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AVAYA INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" should be read in conjunction with the audited consolidated
financial statements and the related notes thereto included elsewhere in this
Annual Report on Form 10-K.
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 highly flexible, reliable and secure, enabling simplified management and cost
reduction while providing a platform for next-generation collaboration from
Avaya.
Our solutions address the needs of a diverse range of customers, including large
multinational enterprises, small- and medium-sized businesses and government
organizations. As of September 30, 2012, we had over 300,000 customers,
including more than 95% of the Fortune 500 companies and installations in over
one million customer locations worldwide. Our customers operate in a broad range
of industries, including financial services, manufacturing, retail,
transportation, energy, media and communications, health care, education and
government.
We sell solutions directly and through our channel partners. As of September 30,
2012, we had approximately 9,900 channel partners worldwide, including system
integrators, service providers, value-added resellers and business partners that
provide sales and service support.
Ownership
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"). The Sponsors, through Parent, acquired Avaya in
a transaction that was completed on October 26, 2007 (the "Merger").
Acquisitions
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 expanded its technology portfolio and now
provides 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 are integrating 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 which 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. Radvision will
help enable Avaya to provide a Cloud offering through hosted solutions by
service providers. 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.
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 $933 million in cash consideration. The acquisition of NES
expanded Avaya's technology portfolio, enhanced its customer base, broadened its
indirect sales channel, and provided greater ability to compete globally.
Please refer to Note 4, "Business Combinations and Other Transactions," to our
audited consolidated financial statements for further details.
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Initial Registration Statement of Parent
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.
Sale of AGC Networks Limited
On August 31, 2010, Avaya sold its 59.13% ownership interest in AGC Networks
Limited (formerly Avaya GlobalConnect Ltd.) ("AGC"), a publicly-traded Indian
company that is a reseller of Avaya products and services in the Indian and
Australian markets. The sale of its stake in AGC enabled Avaya to drive
additional focus on two of its strategic imperatives: the development of the
Avaya business in India and the growth and extension of its channel coverage
model through Avaya's global channel program.
Products and Services
For a description of our products and services, please see "Business-Our
Products" and "Business-Our Services."
Customers and Competitive Advantages
For a discussion of our customers and competitive advantages, please see
"Business-Customers, Sales, Partners and Distribution" and "Business-Our
Competitive Strengths."
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Financial Results Summary
The following table sets forth for fiscal 2012, 2011, and 2010, our results of
operations as reported in our audited consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") located elsewhere in this Annual Report on Form 10-K.
Fiscal years ended September 30,
In millions 2012 2011 2010
STATEMENT OF OPERATIONS DATA:
REVENUE
Products $ 2,672 $ 2,976 $ 2,602
Services 2,499 2,571 2,458
5,171 5,547 5,060
COSTS
Products:
Costs (exclusive of amortization of
intangibles) 1,145 1,314 1,243
Amortization of technology intangible assets 192 257 291
Services 1,248 1,344 1,354
2,585 2,915 2,888
GROSS PROFIT 2,586 2,632 2,172
OPERATING EXPENSES
Selling, general and administrative 1,630 1,845 1,721
Research and development 464 461 407
Amortization of intangible assets 226 226 218
Restructuring and impairment charges, net 147 189 187
Acquisition-related costs 4 5 20
2,471 2,726 2,553
OPERATING INCOME (LOSS) 115 (94 ) (381 )
Interest expense (431 ) (460 ) (487 )
Loss on extinguishment of debt - (246 ) -
Other (expense) income, net (20 ) 5 15
LOSS BEFORE INCOME TAXES (336 ) (795 ) (853 )
Provision for income taxes 8 68 18
NET LOSS (344 ) (863 ) (871 )
Less net income attributable to
noncontrolling interests - - 3
NET LOSS ATTRIBUTABLE TO AVAYA INC. $ (344 ) $ (863 ) $ (874 )
Summary of the Fiscal Year Ended September 30, 2012 versus 2011
Our fiscal 2012 revenue decreased 7% as compared to fiscal 2011, primarily as a
result of lower IT infrastructure spend and investment levels by our end
customers, quality issues on certain product/solution integration transitions
primarily in the second quarter of fiscal 2012, as well as the unfavorable
impact of foreign currency. Incremental revenue from the Radvision business for
the period June 5, 2012 through September 30, 2012 was $31 million.
We earned operating income for fiscal 2012 of $115 million which includes
non-cash depreciation and amortization of $564 million and share-based
compensation of $8 million. We incurred an operating loss for fiscal 2011 of $94
million which includes non-cash depreciation and amortization of $653 million
and share-based compensation of $12 million.
The increase in operating income is attributable to the continued benefit from
cost savings initiatives, the substantial completion of the integration of the
operations of Avaya and NES, lower costs associated with employee incentive
plans and a decrease in restructuring charges, partially offset by the decrease
in products revenue.
In addition to the changes in our revenues discussed above, our fiscal 2012
operating results compared to our fiscal 2011 results reflect, among other
things:
• a decrease in gross profit primarily as a result of decreased revenues,
while gross margin increased to 50.0% in fiscal 2012 as compared to 47.4%
in fiscal 2011;
39--------------------------------------------------------------------------------• a decrease in selling, general and administrative ("SG&A") expense
primarily due to reductions in integration-related costs related to the
acquisition of the NES business, a favorable impact of foreign currency,
the continued benefit associated with our cost savings initiatives and
lower expenses associated with our employee incentive plans, which are driven by our actual financial results relative to established targets; and
• a decrease in restructuring charges in fiscal 2012.
Our net loss for fiscal 2012 and 2011 was $344 million and $863 million,
respectively. The decrease in our net loss is primarily attributable to the
early extinguishment of debt related to the Company's debt refinancing in the
prior year, an increase in operating income as described above, a decrease in
the provision for income taxes and a decrease in interest expense for fiscal
2012 as compared to fiscal 2011.
Summary of the Fiscal Year Ended September 30, 2011 versus 2010
Our fiscal 2011 revenue increased 10% as compared to fiscal 2010, primarily as a
result of the contributions by the NES business. Our operation of the NES
business was for the entire fiscal 2011 as compared to fiscal 2010, which
included results of NES for only the period of December 19, 2009 through
September 30, 2010. The increase in revenue also included an increase in sales
volume of unified communications and contact center products. The increase in
our revenue was partially offset by lower revenue resulting from customers
reducing spending on maintenance contracts and our divestiture of our 59.13%
ownership interest in AGC. Until August 31, 2010, AGC was our majority-owned
subsidiary and its sales to end users were included in our revenues. Although we
currently utilize AGC as a business partner to sell our product lines, such
sales generally generate lower top line revenue due to volume discounts offered
to business partners.
We incurred an operating loss for fiscal 2011 of $94 million which includes
non-cash depreciation and amortization of $653 million and share-based
compensation of $12 million. We incurred an operating loss for fiscal 2010 of
$381 million which includes non-cash depreciation and amortization of $691
million and share-based compensation of $19 million.
In addition to the changes in our revenues discussed above, our fiscal 2011
operating results compared to our fiscal 2010 results reflect, among other
things:
• an increase in gross profit associated with our operation of the NES
business for the entire fiscal 2011 as compared to fiscal 2010, which
included the NES business for only the period December 19, 2009 through
September 30, 2010;
• an increase in SG&A and research and development ("R&D") expenses associated with the operations of the NES business for the entire fiscal
2011 as compared to fiscal 2010, which included the NES business for only
the period December 19, 2009 through September 30, 2010, partially offset
by expense savings associated with cost control initiatives and the
transition of resources to lower-cost geographies; and
• an increase in restructuring charges as the Company continues to implement
initiatives designed to streamline its operations and generate cost savings
including $56 million of costs associated with the elimination of 210
positions in Germany announced in June 2011.
Our net loss for fiscal 2011 and 2010 was $863 million and $871 million,
respectively. The decrease in our net loss is primarily attributable to the
decrease in our operating loss as described above offset by the loss on
extinguishment of debt of $246 million related to the refinancing of certain
debt and a higher provision for income taxes.
Financial Operations Overview
The following describes certain components of our statement of operations and
considerations impacting those results.
Revenue. We derive our revenue primarily from the sale and service of business
collaboration and communications systems and applications. Our product revenue
includes the sale of unified communications, contact center, small and medium
enterprise communications, video and data networking solutions. Product revenue
accounted for 52%, 54% and 51% of our total revenue for fiscal 2012, 2011, and
2010, respectively. Our services revenue includes product maintenance and
support, professional services, including design and integration, and
operations, or managed services.
Our indirect sales channel includes, as of September 30, 2012, approximately
9,900 channel partners, including a global network of alliance partners,
distributors, dealers, value-added resellers, telecommunications service
providers and system integrators. Our indirect sales channel represented 75% of
our product revenues for fiscal 2012, 76% of our product revenues for fiscal
2011, and 71% of our product revenues for fiscal 2010. Our revenue outside the
United States represented 46%, 46% and 45% of our total revenue in fiscal 2012,
2011, and 2010, respectively.
Because we sell our products to end-users in a wide range of industries and
geographies, demand for our products is generally driven more by the level of
general economic activity than by conditions in one particular industry or
geographic region.
Cost of Revenue. Cost of product revenue consists primarily of hardware costs,
royalties and license fees for third-party software included in our systems,
personnel and related overhead costs of operation including but not limited to
current
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engineering, freight, warranty costs, amortization of technology intangible
assets and provisions for excess inventory. We outsource substantially all of
our manufacturing operations to several EMS providers. Our EMS providers produce
the vast majority of our products in facilities located in southern China, with
other products produced in facilities located in Israel, Mexico, Malaysia,
Taiwan, Germany, Indonesia, the United Kingdom and the U.S. The majority of
these costs vary with the unit volumes of product sold. We expect over time to
increase the software content of our products, decrease our product costs and
improve product gross profits. Cost of services revenue consists of salaries and
related overhead costs of personnel engaged in support and services. As we
continue to realize the benefit of cost saving initiatives, which include
productivity improvements from automation of customer service, reducing the
workforce and relocating positions to lower cost geographies, we expect our cost
of services revenue will decrease as a percentage of services revenue.
Selling, General and Administrative Expenses. Sales and marketing expenses
primarily include personnel costs, sales commissions, travel, marketing
promotional and lead generation programs, trade shows, professional services
fees and related overhead expenses. We plan to continue to invest in development
of our distribution channels by increasing the size of our field sales force and
continue to develop the capabilities of our channel partners to enable us to
expand into new geographies and further increase our sales to small and medium
enterprises across the world.
General and administrative expenses consist primarily of salary and benefit
costs for executive and administrative staff, the use and maintenance of
administrative offices, including depreciation expense, logistics, information
systems and legal, financial, human resources, and other corporate functions.
Administrative expenses generally do not increase or decrease directly with
changes in sales volume.
Research and Development Expenses. Research and development expenses primarily
include personnel costs, outside engineering costs, professional services,
prototype costs, test equipment, software usage fees and related overhead
expenses. Research and development expenses are recognized when incurred. The
level of research and development expense is related to the number of products
in development, the stage of development process, the complexity of the
underlying technology, the potential scale of the product upon successful
commercialization and the level of our exploratory research. We conduct such
activities in areas we believe will accelerate our longer term net revenue
growth.
We are devoting substantial resources to the development of additional
functionality for existing products and the development of new products and
related software applications. We intend to continue to make significant
investments in our research and development efforts because we believe they are
essential to maintaining and improving our competitive position. Accordingly, we
expect research and development expenses to continue to increase.
Amortization of Intangible Assets. As a result of the Merger, the acquisitions
of NES and Radvision, and other acquisitions, significant amounts were
recognized in purchase accounting for the estimated fair values of customer
relationships associated with the businesses acquired. The fair value of these
intangible assets was estimated by independent valuations at the time of
acquisition and is amortized into our operating expenses over their estimated
useful lives.
Restructuring and Impairment Charges, net. In response to the global economic
climate, the acquisition of NES and the Company's commitment to control costs,
the Company implemented initiatives designed to streamline the operations of the
Company and generate cost savings. The Company exited and consolidated
facilities and terminated or relocated certain job functions. The expenses
associated with these actions are reflected in our operating results. As the
Company continues to evaluate and identify additional operational synergies,
additional cost saving opportunities may be identified and future restructuring
charges may be incurred.
Interest Expense. Interest expense consists primarily of interest on
indebtedness under our credit facilities, our senior secured notes, and on our
unsecured notes. Interest expense also includes the amortization of deferred
financing costs, the amortization of debt discount associated with our
incremental B-2 term loans that we refinanced in February 2011, amortization of
the debt discount on our term B-3 loans, and the expense associated with
interest rate derivative instruments we use to minimize our exposure to variable
rate interest payments associated with our debt. We regularly evaluate market
conditions, our liquidity profile, and various financing alternatives for
opportunities to enhance our capital structure. If market conditions are
favorable, we may refinance existing debt or issue additional debt securities.
Loss on Extinguishment of Debt. In connection with the issuance of the senior
secured notes and the payment in full of the senior secured incremental term B-2
loans, we recognized a loss on extinguishment of debt in fiscal 2011 of $246
million. The loss represents the difference between the reacquisition price of
the senior secured incremental term B-2 loans (including consent fees paid by
Avaya to the holders of the senior secured incremental term B-2 loans that
consented to the amendment and restatement of the senior secured credit facility
of $1 million) and the carrying value of the senior secured incremental term B-2
loans (including unamortized debt discount and debt issue costs). See Note 9,
"Financing Arrangements" to our audited consolidated financial statements for
further details on the amendment and extension of the senior secured credit
facility and the issuance of the senior secured notes.
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Business Trends
There are a number of trends and uncertainties affecting our business. For
example, the effect that general economic conditions have on our customers'
willingness to spend on information technology, and particularly enterprise
communications technology, impacts the demand for our products and, as a result,
our revenue. The global economic downturn during 2008 through 2010 as well as
the recent economic uncertainties associated with Europe negatively affected
most of the markets we serve. However, despite the negative affect of these
uncertainties during this period we maintained our focus on profitability levels
and investing in our future results. We also invested significantly in research
and development, introducing 130 new product offerings to the market since the
beginning of fiscal 2010. We implemented various initiatives designed to
streamline our operations, generate cost savings, and eliminate overlapping
processes and expenses associated with the NES business. We acquired NES in
order to further expand our technology portfolio, enhance our customer base,
broaden our indirect sales channel and provide us greater ability to compete
globally. In June 2012, we acquired Radvision, a global provider of
videoconferencing and telepresence technologies over IP and wireless networks.
