AVAYA INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.
(Edgar Glimpses Via Acquire Media NewsEdge)
Unless the context otherwise indicates, as used in this "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the terms "we,"
"us," "our," "the Company," "Avaya" and similar terms refer to Avaya Inc. and
its subsidiaries. "Management's Discussion and Analysis of Financial Condition
and Results of Operations" should be read in conjunction with the unaudited
interim consolidated financial statements and the related notes included
elsewhere in this Quarterly Report on Form 10-Q. The matters discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contain certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. See "Cautionary Note Regarding
Forward-Looking Statements" at the end of this discussion.
Our accompanying unaudited interim consolidated financial statements as of
December 31, 2012 and for the three months ended December 31, 2012 and 2011 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 solutions 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 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. 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 solutions and services are aimed at large enterprises, small- and mid-sized
businesses and government organizations. We offer solutions 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.
These three categories are supported by Avaya's portfolio of services including
product support, integration, and professional and managed services that 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 will expand its technology portfolio and provide
customers a highly integrated and interoperable suite of cost-effective, easy to
use, high-definition video collaboration products, with the ability to
interoperate 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 ("UC") 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.
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The integrated Avaya and 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 in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any such State. Further, there is no way to predict whether or not
Parent will be successful in completing the offering as contemplated and if it
is successful, we cannot be certain if, or how much of, the net proceeds will be
used for the purposes identified above.
Refinancing of Debt
During the quarter 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 originally matured 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.
On October 29, 2012 the Company amended and restated its senior secured credit
facility and the senior secured multi-currency asset-based revolving credit
facility to, among other things, permit the extension of the maturity of $135
million aggregate principal amount of its outstanding term B-1 loans from
October 26, 2014 to October 26, 2017 (potentially springing to July 26, 2015,
under certain circumstances) by converting such loans into a new tranche of
senior secured term B-4 loans ("term B-4 loans"), and to permit the Company to
issue or incur additional secured indebtedness. As a result of the amendment and
restatement of the senior secured credit facility, the applicable interest rate
for the portion of the term B-1 loans that was converted into term B-4 loans was
also changed.
On December 21, 2012, the Company amended and restated its senior secured credit
facility to, among other things, permit the extension of the maturity of $713
million aggregate principal amount of its outstanding term B-1 loans from
October 26, 2014 to March 31, 2018 (potentially springing to July 26, 2015,
under certain circumstances) and $134 million aggregate principal amount of its
outstanding term B-4 loans from October 26, 2017 to March 31, 2018 (potentially
springing to July 26, 2015, under certain circumstances) in each case by
converting such loans into a new tranche of senior secured term B-5 loans ("term
B-5 loans"). As a result of the amendment and restatement of the senior secured
credit facility, the applicable interest rate for the portion of the term B-1
loans and term B-4 loans that were converted into term B-5 loans was also
changed.
On December 21, 2012 the Company completed a private placement of $290 million
of 9% senior secured notes due April 2019 (the "9% Senior Secured Notes"). The
proceeds from the 9% Senior Secured Notes were used to repay $284 million
principal amount of term B-5 loans and to pay related fees and expenses.
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").
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Our Products
Our product portfolio spans a broad range of unified communications,
collaboration, customer service, video and data products designed to meet the
diverse needs of small and mid-size businesses, as well as large enterprises.
The majority of our portfolio comprises software products that reside on either
a client or server. Client software resides on both our own and third-party
devices, including desk phones, tablets, desktop PCs and mobile phones.
Server-side software controls communication and collaboration for the
enterprise, and delivers rich value-added applications such as messaging,
telephony, voice, video and web conferencing, mobility and customer service.
Hardware includes a broad range of desk phones, video endpoints, 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. Highlights of our
portfolio include:
Avaya Aura Portfolio
At the core of our next-generation collaboration solutions is the Avaya Aura
platform, our SIP standards-based software suite of collaboration applications,
including real-time voice, video, instant messaging, presence, conferencing, and
non-real-time email, voicemail and social networking. The Avaya Aura platform is
part of our infrastructure solutions portfolio. The Avaya Aura architecture
simplifies complex communications networks and reduces infrastructure costs.
Using this architecture, organizations are able to rapidly and cost-effectively
deploy applications from a centralized data center to users regardless of the
device they are using or the network to which they are connected. 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 solutions helps
provide our customers with the flexibility to be more efficient and successful.
At the heart of our Avaya Aura portfolio is Session Manager, which provides
multimedia communications control and management. Multi-vendor voice, video and
data communications can all be managed and controlled from one centralized
software platform. 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 allows business users to work from
any location, on any device, by providing collaboration and communication
capabilities on a broad variety of operating systems, devices, desktop, laptop
and tablet computers, smart phones, mobile devices and dedicated deskphones.
Highlights of the Avaya Aura portfolio include the following:
• Avaya Aura Messaging, an application that enables migration from
traditional voice messaging systems to SIP-based multimedia messaging with
enterprise-class features, scalability and reliability.
• Avaya Aura Presence Services, an application that provides contextual
information and availability from across multiple devices and applications
to users, delivering a richer collaboration experience. These capabilities
are leveraged across the entire spectrum of communications applications,
ranging from voice calls and instant messaging to customer services and
business processes.
• Avaya Aura Conferencing, which offers a rich set of scalable conferencing
configurations and delivers audio conferencing, web conferencing,
document-based collaboration and video-enabled web conferencing while
letting users leverage familiar desktop applications and interfaces for
increased conference control.
