)
19

 
28

 
64

 
73

Adjusted EBITDA
$
225

 
$
225

 
$
648

 
$
704

 
(a)
Sponsors’ fees represent monitoring fees payable to affiliates of the Sponsors pursuant to a management services agreement entered into at the time of the Merger.
(b)
Acquisition-related costs include legal and other costs related to Radvision, the acquisition of NES and other acquisitions.
(c)
Integration-related costs primarily represent third-party consulting fees and other administrative costs associated with consolidating and coordinating the operations of Avaya with Radvision, NES and other acquisitions. In fiscal 2013, the costs 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. In fiscal 2012, the costs primarily relate to developing compatible IT systems and internal processes with NES.
(d)
Loss on extinguishment of debt represents the loss recognized in connection with the repayment of $284 million of term B-5 loans and $584 million of term B-1 loans. The loss is based on the difference between the reacquisition price and the carrying value (including unamortized debt issue costs) of the debt. See Note 7, “Financing Arrangements,” to our unaudited interim consolidated financial statements located elsewhere in this Form 10-Q.
(e)
The third-party fees expensed in connection with debt modification represent fees paid to third parties in connection with modifications of the senior secured credit facility and the exchange of $1,384 million of senior unsecured notes for senior secured notes. See Note 7, “Financing Arrangements,” to our unaudited interim consolidated financial statements located elsewhere in this Form 10-Q.
(f)
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. For the three and nine months ended June 30, 2013, the amounts include a net curtailment gain of $6 million associated with the U.S. pension and postretirement plans. For the three and nine months ended June 30, 2012, the amounts include a curtailment charge of $5 million associated with workforce reductions in Germany and the U.S.

62

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, 2012 filed with the SEC on December 12, 2012. As of June 30, 2013, 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 the disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and (2) that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

b)
 Changes in Internal Control Over Financial Reporting.
On June 5, 2012, the Company completed the acquisition of RADVISION Ltd. (“Radvision”). The Company has analyzed, evaluated and, where necessary, implemented certain changes in the controls and procedures over financial reporting as they relate to the Radvision business. There were no other changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


63

PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings.

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

Item 1A.
Risk Factors

There have been no material changes during the quarterly period ended June 30, 2013 to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012.

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 2021.

During and subsequent to the quarter ended June 30, 2013, no events took place that were required to be disclosed in a report on Form 8-K but were not reported.



64

Item 6.
Exhibits.
Exhibit
Number
  
 
 
 
 
10.1
 
Form of Segment Transformation Growth Incentive cash award agreement dated July 2013.
 
 
 
10.2
 
Form of Segment Transformation Growth Incentive restricted stock unit award agreement dated July 2013.
 
 
 
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 June 30, 2013, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets at June 30, 2013 and September 30, 2012, (ii) Consolidated Statement of Operations for the three and nine months ended June 30, 2013 and 2012(iii) the Consolidated Statement of Comprehensive Income for the three and nine months ended June 30, 2013 and 2012 (iv) Consolidated Statements of Cash Flows for the nine months ended June 30, 2013 and 2012, 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/    KEVIN J. MACKAY        
 
 
Kevin J. MacKay
Vice President, Controller & Chief Accounting Officer
(Principal Accounting Officer)

August 9, 2013


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