The integrated Avaya and Radvision portfolios will extend intra-company business
to business and business to consumer video communications, and also support
internal BYOD initiatives. We believe the investments in NES, Radvision, and
other acquisitions, as well as our ongoing investments in research and
development are helping us to capitalize on the increasing focus of enterprises
on deploying collaboration solutions in order to increase productivity, reduce
costs and complexity and gain competitive advantage, which is being further
accelerated by a trend toward a more mobile workforce and the associated
proliferation of devices. In addition, we believe that the limitations of
traditional collaboration solutions present an opportunity for differentiated
vendors to gain market share.
We have also successfully expanded our indirect channel. Since fiscal 2009 and
the acquisition of NES, our indirect channel has grown from 53% to 75% of our
product revenues. We believe this expansion of our indirect channel favorably
impacts our financial results by reducing selling expenses and allowing us to
reach more end users and grow our business, although sales through the indirect
channel generally generate lower profits than direct sales due to higher
discounts. In furtherance of our effort to maintain an effective business
partner program, we continue to refine and expand our global coverage. For
example, in August 2010 we sold our 59.13% ownership interest in AGC, a publicly
traded reseller of our products and services in India, which allowed us to
pursue additional channel partners in India while continuing to sell through
AGC.
Certain trends and uncertainties also impact our global services organization,
which provides us a large recurring revenue stream. Due to advances in
technology, our customers continue to expect to pay less for traditional
services. In addition, despite the benefits of a robust indirect channel, our
channel partners have direct contact with our customers that may foster
independent relationships between them and a loss of certain services agreements
for us. We have been able to offset these impacts by focusing on other types of
services not traditionally provided by our channel partners, such as
professional and managed or operations services.
We expect our gross profit and gross margin to continue to improve in the
foreseeable future as we implement various initiatives such as increasing our
focus on sales of higher margin software, securing more favorable pricing with
our contract manufacturers and lower transportation costs, optimizing design of
products and services productivity to drive efficiencies, executing on certain
cost savings initiatives and achieving greater economies of scale. We have also
redesigned the Avaya support website and are transitioning 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 and improve our services gross margins. Historically,
lower profits experienced by the acquired NES business and competitor and
customer pricing pressures have been challenges to improving the gross margins
of our business. However, we continue to apply our business model discipline to
the acquired NES business to accomplish our gross margin initiatives.
For fiscal 2012, 2011 and 2010, revenue outside of the U.S. represented 46%, 46%
and 45% of total revenue, respectively. Foreign currency exchange rates and
fluctuations have had an impact on our revenue, costs and cash flows from our
international operations. Our primary currency exposures are to the euro,
British pound, Indian rupee, Japanese yen, Canadian dollar and Brazilian real.
These exposures may change over time as business practices evolve and as the
geographic mix of our business changes and we are not able to predict the impact
that foreign currency fluctuations will have on future periods.
Focus on Cost Structure
In connection with the Merger in fiscal 2008, Avaya's management and board of
directors developed and began implementing various plans and initiatives
designed to streamline the operations of the Company and generate cost savings.
Additionally, in response to the global economic downturn and in connection with
its acquisition of NES, the Company identified and initiated cost savings
programs throughout fiscal 2010, 2011, and 2012. These cost savings programs
include: (1) reducing headcount, (2) relocating certain job functions to lower
cost geographies, including service delivery, customer care, research and
development, human resources and finance and (3) eliminating real estate costs
associated with unused or under-utilized facilities.
Reductions in headcount included the elimination of redundancies by re-defining
and consolidating job functions, reductions in
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management and in back-office headcount of our sales organization, reduced
headcount in our services business, the use of remote monitoring of customer
systems, which made our services segment more efficient, and a shift in the mix
of the Company's distribution channels toward the indirect channel which reduced
our personnel needs. We were also able to attain additional salary savings as
the Company placed greater emphasis on shifting job functions to its shared
service centers in India and Argentina, as well as the automation of customer
service.
Reductions in real estate costs were achieved by: (1) eliminating redundant
facilities, particularly research and development facilities, in similar
geographic areas as part of transitioning and integrating the operations of NES,
(2) reductions in headcount, which decreased our real estate needs, and
(3) reducing operating costs through more efficient facilities management. These
initiatives enabled us to vacate and consolidate facilities without affecting
the quality or distribution of our products and services, and reduce our real
estate costs.
Restructuring charges were $142 million, $189 million and $171 million for
fiscal 2012, 2011 and 2010, respectively.
Restructuring charges for fiscal 2012 and 2011, net of adjustments to previous
periods, include employee separation costs of $123 million and $153 million,
respectively. Employee separation costs include $70 million and $56 million
associated with the elimination of 327 and 210 positions in Germany in fiscal
2012 and 2011, respectively. The employee separation costs consist of severance
and employment benefits payments and include, but are not limited to, social
pension fund payments and health care and unemployment insurance costs to be
paid to or on behalf of the affected employees. Real estate charges, net of
adjustments to previous periods in fiscal 2012 and 2011 were $19 million and $36
million, respectively.
Restructuring charges for fiscal 2010, net of adjustments to previous periods,
include employee separation costs primarily in EMEA and the U.S. of $147
million. As part of the acquisition of NES, the Company acquired a workforce of
approximately 5,900. The Company's workforce at September 30, 2009 and 2010 was
approximately 15,500 and 18,900, respectively, excluding AGC, which we sold in
August 2010. In fiscal 2010, real estate charges, net of adjustments to
previous periods, were $24 million and included the costs of consolidating
utilized or under-utilized facilities primarily located in the U.S. as part of
transitioning and integrating the operations of NES, including certain
facilities under leases assumed in the acquisition.
The Company continues to evaluate opportunities to streamline its operations and
identify cost savings globally. Although a specific plan does not exist at this
time, the Company may take additional restructuring actions in the future and
the costs of those actions could be material. All costs associated with such
actions would be recognized in accordance with authoritative accounting guidance
and the Company's accounting policies as outlined in Note 2, "Summary of
Significant Accounting Policies - Restructuring Programs" to our audited
consolidated financial statements. See Note 8, "Business Restructuring Reserves
and Programs" to our audited consolidated financial statements for further
details on our restructuring programs.
Refinancing of Debt
On February 11, 2011, we completed a debt refinancing that deferred the maturity
of $3.18 billion of senior secured loans. As part of the transaction, $2.2
billion outstanding par value of the senior secured term B-1 loans was converted
into a new tranche of senior secured term B-3 loans, extending the maturity of
that indebtedness from October 26, 2014 to October 25, 2017, and $988 million
par value of senior secured incremental term B-2 loans was repaid with the
proceeds from a private placement of $1,009 million of senior secured notes,
extending the maturity of that indebtedness from October 26, 2014 to April 1,
2019.
On August 8, 2011, the Company amended the terms of the multi-currency revolvers
available under its senior secured credit facility and its senior secured
multi-currency asset-based revolving credit facility to extend the final
maturity of each from October 26, 2013 to October 26, 2016. All other terms and
conditions of the senior secured credit facility and the senior secured
multi-currency asset-based revolving credit facility remain unchanged.
On October 29, 2012, we completed a debt refinancing that deferred the maturity
of $135 million of senior secured 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.
See Note 9, "Financing Arrangements" to our audited consolidated financial
statements for further details on our financing arrangements.
Selected Segment Information
The Company 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 the Company's services portfolio
and is called Avaya Global Services ("AGS").
In GCS, we deliver business collaboration and communications solutions primarily
for IT infrastructure, unified communications, and contact center solutions. Our
infrastructure and UC application solutions are designed to promote
collaboration, innovation, productivity and real-time decision-making by
providing business users a highly intuitive and personalized user experience
that enables them to collaborate seamlessly across various modes of
communication, including
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voice, video, email, instant messaging, text messaging, web conferencing,
voicemail and social networking. Our contact center application solutions are
highly reliable, scalable communications-centric applications suites designed to
optimize customer service.
Our Networking segment provides a broad range of internet protocol networking
infrastructure products including ethernet switches, routers and Virtual Private
Network appliances, wireless networking routers, access control solutions,
unified management solutions and end-to-end virtualization strategies and
architectures.
Through our AGS segment we help our customers evaluate, plan, design, implement,
support, manage and optimize their enterprise communications networks to help
them achieve enhanced business results. Our award-winning service portfolio
includes product support, integration and professional and operations, or
managed services that enable customers to optimize and manage their converged
communications networks worldwide.
Deferred Tax Assets
Our deferred tax assets are primarily a result of deductible temporary
differences related to net operating loss ("NOL's") carryforwards, benefit
obligations, tax credit carryforwards, and other accruals which are available to
reduce taxable income in future periods. As of September 30, 2012, the Company
had tax-effected NOL carryforwards of $1,037 million, comprised of $542 million
for U.S. Federal, state and local taxes and $495 million for foreign taxes
including $180 million, $255 million and $24 million, in Germany, Luxembourg and
France, respectively. U.S. Federal and state NOL carryforwards expire through
the year 2031, with the majority expiring in excess of 10 years. The majority of
foreign NOL carryforwards have no expiration. Additionally, the Company has
various other tax credit carryforwards totaling $73 million. Of this total, $17
million expire within five years, $21 million expire between five and 15 years
and $35 million expire in excess of 15 years.
The Internal Revenue Code contains certain provisions which may limit the use of
U.S. Federal net operating losses and U.S. Federal tax credits upon a change in
ownership (determined under very broad and complex direct and indirect ownership
rules) in the Company within a three-year testing period. As a result of the
Merger, a significant change in the ownership of the Company occurred that
limits, on an annual basis, the Company's ability to utilize its U.S. Federal
NOL's and U.S. Federal tax credits. The Company's NOL's and tax credits will
continue to be available to offset taxable income and tax liabilities (until
such NOL's and tax credits are either used or expire) subject to the annual
limitation. If the annual limitation amount is not fully utilized in a
particular tax year, then the unused portion from that particular tax year will
be added to the annual limitation in subsequent years. 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) relating to a proposed initial public offering of its common
stock. We do not believe that this share issuance will itself, or when
aggregated with other prior shareholder ownership changes during the applicable
testing period, cause an ownership change that would further limit, on an annual
basis, our ability to utilize our current U.S. Federal net operating losses and
U.S. Federal tax credits.
In fiscal 2008 and 2009, we recognized significant impairments of our intangible
assets and goodwill which contributed to a significant book taxable loss in the
U.S. We also incurred and expect to continue to incur significant interest
expense related to our debt and amortization and depreciation expense associated
with the step-up in basis of our assets in purchase accounting associated with
the Merger and the acquisition of NES. As a result of continuing pre-tax losses
incurred subsequent to the Merger, as of September 30, 2012, excluding the U.S.
deferred tax liabilities on indefinite-lived intangible assets, our deferred tax
assets exceed our deferred tax liabilities in the U.S. and we are in a
three-year cumulative book taxable loss position in the U.S.
Further, as a result of operational losses and continued business restructuring
accruals in Germany, Spain and France as well as intercompany interest expense
in Luxembourg, the Company's subsidiaries in Germany, Luxembourg, Spain and
France are in a three year cumulative book taxable loss position.
In assessing the realization of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The Company considered the scheduled reversal of
deferred tax assets and liabilities, projected future taxable income, and
certain tax planning strategies in making this assessment. Based on this
assessment in fiscal 2010, 2011, and 2012 the Company determined that it is more
likely than not that the U.S., German, Luxembourg, Spanish and French deferred
tax assets will not be realized to the extent they exceed the scheduled reversal
of deferred tax liabilities. Accordingly, we have provided a valuation allowance
against our U.S., German, Luxembourg, Spanish and French net deferred tax assets
which has and will continue to adversely affect our effective income tax rate.
At September 30, 2012, the valuation allowance of $1,523 million is comprised of
$958 million relating to U.S. deferred tax assets and $565 million relating to
foreign deferred tax assets for which $260 million, $255 million and $24 million
relates to our German, Luxembourg and French subsidiaries, respectively. In
fiscal 2012, the Company recorded an increase of $113 million to its valuation
allowance. The increase in the valuation allowance is comprised of a $56 million
charge included in the
44
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provision for income taxes (which includes $131 million charge for federal and
international income taxes, $56 million release of valuation allowance
associated with federal tax expense on net gains in other comprehensive income
and $19 million benefit for state income taxes) and a $57 million change to net
deferred tax assets related to other changes in other comprehensive income.
Results of Operations
Fiscal Year Ended September 30, 2012 Compared with Fiscal Year Ended September
30, 2011
Revenue
Our revenue for fiscal 2012 and 2011 was $5,171 million and $5,547 million,
respectively, a decrease of $376 million or 7%. Incremental revenue from the
Radvision business for the period June 5, 2012 through September 30, 2012 was
$31 million. The following table sets forth a comparison of revenue by
portfolio:
Fiscal years ended September 30,
Percentage of Yr. to Yr. Yr. to Yr. Percent
Total Revenue Percent Change, net of Foreign
In millions 2012 2011 2012 2011 Change Currency Impact
GCS $ 2,390 $ 2,675 46 % 49 % (11 )% (10 )%
Purchase accounting
adjustments (2 ) (3 ) - % - % (1) (1)
Networking 284 304 6 % 5 % (7 )% (6 )%
Total product revenue 2,672 2,976 52 % 54 % (10 )% (9 )%
AGS 2,499 2,573 48 % 46 % (3 )% (1 )%
Purchase accounting
adjustments - (2 ) - % - % (1) (1)
Total service revenue 2,499 2,571 48 % 46 % (3 )% (1 )%
Total revenue $ 5,171 $ 5,547 100 % 100 % (7 )% (6 )%
(1) Not meaningful
GCS revenue for fiscal 2012 and 2011 was $2,390 million and $2,675 million,
respectively, a decrease of $285 million or 11%. The decrease in GCS revenue was
driven by lower IT infrastructure spend by our end customers, limited quality
issues on product/solution integration transitions, pricing pressures and an
unfavorable impact of foreign currency, particularly in EMEA. The Company
continues to make progress addressing the limited quality issues in its
infrastructure solutions product portfolio through patches issued to end-users
and applied to inventories held by our contract manufacturers.
Networking revenue for fiscal 2012 and 2011 was $284 million and $304 million,
respectively, a decrease of $20 million or 7%. The decrease in Networking
revenue is primarily a result of higher demand in fiscal 2011 due to our new
product offerings, primarily in the U.S.
AGS revenue for fiscal 2012 and 2011 was $2,499 million and $2,573 million,
respectively, a decrease of $74 million or 3%. The decrease in AGS revenue was
primarily due to an unfavorable impact of foreign currency, particularly in
EMEA, as well as customers reducing their spending on maintenance contracts.