• The Avaya Aura architecture supports communications and collaboration
endpoints including telephones, speaker phones, personal video
collaboration devices and client software designed to provide enterprise
class communications and our Avaya Flare Experience, as discussed below, on
our own devices as well as laptops, smartphones and tablets.
• Avaya Aura Video Conferencing solutions, a wide suite of high-definition,
low-bandwidth, SIP-based video endpoints combined with software
applications to enable rich video conferencing to serve individual desktop
users and small workgroups as well as large conference rooms.
Radvision Scopia
In June 2012, Avaya acquired RADVISION Ltd., a global provider of
videoconferencing and telepresence technologies over internet protocol ("IP")
and wireless networks. Through that transaction, Avaya acquired a video
conferencing portfolio designed to help customers be more effective regardless
of whether they are working from their desktop, a conference room or a mobile
device.
The Radvision Scopia infrastructure is designed to deliver flexibility and cost
effectiveness as enterprises adopt the latest HD and Unified Communications
technologies. The Radvision Scopia platform is an effective combination of
hardware and software that supports media processing for advanced room system
devices while delivering high scalability and distributed processing for
desktops and mobile deployments.
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Our Radvision Scopia XT video conferencing room systems incorporate the latest
video communications technology including dual 1080p/60fps video channels, H.264
high profile for bandwidth efficiency, H.264 scalable video coding for error
resiliency, and Apple iPad device multi-touch control.
The Radvision Scopia Desktop application extends a room system deployment to
remote and desktop users with a simple web-browser plug-in that is centrally
managed, distributed and deployed. It allows for scheduled and ad hoc video
conferences across a variety of devices and provides the ability to easily
include participants from both inside and outside the organization.
Radvision Scopia Mobile provides applications for video conferencing, conference
control, and management for smart phones and tablets supporting Apple iOS when
connected over mobile broadband or Wi-Fi.
Avaya Contact Centers
Avaya is a leader in the contact center market. Across the contact center our
portfolio provides a foundation for managing voice interactions that has been
extended to include multiple channels supporting instant messaging, video,
email, and social media.
Our Avaya Aura Contact Center is a SIP-based application that enables session
based media, independent communications, and interactions. This session based
approach allows for blended agent queues and assigns customer interactions
specific to the incoming channel. Agents receive the request at the desktop
through a single integrated queue, unified reporting is provided to the
supervisor supported by analytics across activities, and users are administrated
through a single unified tool.
Avaya Aura Contact Center allows an agent to see all the information related to
a customer and provides that customer with a seamless interaction as he or she
traverses channels (e.g. telephone call, video, chat or email). With improved
information, agents have the ability to provide better customer support for
service related issues and support questions arising during sales and customer
support. As a result, the combined portfolio not only optimizes agent skill sets
to address multiple communication channels and customer needs, but enhances
customer experience.
Avaya Aura Contact Center is a scalable communications infrastructure that
enables small, medium, and large enterprises that span global implementations.
The capabilities of our contact center solutions include:
• Assisted and Automated Experience Management, which provides intelligent
routing of voice and multimedia contacts and a variety of applications for
customer service agents, as well as outbound and self-service applications
to manage collaboration and workflow between an enterprise and its
customers;
• Workforce Optimization, which includes call recording, quality monitoring
and workforce management applications; and
• Performance Management, which provides contact center reporting, analytics
and operations performance management solutions, as well as agent
performance management and scheduling to ensure optimal use of resources
and improve customer satisfaction.
In today's mobile and distributed environments, agents and supervisors benefit
from the ability to move the delivery of their communications and customer
support activities to the location of their choice (office, home, or remote
location). Avaya Aura Contact Center also provides agents and supervisors with
the ability to move from device to device (hard phone, soft phone and mobile
phone).
Avaya Flare Experience
In September 2010, we unveiled the Avaya Flare Experience, a real-time,
enterprise video communications and collaboration solution. The Avaya Flare
Experience is part of our Unified Communication Applications or UC Applications
solutions portfolio and helps break down the barriers between today's
communications and collaboration tools with a distinctive user interface for
quick, easy access to voice and video, social media, presence and instant
messaging and audio/video/web conferencing, a consolidated view of multiple
directories, context history and more.
The Avaya Flare Experience features a central spotlight that highlights active
or in-progress collaboration sessions. Initiating a communication session is as
easy as moving one or more contacts from the directory into the spotlight. For
text messages, a pop-up keyboard appears when a user taps a text-based icon
under a contact's photo. The Avaya Flare Experience combines contacts from
multiple sources into a single "fan," synchronizes email/calendars with
Microsoft ActiveSync and integrates collaboration activity into a common
interaction history, providing context to any session. We believe these
capabilities deliver a simpler, more compelling experience to end-users using
video, voice and text.
Currently, the Avaya Flare Experience runs on the Avaya Desktop Video Device, an
Android-based, video-enabled desktop collaboration endpoint for executive
desktops or power communicators that can also perform as a customer kiosk. In
addition, in January 2012 we announced the availability of Avaya Flare
Communicator for Apple iPad tablets. We are adapting the Avaya Flare software
for other devices and operating systems such as Google Android tablets, Windows
laptops and other consumer
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device classes and platforms. Overall, we believe our software-centric solutions
are helping to enable customers to be more productive and compete more
effectively by changing the way users collaborate. The Avaya Flare Experience
complements the widely deployed Avaya one-X product line that provides mobile
applications for smartphones (Google Android, Apple iPhone, RIM BlackBerry,
Symbian), or any phone using natural speech commands, as well as
desktop-integrated Microsoft Windows and Apple Mac clients. Avaya one-X clients
are expected to evolve over time to incorporate Avaya Flare capabilities in a
single software family. Avaya Flare and Avaya one-X Unified Collaboration and
Communication clients provide flexibility that helps organizations to provide
the right experience to the right users to drive faster decision-making, reduce
costs and provide more streamlined communications.
