Avaya Holdings Corp.
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
Avaya Holdings Corp.
Condensed Consolidated Statements of Cash FlowsChanges in Stockholders' Equity (Unaudited)
(In millions)
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
| Period from December 16, 2017 through December 31, 2017 | | | Period from October 1, 2017 through December 15, 2017 | | Three months ended December 31, 2016 |
OPERATING ACTIVITIES: | | | | | | |
Net income (loss) | $ | 237 |
| | | $ | 2,977 |
| | $ | (103 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: | | | | | | |
Depreciation and amortization | 22 |
| | | 31 |
| | 90 |
|
Share-based compensation | 1 |
| | | — |
| | 2 |
|
Amortization of debt issuance costs | — |
| | | — |
| | 36 |
|
Accretion of debt discount | — |
| | | — |
| | 25 |
|
Provision for uncollectible receivables | 1 |
| | | (1 | ) | | 1 |
|
Deferred income taxes, net | (245 | ) | | | 455 |
| | (1 | ) |
Post-retirement curtailment | — |
| | | — |
| | (4 | ) |
Loss on disposal of long-lived assets | — |
| | | 1 |
| | — |
|
Unrealized gain on foreign currency exchange | (4 | ) | | | — |
| | (8 | ) |
Reorganization items: | | | | | | |
Net gain on settlement of Liabilities subject to compromise | — |
| | | (1,804 | ) | | — |
|
Payment to PBGC | — |
| | | (340 | ) | | — |
|
Payment to pension trust | — |
| | | (49 | ) | | — |
|
Payment of unsecured claims | — |
| | | (58 | ) | | — |
|
Fresh start adjustments, net | — |
| | | (1,671 | ) | | — |
|
Non-cash and financing related reorganization items, net | — |
| | | 26 |
| | — |
|
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | 5 |
| | | 14 |
| | 54 |
|
Inventory | 3 |
| | | (2 | ) | | 1 |
|
Accounts payable | 27 |
| | | (40 | ) | | (22 | ) |
Payroll and benefit obligations | (22 | ) | | | 16 |
| | (56 | ) |
Business restructuring reserve | (3 | ) | | | (7 | ) | | (18 | ) |
Deferred revenue | 44 |
| | | 28 |
| | 1 |
|
Other assets and liabilities | — |
| | | (16 | ) | | (42 | ) |
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES | 66 |
| | | (440 | ) | | (44 | ) |
INVESTING ACTIVITIES: | | | | | | |
Capital expenditures | (2 | ) | | | (13 | ) | | (14 | ) |
Acquisition of businesses, net of cash acquired | — |
| | | — |
| | (4 | ) |
Restricted cash | 10 |
| | | 21 |
| | — |
|
Other investing activities, net | — |
| | | — |
| | 3 |
|
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES | 8 |
| | | 8 |
| | (15 | ) |
FINANCING ACTIVITIES: | | | | | | |
Proceeds from Term Loan Credit Agreement | — |
| | | 2,896 |
| | — |
|
Repayment of DIP financing | — |
| | | (725 | ) | | — |
|
Repayment of first lien debt | — |
| | | (2,061 | ) | | — |
|
Repayment of Foreign ABL | — |
| | | — |
| | (5 | ) |
Repayment of Domestic ABL | — |
| | | — |
| | (22 | ) |
Repayment of long-term debt, including adequate protection payments | — |
| | | (111 | ) | | (6 | ) |
Debt issuance costs | — |
| | | (97 | ) | | — |
|
Repayments of borrowings on revolving loans under the Senior Secured Credit Agreement | — |
| | | — |
| | (18 | ) |
Repayments of borrowings under sale-leaseback transaction | — |
| | | (4 | ) | | (5 | ) |
Other financing activities, net | — |
| | | — |
| | (1 | ) |
NET CASH USED FOR FINANCING ACTIVITIES | — |
| | | (102 | ) | | (57 | ) |
Effect of exchange rate changes on cash and cash equivalents | 3 |
| | | (2 | ) | | (11 | ) |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 77 |
| | | (536 | ) | | (127 | ) |
Cash and cash equivalents at beginning of period | 340 |
| | | 876 |
| | 336 |
|
Cash and cash equivalents at end of period | $ | 417 |
| | | $ | 340 |
| | $ | 209 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders' Equity |
| | Shares | | Par Value | | | | |
Balance as of September 30, 2020 | | 83.3 | | | $ | 1 | | | $ | 1,449�� | | | $ | (969) | | | $ | (245) | | | $ | 236 | |
Issuance of common stock under the equity incentive plan | | 0.3 | | | | | | | | | | | 0 | |
Issuance of common stock under the employee stock purchase plan | | 0.3 | | | | | 3 | | | | | | | 3 | |
Shares repurchased and retired for tax withholding on vesting of restricted stock units | | (0.1) | | | | | (2) | | | | | | | (2) | |
Share-based compensation expense | | | | | | 14 | | | | | | | 14 | |
Preferred stock dividends accrued | | | | | | (1) | | | | | | | (1) | |
Adjustment for adoption of new accounting standard (Note 2) | | | | | | | | (3) | | | | | (3) | |
Net loss | | | | | | | | (4) | | | | | (4) | |
Other comprehensive income | | | | | | | | | | 17 | | | 17 | |
Balance as of December 31, 2020 | | 83.8 | | | $ | 1 | | | $ | 1,463 | | | $ | (976) | | | $ | (228) | | | $ | 260 | |