These decreases in maintenance contracts revenue were partially offset by an
increase in professional services.
45
--------------------------------------------------------------------------------The following table sets forth a comparison of revenue by location:
Fiscal years ended September 30,
Yr. to Yr.
Percentage
Percentage of Yr. to Yr. Change, net of
Total Revenue Percentage Foreign
Dollars in millions 2012 2011 2012 2011 Change Currency Impact
U.S. $ 2,786 $ 2,998 54 % 54 % (7 )% (7 )%
International:
Germany 461 505 9 % 9 % (9 )% (3 )%
EMEA (Excluding
Germany) 888 983 17 % 18 % (10 )% (8 )%
Total EMEA 1,349 1,488 26 % 27 % (9 )% (6 )%
APAC-Asia Pacific 497 515 10 % 9 % (3 )% (3 )%
Americas
International-Canada
and Latin America 539 546 10 % 10 % (1 )% 2 %
Total International 2,385 2,549 46 % 46 % (6 )% (4 )%
Total revenue $ 5,171 $ 5,547 100 % 100 % (7 )% (6 )%
Revenue in the U.S. for fiscal 2012 and 2011 was $2,786 million and $2,998
million, respectively, a decrease of $212 million million or 7%. The decrease in
U.S. revenue was primarily due to lower revenues associated with our
infrastructure solutions portfolio, maintenance services particularly in the
government sector, and networking products, partially offset by higher sales
associated with contact center applications and professional services. Revenue
in EMEA for fiscal 2012 and 2011 was $1,349 million and $1,488 million,
respectively, a decrease of $139 million or 9%. The decrease in EMEA revenues
was primarily due to lower revenues associated with our infrastructure solutions
portfolio, German rental base and maintenance services associated with our
infrastructure solutions portfolio, as well as an unfavorable impact of foreign
currency, partially offset by an increase in sales of our new networking product
offerings. Within EMEA, revenue in Germany decreased due to a decline in our
rental base as lease renewals are typically at lower rates, which is expected to
continue into fiscal 2013. Revenue in APAC for fiscal 2012 and 2011 was $497
million and $515 million, respectively, a decrease of $18 million. The decrease
in APAC revenue is primarily attributable to lower revenues associated with our
infrastructure solutions portfolio, partially offset by higher maintenance
services and professional services. Revenue in Americas International was $539
million and $546 million for fiscal 2012 and 2011, respectively, a decrease of
$7 million or 1%. The decrease in Americas International revenue was primarily
due to lower revenues associated with our infrastructure solutions and contact
center portfolios and an unfavorable impact of foreign currency, partially
offset by an increase in Networking revenues.
We sell our solutions both directly and through an indirect sales channel. The
following table sets forth a comparison of revenue from sales of products by
channel:
Fiscal years ended September 30,
Yr. to Yr.
Percentage of Yr. to Yr. Percentage
ECS Product Revenue Percentage Change, net of Foreign
Dollars in millions 2012 2011 2012 2011 Change Currency Impact
Direct $ 662 $ 700 25 % 24 % (5 )% (3 )%
Indirect 2,010 2,276 75 % 76 % (12 )% (11 )%
Total ECS product revenue $ 2,672 $ 2,976 100 % 100 % (10 )% (9 )%
The percentage of product sales through the indirect channel decreased by 1
percentage point to 75% in fiscal 2012 as compared to 76% in fiscal 2011. The
decrease in sales volume in the indirect channel was a result of the revenue
declines and factors causing those declines discussed above and due to inventory
working capital management by distributors. The percentage of total revenue
derived from indirect channels decreased relative to the percentage derived from
direct sales due to the continuing transition from legacy NES products to the
newer Avaya platforms. Sales from the NES business, prior to its acquisition by
Avaya, were substantially generated through the indirect channel.
46
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Gross Profit
The following table sets forth a comparison of gross profit by segment:
Fiscal years ended September 30,
Gross Profit Gross Margin
Dollars in millions 2012 2011 2012 2011 Change
GCS $ 1,387 $ 1,532 58.0 % 57.3 % $ (145 ) (9 )%
Networking 115 131 40.5 % 43.1 % (16 ) (12 )%
ECS 1,502 1,663 56.2 % 55.9 % (161 ) (10 )%
AGS 1,224 1,222 49.0 % 47.5 % 2 - %
Unallocated amounts (140 ) (253 ) (1) (1) 113 (1)
Total $ 2,586 $ 2,632 50.0 % 47.4 % $ (46 ) (2 )%
(1) Not meaningful
Gross profit for fiscal 2012 and 2011 was $2,586 million and $2,632 million,
respectively. Gross profit decreased by $46 million or 2% and includes
incremental gross profit from the Radvision business for the period June 5, 2012
through September 30, 2012 of $22 million. The decrease is attributable to
decreased sales volumes, pricing pressures and an unfavorable impact of foreign
currency. These decreases were partially offset by the success of our gross
margin improvement initiatives as discussed below, the impact of lower
amortization of technology intangible assets, reductions in integration-related
costs related to the acquisition of the NES business, a favorable change in our
product mix as we had lower sales of lower margin products and lower costs
associated with our employee incentive plans, which are driven by our actual
financial results relative to established targets. Gross margin increased to
50.0% for fiscal 2012 from 47.4% for fiscal 2011. The increase in gross margin
is primarily due to the success of our gross margin improvement initiatives as
discussed above, the impact of lower amortization of technology intangible
assets, reductions in integration-related costs related to the acquisition of
the NES business and lower costs associated with our employee incentive plans.
GCS gross profit for fiscal 2012 and 2011 was $1,387 million and $1,532 million,
respectively. GCS gross profit decreased $145 million or 9%. The decrease in GCS
gross profit is primarily due to the decrease in sales volume, pricing pressures
and the unfavorable impact of foreign currency. These decreases were partially
offset by the success of our gross margin improvement initiatives discussed
above. The decreases were also offset by the reductions in integration-related
costs related to the acquisition of the NES business and a favorable change in
our product mix as we had lower sales of lower margin products. GCS gross margin
increased to 58.0% for fiscal 2012 compared to 57.3% for fiscal 2011. The
increase is primarily due to the positive effect of our gross margin improvement
initiatives described above and a favorable change in our product mix as we had
lower sales of lower margin products partially offset by lower sales volume,
which reduced the leverage on our fixed costs.
Networking gross profit for fiscal 2012 and 2011 was $115 million and $131
million, respectively. Networking gross margin decreased to 40.5% for fiscal
2012 from 43.1% for fiscal 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 fiscal 2012 and 2011 was $1,224 million and $1,222 million
and gross margin was 49.0% and 47.5%, respectively. The increases in AGS gross
profit and gross margin are primarily due to the continued benefit from cost
savings initiatives discussed above, as well as lower costs associated with our
employee incentive plans. We have redesigned the Avaya support website and are
transitioning 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.
Unallocated amounts for fiscal 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 fiscal 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.
47
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Operating expenses
Fiscal years ended September 30,
Percentage of Revenue
Dollars in millions 2012 2011 2012 2011 Change
Selling, general and
administrative $ 1,630 $ 1,845 31.5 % 33.3 % $ (215 ) (12 )%
Research and development 464 461 9.0 % 8.3 % 3 1 %
Amortization of
intangible assets 226 226 4.4 % 4.1 % - - %
Restructuring and
impairment charges, net 147 189 2.8 % 3.4 % (42 ) (22 )%
Acquisition-related costs 4 5 0.1 % 0.1 % (1 ) (20 )%
Total operating expenses $ 2,471 $ 2,726 47.8 % 49.2 % $ (255 ) (9 )%
SG&A expenses for fiscal 2012 and 2011 were $1,630 million and $1,845 million,
respectively, a decrease of $215 million. The decrease was primarily due to
reductions in integration-related costs related to the acquisition of the NES
business, a favorable impact of foreign currency, lower expenses as a result of
our cost savings initiatives discussed above and lower expenses associated with
our employee incentive plans, which are driven by our actual financial results
relative to established targets. Integration-related costs included in SG&A were
$19 million and $103 million for fiscal 2012 and 2011, respectively. In fiscal
2011, integration-related costs primarily represent third-party consulting fees
and other administrative costs associated with consolidating and coordinating
the operations of Avaya and NES. These costs were incurred in connection with,
among other things, the on-boarding of NES personnel, developing compatible IT
systems and internal processes, and developing and implementing a strategic
operating plan to enable a smooth transition with minimal disruption to NES
customers. Such costs include fees paid to certain Nortel-controlled entities
for logistic and other support functions being performed on a temporary basis
pursuant to a transition services agreement which expired in June 2011. For
fiscal 2012, integration-related costs are primarily associated with the
continued development of compatible IT systems.
R&D expenses for fiscal 2012 and 2011 were $464 million and $461 million,
respectively, an increase of $3 million. The increase was primarily due to an
increase in costs of new product development, as well as the incremental
expenses associated with the acquisition of Radvision. The increase in these
costs was partially offset by lower expenses associated with our employee
incentive plans, which are driven by our actual financial results relative to
established targets, and a favorable impact of foreign currency. Capitalized
software development costs for fiscal 2012 and 2011 were $35 million and $42
million, respectively, a decrease of $7 million. Because the projects in our
product development portfolio for fiscal 2011 were generally further along in
the development cycle than those for fiscal 2012, we capitalized a lower portion
of our current period R&D spend.
Amortization of intangible assets was $226 million for fiscal 2012 and 2011.
Restructuring and impairment charges, net, for fiscal 2012 and 2011 were $147
million and $189 million, respectively, a decrease of $42 million. The Company
continues to focus on controlling costs and, as a result, implemented additional
initiatives designed to streamline its operations and generate cost
savings. These initiatives include exiting facilities and reducing the workforce
or relocating positions to lower cost geographies. Restructuring charges
recorded during fiscal 2012 include employee separation costs of $123 million
and lease obligations of $19 million. Employee separation costs for fiscal 2012
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. The costs consist of severance and
employment benefits payments and include, but are not limited to, social pension
fund payments and health care and unemployment insurance costs to be paid to or
on behalf of the affected employees. In addition to the restructuring charges
related to Germany, the company had employee separation costs in the US, 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. Restructuring charges recorded during fiscal
2011 include employee separation costs of $153 million and lease obligations of
$36 million. Employee separation charges for this period include $56 million
associated with an agreement reached with the Germany works council representing
employees of certain of Avaya's German subsidiaries for the elimination of 210
employee positions. For fiscal 2011, lease obligations included in restructuring
charges represent the remaining lease obligations associated with facilities
partially or totally vacated during the period primarily in Ireland 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.
The Company has initiated a plan to dispose of a Company owned facility in
Munich, Germany and relocate to a new facility. Accordingly, the Company has
written the value of this asset down to its net realizable value of $3 million
and has reclassified this asset as held for sale. Included in restructuring and
impairment charges, net in the Statement of Operations is an impairment charge
of $5 million for fiscal 2012.
48
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Acquisition-related costs for fiscal 2012 and 2011 were $4 million and $5
million, and include third-party legal and other costs related to the
acquisition of Radvision and other business acquisitions in fiscal 2012 and
2011.
Operating Income (Loss)
Fiscal 2012 operating income was $115 million compared to an operating loss of
$94 million for fiscal 2011.
Results for fiscal 2012 include the impact of integration-related costs
(included in SG&A and elsewhere) of $19 million and acquisition-related costs of
$4 million. In addition, in fiscal 2012, the Company incurred impairment charges
of $5 million related to the write-down of the Munich, Germany facility. For
fiscal 2011, we incurred integration-related costs (included in SG&A and
elsewhere) of $132 million and acquisition-related costs of $5 million.
Operating income (loss) for fiscal 2012 and 2011 includes non-cash expenses for
depreciation and amortization of $564 million and $653 million and share-based
compensation of $8 million and $12 million, respectively.
Interest Expense
Interest expense for fiscal 2012 and 2011 was $431 million and $460 million,
respectively, which includes non-cash interest expense of $22 million and $41
million, respectively. Non-cash interest expense for fiscal 2012 includes (1)
amortization of debt issuance costs and (2) accretion of debt discount
attributable to our senior secured term B-3 loans which were issued on
February 11, 2011 as a result of the modification to certain provisions of the
senior secured credit facility. Non-cash interest expense for fiscal 2011
includes: (1) amortization of debt issuance costs and (2) accretion of debt
discount attributable to our senior secured incremental term B-2 loans through
February 11, 2011 the date on which the loans were repaid in full, and
(3) accretion of debt discount attributable to our senior secured term B-3 loans
which were issued on February 11, 2011 as a result of the modification to
certain provisions of the senior secured credit facility.
Cash interest expense for fiscal 2012 decreased $10 million. The decrease was a
result of the expiration of certain unfavorable interest rate swap contracts
combined with the impact of the issuance of the senior secured notes and the
related repayment of the senior secured incremental B-2 loans. The senior
secured notes bear interest at a lower rate per annum than the previously
outstanding senior secured incremental term B-2 loans. This decrease was
partially offset by an increase in interest expense due to the impact of the
amendment and restatement of the senior secured credit facility. The amendment
and restatement of the senior secured credit facility resulted in the creation
of a new tranche of senior secured term B-3 loans which bear interest at a
higher rate per annum than the senior secured term B-1 loans that they replaced.
See Note 9, "Financing Arrangements" to our audited consolidated financial
statements for further details on the amendment and extension of the senior
secured credit facility and the issuance of the senior secured notes.
Loss on Extinguishment of Debt
In connection with the issuance of our senior secured notes and the payment in
full of our senior secured incremental term B-2 loans, we recognized a loss on
extinguishment of debt for fiscal 2011 of $246 million. The loss represents the
difference between the reacquisition price of the incremental term B-2 loans
(including consent fees paid by Avaya to the holders of the incremental term B-2
loans that consented to the amendment and restatement of the senior secured
credit facility of $1 million) and the carrying value of the incremental term
B-2 loans (including unamortized debt discount and debt issue costs). See Note
9, "Financing Arrangements" to our audited consolidated financial statements for
further details on the issuance of our senior secured notes and repayment of our
senior secured incremental term B-2 loans.
Other (Expense) Income, Net
Other expense, net, for fiscal 2012 was $20 million as compared to other income,
net of $5 million for fiscal 2011. During fiscal 2012, other expense, net
primarily related to net foreign currency transaction losses of $21 million.
During fiscal 2011, net foreign currency transaction gains and interest income
were partially offset by fees paid to third parties in connection with the
modification of the senior secured term B-1 loan of $9 million.
Provision for Income Taxes
For fiscal 2012 and 2011 the provision for income taxes was $8 million and $68
million and the effective income tax rate was 2% and 9%, respectively.