Avaya IP Office
Avaya IP Office is our award-winning global flagship Small and Medium
Enterprises, or SME, communications solution specially designed to meet
communications challenges facing small and medium enterprises. Avaya IP Office
is part of our infrastructure solutions portfolio. IP Office provides solutions
that help simplify processes and streamline information exchange within systems.
Communications capabilities can be added as needed, and IP Office connects to
both traditional and the latest IP lines to give growing companies flexibility
and the ability to retain and leverage their existing investment. We recently
unveiled the latest version of our communications solution for this market -
Avaya IP Office 8.1 - which adds innovative capabilities to tap the full
potential of next-generation collaboration. This includes new mobility,
management and security features, as well increased scalability, to help SMEs
efficiently and securely take advantage of BYOD environments and advanced
mobility. In addition, in November 2012 we announced the 300,000th shipment of
Avaya IP Office. This latest milestone highlights Avaya's accelerating momentum
in the SME market-with a 50 percent increase in IP Office sales in the past two
years-as more small and mid-size businesses seek a simple, yet powerful way to
gain the full benefits of unified communications and customer experience
management capabilities.
Avaya Agile Communication Environment (ACE)
Avaya 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, ERP, 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 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, 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.
AvayaLive
AvayaLive is our overall Avaya-provided cloud solutions portfolio, allowing our
customers to procure, provision, and deploy unified collaboration solutions
without the need for on-premise equipment. The AvayaLive portfolio is focused on
providing feature-rich, user deployable, collaboration platforms in a
Communications As a Service (Caas) model, without requiring additional IT
staffing or training.
AvayaLive Connect is a single-source for a complete unified communication
experience for entrepreneurial businesses. The entrepreneurial business is
defined by agility, creativity, and the rapid access to technology and the
AvayaLive Connect solution is hallmarked by all three. The solution provides
voice, video, conferencing, chat and messaging solutions in a simple,
cloud-based solution. These services are accessible from mobile devices,
personal computers, "hard" phones and tablets to enable collaboration from
nearly anywhere a network is available. AvayaLive Connect is billed on a
per-user/per month basis allowing businesses to add users to meet the demands of
their customers. Utilizing the Amazon Elastic Compute Cloud (EC2), AvayaLive
Connect scales to meet these demands with ease and without expensive resource or
administrative overhead.
AvayaLive Engage is an online, immersive conferencing and social collaboration
environment that lets users collaborate as though they were face to face.
AvayaLive Engage replicates real life interactions using personalized avatars,
which users control to navigate through an online, three-dimensional
environment, with the ability to talk, chat, share, collaborate and present in
real-time. A cloud-based solution requiring only a web browser plug-in, the
product allows collaboration between users from any browser, inside or outside
of the enterprise.
Avaya Networking
In support of our data communications strategy, our networking product portfolio
is designed to address and surpass competitors' products with respect to three
key requirements: resiliency, efficiency and performance.
Our networking portfolio is complementary to our business collaboration, unified
communications and contact center portfolios based on the Avaya Aura
architecture. We believe that customers today benefit from end-to-end solution
design, testing and
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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, 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 Local Area Network switches for data center,
core, edge and branch applications;
• Unified Branch-a range of routers and Virtual Private Network appliances
that provide a secure connection for branches;
• Wireless Networking-a cost-effective and scalable solution enabling
enterprises to deploy wireless coverage;
• Access Control-solutions that provide policy decision to enforce role-based
access control to the network;
• Unified Management-providing support for data and voice networks by
simplifying the requirements associated across functional areas; and
• Avaya VENA-an end-to-end virtualization strategy and architecture that helps simplify data center and campus networking and optimizes business
applications and service deployments in and between data centers and
campuses, while helping to reduce costs and improve time to service.
We sell our portfolio of data networking products globally into enterprises of
all types, with particular strength in healthcare, education, hospitality,
financial services and local and state government.
Our 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-standard 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. 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. Session Manager
instantly 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.
Additional Technologies
In addition to SIP, we use technologies including:
• SIP/SIMPLE and XMP: the Avaya Aura Presence Services collects, publishes,
aggregates and federates using SIP/SIMPLE and XMPP standards, providing
interoperability with systems from other vendors, including but not limited
to Microsoft, IBM and Google;
• Service Oriented Architecture, or SOA, oriented web services, including
SOAP, REST and WSDL, are used extensively in Avaya ACE, leveraging open,
extensible standards and protocols to facilitate rapid deployment and
deliver customer choice;
• 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;
• 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; and
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• 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.
Our Services
AGS evaluates, plans, designs, implements, supports, manages and optimizes
enterprise communications networks to help customers achieve enhanced business
results both directly and through partners. Our award-winning portfolio of
services includes product support, integration and professional and managed
services that enable customers to optimize and manage their converged
communications networks worldwide and achieve enhanced business results. AGS is
supported by patented design and management tools and network operations and
technical support centers around the world.
Within AGS are Avaya Client Services and Professional Services.
Avaya Client Services ("ACS")
ACS is a market-leading organization that supports, manages and optimizes
enterprise communications networks to help customers maximize the performance of
their communications solutions. Avaya Client Services is supported by patented
tools and by network operations and technical support centers around the world.