| | | | | | | | | | | | |
Balance as of September 30, 2019 | | 111.0 | | | $ | 1 | | | $ | 1,761 | | | $ | (289) | | | $ | (173) | | | $ | 1,300 | |
Issuance of common stock under the equity incentive plan | | 0.3 | | | | | | | | | | | 0 | |
Shares repurchased and retired for tax withholding on vesting of restricted stock units | | (0.1) | | | | | (2) | | | | | | | (2) | |
Shares repurchased and retired under share repurchase program | | (10.7) | | | | | (142) | | | | | | | (142) | |
Share-based compensation expense | | | | | | 6 | | | | | | | 6 | |
Accretion of preferred stock to redemption value | | | | | | (4) | | | | | | | (4) | |
Preferred stock dividends accrued | | | | | | (1) | | | | | | | (1) | |
Net loss | | | | | | | | (54) | | | | | (54) | |
Other comprehensive income | | | | | | | | | | 10 | | | 10 | |
Balance as of December 31, 2019 | | 100.5 | | | $ | 1 | | | $ | 1,618 | | | $ | (343) | | | $ | (163) | | | $ | 1,113 | |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)Avaya Holdings Corp.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
| | | | | | | | | | | | | | |
| | Three months ended December 31, |
| | 2020 | | 2019 |
OPERATING ACTIVITIES: | | | | |
Net loss | | $ | (4) | | | $ | (54) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 103 | | | 107 | |
Share-based compensation | | 14 | | | 6 | |
Amortization of debt discount and issuance costs | | 7 | | | 8 | |
Deferred income taxes, net | | 2 | | | (8) | |
Change in fair value of emergence date warrants | | 5 | | | 3 | |
Unrealized loss on foreign currency transactions | | 11 | | | 9 | |
Unrealized gain on equity securities | | 0 | | | (1) | |
Realized gain on sale of equity securities | | 0 | | | (11) | |
Other non-cash credits, net | | 0 | | | (14) | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | | 23 | | | 35 | |
Inventory | | 2 | | | 3 | |
Operating lease right-of-use assets and liabilities | | 0 | | | 3 | |
Contract assets | | (32) | | | (18) | |
Contract costs | | (8) | | | (8) | |
Accounts payable | | 51 | | | (15) | |
Payroll and benefit obligations | | (57) | | | (10) | |
Business restructuring reserves | | (4) | | | (6) | |
Contract liabilities | | (56) | | | (25) | |
Other assets and liabilities | | (9) | | | 8 | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | | 48 | | | 12 | |
INVESTING ACTIVITIES: | | | | |
Capital expenditures | | (27) | | | (26) | |
Proceeds from sale of marketable securities | | 0 | | | 294 | |
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES | | (27) | | | 268 | |
FINANCING ACTIVITIES: | | | | |
Shares repurchased under share repurchase program | | 0 | | | (132) | |
Proceeds from issuance of Series A Preferred Stock, net of issuance costs of $4 | | 0 | | | 121 | |
Repayment of Term Loan Credit Agreement | | 0 | | | (250) | |
Principal payments for financing leases | | (7) | | | (3) | |
Proceeds from other financing arrangements | | 1 | | | 0 | |
Payment of acquisition-related contingent consideration | | 0 | | | (5) | |
Debt issuance costs | | (2) | | | 0 | |
Proceeds from Employee Stock Purchase Plan | | 4 | | | 0 | |
Other financing activities, net | | (2) | | | (2) | |
NET CASH USED FOR FINANCING ACTIVITIES | | (6) | | | (271) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | | 9 | | | 5 | |
NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | | 24 | | | 14 | |
Cash, cash equivalents, and restricted cash at beginning of period | | 731 | | | 756 | |
Cash, cash equivalents, and restricted cash at end of period | | $ | 755 | | | $ | 770 | |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
| |
1. | Background and Basis of Presentation |
Avaya Holdings Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Background and Basis of Presentation
Background
Avaya Holdings Corp. (the "Parent" or "Avaya Holdings"), together with its consolidated subsidiaries (collectively, the “Company”"Company" or “Avaya”"Avaya"), is a leading global provider of software and associated hardwareleader in digital communications products, solutions and services for contact centerbusinesses of all sizes delivering its technology predominantly through software and unifiedservices. Avaya builds open, converged and innovative solutions to enhance and simplify communications offered on-premises,and collaboration in the cloud, on-premise or as a hybrid solution. Avaya provides the mission-critical, real-time communication applications for small businessesof both. The Company's global team of professionals delivers services from initial planning and design, to large multinational enterprisesimplementation and government organizations. Currently, theintegration, to ongoing managed operations, optimization, training and support. The Company manages its business operations in two2 segments, Global CommunicationsProducts & Solutions ("GCS") representing the Company's products portfolio, and Avaya Global Services ("AGS") representing the Company's services portfolio.Services. The Company sells directly to customers through its worldwide sales force and indirectly through its global network of channel partners, including distributors, service providers, dealers, value-added resellers, system integrators and business partners that provide sales and services support.