The effective income tax rate for fiscal 2012 differs from the U.S. Federal tax
rate primarily due to (1) the effect of taxable income in certain non-U.S.
jurisdictions, (2) the valuation allowance established against the Company's
deferred tax assets, (3) $62 million release of valuation allowance associated
with tax expense on net gains in other comprehensive income, (4) $17 million of
income tax expense related to undistributed foreign earnings, and (5) $9 million
of income tax benefit related to the correction of prior year deferred tax
assets and liabilities for certain non-U.S. legal entities.
In fiscal 2012, the Company recorded a tax charge of $62 million to other
comprehensive income and a decrease in deferred tax assets primarily relating to
post-employment benefits. The charge to other comprehensive income and decrease
in deferred tax
49
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assets resulted in the recording of a $56 million federal and a $6 million state
income tax benefit in continuing operations related to the release of the
corresponding valuation allowance. In fiscal 2011, the Company recorded a tax
benefit to other comprehensive income. Therefore, there was no adjustment to the
income tax provision in continuing operations.
As of September 30, 2012, the Company changed its indefinite reinvestment of
undistributed foreign earnings assertion with respect to its non-U.S.
subsidiaries. As a result the Company recorded fiscal 2012 income tax expense of
$17 million relating to non-U.S. taxes. In the future, the Company will continue
to evaluate whether or not to indefinitely reinvest future undistributed foreign
earnings.
During the fourth quarter of fiscal 2012, the Company recorded a correction to
prior year deferred tax assets and liabilities for certain non-U.S. legal
entities. This adjustment decreased the provision for income taxes by $9
million. Without this adjustment the Company's provision for income taxes and
effective income tax rate would have been $17 million and (5%), respectively for
fiscal 2012. The Company evaluated the correction in relation to the current
quarter and fiscal 2012, as well as the periods in which the adjustment
originated, and concluded that the adjustment is not material to the current
year and any prior quarter or year.
The effective income tax rate for fiscal 2011 differs from the U.S. Federal tax
rate primarily due to the effect of taxable income in certain non-U.S.
jurisdictions and due to the valuation allowance established against the
Company's U.S. deferred tax assets.
See Note 12, "Income Taxes" to our audited consolidated financial statements for
further details and a reconciliation of the Company's loss before income taxes
at the U.S. Federal statutory rate to the provision for income taxes.
Fiscal Year Ended September 30, 2011 Compared with Fiscal Year Ended
September 30, 2010
Revenue
Our revenue for fiscal 2011 and 2010 was $5,547 million and $5,060 million,
respectively, an increase of $487 million or 10%. The following table sets forth
a comparison of revenue by segment:
Fiscal years ended September 30,
Percentage of Yr. to Yr. Yr. to Yr. Percent
Total Revenue Percent Change, net of Foreign
In millions 2011 2010 2011 2010 Change Currency Impact
GCS $ 2,675 $ 2,329 49 % 46 % 15 % 14 %
Purchase accounting (1) (1)
adjustments (3 ) (7 ) - % - %
Networking 304 280 5 % 5 % 9 % 8 %
Total product revenue 2,976 2,602 54 % 51 % 14 % 13 %
AGS 2,573 2,463 46 % 49 % 4 % 3 %
Purchase accounting (1) (1)
adjustments (2 ) (5 ) - % - %
Total service revenue 2,571 2,458 46 % 49 % 5 % 3 %
Total revenue $ 5,547 $ 5,060 100 % 100 % 10 % 8 %
(1) Not meaningful
GCS revenue for fiscal 2011 and 2010 was $2,675 million and $2,329 million,
respectively. GCS revenue increased $346 million or 15% primarily due to
incremental revenue from the NES business and increased sales volume. The NES
business is included in our results for the full fiscal 2011 as compared to
results for fiscal 2010, which included the results of the NES business for only
the period of December 19, 2009 through September 30, 2010. In 2011, GCS revenue
also benefited from the introduction of new product offerings during the second
half of fiscal 2010 and throughout fiscal 2011 and an increase in new Avaya Aura
licenses sold. We believe the additional functionality created by our Avaya Aura
technology also resulted in increased demand across many of our infrastructure
solutions. The increase in contact center application solutions revenues was
driven by new product offerings. These increases were partially offset by the
impact of our divestiture of our 59.13% ownership interest in AGC in August
2010. Until August 31, 2010 AGC was our majority-owned subsidiary and its sales
to end users were included in our revenues. Our divestiture of AGC allowed us to
pursue additional channel partners in India while continuing to sell through
AGC.
Networking revenue for fiscal 2011 and 2010 was $304 million and $280 million,
respectively. Networking revenue increased $24 million or 9% primarily due to
incremental revenue from the NES business for fiscal 2011 as compared to results
for fiscal 2010, which included the results of the NES business for only the
period of December 19, 2009 through September 30, 2010. Our networking business
was acquired as part of the acquisition of NES on December 18, 2009. The
addition of the NES businesses has given us a position within the global data
networking industry, one in which we did not participate immediately
50
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prior to the acquisition.
AGS revenue for fiscal 2011 and 2010 was $2,573 million and $2,463 million,
respectively. AGS revenues increased $110 million or 4% primarily due to
incremental revenue from the NES business for fiscal 2011 as compared to fiscal
2010, which included the results of the NES business for only the period of
December 19, 2009 through September 30, 2010.
The following table sets forth a comparison of revenue by location:
Fiscal years ended September 30,
Yr. to Yr.
Percentage
Percentage of Yr. to Yr. Change, net of
Total Revenue Percentage Foreign
Dollars in millions 2011 2010 2011 2010 Change Currency Impact
U.S. $ 2,998 $ 2,764 54 % 55 % 8 % 8 %
International:
Germany 505 537 9 % 10 % (6 )% (7 )%
EMEA (Excluding
Germany) 983 846 18 % 17 % 16 % 14 %
Total EMEA 1,488 1,383 27 % 27 % 8 % 6 %
APAC-Asia Pacific 515 464 9 % 9 % 11 % 8 %
Americas
International-Canada
and Latin America 546 449 10 % 9 % 22 % 18 %
Total International 2,549 2,296 46 % 45 % 11 % 9 %
Total revenue $ 5,547 $ 5,060 100 % 100 % 10 % 8 %
Revenue in the U.S. for fiscal 2011 and 2010 was $2,998 million and $2,764
million, respectively. Revenue in the U.S. increased $234 million or 8%
primarily due to incremental revenue from the NES business for fiscal 2011 as
compared to results for fiscal 2010, which included the results of the NES
business for only the period of December 19, 2009 through September 30, 2010.
This increase also included an increase in sales volume driven by new product
offerings. Revenue in EMEA for fiscal 2011 and 2010 was $1,488 million and
$1,383 million, respectively. Revenue in EMEA increased $105 million or 8%
primarily due to incremental revenue from the NES business for fiscal 2011 as
compared to results for fiscal 2010, which included the results of the NES
business for only the period of December 19, 2009 through September 30, 2010 and
an increase in sales volume of unified communications products. The increase of
revenue in EMEA was partially offset by a decrease of revenue in Germany
attributable to customers reducing spending on maintenance contracts and the
decline in our rental base as lease renewals are typically at lower rates, which
is expected to continue in fiscal 2012. Revenue in APAC and Americas
International increased $51 million and $97 million, respectively. The increases
were due to incremental revenue from the NES business for fiscal 2011 as
compared to results for fiscal 2010, which included the results of the NES
business for only the period of December 19, 2009 through September 30, 2010,
increased sales volume driven by new product offerings and an increase in
professional services, as well as the favorable impact of foreign currency. The
increase in revenue in APAC was partially offset by the impact of our
divestiture of AGC in August 2010. Although we continue to market to end users
in the APAC region through the indirect channel using AGC as a business partner,
sales through our indirect channel generally generate lower top line revenue due
to volume discounts.
The following table sets forth a comparison of revenue from sales of products by
channel:
Fiscal years ended September 30,
Yr. to Yr.
Percentage of Yr. to Yr. Percentage
ECS Product Revenue Percentage Change, net of Foreign
Dollars in millions 2011 2010 2011 2010 Change Currency Impact
Direct $ 700 $ 763 24 % 29 % (8 )% (10 )%
Indirect 2,276 1,839 76 % 71 % 24 % 23 %
Total ECS product revenue $ 2,976 $ 2,602 100 % 100 % 14 % 13 %
The percentage of product sales through the indirect channel increased by 5
percentage points to 76% in fiscal 2011 as compared to 71% in fiscal 2010. The
increase was primarily attributable to the impact of the sale of AGC in August
2010. As a result of our divestiture of AGC, we continue to market to end users
through AGC and those sales in fiscal 2011 are included in our indirect
revenues. Until August 31, 2010 AGC was our majority-owned subsidiary and its
sales to end users were included in our direct revenues. In addition, the
increase is also attributable to the incremental product sales from the NES
business,
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which, prior to the acquisition of NES, were substantially generated through the
indirect channel. Due to higher volume discounts, sales through the indirect
channel generally generate lower margins than direct sales. However, our use of
the indirect channel lowers selling expenses and allows us to reach more end
users.
Gross Profit
The following table sets forth a comparison of gross profit by segment:
Fiscal years ended September 30,
Gross Profit Gross Margin
Dollars in millions 2011 2010 2011 2010 Change
GCS $ 1,532 $ 1,249 57.3 % 53.6 % $ 283 23 %
Networking 131 117 43.1 % 41.8 % 14 12 %
ECS 1,663 1,366 55.9 % 52.5 % 297 22 %
AGS 1,222 1,119 47.5 % 45.4 % 103 9 %
Unallocated amounts (253 ) (313 ) (1) (1) 60 (1)
Total $ 2,632 $ 2,172 47.4 % 42.9 % $ 460 21 %
(1) Not meaningful
Gross profit for fiscal 2011 and 2010 was $2,632 million and $2,172 million,
respectively. Gross profit increased by $460 million or 21% primarily due to the
incremental margin from the NES business for fiscal 2011 as compared to results
for fiscal 2010, which included the results of the NES business for only the
period of December 19, 2009 through September 30, 2010 and an increase in sales
volume. Gross margin increased to 47.4% for fiscal 2011 from 42.9% for the
fiscal 2010. The increase in gross profit and gross margin is primarily due to
higher sales volume which leveraged our fixed costs, prior period cost saving
initiatives including exiting facilities and reducing the workforce and
relocating positions to lower-cost geographies and lower amortization of
technology intangible assets, partially offset by higher costs associated with
our employee incentive programs, which are driven by our actual financial
results relative to established targets.
GCS gross profit for fiscal 2011 and 2010 was $1,532 million and $1,249 million,
respectively. GCS gross profit increased $283 million or 23% primarily due to
the incremental margin provided by the NES business for fiscal 2011 as compared
to results for fiscal 2010, which included the results of the NES business for
only the period of December 19, 2009 through September 30, 2010 and an increase
in sales volume driven by new product offerings. GCS gross margin increased to
57.3% for fiscal 2011 from 53.6% for fiscal 2010. The increase in gross margin
is primarily due to the increase in sales volume which leveraged our fixed costs
and prior period cost saving initiatives including exiting facilities and
reducing the workforce and relocating positions to lower-cost geographies.
Networking gross profit for the fiscal 2011 and 2010 was $131 million and $117
million, respectively. Our networking business was acquired as part of the
acquisition of NES on December 18, 2009. Results for fiscal 2011 includes the
impact of the NES business for the entire year as compared to fiscal 2010, which
included the results of the NES business for only the period of December 19,
2009 through September 30, 2010. Gross margin increased to 43.1% for fiscal 2011
from 41.8% in fiscal 2010. The increase in gross margin is primarily due to a
reduction in costs of our networking products, partially offset by pricing
pressures impacting revenues.
AGS gross profit for fiscal 2011 and 2010 was $1,222 million and $1,119 million,
respectively. AGS gross profit increased $103 million or 9% primarily due to an
increase in revenues from professional services. The increase in AGS gross
margin also included the incremental margin provided by the NES business for
fiscal 2011 as compared to results for fiscal 2010, which included the results
of the NES business for only the period of December 19, 2009 through
September 30, 2010. AGS gross margin increased to 47.5% for fiscal 2011 from
45.4% for fiscal 2010. The change in gross margin is primarily attributable to
the continued benefit from cost saving initiatives, which include the benefit of
productivity improvements from reducing the workforce and relocating positions
to lower cost geographies partially offset by the effects of the acquired NES
business for the period December 19, 2009 through September 30, 2010. The
acquired NES business historically experienced lower services margins prior to
the acquisition. Accordingly, the acquisition of NES negatively impacts the
gross margin percentage of AGS for the period presented.
Total gross profit for fiscal 2011 and 2010 included the effect of certain
acquisition adjustments including the amortization of acquired technology
intangibles and the amortization of the inventory step-up related to the
acquisition of NES and the Merger.
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Operating expenses
Fiscal years ended September 30,
Percentage of Revenue
Dollars in millions 2011 2010 2011 2010 Change
Selling, general and
administrative $ 1,845 $ 1,721 33.3 % 34.0 % $ 124 7 %
Research and development 461 407 8.3 % 8.0 % 54 13 %
Amortization of
intangible assets 226 218 4.1 % 4.3 % 8 4 %
Restructuring and
impairment charges, net 189 187 3.4 % 3.7 % 2 1 %
Acquisition-related costs 5 20 0.1 % 0.4 % (15 ) (75 )%
Total operating expenses $ 2,726 $ 2,553 49.2 % 50.4 % $ 173
7 %
SG&A expenses for fiscal 2011 and 2010 were $1,845 million and $1,721 million,
respectively, an increase of $124 million. The increase in expenses was due to
incremental SG&A expenses incurred by the NES business for fiscal 2011 as
compared to results for fiscal 2010, which included the results of the NES
business for only the period of December 19, 2009 through September 30, 2010. In
addition, the increases included unfavorable impacts of foreign currency, as
well as higher costs under our employee incentive plans, which are driven by
actual results versus established targets. These increases were partially offset
by decreases in integration-related costs. Integration-related costs included in
SG&A were $103 million and $154 million for fiscal 2011 and 2010, respectively.
Integration-related costs primarily represent third-party consulting fees and
other administrative costs associated with consolidating and coordinating the
operations of Avaya and NES. These costs were incurred in connection with, among
other things, the on-boarding of NES personnel, developing compatible IT systems
and internal processes, and developing and implementing a strategic operating
plan to enable a smooth transition with minimal disruption to NES customers.