The contracts for these services range between one and seven 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 which provides a comprehensive suite of support
options both directly and through partners, which enables customers to
choose from modular options such as remote support, monitoring, parts,
onsite, major upgrade subscription and more. We believe Avaya's solutions
also enable customers to receive faster and better support than
competitors can deliver, often with little or no additional costs. For
example, through our new support site, customers now have access to live
chat with agents, web based knowledge articles and "how-to" videos,
virtual agent technology, and voice and online collaboration tools for
faster resolution of customer issues. Secure Access Link is high speed
network connectivity between the client and Avaya, capturing vital information to help ensure reliability, uptime and faster issue resolution
of their Avaya systems and applications. Operations Intelligence Suite is
a web-based portal that allows clients to have visibility to incidents if
they occur to ensure rapid resolution. It also enhances and maintains the
client's network by the ability to perform testing, root cause analysis
and issue prevention.
• Avaya Operations Services which provides holistic managed services for
customers' communications environments. Avaya can manage complex
multi-vendor, multi-technology and aging networks with Service Level Agreements (SLAs) to help optimize network performance. With AOS 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, reporting, or private
cloud options. AOS has approximately 700 experts in managing
communications environments, supporting hundreds of customers across the
globe.
Professional Services
Our planning, design and integration specialists and communications consultants
provide and implement solutions that help reduce costs and enhance business
agility. We also provide vertical solutions designed to leverage existing
product environments, contact centers and unified communications networks as
well as IT professional services which includes U.S. Government customers.
Financial Results Summary
Our revenues for the three months ended December 31, 2012 decreased 11% as
compared to the corresponding period in the prior year. The decrease is
primarily the result of lower customer spend for unified communication products
in a cautious spending environment, which also contributed to lower maintenance
and professional services revenues.
We earned operating income for the three months ended December 31, 2012 of $23
million as compared to $82 million for the three months ended December 31, 2011,
a decrease of $59 million. The decrease in operating income is attributable to
the decrease in revenues described above and an increase in restructuring
charges, partially offset by the continued benefit from cost savings initiatives
and lower costs associated with employee incentive plans.
Operating income for the three months ended December 31, 2012 and 2011 includes
non-cash expenses for depreciation and amortization of $114 million and $143
million and share-based compensation of $2 million and $3 million for each of
the periods, respectively.
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Our net loss for the three months ended December 31, 2012 and 2011 was $85
million and $26 million, respectively. The increase in our net loss is primarily
attributable to the decrease in operating income as described above, as well as
costs incurred in connection with the modifications to our senior secured credit
facility, partially offset by an increase in the benefit from income taxes for
the three months ended December 31, 2012 as compared to the three months ended
December 31, 2011.
Results From Operations
Three Months Ended December 31, 2012 Compared with Three Months Ended December
31, 2011
Revenue
Our revenue for the three months ended December 31, 2012 and 2011 was $1,240
million and $1,387 million, respectively, a decrease of $147 million or 11%.
Incremental revenue from the Radvision business for the current period was $24
million. The following table sets forth a comparison of revenue by portfolio:
Three months ended December 31,
Percentage of Total Revenue Yr. to Yr. Yr. to Yr. Percentage
Dollars in Percentage Change, net of Foreign
millions 2012 2011 2012 2011 Change Currency Impact
GCS $ 573 $ 667 46 % 48 % -14 % -14 %
Networking 58 82 5 % 6 % -29 % -29 %
Total ECS product
revenue 631 749 51 % 54 % -16 % -16 %
AGS 609 638 49 % 46 % -5 % -4 %
Total revenue $ 1,240 $ 1,387 100 % 100 % -11 % -10 %
GCS revenue for the three months ended December 31, 2012 and 2011 was $573
million and $667 million, respectively, a decrease of $94 million or 14%. The
decrease in GCS revenue was primarily the result of lower customer spend for
unified communication products in a cautious spending environment. These
decreases were partially offset by the incremental revenue from the Radvision
business for the current period.
Networking revenue for the three months ended December 31, 2012 and 2011 was $58
million and $82 million, respectively, a decrease of $24 million or 29%. The
decrease in Networking revenue is primarily a result of lower demand in EMEA and
the U.S.
AGS revenue for the three months ended December 31, 2012 and 2011 was $609
million and $638 million, respectively, a decrease of $29 million or 5%. The
decrease in AGS revenue was primarily due to lower maintenance and professional
services revenues particularly with our U.S. Government customers, as well as
the unfavorable impact of foreign currency, particularly in EMEA. These
decreases were partially offset by an increase in revenues from operational
services performed under SLAs entered into in prior periods.
The following table sets forth a comparison of revenue by location:
Three months ended December 31,
Percentage of
Total Revenue Yr. to Yr. Yr. to Yr. Percentage
Dollars in Percentage Change, net of Foreign
millions 2012 2011 2012 2011 Change Currency Impact
U.S. $ 670 $ 748 54 % 54 % -10 % -10 %
International:
EMEA 331 365 27 % 26 % -9 % -8 %
APAC - Asia
Pacific 123 126 10 % 9 % -2 % -2 %
Americas
International -
Canada and Latin
America 116 148 9 % 11 % -22 % -22 %
Total
International 570 639 46 % 46 % -11 % -10 %
Total revenue $ 1,240 $ 1,387 100 % 100 % -11 % -10 %
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Revenue in the U.S. for the three months ended December 31, 2012 and 2011 was
$670 million and $748 million, respectively, a decrease of $78 million million
or 10%. The decrease in U.S. revenue was primarily attributable to lower sales
associated with our unified communications products, which also contributed to
lower revenues from maintenance and professional services, particularly with our
U.S. Government customers. The decrease in U.S. revenue was also attributable to
lower demand for networking products. These decreases were partially offset by
the incremental revenues from the Radvision business. Revenue in EMEA for the
three months ended December 31, 2012 and 2011 was $331 million and $365 million,
respectively, a decrease of $34 million or 9%. The decrease in EMEA revenue was
primarily attributable to lower sales associated with our infrastructure
solutions and networking products and to a lesser extent an unfavorable impact
of foreign currency, partially offset by revenues from the Radvision business.
Revenue in APAC for the three months ended December 31, 2012 and 2011 was $123
million and $126 million, respectively. The decrease in APAC revenue is
primarily attributable to lower revenues associated with our infrastructure
solutions portfolio and professional services, partially offset by higher
maintenance services. Revenue in Americas International was $116 million and
$148 million for the three months ended December 31, 2012 and 2011,
respectively, a decrease of $32 million or 22%. The decrease in Americas
International revenue was particularly attributable to Canada and Brazil and was
associated primarily with our infrastructure solutions and contact center
portfolios.
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 December 31,
Percentage of Total
ECS Product Revenue Yr. to Yr. Yr. to Yr. Percentage
Dollars in Percentage Change, net of Foreign
millions 2012 2011 2012 2011 Change Currency Impact
Direct $ 141 $ 167 22 % 22 % -16 % -14 %
Indirect 490 582 78 % 78 % -16 % -16 %
Total ECS product
revenue $ 631 $ 749 100 % 100 % -16 % -16 %
Gross Profit
The following table sets forth a comparison of gross profit by segment:
Three months ended December 31,
Gross Profit Gross Margin Change
Dollars in millions 2012 2011 2012 2011 Amount Pct.
GCS $ 349 $ 400 60.9 % 60.0 % $ (51 ) (13 )%
Networking 22 37 37.9 % 45.1 % (15 ) (41 )%
ECS 371 437 58.8 % 58.3 % (66 ) (15 )%
AGS 318 313 52.2 % 49.1 % 5 2 %
Unallocated amounts (23 ) (46 ) (1 ) (1 ) 23 (1 )
Total $ 666 $ 704 53.7 % 50.8 % $ (38 ) (5 )%
(1) Not meaningful
Gross profit for the three months ended December 31, 2012 and 2011 was $666
million and $704 million, respectively, a decrease of $38 million or 5% and
includes incremental gross profit from the Radvision business. The decrease is
attributable to decreased sales volumes. These decreases were partially offset
by the success of our gross margin improvement initiatives, the impact of lower
amortization of technology intangible assets, lower costs associated with our
employee incentive plans, which are driven by our actual financial results
relative to established targets, and a $5 million benefit associated with the
release of a contingent liability related to a labor matter in EMEA that we
released as a result 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 53.7% for the three
months ended December 31, 2012 from 50.8% for the three months ended December
31, 2011.
GCS gross profit for the three months ended December 31, 2012 and 2011 was $349
million and $400 million, respectively, a decrease of $51 million or 13%. The
decrease in GCS gross profit is primarily due to the decrease in sales volume
and the unfavorable impact of foreign currency. These decreases were partially
offset by the success of our gross margin improvement
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initiatives discussed above and lower costs associated with our employee
incentive plans. As a result of the above factors, GCS gross margin increased to
60.9% for the three months ended December 31, 2012 compared to 60.0% for the
three months ended December 31, 2011.
Networking gross profit for the three months ended December 31, 2012 and 2011
was $22 million and $37 million, respectively, a decrease of $15 million or 41%.
Networking gross margin decreased to 37.9% for the three months ended December
31, 2012 from 45.1% for the three months ended December 31, 2011. 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 three months ended December 31, 2012 and 2011 was $318
million and $313 million, respectively, an increase of $5 million or 2%. The
increase in AGS gross profit is primarily due to the continued benefit from our
gross margin improvement initiatives discussed above, as well as lower costs
associated with our employee incentive plans and a $5 million benefit associated
with the release of a contingent liability related to a labor matter in EMEA
that we released 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 52.2% for the three months ended December 31, 2012
compared to 49.1% for the three months ended December 31, 2011.
Unallocated amounts for the three months ended December 31, 2012 and 2011
include the effect of the amortization of acquired technology intangibles
related to the acquisition of NES and the Merger, costs that are not core to the
measurement of segment management's performance, but rather are controlled at
the corporate level, and certain purchase accounting adjustments in connection
with the Merger. Unallocated costs for three months ended December 31, 2012 also
included the effect of the amortization of acquired technology intangible assets
related to the acquisition of Radvision in June 2012. 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 December 31,
Percentage of Revenue Change
Dollars in millions 2012 2011 2012 2011 Amount Pct.
Selling, general and
administrative $ 384 $ 433 31.0 % 31.2 % $ (49 ) (11 )%
Research and development 118 111 9.5 % 8.0 % 7 6 %
Amortization of intangible
assets 57 56 4.6 % 4.0 % 1 2 %
Restructuring and impairment
charges, net 84 21 6.8 % 1.5 % 63 300 %
Acquisition-related costs - 1 - % 0.1 % (1 ) (100 )%
Total operating expenses $ 643 $ 622 51.9 % 44.8 % $ 21
3 %
Selling, general and administrative ("SG&A") expenses for the three months ended
December 31, 2012 and 2011 were $384 million and $433 million, respectively, a
decrease of $49 million. The decrease was primarily due to lower expenses as a
result of our cost savings initiatives and lower expenses associated with our
employee incentive plans, and a $3 million benefit associated with the release
of a contingent liability related to a labor matter in EMEA that we released as
a result of a favorable court ruling and the favorable impact of foreign
currency. Our cost savings initiatives include exiting 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.