Such costs also include fees paid to certain Nortel-controlled entities for
logistics and other support functions being performed on a temporary basis
pursuant to a transition services agreement. SG&A also decreased as a result of
the continued benefit from cost savings initiatives implemented in prior
periods, which included exiting facilities and reducing the workforce and
relocating positions to lower-cost geographies and the impact of our divestiture
of AGC in August 2010. Until August 31, 2010 AGC was our majority-owned
subsidiary and its SG&A expenses were included in our SG&A expenses.
R&D expenses for fiscal 2011 and 2010 were $461 million and $407 million,
respectively, an increase of $54 million. The increase in R&D expenses was due
to incremental R&D expenses from the acquired NES business for fiscal 2011 as
compared to results for fiscal 2010, which included the results of the NES
business for only the period of December 19, 2009 through September 30, 2010, as
well as higher costs under our employee incentive programs. This increase was
partially offset by reductions resulting from continued focus on cost saving
initiatives and the re-prioritization of projects.
Amortization of intangible assets for fiscal 2011 and 2010 was $226 million and
$218 million, respectively, an increase of $8 million.
Restructuring and impairment charges, net, for fiscal 2011 and 2010 were $189
million and $187 million, respectively, an increase of $2 million. During fiscal
2011 and 2010, we continued our focus on controlling costs. In response to the
global economic climate and in anticipation of the acquisition of NES, we began
implementing additional initiatives designed to streamline our operations,
generate cost savings, and eliminate overlapping processes and expenses
associated with the NES business. These initiatives include exiting facilities
and reducing the workforce or relocating positions to lower cost geographies.
Restructuring charges recorded during fiscal 2011 include employee separation
costs of $153 million and lease obligations of $36 million. Employee separation
charges for this period include $56 million associated with an agreement reached
with the works council representing employees of certain of the Company's German
subsidiaries for the elimination of 210 employee positions. Severance and
employment benefits payments associated with this action are expected to be paid
through fiscal 2014, and include, but are not limited to, social pension fund
payments and health care and unemployment insurance costs to be paid to or on
behalf of the affected employees. For fiscal 2011, lease obligations included in
restructuring charges represent the remaining lease obligations associated with
facilities vacated during the period primarily in Ireland and the U.S.
Restructuring charges recorded during fiscal 2010 include employee separation
costs of $147 million and lease obligations of $24 million and primarily include
costs associated with involuntary employee severance actions in EMEA and the
U.S. and facilities vacated during the period primarily in the U.S. and United
Kingdom.
In addition, during fiscal 2010, we recorded an impairment charge of $16 million
associated with certain technologies in the NES acquisition. Our acquisition of
NES provided us with access to several proprietary technologies that previously
were not available to Avaya. Some of these technologies, based on their
functionality, overlapped with our pre-existing technologies. In order to
realize synergies and reduce our expenditures on research and development and
marketing, the number of technologies Avaya supports is being reduced. As a
result, we identified certain technologies associated with our GCS products
segment that are redundant to others that Avaya no longer aggressively develops
and markets. The Company determined that no events or
53
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circumstances changed during fiscal 2011 that would indicate that any
technologies were impaired.
Acquisition-related costs for fiscal 2011 and 2010 were $5 million and $20
million, respectively, a decrease of $15 million, and include third-party legal
and other costs related to business acquisitions in fiscal 2011 and the
acquisition of NES in fiscal 2010.
Operating Loss
Operating loss for fiscal 2011 was $94 million compared to $381 million for
fiscal 2010.
Results for fiscal 2011 include the impact of the operating results associated
with the NES business, which includes the effect of certain acquisition
adjustments and the amortization of acquired technology and customer
intangibles, for fiscal 2011 as compared to results for fiscal 2010, which
included the results of the NES business for only the period of December 19,
2009 through September 30, 2010. In addition, for fiscal 2011, we incurred
integration-related costs (included in SG&A and elsewhere) of $132 million and
acquisition-related costs of $5 million, as described above. For fiscal 2010, we
incurred integration-related costs (included in SG&A and elsewhere) of $208
million, acquisition-related costs of $20 million and an impairment of $16
million to our long-lived assets.
Our operating loss for fiscal 2011 and 2010 includes non-cash expenses for
depreciation and amortization of $653 million and $691 and share-based
compensation of $12 million and $19 million, respectively.
Interest Expense
Interest expense for fiscal 2011 and 2010 was $460 million and $487 million,
which includes non-cash interest expense of $41 million and $105 million,
respectively. Non-cash interest expense for fiscal 2011 includes
(1) amortization of debt issuance costs, (2) accretion of debt discount
attributable to our senior secured incremental term B-2 loans, which were issued
in connection with the acquisition of NES, through February 11, 2011, the date
on which those loans were repaid in full, and (3) accretion of debt discount
attributable to our senior secured term B-3 loans, which were issued on
February 11, 2011 as a result of the modification to certain provisions of the
senior secured credit facility. Non-cash interest expense for fiscal 2010
includes (1) amortization of debt issuance costs, (2) accretion of debt discount
attributable to our senior secured incremental term B-2 loans and (3) PIK
interest, which we elected to finance through our senior unsecured PIK toggle
notes for the period of May 1, 2009 through October 31, 2009 and November 1,
2009 through April 30, 2010.
Cash interest expense for fiscal 2011 increased as a result of (1) our election
to pay cash interest on our senior unsecured PIK toggle notes for the periods of
May 1, 2010 through October 31, 2010, November 1, 2010 through April 30, 2011,
and May 1, 2011 through October 31, 2011, and (2) the amendment and restatement
of the senior secured credit facility. The amendment and restatement of the
senior secured credit facility permitted the extension of the maturity of a
portion of the senior secured term B-1 loans representing outstanding principal
amounts of $2.2 billion from October 26, 2014 to October 26, 2017 by converting
such loans into a new tranche of senior secured B-3 loans that bear interest at
a higher rate per annum than the senior secured term B-1 loans that they
replaced. This increase was partially offset by decreased cash interest expense
as a result of the expiration of certain interest rate swap contracts associated
with our senior secured credit facility. See Note 9, "Financing Arrangements" to
our audited consolidated financial statements for further details on the
amendment and extension of the senior secured credit facility.
Loss on Extinguishment of Debt
In connection with the issuance of the senior secured notes and the payment in
full of the senior secured incremental term B-2 loans, we recognized a loss on
extinguishment of debt for fiscal 2011 of $246 million. The loss represents the
difference between the reacquisition price of the senior secured incremental
term B-2 loans (including $1 million of consent fees paid to the holders of the
senior secured incremental term B-2 loans that consented to the amendment and
restatement of the senior secured credit facility) and the carrying value of the
senior secured incremental term B-2 loans (including unamortized debt discount
and debt issue costs). See Note 9, "Financing Arrangements" to our audited
consolidated financial statements for further details on the issuance of our
senior secured notes and repayment of the senior secured incremental term B-2
loans.
Other Income, Net
Other income, net for fiscal 2011 and 2010 was $5 million and $15 million,
respectively, a decrease of $10 million. For fiscal 2011 other income, net
includes fees paid to third parties in connection with the modification of the
senior secured term B-1 loan of $9 million offset by interest income and net
foreign currency transaction gains. For fiscal 2010 other income, net includes
interest income and a $7 million gain on our divestiture of AGC.
Provision for Income Taxes
The provision for income taxes was $68 million and $18 million for fiscal 2011
and 2010, respectively. The effective tax rate for fiscal 2011 and 2010 was 8.5%
and 2.1%, respectively, and differs from the U.S. Federal tax rate primarily due
to the effect of taxable income in non-U.S. jurisdictions and the valuation
allowance principally established against our U.S. deferred tax
54
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assets. Additionally, the tax provision for fiscal 2011 includes an $8 million
benefit for the reversal of a valuation allowance related to NOLs, which are now
expected to be utilized by a non-U.S. entity and a $5 million benefit for a
reduction in unrecognized tax benefits due to reduction of uncertain tax
positions plus the reversal of interest in the amount of $3 million. The tax
benefit for fiscal 2010 includes a $10 million reduction in our unrecognized tax
benefits due to the settlement of a tax issue plus the reversal of interest in
the amount of $5 million.
See Note 12, "Income Taxes" to our audited consolidated financial statements for
further details and a reconciliation of the Company's loss before income taxes
at the U.S. Federal statutory rate to the provision for income taxes.
Liquidity and Capital Resources
We expect our existing cash balance, cash generated by operations and borrowings
available under our credit facilities to be our primary sources of short-term
liquidity. Based on our current level of operations, we believe these sources
will be adequate to meet our liquidity needs for at least the next twelve
months. As part of our analysis, we have assessed the implications of the recent
financial events on our current business and determined that these market
conditions have not resulted in an inability to meet our obligations as they
come due in the ordinary course of business and have not had a significant
impact on our liquidity as of September 30, 2012. However, we cannot assure you
that our business will generate sufficient cash flow 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
The following table provides the condensed statements of cash flows for the
periods indicated:
Fiscal years ended September 30,
In millions 2012 2011 2010
Net cash (used for) provided by:
Net loss $ (344 ) $ (863 ) $ (871 )
Adjustments to reconcile net loss to net
cash used for operating activities 610 637 880
Changes in operating assets and
liabilities (222 ) (74 ) 33
Operating activities 44 (300 ) 42
Investing activities (271 ) (101 ) (864 )
Financing activities 157 228 853
Effect of exchange rate changes on cash
and cash equivalents 7 (6 ) (19 )
Net (decrease) increase in cash and cash
equivalents (63 ) (179 ) 12
Cash and cash equivalents at beginning of
year 400 579 567
Cash and cash equivalents at end of year $ 337 $ 400 $ 579
Operating Activities
Cash provided by (used for) operations was $44 million, ($300) million, and $42
million for fiscal 2012, 2011 and 2010, respectively. In fiscal 2011, cash used
for operations included $291 million in payments associated with the refinancing
of our incremental term B-2 loans. In connection with this refinancing the
Company recognized a $241 million cash loss on the extinguishment of debt
(excluding $5 million of non-cash charges for debt issuance costs) and paid $50
million of amortized discount. See Note 9, "Financing Arrangements" to our
audited consolidated financial statements for further details on the issuance of
our senior secured notes and repayment of our senior secured incremental term
B-2 loans.
Adjustments to reconcile net loss to net cash provided by (used for) operations
for fiscal 2012, 2011 and 2010 were $610 million, $637 million, and $880
million, and consisted of depreciation and amortization of $564 million, $653
million, and $691 million, unrealized loss (gain) on foreign currency exchange
of $29 million, ($38) million, and $41 million, non-cash interest expense of $22
million, $41 million and $105 million and share based compensation of $8
million, $12 million, and $19 million, respectively. In addition to these
adjustments, as discussed above we paid $50 million of amortized discount in
connection with the repayment of our incremental B-2 loans in fiscal 2011.
Cash provided by (used for) changes in operating assets and liabilities for
fiscal 2012, 2011 and 2010 were ($222) million, ($74) million, and $33 million,
respectively.
In fiscal 2012 the decrease in net cash associated with the changes in our
operating assets and liabilities was predominantly driven by payments associated
with our business restructuring reserves established in prior years, reductions
in the Company's accounts payable and deferred revenue balances and payment of
previously established employee payroll and benefit
55
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obligations, the most significant of which were payments under our pension and
employee incentive plans. These decreases were partially offset by a decrease in
inventory levels.
In fiscal 2011 the decrease in net cash associated with the changes in our
operating assets and liabilities was predominantly driven by a decrease in
foreign exchange contracts due to settlement and changes in foreign currency
exchange rates associated with these contracts, an increase in inventory and a
decrease in payroll and benefit obligations. These decreases in operating assets
and liabilities were partially offset by the increase in accrued interest as a
result of the issuance of the senior secured notes and repayment of the senior
secured incremental term B-2 loans, which resulted in a change in the timing of
when our interest payments are due. The decreases in operating asset and
liabilities were also partially offset by efforts to closely manage the timing
of our payments to vendors, improvements in the collections of accounts
receivable and the effects of non-cash business restructuring reserves net of
cash payments against our reserves.
In fiscal 2010 the increase in net cash associated with the changes in our
operating assets and liabilities was predominantly due to increases in accounts
payable and deferred revenues partially offset by increases in accounts
receivable and deferred costs and payments made in connection with our
restructuring activities.
Investing Activities
Net cash used for investing activities for fiscal 2012, 2011 and 2010 was $271
million, $101 million, and $864 million, and consisted primarily of cash used
for the acquisition of businesses of $212 million, $16 million and $805 million,
capital expenditures of $92 million, $83 million and $79 million and payments to
develop capitalized software of $35 million, $42 million and $43 million,
respectively. Cash used for the acquisition of businesses in fiscal 2012
includes $208 million of payments (net of cash acquired of $22 million) related
to our acquisition of Radvision. Cash for the acquisition of businesses in
fiscal 2010 includes payments in connection with the acquisition of NES of $800
million (net of cash acquired of $38 million, the application of the $100
million good-faith deposit made in fiscal 2009 and the return of funds held in
escrow of $5 million). In fiscal 2012 the cash used for investing activities was
partially offset by $74 million of cash proceeds from the sale of investments
primarily related to marketable securities acquired in the acquisition of
Radvision. In fiscal 2010, cash used for investing activities was partially
offset by $32 million in net proceeds received from the divestiture of our
59.13% ownership in AGC (net of cash sold of $13 million) and $18 million in
proceeds from the liquidation of auction rate securities acquired in connection
with the acquisition of NES.
Financing Activities
Net cash provided by financing activities for fiscal 2012, 2011 and 2010 was
$157 million, $228 million, and $853 million, respectively, and primarily
included proceeds from our financing agreements (net of repayments), capital
contributions received from Parent and payments for debt issuance and
modification costs.
In fiscal 2012 net cash provided by financing activities included a capital
contribution 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 $60 million borrowed by the Company under its senior secured
asset-based credit facility. The capital contribution from Parent and the
amounts borrowed under our senior secured asset-based credit facility were used
to finance, in part, the acquisition of Radvision. Following the completion of
the acquisition, all amounts borrowed under the senior secured asset-based
credit facility were repaid in full.
In fiscal 2011 net cash provided by financing activities included proceeds of
$967 million from the issuance of $1,009 million of senior secured notes net of
$42 million of cash paid for debt issuance and debt modification costs. The
proceeds from the issuance of the senior secured notes were used, to repay in
full the Company's senior secured incremental term B-2 loans which had a
discounted carrying value of $696 million. In addition to the discounted
carrying value of $696 million, the total payment of $987 million included $241
million of unamortized loan discount recognized as a cash loss on extinguishment
of debt (excluding $5 million of non-cash charges for debt issuance costs) and
$50 million of amortized loan discount as discussed in Sources and Uses of Cash
- Operating Activities above. See Note 9, "Financing Arrangements" to our
audited consolidated financial statements for further details on the issuance of
our senior secured notes and repayment of our senior secured incremental term
B-2 loans.