Research and development ("R&D") expenses for the three months ended December
31, 2012 and 2011 were $118 million and $111 million, respectively, an increase
of $7 million. The increase was primarily due to an increase in costs of new
product development, as well as the incremental expenses associated with the
Radvision business. The increase in these costs was partially offset by lower
expenses associated with our cost savings initiatives discussed above and
employee incentive plans. Capitalized software development costs for the three
months ended December 31, 2012 and 2011 were $7 million and $12 million,
respectively, a decrease of $5 million. Because the projects in our product
development portfolio for the three months ended December 31, 2011 were
generally further along in the development cycle than those for the three months
ended December 31, 2012, we capitalized a lower portion of our current period
R&D spend.
Amortization of intangible assets was $57 million and $56 million for the three
months ended December 31, 2012 and 2011, respectively.
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Restructuring and impairment charges, net, for the three months ended December
31, 2012 and 2011 were $84 million and $21 million, respectively, an increase of
$63 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 December 31, 2012 include employee separation
costs of $70 million and lease obligations of $14 million. The employee
separation costs are primarily associated with employee severance actions in
EMEA and the U.S. The EMEA approved plan provides for the elimination of 234
positions and resulted in a charge of $50 million. A voluntary program offered
to certain management employees in the U.S. resulted in the elimination of 195
positions and resulted in a charge of $9 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. Restructuring charges for the three months ended December 31, 2012
includes lease obligations primarily related to the Company's Maidenhead, United
Kingdom and Highlands Ranch, Colorado facilities. Restructuring charges recorded
during the three months ended December 31, 2011 include employee separation
costs of $20 million and lease obligations of $1 million. Employee separation
charges for this period are primarily associated with employee severance actions
in the U.S., Germany, the United Kingdom and Canada. The Company continues to
evaluate opportunities to streamline its operations and identify cost savings
globally and may take additional restructuring actions in the future and the
costs of those actions could be material.
Acquisition-related costs for the three months ended December 31, 2011 was $1
million and include third-party legal and other costs related to business
acquisitions in fiscal 2012. There were no acquisition-related costs for the
three months ended December 31, 2012.
Operating Income
For the three months ended December 31, 2012, operating income was $23 million
compared to $82 million for the three months ended December 31, 2011.
Operating income for the three months ended December 31, 2012 and 2011 includes
non-cash expenses for depreciation and amortization of $114 million and $143
million and share-based compensation of $2 million and $3 million for each of
the periods, respectively.
Interest Expense
Interest expense for the three months ended December 31, 2012 and 2011 was $108
million and $109 million, respectively, which includes non-cash interest expense
of $6 million and $5 million, respectively. Non-cash interest expense for each
period includes (1) amortization of debt issuance costs and (2) accretion of
debt discount. Cash interest expense for the three months ended December 31,
2012 compared to the three months ended December 31, 2011 decreased as a result
of the expiration of certain unfavorable interest rate swap contracts which was
partially offset by increases in interest expense as a result of certain debt
refinancing transactions during the three months ended December 31, 2012.
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 originally matured October 26,
2014. On October 29, 2012, the Company extended the maturity date for a portion
of the term B-1 loans representing outstanding principal amounts of $135 million
by converting such loans into a new tranche of term B-4 loans. On December 21,
2012, the Company further extended the maturity date for a portion of the term
B-1 loans representing outstanding principal amounts of $713 million and a
portion of the term B-4 loans representing outstanding principal amounts of $134
million by converting such loans into a new tranche of term B-5 loans. In
addition, the Company issued $290 million of 9% Senior Secured Notes, the
proceeds of which were used to repay a portion of the term B-5 loans and fees
and expenses. The term B-4 loans, term B-5 loans and 9% Senior Secured Notes all
bear interest at a higher rate per annum than the term loans previously
outstanding under the senior secured credit facility. See Note 7, "Financing
Arrangements" to our unaudited interim consolidated financial statements for
further details.
Loss on Extinguishment of Debt
In connection with the issuance of our 9% Senior Secured Notes and the payment
of $284 million of our term B-5 loans, we recognized a loss on extinguishment of
debt for the three months ended December 31, 2012 of $3 million. The loss
represents the difference between the reacquisition price of the term B-5 loans
and the carrying value of the term B-5 loans (including unamortized debt issue
costs). See Note 7, "Financing Arrangements" to our unaudited interim
consolidated financial statements for further details on the issuance of our 9%
Senior Secured Notes and the repayment of a portion of our term B-5 loans.
Other Expense, Net
Other expense, net, for the three months ended December 31, 2012 was $6 million
as compared to $1 million for the three months ended December 31, 2011. This
difference primarily represents fees paid to third parties in connection with
the modifications to our senior secured credit facility of $4 million during the
three months ended December 31, 2012.
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Benefit from Income Taxes
The benefit from income taxes for the three months ended December 31, 2012 was
$9 million, as compared to $2 million for the three months ended December 31,
2011.
The effective rate for the three months ended December 31, 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, (3) $17 million
of income tax benefit recognized upon the expiration of certain interest rate
swaps, and (4) $2 million release of valuation allowance associated with tax
expense on net gains in other comprehensive income.