In fiscal 2010 net cash provided by financing activities included net proceeds
of $783 million from the issuance of senior secured incremental term B-2 loans
with detachable warrants to purchase 61.5 million shares of the Parent's common
stock and a capital contribution to Avaya from Parent in the amount of $125
million. The net proceeds of the senior secured incremental term B-2 loans and
the capital contribution were used to finance, in part, the acquisition of NES.
Net cash provided by financing activities was partially offset by the scheduled
repayments of our long-term debt of $37 million, $42 million and $48 million in
fiscal 2012, 2011 and 2010, respectively.
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Contractual Obligations and Sources of Liquidity
Contractual Obligations
The following table summarizes our contractual obligations as of September 30,
2012:
Payments due by period
Less than 1-3 3-5 More than
In millions Total 1 year years years 5 years
Capital lease obligations (1) $ 24 $ 3 $ 8 $ 7 $ 6
Operating lease obligations (2) 499 101 153 108 137
Purchase obligations with contract
manufacturers and suppliers (3) 61 61 - - -
Other purchase obligations (4) 114 40 66 8 -
Senior secured term B-1 loans (5) 1,434 15 1,419 - -
Senior secured term B-3 loans (5) 2,152 23 46 46 2,037
Senior secured notes (6) 1,009 - - - 1,009
9.75% senior unsecured notes due 2015 (7) 700 - - 700 -
10.125%/10.875% senior PIK toggle unsecured
notes due 2015 (7) 834 - 15 819 -
Interest payments due on long-term debt (8) 1,734 389 717 464 164
Pension benefit obligations (9) 178 178 - - -
Total $ 8,739 $ 810 $ 2,424 $ 2,152 $ 3,353
(1) The payments due for capital lease obligations do not include future
payments for interest.
(2) Contractual obligations for operating leases include $64 million of future
minimum lease payments that have been accrued for in accordance with GAAP
pertaining to restructuring and exit activities.
(3) We purchase components from a variety of suppliers and use several contract
manufacturers to provide manufacturing services for our products. During
the normal course of business, in order to manage manufacturing lead times
and to help assure adequate component supply, we enter into agreements with
contract manufacturers and suppliers that allow them to produce and procure
inventory based upon forecasted requirements provided by us. If we do not
meet these specified purchase commitments, we could be required to purchase
the inventory. See Note 17, "Commitments and Contingencies," to our audited
consolidated financial statements for further details on our purchase
commitments.
(4) Other purchase obligations represent an estimate of contractual obligations
in the ordinary course of business, other than commitments with contract
manufacturers and suppliers, for which we have not received the goods or
services as of September 30, 2012. Although contractual obligations are
considered enforceable and legally binding, the terms generally allow us
the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.
(5) The contractual cash obligations for the senior secured credit facility
represent the minimum principal payments owed per year. The contractual
cash obligations do not reflect a potential springing of the term B-3 loans
to July 26, 2015 (as described in Note 9, "Financing Arrangements" to our
audited consolidated financial statements) or any contingent mandatory
annual principal repayments that may be required to be made upon us
achieving certain excess cash flow targets, as defined in our senior
secured credit facility.
On October 29, 2012, we completed a debt refinancing that deferred the maturity
of $135 million of senior secured 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. See Note 20, "Subsequent Event" to our audited consolidated
financial statements for further details on this refinancing arrangement.
(6) The contract obligations for the senior secured notes, which mature on
April 1, 2019, represent principal payments only.
(7) The contractual cash obligations for the 9.75% senior unsecured notes due
2015 and 10.125%/10.875% senior PIK toggle unsecured notes due 2015 (see Note 9, "Financing Arrangements," to our audited consolidated financial
statements) represent principal payments only.
(8) The contractual cash obligations for interest payments represent the related interest payments on long-term debt and the contractual obligations
associated with the related interest rate swaps which hedge approximately
50% of the floating rate interest risk associated with the senior secured
credit facility. The interest payments for the senior secured term B-1
loans and senior secured term B-3 loans were calculated by applying an applicable margin to a projected 3-month LIBOR rate. The interest payments
were calculated using a 7% rate for the senior secured notes. The interest
payments
57--------------------------------------------------------------------------------
were calculated using a 9.75% and 10.125% rate for the cash-pay notes and PIK
toggle notes, respectively.
(9) The Company sponsors non-contributory defined pension and postretirement
plans covering certain employees and retirees. The Company's general
funding policy with respect to qualified pension plans is to contribute
amounts at least sufficient to satisfy the minimum amount required by
applicable law and regulations, or to directly pay benefits where
appropriate. Most postretirement medical benefits are not pre-funded.
Consequently, the Company makes payments as these retiree medical benefits
are disbursed.
Additionally, as of September 30, 2012, the Company had gross unrecognized tax
benefits of $248 million. Also, included in non-current liabilities is $9
million relating to audits by state and local and foreign taxing authorities for
the periods prior to the Company's separation from Lucent Technologies Inc. (now
Alcatel-Lucent) pursuant to the Tax Sharing Agreement between the Company and
Lucent. Further, an additional $37 million for gross interest and penalties
relating to these amounts had been classified as non-current liabilities. At
this time, the Company is unable to make a reasonably reliable estimate of the
timing of payments in connection with these tax liabilities; therefore, such
amounts are not included in the above contractual obligation table.
On October 29, 2012, we completed a debt refinancing that effectively deferred
the maturity of $135 million of senior secured 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 and increased the applicable interest for the new tranche
of senior secured term B-4 loans. See Note 20, "Subsequent Event" to our audited
consolidated financial statements.
Our primary future cash requirements will be to fund working capital, debt
service, capital expenditures, restructuring payments and benefit obligations.
In addition, we may use cash in the future to make strategic acquisitions.
In addition to our working capital requirements, we expect our primary cash
requirements for fiscal 2013 to be as follows:
• Debt service-We expect to make payments of approximately $431 million
during fiscal 2013 for principal and interest associated with long-term
debt, as refinanced.
• Restructuring payments-We expect to make payments of approximately $84
million during fiscal 2013 for employee separation costs and lease termination obligations associated with restructuring actions we have taken
through September 30, 2012.
• Capital expenditures-We expect to spend approximately $126 million for capital expenditures and capitalized software development costs during
fiscal 2013.
• Benefit obligations-We estimate we will make payments under our pension and
postretirement obligations totaling $185 million during fiscal 2013. These
payments include: $102 million to satisfy the minimum statutory funding
requirements of our U.S. qualified pension plans, $7 million of payments
under our U.S. benefit plans that are not pre-funded, $27 million under our
non-U.S. benefit plans that are predominately not pre-funded and $49
million under our U.S. retiree medical benefit plan that is not pre-funded.
See discussion in Note 13, "Benefit Obligations," to our audited
consolidated financial statements for further details of our benefit
obligations.
We and our subsidiaries, affiliates and significant shareholders may from time
to time seek to retire or purchase our outstanding debt (including publicly
issued debt) through cash purchases and/or exchanges, in open market purchases,
privately negotiated transactions, by tender offer or otherwise. Such
repurchases or exchanges, if any, will depend on prevailing market conditions,
liquidity requirements, contractual restrictions and other factors. The amounts
involved may be material.
Future Sources of Liquidity
We expect our 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 2012 designed to reduce overhead and provide
cash savings. The Company currently has two revolving credit facilities
providing for borrowings of up to an aggregate of $535 million subject to
certain contractual limitations. Our senior secured multi-currency asset-based
revolving credit facility provides senior secured revolving financing of up to
$335 million, subject to availability under a borrowing base which, 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. In addition, although the senior secured multi-currency
asset-based revolving credit facility does not require us to comply with any
financial ratio maintenance covenants, if we have Excess Availability under the
facility of less than $33.5 million at any time, we will not be permitted to
borrow any additional amounts thereunder unless our pro forma Consolidated Fixed
Charge Coverage Ratio (each such term as defined in the credit agreement
governing the facility) is at least 1.0 to 1.0. At September 30, 2012 there were
no borrowings under the facility, however there were letters of credit issued in
the ordinary course of business which reduce the amount of borrowings available.
Based on the borrowing base as calculated at September 30, 2012, the remaining
availability under the
58
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facility was $258 million which is net of $77 million in issued letters of
credit. We also have a senior secured multi-currency revolver, which allows for
borrowings of up to $200 million. At September 30, 2012, there were no amounts
outstanding under the senior secured multi-currency revolver and the $200
million was available in full. Both revolving credit facilities include other
customary conditions that, if not complied with, could restrict our availability
to borrow.
On August 8, 2011, the Company amended the terms of the multi-currency revolvers
available under its senior secured credit facility and its senior secured
multi-currency asset-based revolving credit facility to extend the final
maturity of each from October 26, 2013 to October 26, 2016. All other terms and
conditions of the senior secured credit facility and the senior secured
multi-currency asset-based revolving credit facility remained unchanged. For
more information on the revolving credit facilities, the restrictions on
borrowing thereunder, and amendments entered into in October 2012 see Note 9,
"Financing Arrangements" and Note 20, "Subsequent Event," to our audited
consolidated financial statements.
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.
If we do not generate sufficient cash from operations, face unanticipated cash
needs such as the need to fund significant strategic acquisitions or do not
otherwise have sufficient cash and cash equivalents, we may need to incur
additional debt or issue additional equity. In order to meet our cash needs we
may, from time to time, borrow under our credit facilities or issue long-term or
short-term debt or equity, if the market and our credit facilities and the
indentures governing our notes permit us to do so. Furthermore, if we acquire a
business in the future that has existing debt, our debt service requirements may
increase. We regularly evaluate market conditions, our liquidity profile, and
various financing alternatives for opportunities to enhance our capital
structure. If market conditions are favorable, we may refinance our existing
debt or issue additional securities.
Based on past performance and current expectations, we believe that our existing
cash and cash equivalents of $337 million as of September 30, 2012 and future
cash provided by operating activities will be sufficient to meet our future cash
requirements described above for at least the next twelve months. Our ability to
meet these 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.
Uncertainties Regarding Our Liquidity
We believe the following uncertainties exist regarding our liquidity:
• Revenues-Our ability to generate net cash from operating activities has
been a primary source of our liquidity. If our revenues and gross profits
were to decline significantly during this economic downturn and challenging
market conditions, particularly in the U.S. and Europe, our ability to
generate net cash from operating activities in a sufficient amount to meet
our cash needs could be adversely affected. Furthermore, our 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.
• Cost Saving Initiatives-Our ability to reduce costs through cost saving
initiatives will have a direct effect on our cash flows and available cash
balances, as certain restructuring charges are recorded in the current year
but are paid in future periods. Further, although we may identify
additional cost saving initiatives in the future, we may be unsuccessful in
these actions or the amount required for severance payments may be so
prohibitive as to preclude the implementation of such cost savings
initiatives, which could negatively impact our future cash flows.
• Debt Ratings-Our ability to obtain external financing and the related cost
of borrowing are affected by our debt ratings. See "Debt Ratings."
• Future Acquisitions-We may from time to time in the future make
acquisitions. Such acquisitions may require significant amounts of cash or
may result in increased debt service requirements to the extent we assume
or incur debt in connection with such acquisitions.
59--------------------------------------------------------------------------------• Litigation-In the ordinary course of business, the Company is involved in
litigation, claims, government inquiries, investigations, charges and
proceedings. See Note 17, "Commitments and Contingencies," to our audited
consolidated financial statements. Our ability to successfully defend the
Company against future litigation may impact cash flows.
Debt Ratings
As of September 30, 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. Although a change in debt rating would
have no impact on our existing borrowing arrangements, 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.
Debt Service Obligations
As a result of the Merger and the acquisition of NES, our level of indebtedness
increased. As of September 30, 2012, principal payments due under our
indebtedness were $6,129 million, excluding capital lease obligations of $24
million. Our interest expense for fiscal 2012, 2011, and 2010 was $431 million,
$460 million and $487 million, respectively, and includes $22 million, $41
million and $105 million of non-cash interest expense, respectively.
Our leverage requires that a substantial portion of our cash flows from
operations be dedicated to the payment of principal and interest on our
indebtedness.
We continually monitor our exposure to the risk of increased interest rates as
portions of our borrowings under our credit facilities are at variable rates of
interest. We use interest rate swap agreements to manage the amount of our
floating rate debt to the extent we deem appropriate. At September 30, 2012 the
outstanding notional amount of these swap agreements was $1.8 billion.
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. As a result, payment in kind interest of $41
million and $43 million was added to the principal amount of the notes effective
November 1, 2009 and May 1, 2010, respectively, and will be payable when the
notes become due. For the interest periods of May 1, 2010 to October 31, 2011,
the Company made such payments in cash interest. Under the terms of the debt
agreements, after November 1, 2011, the Company is required to make all interest
payments on the senior unsecured PIK toggle notes entirely in cash. The Company
has made all scheduled payments timely under the senior secured credit facility,
the indenture governing its senior secured notes, and the indenture governing
its senior unsecured notes.
Strategic Uses of Cash and Cash Equivalents
As further discussed in "Liquidity and Capital Resources," our cash and cash
equivalents decreased by $63 million to $337 million at September 30, 2012 from
$400 million at September 30, 2011.
Our cash and cash equivalents balance at September 30, 2011 and 2010 was $400
million and $579 million, respectively, a decrease of $179 million. Cash and
cash equivalents at September 30, 2011 and September 30, 2010 do not include
restricted cash of $1 million and $28 million, respectively. The restricted cash
balance at September 30, 2010 related primarily to the securing of a standby
letter of credit related to a facility lease in Germany, which was classified as
other non-current assets, and was secured by a letter of credit issued under
Avaya Inc.'s senior secured multi-currency asset-based revolving credit facility
as of September 30, 2011.
Credit Facilities
In connection with the Merger on October 26, 2007, the Company entered into
borrowing arrangements with several financial institutions, certain of which
arrangements were amended December 18, 2009 in connection with the acquisition
of NES and amended on February 11, 2011 in connection with the refinancing.
Long-term debt under our borrowing arrangements includes a senior secured credit
facility consisting of term loans and a revolving credit facility, a senior
secured multi-currency asset based revolving credit facility, senior secured
notes and senior unsecured notes. On August 8, 2011, the Company amended the
terms of the multi-currency revolvers available under its senior secured credit
facility and its senior secured multi-currency asset-based revolving credit
facility to extend the final maturity of each from October 26, 2013 to
October 26, 2016. All other terms and conditions of the senior secured credit
facility and the senior secured multi-currency asset-based revolving credit
facility remained unchanged. We are not in default under the senior secured
credit facility, the indentures governing our notes or our senior secured
multi-currency asset-based revolving credit facility. See Note 9, "Financing
Arrangements" and Note 20, "Subsequent Event," to our audited consolidated
financial statements for further details, including information regarding
amendments to our credit facilities that were entered into in October 2012.