During the three months ended December 31, 2012, 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 three months ended December 31, 2012, the Company recorded a tax
charge of $2 million to other comprehensive income and a decrease in deferred
tax assets primarily relating to pension benefits. The charge to other
comprehensive income and decrease in deferred tax assets resulted in the
recording of an income tax benefit in continuing operations related to the
release of the corresponding valuation allowance.
The effective rate for the three months ended December 31, 2011 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) $12
million release of valuation allowance associated with tax expense on net gains
in other comprehensive income.
During the three months ended December 31, 2011, the Company recorded a tax
charge of $12 million to other comprehensive income and a decrease in deferred
tax assets primarily relating to pension benefits. The charge to other
comprehensive income and decrease in deferred tax assets resulted in the
recording of an income tax benefit in continuing operations related to the
release of the corresponding valuation allowance.
Liquidity and Capital Resources
Cash and cash equivalents decreased by $52 million to $285 million at
December 31, 2012 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 December 31, 2012. 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.
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Sources and Uses of Cash
A condensed statement of cash flows for the three months ended December 31, 2012
and 2011 follows:
Three months ended December 31,
In millions 2012 2011
Net cash (used for) provided by:
Net loss $ (85 ) $ (26 )
Adjustments to net loss for non-cash items 101 157
Changes in operating assets and liabilities (10 ) (141 )
Operating activities 6 (10 )
Investing activities (31 ) (36 )
Financing activities (26 ) (10 )
Effect of exchange rate changes on cash and cash equivalents (1 ) 1
Net decrease in cash and cash equivalents (52 ) (55 )
Cash and cash equivalents at beginning of period 337 400
Cash and cash equivalents at end of period $ 285 $ 345
Operating Activities
Cash provided by operating activities was $6 million for the three months ended
December 31, 2012 compared to cash used for operating activities of $10 million
for the three months ended December 31, 2011.
Adjustments to reconcile net loss to net cash provided by (used for) operations
for the three months ended December 31, 2012 and 2011 were $101 million and $157
million, respectively and primarily consisted of depreciation and amortization
of $114 million and $143 million, respectively.
During the three months ended December 31, 2012, changes in our operating assets
and liabilities resulted in a net decrease in cash and cash equivalents of $10
million. The net decrease was driven by the payment of accrued interest and
payments associated with our employee incentive programs, partially offset by
the effects of non-cash business restructuring reserves net of cash payments
against our reserves.
During the three months ended December 31, 2011, changes in our operating assets
and liabilities resulted in a net decrease in cash and cash equivalents of $141
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 $31 million and $36 million for the three
months ended December 31, 2012 and 2011, respectively. The primary use of cash
for investing activities for the three months ended December 31, 2012 was
related to capital expenditures and capitalized software development costs of
$23 million and $7 million, respectively. Also included in cash used for
investing activities for the three months ended December 31, 2012 was $9 million
of cash proceeds for the sale of long-lived assets. Cash used for investing
activities for the three months ended December 31, 2011 included capital
expenditures and capitalized software development costs of $14 million and $12
million, respectively. Further, during the three months ended December 31, 2012
and 2011, 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. Also included in cash used for investing
activities for the three months ended December 31, 2011 is $4 million for other
acquisitions and $4 million of cash proceeds for the sale of long-lived assets.
Financing Activities
Net cash used for financing activities was $26 million and $10 million for the
three months ended December 31, 2012 and 2011. Cash flows from financing
activities for the three months ended December 31, 2012 includes proceeds of
$268 million from the issuance of $290 million of 9% Senior Secures Notes, net
of $22 million of cash paid for debt issuance and debt modification costs. 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. Included in cash used for
financing activities is $9 million in scheduled debt payments for each
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of the three months ended December 31, 2012 and 2011. See Note 7, "Financing
Arrangements" to our unaudited consolidated financial statements for further
details on the issuance of our 9% Senior Secured Notes and repayment of a
portion of our term B-5 loans.
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 $148 million during the remainder
of fiscal 2013. These payments include: $85 million to satisfy the minimum
statutory funding requirements of our U.S. qualified plans, $5 million of
payments under our U.S. benefit plans which are not pre-funded, $23
million under our non-U.S. benefit plans which are predominately not
pre-funded, $4 million under our U.S. retiree medical benefit plan which is not pre-funded and $31 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 in Note 7, "Financing Arrangements" to our unaudited interim consolidated financial statements, the Company entered
into certain refinancing transactions during the quarter ended December
31, 2012. We expect to make payments of $281 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 $92 million for capital expenditures and capitalized software development costs during the
remainder of fiscal 2013.
• Restructuring payments-We expect to make payments of approximately $96 million during the remainder of fiscal 2013 for employee separation costs
and lease termination obligations associated with restructuring actions we
have implemented through December 31, 2012.
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 February 1, 2013, the Company announced the commencement of an offer to
holders of its senior unsecured cash-pay notes and senior unsecured PIK toggle
notes to exchange their unsecured notes for a new series of 10.50% Senior
Secured Notes due 2021. The new notes, as offered will be secured on a
junior-priority basis by substantially the same collateral securing Avaya's 7%
Senior Secured Notes and 9% Senior Secured Notes. The new notes have not been
and will not be registered under the
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Securities Act or any state securities laws, and, unless so registered, may not
be offered or sold in the United States or to any U.S. persons except pursuant
to an exemption from, or in a transaction subject to, the registration
requirements of the Securities Act and any applicable state securities laws. The
exchange offer is only being made to holders of the senior unsecured cash-pay
notes and senior unsecured PIK toggle notes that are either (1) a "qualified
institutional buyer" under Rule 144A under the Securities Act and an "accredited
investor" under Rule 501(a) of Regulation D under the Securities Act, or (2) a
person who is not a "U.S. person" as defined under Regulation S under the
Securities Act.