Guarantees of Indebtedness and Other Off-Balance Sheet Arrangements
We are party to several types of agreements, including surety bonds, purchase
commitments, product financing arrangements
60
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and performance guarantees, which are fully discussed in Note 17, "Commitments
and Contingencies," to our audited consolidated financial statements.
Legal Proceedings and Environmental, Health and Safety Matters
We are subject to certain legal proceedings, which are fully discussed in Note
17, "Commitments and Contingencies" to our audited consolidated financial
statements.
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 benefit costs, and non-retirement post-employment
benefit 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:
Fiscal years ended September 30,
In millions 2012 2011 2010
Net loss $ (344 ) $ (863 ) $ (871 )
Interest expense 431 460 487
Interest income (3 ) (5 ) (5 )
Income tax expense 8 68 18
Depreciation and amortization 564 653 691
EBITDA 656 313 320
Impact of purchase accounting adjustments (a) 3 - 5
Restructuring charges, net 142 189 171
Sponsors' fees (b) 7 7 7
Acquisition-related costs (c) 4 5 20
Integration-related costs (d) 19 132 208
Debt registration fees - - 1
Loss on extinguishment of debt (e) - 246 -
Third-party fees expensed in connection with
the debt modification (f) - 9 -
Strategic initiative costs (g) - - 6
Non-cash share-based compensation 8 12 19
Write-down of assets held for sale to net
realizable value 5 1 -
Loss (gain) on investments and sale of
long-lived assets, net 3 1 (4 )
Impairment of long-lived assets 6 - 16
Reversal of contingent liability related to
acquisition (1 ) - -
Net income of unrestricted subsidiaries, net of
dividends received - - (6 )
Loss (gain) on foreign currency transactions 21 (12 ) 1
Pension/OPEB/nonretirement postemployment
benefits and long-term disability costs (h) 98 68 31
Adjusted EBITDA $ 971 $ 971 $ 795
(a) For fiscal 2012, 2011 and 2010, represents adjustments to eliminate the
impact of certain purchase accounting adjustments recorded as a result of
certain acquisitions including Radvision, NES, and other acquisitions and
the Merger, including the recognition of the amortization of business
partner commissions, which were eliminated in purchase accounting, the
recognition of revenue and costs that were deferred in prior periods and
eliminated in purchase accounting and the elimination of the impact of
estimated fair value adjustments for certain assets and liabilities, such
as inventory.
(b) Sponsors' fees represent monitoring fees payable to affiliates of the
Sponsors pursuant to a management services agreement entered into at the
time of the Merger. See Item 13, "Certain Relationships and Related
Transactions and Director Independence."
(c) Acquisition-related costs include legal and other costs related to
Radvision, NES and other acquisitions.
(d) Integration-related costs primarily represent third-party consulting fees
and other administrative costs associated with consolidating and coordinating the operations of Avaya with Radvision and NES. In fiscal
2012, the costs associated with Radvision primarily relate to consolidating
and coordinating the operations of Avaya and Radvision and the costs
associated with NES, primarily related to developing compatible IT systems
and internal processes. In fiscal 2011, integration costs were incurred in
connection with, among other things, the on-boarding of NES personnel,
developing compatible IT systems and internal processes and developing and
implementing a strategic operating plan to help enable a smooth transition
with minimal disruption to NES customers. Integration-related costs also
include fees paid to certain Nortel-controlled entities for logistics and
other support functions being performed on a temporary basis pursuant to a
transition services agreement.
(e) Loss on extinguishment of debt represents the loss recognized in connection
with the payment in full of the senior secured incremental term B-2 loans.
The loss is based on the difference between the reacquisition price and the
carrying value of the senior secured incremental term B-2 loans. See
Note 9, "Financing Arrangements," to our audited consolidated financial
statements.
62--------------------------------------------------------------------------------(f) 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 9, "Financing Arrangements,"
to our audited consolidated financial statements.
(g) Strategic initiative costs represent consulting fees in connection with
management's cost-savings actions, which commenced subsequent to the
Merger.
(h) 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 fiscal 2012 and 2011, the
amounts include a curtailment charge of $5 million associated with
workforce reduction in Germany and the U.S. and $7 million associated with
workforce reductions in Germany, respectively.
Use of Estimates and Critical Accounting Policies
Our consolidated financial statements are based on the selection and application
of accounting principles generally accepted in the United States of America,
which require us to make estimates and assumptions about future events that
affect the amounts reported in our financial statements and the accompanying
notes. Future events and their effects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires the exercise of
judgment. Actual results could differ from those estimates, and any such
differences may be material to the financial statements. We believe that the
following policies may involve a higher degree of judgment and complexity in
their application and represent the critical accounting policies used in the
preparation of our financial statements. If different assumptions or conditions
were to prevail, the results could be materially different from our reported
results.
Acquisition Accounting
The Company accounts for business combinations using the acquisition method,
which requires an allocation of the purchase price of an acquired entity to the
assets acquired and liabilities assumed based on their estimated fair values at
the date of acquisition. Goodwill represents the excess of the purchase price
over the net tangible and intangible assets acquired.
Revenue Recognition
The Company derives revenue primarily from the sale of products, software, and
services for communications systems and applications. The Company's products are
sold directly through its worldwide sales force and indirectly through its
global network of distributors, dealers, value-added resellers and systems
integrators. Services includes (i) supplemental maintenance service, including
services provided under contracts to monitor and optimize customers'
communications network performance; (ii) professional services for
implementation and integration of converged voice and data networks, network
security and unified communications; and (iii) operations, or managed services.
Maintenance contracts have terms that range from one to five years. Contracts
for professional services typically have terms that range from four to six weeks
for standard solutions and from six months to one year for customized solutions.
Contracts for operations services have terms that range from one to seven years.
In accordance with GAAP, revenue is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectability is reasonably assured. For arrangements that require acceptance
of the product, system, or solution as specified by the customer, revenue is
deferred until the acceptance criteria have been met.
The Company's indirect sales to channel partners are generally recognized at the
time of shipment if all contractual obligations have been satisfied. The Company
accrues a provision for estimated sales returns and other allowances, including
promotional marketing programs and other incentives as a reduction of revenue at
time of sale. When estimating returns, the Company considers customary inventory
levels held by distributors.
Multiple deliverable arrangements beginning in fiscal 2011
In October 2009, the Financial Accounting Standards Board ("FASB") amended the
software revenue recognition guidance to remove from its scope tangible products
containing software components and non-software components that function
together to deliver the product's essential functionality. The FASB also amended
the guidance for multiple deliverable revenue arrangements to: (i) provide
updated guidance on how the deliverables in an arrangement should be separated
and how the consideration should be allocated; and (ii) change the term "fair
value" to "selling price" and require an entity to allocate revenue using the
estimated selling prices of the deliverables when a vendor does not have
vendor-specific or third-party evidence of selling price. The Company adopted
the new guidance on a prospective basis as of the beginning of fiscal 2011 for
revenue arrangements entered into or materially modified on or after October 1,
2010.
The new guidance did not generally change the units of accounting for the
Company's revenue transactions as delivered and undelivered items generally
qualified as separate units of accounting under the historical guidance. The new
guidance affects the timing of revenue recognition for multiple deliverable
arrangements that included delivered items and undelivered items for
63
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which the Company was unable to demonstrate fair value pursuant to the
historical guidance. In such cases, the delivered items were combined with the
undelivered items to form a single unit of accounting and revenue was recognized
either on a straight-line basis over the services period or deferred until the
earlier of when the fair value requirements were met or when the last item was
delivered. In addition, the Company previously used the residual method to
allocate the arrangement consideration in cases where fair value could only be
determined for the undelivered items. Under the new guidance, the Company
allocates the total arrangement consideration based upon the relative selling
price of each deliverable and revenue is recognized as each item is delivered.
The Company enters into multiple deliverable arrangements, which may include
various combinations of products, software and services. Most product and
service deliverables qualify as separate units of accounting and can be sold on
a standalone basis. A deliverable constitutes a separate unit of accounting when
it has standalone value and, where return rights exist, delivery or performance
of the undelivered items is considered probable and substantially within the
Company's control. When the Company sells products with implementation services,
they are generally combined as one or more units of accounting, depending on the
nature of the services and the customer's acceptance requirements.
Most of the Company's solutions have both software and non-software components
that function together to deliver the products' essential functionality. For
these multiple deliverable arrangements, the Company allocates revenue to the
deliverables based on their relative selling prices. To the extent that a
deliverable is subject to specific guidance on whether and/or how to allocate
the consideration in a multiple deliverable arrangement, that deliverable is
accounted for in accordance with such specific guidance. The Company limits the
amount of revenue recognition for delivered items to the amount that is not
contingent on the future delivery of products or services or meeting other
future performance obligations.
The Company allocates revenue based on a selling price hierarchy of
vendor-specific objective evidence, third-party evidence, and then selling
price. Vendor-specific objective evidence is based on the price charged when the
deliverable is sold separately. Third-party evidence is based on largely
interchangeable competitor products or services in standalone sales to similarly
situated customers. As the Company is unable to reliably determine what
competitors products' selling prices are on a standalone basis, the Company is
not typically able to determine third-party evidence. Estimated selling price is
based on the Company's best estimates of what the selling prices of deliverables
would be if they were sold regularly on a standalone basis. Estimated selling
price is established considering multiple factors including, but not limited to,
pricing practices in different geographies and through different sales channels,
major product and services groups, and customer classifications.
Once the Company allocates revenue to each deliverable, the Company recognizes
revenue in accordance with its policies when all revenue recognition criteria
are met. Products revenue is generally recognized upon delivery and maintenance
and operations services revenue is generally recognized ratably over the period
during which the services are performed. However, revenue for professional
services arrangements is generally recognized upon completion of performance and
revenue for arrangements that require acceptance of the product, system, or
solution, is recognized when the acceptance criteria have been met.
Standalone or subsequent sales of software or software-related items are
recognized in accordance with the software revenue recognition guidance. For
multiple deliverable arrangements that only include software items, the Company
generally uses the residual method to allocate the arrangement consideration.
Under the residual method, the amount of consideration allocated to the
delivered items equals the total arrangement consideration, less the fair value
of the undelivered items. Where vendor-specific objective evidence for the
undelivered items cannot be determined, the Company defers revenue until all
items are delivered and services have been performed, or until such evidence of
fair value can be determined for the undelivered items.
Multiple deliverable arrangements in fiscal 2010 and prior
Prior to fiscal 2011, a multiple deliverable arrangement is separated into more
than one unit of accounting if all of the following criteria are met: (i) the
delivered item(s) has value to the customer on a standalone basis; (ii) there is
objective and reliable evidence of the fair value of the undelivered item(s);
and (iii) if the arrangement includes a general right of return relative to the
delivered item(s), delivery or performance of the undelivered item(s) is
considered probable and substantially within the control of the Company. If
these criteria are not met, the delivered items are combined with the
undelivered items to form a single unit of accounting and revenue is recognized
on either a straight-line basis over the services period or deferred until the
earlier of when such criteria are met or when the last item is delivered.
The Company uses the residual method to allocate the arrangement consideration
for multiple deliverable arrangements for which objective and reliable evidence
of fair value can only be determined for the undelivered items. Under the
residual method, the amount of consideration allocated to the delivered items
equals the total arrangement consideration, less the fair value of the
undelivered items.
The Company uses objective and reliable evidence of fair value to separate the
deliverables into more than one unit of accounting if the Company has
vendor-specific objective evidence or third-party evidence of fair value for all
of the deliverables. The accounting guidance does not permit the Company to use
an estimated selling price for these arrangements
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when objective and reliable evidence of fair value is not available.
The Company recognizes revenue in accordance with the software revenue
recognition guidance for arrangements that include software that is more than
incidental to the products or services as a whole. In multiple deliverable
software arrangements, the Company generally uses the residual method to
allocate the arrangement consideration. When vendor-specific objective evidence
of fair value cannot be determined for the undelivered items, the Company defers
revenue until all items have been delivered or until such evidence can be
determined.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the Consolidated Statements of Operations in the period
that includes the enactment date. A valuation allowance is recorded to reduce
the carrying amounts of deferred tax assets if it is more likely than not that
such assets will not be realized. Additionally, the accounting for income taxes
requires the Company to evaluate and make an assertion as to whether
undistributed foreign earnings will be indefinitely reinvested or repatriated.
As discussed more fully in Note 12, "Income Taxes" to our audited consolidated
financial statements at September 30, 2012, the Company changed its indefinite
reinvestment of undistributed foreign earnings assertion.
FASB Accounting Standards Codification ("ASC") subtopic 740-10, "Income
Taxes-Overall" ("ASC 740-10") prescribes a comprehensive model for the financial
statement recognition, measurement, classification, and disclosure of uncertain
tax positions. ASC 740-10 contains a two-step approach to recognizing and
measuring uncertain tax positions. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on
audit, based on the technical merits of the position. The second step is to
measure the tax benefit as the largest amount that is more than 50% likely of
being realized upon settlement.
Significant judgment is required in evaluating our uncertain tax positions and
determining our provision for income taxes. Although we believe our reserves are
reasonable, no assurance can be given that the final tax outcome of these
matters will not be different from that which is reflected in our historical
income tax provision and accruals. We adjust these reserves in light of changing
facts and circumstances.
Intangible and Long-lived Assets
Intangible assets include 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 two to fifteen years. 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 in accordance with FASB ASC Topic 360, "Property, Plant, and
Equipment" ("ASC 360"). Determination of recoverability is based on an estimate
of undiscounted future cash flows resulting from the use of the asset and its
eventual disposition. Measurement of an impairment loss for long-lived assets
that management expects to hold and use is based on the estimated fair value of
the asset. Long-lived assets to be disposed of are reported at the lower of
carrying amount or estimated fair value less costs to sell. Intangible assets
determined to have indefinite useful lives are not amortized but are tested for
impairment annually each September 30th, and more frequently if events occur or
circumstances change that indicate an asset may be impaired. The estimated
useful life of intangible and long-lived assets are based on many factors
including assumptions regarding the effects of obsolescence, demand, competition
and other economic factors, expectations regarding the future use of the asset,
and our historical experience with similar assets. The assumptions used to
determine the estimated useful lives could change due to numerous factors
including product demand, market conditions, technological developments,
economic conditions and competition.
Goodwill
Goodwill is not amortized but is subject to periodic testing for impairment in
accordance with FASB ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350")
at the reporting unit level which is one level below the Company's operating
segments. The assessment of goodwill impairment is conducted by estimating and
comparing the fair value of the Company's reporting units' net assets, as
defined in ASC 350, to their carrying value as of that date. The fair value is
estimated using an income approach whereby the fair value of the asset is based
on the future cash flows that each reporting unit's assets can be expected to
generate. Future cash flows are based on forward-looking information regarding
market share and costs for each 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
anticipated synergies or cost savings are realized with newly acquired entities.
The test for impairment is conducted annually each September 30th, and more
frequently if events occur or
65
--------------------------------------------------------------------------------
circumstances change that indicate that the fair value of a reporting unit may
be below its carrying amount.
At September 30, 2012 the Company performed its annual goodwill impairment test
and determined that the respective book values of the Company's reporting units
did not exceed their estimated fair values and that it was not necessary to
record impairment charges. In order to evaluate the sensitivity of the fair
value calculations on the goodwill impairment test the Company applied a
hypothetical 10% decrease to the fair value of each reporting unit. This
hypothetical 10% decrease in the fair value of each reporting unit at September
30, 2012 indicated that only one reporting unit, with goodwill of $133 million,
would fail step one of the goodwill impairment test. Based on our goodwill
impairment assessment performed as of September 30, 2012, we determined that no
other reporting unit was at risk for failing step one of the goodwill impairment
test.
Restructuring Programs
The Company accounts for exit or disposal of activities in accordance with FASB
ASC Topic 420, "Exit or Disposal Cost Obligations" ("ASC 420"). In accordance
with ASC 420, a business restructuring is defined as an exit or disposal
activity that includes but is not limited to a program that is planned and
controlled by management and materially changes either the scope of a business
or the manner in which that business is conducted. Business restructuring
charges includes (i) one-time termination benefits related to employee
separations, (ii) contract termination costs and (iii) other costs associated
with exit or disposal activities including, but not limited to, costs for
consolidating or closing facilities and relocating employees.
A liability is recognized and measured at its fair value for one-time
termination benefits once the plan of termination is communicated to affected
employees and it meets all of the following criteria: (i) management commits to
a plan of termination, (ii) the plan identifies the number of employees to be
terminated and their job classifications or functions, locations and the
expected completion date, (iii) the plan establishes the terms of the benefit
arrangement and (iv) it is unlikely that significant changes to the plan will be
made or the plan will be withdrawn. Contract termination costs include costs to
terminate a contract or costs that will continue to be incurred under the
contract without benefit to the Company. A liability is recognized and measured
at its fair value when the Company either terminates the contract or ceases
using the rights conveyed by the contract. A liability is recognized and
measured at its fair value for other associated costs in the period in which the
liability is incurred.
In connection with the Merger, the Company adopted a plan to exit certain
activities of the newly acquired company. A liability was recognized as of the
consummation date of the acquisition for the costs under the exit plan in
accordance with the authoritative guidance at that time if these costs were not
associated with or were not incurred to generate revenues of the combined entity
after the consummation date and either (i) had no future economic benefit to the
combined company, were incremental to other costs incurred by either the
acquired company or the acquiring company in the conduct of activities prior to
the consummation date, and were expected to be incurred as a direct result of
the plan to exit an activity of the acquired company or (ii) the cost
represented an amount to be incurred by the combined company under a contractual
obligation of the acquired company that existed prior to the consummation date
and will either continue after the plan is completed with no economic benefit to
the combined company or be a penalty incurred by the combined company to cancel
that contractual obligation.
Pension and Postretirement 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's pension and postretirement benefit costs are developed from
actuarial valuations. Inherent in these valuations are key assumptions,
including the discount rate and expected long-term rate of return on plan
assets. Material changes in pension and postretirement benefit costs may occur
in the future due to changes in these assumptions, changes in the number of plan
participants, changes in the level of benefits provided, changes in asset levels
and changes in legislation.
The discount rate is subject to change each year, consistent with changes in
rates of return on high-quality fixed-income investments currently available and
expected to be available during the expected benefit payment period. As of
September 30, 2012, the Company selects the assumed discount rate for its U.S.
pension and postretirement plans by applying the rates from the AonHewitt AA
Only and AonHewitt AA Only Above Median yield curves to the expected benefit
payment streams and develops a rate at which it is believed the benefit
obligations could be effectively settled. Previously, the Company applied rates
from the Citigroup Pension Discount Curve and the Citigroup Above Median Pension
Discount Curve. The Company follows a similar process for its non-U.S. pension
plans by applying the published iBoxx indices. Based on the published rates as
of September 30, 2012, the Company used a weighted average discount rate of
3.94% for the U.S. pension plans, 3.61% for the non-U.S. pension plans, and
3.81% for the postretirement plans. For the U.S. pension plans, non-U.S. pension
plans, and the postretirement plans, every one-percentage-point increase or
decrease in the discount rate reduces or increases our benefit obligation by
$449 million, $98 million, and $65 million, respectively.
66
--------------------------------------------------------------------------------
The market-related value of the Company's plan assets as of the measurement date
is developed using a 5-year smoothing technique. First, a preliminary
market-related value is calculated by adjusting the market-related value at the
beginning of the year for payments to and from plan assets and the expected
return on assets during the year. The expected return on assets represents the
expected long-term rate of return on plan assets adjusted up to plus or minus 2%
based on the actual 10-year average rate of return on plan assets. A final
market-related value is determined as the preliminary market-related value, plus
20% of the difference between the actual return and expected return for each of
the past five years.
These pension and other postretirement benefits are accounted for in accordance
with FASB ASC Topic 715, "Compensation-Retirement Benefits" ("ASC 715"). ASC 715
requires that plan assets and obligations be measured as of the reporting date
and the over-funded, under-funded or unfunded status of plans be recognized as
of the reporting date as an asset or liability in the Consolidated Balance
Sheets. In addition, ASC 715 requires costs and related obligations and assets
arising from pensions and other postretirement benefit plans to be accounted for
based on actuarially-determined estimates.
The plans use different factors, including years of service, eligible
compensation and age, to determine the benefit amount for eligible participants.
The Company funds its U.S. pension plans in compliance with applicable laws. See
Note 13, "Benefit Obligations," to our audited consolidated financial statements
for a discussion of the Company's pension and postretirement plans.
Commitments and Contingencies
In the ordinary course of business we are subject to legal proceedings related
to environmental, product, employment, intellectual property, licensing and
other matters. In addition, we are subject to indemnification and liability
sharing claims by Lucent Technologies Inc. (now Alcatel-Lucent) under the terms
of the Contribution and Distribution Agreement. In order to determine the amount
of reserves required, we assess the likelihood of any adverse judgments or
outcomes to these matters as well as potential ranges of probable losses. A
determination of the amount of reserves required for these contingencies is made
after analysis of each individual issue. The estimates of required reserves may
change in the future due to new developments in each matter or changes in
approach such as a change in settlement strategy. Assessing the adequacy of any
reserve for matters for which we may have to indemnify Alcatel-Lucent is
especially difficult, as we do not control the defense of those matters and have
limited information. In addition, estimates are made for our repurchase
obligations related to products sold to various distributors who obtain
financing from certain third party lending institutions, as described in Note
17, "Commitments and Contingencies" to our audited consolidated financial
statements.
Share-based Compensation
The Company accounts for share-based compensation in accordance with FASB Topic
ASC 718, "Compensation-Stock Compensation" ("ASC 718"), which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors including stock options, restricted stock
units and stock purchases based on estimated fair values. The determination of
the fair value of share-based payment awards on the date of grant using an
option pricing model is affected by the fair market value of our Parent's stock
(as defined in Avaya Holdings Corp's Amended and Restated 2007 Equity Incentive
Plan) as well as a number of highly complex and subjective assumptions.
New Accounting Guidance Recently Adopted
Disclosure of Supplementary Pro Forma Information for Business Combinations
In December 2010, the Financial Accounting Standards Board ("FASB") issued
revised guidance which requires that if a company presents pro forma comparative
financial statements for business combinations, the company should disclose
revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the
beginning of the comparable prior annual reporting period only. This guidance
also expands the supplemental pro forma disclosures to include a description of
the nature and amount of material, nonrecurring pro forma adjustments directly
attributable to the business combination included in the reported pro forma
revenue and earnings. This accounting guidance became effective for the Company
for business combinations for which the acquisition date was on or after
October 1, 2011. The adoption of this guidance did not have a material impact on
the Company's financial statement disclosures.
Goodwill Impairment Test
In December 2010, the FASB issued revised guidance on when a company should
perform step two of the goodwill impairment test for reporting units with zero
or negative carrying amounts. This guidance requires that for reporting units
with zero or negative carrying amounts, a company is required to perform step
two of the goodwill impairment test if it is more likely than not that a
goodwill impairment exists. In determining whether it is more likely than not
that a goodwill impairment exists, an entity should consider whether there are
any adverse qualitative factors indicating that an impairment may exist. This
accounting guidance became effective for the Company beginning October 1, 2011
and did not have a material impact on the Company's consolidated financial
statements or financial statement disclosures.
67
--------------------------------------------------------------------------------
Fair Value Measures
In May 2011, the FASB issued revised guidance which is intended to achieve
common fair value measurement and disclosure guidance in GAAP and International
Financial Reporting Standards. The majority of the changes represent a
clarification to existing GAAP. Additionally, the revised guidance includes
expanded disclosure requirements. This accounting guidance became effective for
the Company beginning in the second quarter of fiscal 2012 and did not have a
material impact on the Company's consolidated financial statements or financial
statement disclosures.
Multiemployer Pension Plan Disclosures
In September 2011, the FASB issued revised guidance which requires additional
disclosure about an employer's participation in a multiemployer pension plan.
The accounting guidance became effective for the Company as of September 30,
2012 and is applied retrospectively for all prior periods presented. The
adoption of this accounting guidance did not have a material impact on the
Company's financial statement disclosures.
Recent Accounting Guidance Not Yet Effective
In June 2011, the FASB issued revised guidance on the presentation of
comprehensive income and its components in the financial statements. As a result
of the guidance, companies will now be required to present net income and other
comprehensive income either in a single continuous statement or in two separate,
but consecutive statements. This standard eliminates the current option to
report other comprehensive income and its components in the statement of changes
in equity. The standard does not, however, change the items that must be
reported in other comprehensive income or the determination of net income. This
new guidance is to be applied retrospectively. This accounting guidance is
effective for the Company beginning in fiscal 2013 and is only expected to
impact the presentation of the Company's consolidated financial statements.
In September 2011, the FASB issued revised guidance intended to simplify how an
entity tests goodwill for impairment. As a result of the guidance, an entity
will be allowed to first assess qualitative factors to determine whether it is
necessary to perform the two-step quantitative goodwill impairment test. An
entity will not be required to calculate the fair value of a reporting unit
unless the entity determines, based on a qualitative assessment, that it is more
likely than not that its fair value is less than its carrying amount. The
accounting guidance is effective for the Company beginning in fiscal 2013 and
early adoption is permitted. This accounting guidance is not expected to have a
material impact on the consolidated financial statements or financial statement
disclosures.
In 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 is effective for the
Company beginning in fiscal 2013. This accounting guidance is not expected to
have a material impact on the consolidated financial statements or financial
statement disclosures.
Cautionary Note Regarding Forward Looking Statements
This Annual Report on Form 10-K contains "forward-looking statements." In some
cases, these statements may be identified by the use of forward-looking
terminology such as "anticipate," "believe," "continue," "could," "estimate,"
"expect," "intend," "may," "might," "our vision," "plan," "potential,"
"predict," "should," "will" or "would" or other similar words. These statements
discuss future expectations, contain projections of results of operations or of
financial condition, or state trends and known uncertainties or other
forward-looking information. You are cautioned that forward-looking statements
are inherently uncertain. Each forward-looking statement contained in this
report is subject to risks and uncertainties that could cause actual results to
differ materially from those expressed or implied by such statement. We refer
you to the section entitled "Risk Factors" in this Form 10-K for identification
of important factors with respect to these risks and uncertainties. We caution
readers not to place considerable reliance on such statements. Our business is
subject to substantial risks and uncertainties, including those identified in
this report. The information contained in this report is provided by us as of
the date of this Form 10-K, and we do not undertake any obligation to update any
forward-looking statements contained in this document as a result of new
information, future events or otherwise. Forward-looking statements include,
without limitation, statements regarding:
• our expectations regarding our revenue, cost of revenue, selling, general
and administrative expenses, research and development expenses,
amortization of intangible assets and interest expense;
• our expectations regarding the demand for our next-generation business
collaboration solutions and the market trends contributing to such demand;
• our strategy for worldwide growth, including our ability to develop and
sell advanced communications products and services, including unified
communications, networking solutions and contact center solutions;
• the strength of our current intellectual property portfolio and our
intention to obtain patents and other intellectual
68--------------------------------------------------------------------------------property rights used in connection with our business;
• our anticipated competition as the business collaboration market evolves;
• the product sales to be generated by our backlog;
• our future cash requirements, including our primary cash requirements for
the period October 1, 2012 through September 30, 2013;
• the intention to use the net proceeds of any initial public offering
conducted by Parent, among other things, to repay a portion of our existing
indebtedness;
• our future sources of liquidity, including any future refinancing of our
existing debt or issuance of additional securities;
• the uncertainties regarding our liquidity, including our ability to generate revenue, reduce costs, make future acquisitions and defend against
litigation;
• the impact of new accounting pronouncements; and
• our expectations regarding the impact of legal proceedings, including
antitrust, intellectual property or employment litigation.
Many factors could 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, networking solutions and
contact center solutions;
• our reliance on our indirect sales channel;
• economic conditions and the willingness of enterprises to make capital
investments;
• the market for our products and services, including unified communications
solutions;
• our ability to remain competitive in the markets we serve;
• 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 integrate acquired businesses, such as Radvision;
• our ability to successfully transition toward or integrate the products of
acquired businesses into our portfolio;
• our ability to manage our supply chain and logistics functions;
• liquidity and our access to capital markets;
• the ability to protect our intellectual property and avoid claims of
infringement;
• our ability to maintain adequate security over our information systems;
• environmental, health and safety laws, regulations, costs and other
liabilities;
• climate change risks;
• an adverse result in any significant litigation, including antitrust,
intellectual property or employment litigation;
• risks relating to the transaction of business internationally; and
• pension and post-retirement healthcare and life insurance liabilities.
69--------------------------------------------------------------------------------
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