The exchange offer, which is currently scheduled to expire on March 4, 2013, is
subject to satisfaction or waiver of certain conditions.
The information contained in this Form 10-Q does not constitute an offer to
purchase, sell or the solicitation of an offer to purchase, or a solicitation of
tenders. There can be no assurance that the exchange offer will be completed on
the terms described above, or at all.
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 in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Further, there is no way to predict whether or not Parent will be successful in
completing the offering as contemplated and if it is successful, we cannot be
certain if, or how much of, the net proceeds will be used for the purposes
identified above.
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.
Debt Ratings
As of December 31, 2012, we had a long-term corporate family rating of B3 with a
negative outlook from Moody's and a corporate credit rating of B- with a stable
outlook from Standard & Poor's. Our ability to obtain additional external
financing and the related cost of borrowing may be affected by our debt ratings,
which are periodically reviewed by the major credit rating agencies. The ratings
are subject to change or withdrawal at any time by the respective credit rating
agencies.
Credit Facilities
In connection with the Merger on October 26, 2007, we entered into borrowing
arrangements with several financial institutions, certain of which arrangements
were amended December 18, 2009 in connection with the acquisition of certain
assets and assumption of certain liabilities of the enterprise solutions
business ("NES") of Nortel Networks Corp. and amended on February 11, 2011 in
connection with a refinancing. Long-term debt under our borrowing arrangements
includes a senior secured credit facility consisting of term loans and a
revolving credit facility, a senior secured multi-currency asset based revolving
credit facility, senior secured notes and senior unsecured notes.
During the three months ended December 31, 2012, the Company entered into debt
refinancing transactions including (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 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 term B-4 loans, and (3) the issuance of 9% Senior Secured Notes, the proceeds
of which were used to repay a portion of the outstanding term loans outstanding
under our senior secured credit facility.
As of December 31, 2012, term loans outstanding under the Cash Flow Credit
Agreement include senior secured term B-1 loans, senior secured term B-3 loans,
senior secured term B-4 loans and senior secured term B-5 loans with remaining
face values (after all principal payments to date) of $583 million, $2,146
million, $1 million, and $562 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.
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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 three months ended December 31, 2012 except for recently adopted accounting
guidance as discussed in Note 2, "Recent Accounting Pronouncements" to our
unaudited interim consolidated financial statements.
New Accounting Pronouncements
See discussion in Note 2, "Recent Accounting Pronouncements" to our unaudited
interim consolidated financial statements for further details.
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.
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The unaudited reconciliation of net loss, which is a GAAP measure, to EBITDA and
Adjusted EBITDA is presented below:
Three months ended December 31,
(In millions) 2012 2011
Net loss $ (85 ) $ (26 )
Interest expense 108 109
Interest income (1 ) (1 )
Benefit from income taxes (9 ) (2 )
Depreciation and amortization 114 143
EBITDA 127 223
Restructuring charges, net 84 21
Sponsors' fees (a) 2 2
Acquisition-related costs (b) - 1
Integration-related costs (c) 4 5
Loss on extinguishment of debt (d) 3 -
Third-party fees expensed in connection with the debt
modification (e)
4 -
Non-cash share-based compensation 2 3
Loss on investments and sale of long-lived assets, net - 1
Loss on foreign currency transactions 2 1
Pension/OPEB/nonretirement postemployment benefits and
long-term disability costs (f)
23 22
Adjusted EBITDA $ 251 $ 279
(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 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. The loss is based on the difference between the reacquisition price of the term B-5
loans and the carrying value of the term B-5 loans (including unamortized
debt issue costs). 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 the modification
of the senior secured credit facility. 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.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements." All
statements other than statements of historical fact are "forward-looking"
statements for purposes of the U.S. federal and state securities laws. These
statements may be identified by the use of forward looking terminology such as
"anticipate," "believe," "continue," "could," "estimate," "expect," "intend,"
"may," "might," "plan," "potential," "predict," "should" or "will" or the
negative thereof or other variations thereon or comparable terminology. In
particular, statements about our expectations, beliefs, plans, objectives,
assumptions or future events or performance contained in this report under Part
II, Item 1A, "Risk Factors," and Part I, Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," are forward-looking
statements.
We have based these forward-looking statements on our current expectations,
assumptions, estimates and projections. While we believe these expectations,
assumptions, estimates and projections are reasonable, such forward-looking
statements are only predictions and involve known and unknown risks and
uncertainties, many of which are beyond our control. These and other important
factors, including those discussed in this report, may cause our actual results,
performance or achievements to differ materially from any future results,
performance or achievements expressed or implied by these forward-looking
statements. Some of the key factors that could cause actual results to differ
from our expectations include:
• our ability to develop and sell advanced communications products and
services, including unified communications, data networking solutions and
contact center applications;
• the market for our products and services, including unified communications
solutions;
• our ability to remain competitive in the markets we serve;
• economic conditions and the willingness of enterprises to make capital
investments;
• our reliance on our indirect sales channel;
• the ability to protect our intellectual property and avoid claims of
infringement;
• the ability to retain and attract key employees;
• our degree of leverage and its effect on our ability to raise additional
capital and to react to changes in the economy or our industry;
• our ability to manage our supply chain and logistics functions;
• liquidity and our access to capital markets;
• risks relating to the transaction of business internationally;
• our ability to effectively integrate acquired businesses into ours,
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.
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