Basis of Presentation
Avaya Holdings has no material assets or standalone operations other than its ownership inof direct wholly-owned subsidiary Avaya Inc. and its subsidiaries. The accompanying unaudited interim Condensed Consolidated Financial Statements as of December 31, 2017 and for the period from December 16, 2017 through December 31, 2017, the period from October 1, 2017 through December 15, 2017 and the three months ended December 31, 2016, reflect the operating results of Avaya Holdings and its consolidated subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”("GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”("SEC") for interim financial statements, andstatements. The unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and other financial information for the fiscal year ended September 30, 2017,2020, included in Amendment No. 3 to the Company’s Company's Annual Report on Form 1010-K filed with the SEC on January 10, 2018.November 25, 2020. In management’smanagement's opinion, these unaudited interim Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal and recurring adjustments, necessary to present fairly state the results of operations, financial position and cash flows for the periods indicated. The condensed consolidated results of operations for the interim periods reported are not necessarily indicative of ourthe results for the entire fiscal year. Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the periods reported. These estimates include assessing the collectability of accounts receivable, sales returns and allowances, the use and recoverability of inventory, the realization of deferred tax assets, business restructuring reserves, pension and post-retirement benefit costs, the fair value of equity compensation, the fair value of assets and liabilities in connection with fresh start accounting as well as those acquired in business combinations, the recoverability of long-lived assets, useful lives and impairment of tangible and intangible assets including goodwill, the amount of exposure from potential loss contingencies, and fair value measurements, among others. The markets for the Company’s products are characterized by intense competition, rapid technological development and frequent new product introductions, all of which could affect the future recoverability of the Company’s assets. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results couldmay differ from these estimates.
On January 19, 2017 (the “Petition Date”), Avaya Holdings, together with certain During the second quarter of fiscal 2020, the World Health Organization characterized a novel strain of coronavirus ("COVID-19") as a pandemic. The spread of COVID-19 around the globe and the actions required to mitigate its affiliates, namely Avaya CALA Inc., Avaya EMEA Ltd., Avaya Federal Solutions, Inc., Avaya Holdings LLC, Avaya Holdings Two, LLC, Avaya Inc., Avaya Integrated Cabinet Solutions Inc., Avaya Management Services Inc., Avaya Services Inc., Avaya World Services Inc., Octel Communications LLC, Sierra Asia Pacific Inc., Sierra Communication International LLC, Technology Corporation of America, Inc., Ubiquity Software Corporation, VPNet Technologies, Inc., and Zang, Inc. (the “Debtors”), filed voluntary petitions for relief (the “Bankruptcy Filing”) under Chapter 11impact have created substantial disruption to the global economy. The duration of the United States Bankruptcy Code (the “Bankruptcy Code’) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court’). The cases were jointly administered as Case No. 17-10089 (SMB). The Debtors operated their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Chapter 11 of the Bankruptcy Codepandemic and the orderslong-term impacts on the global economy are uncertain. The pandemic may affect management’s estimates and assumptions, in particular those that require a projection of our financial results, our cash flows or broader economic conditions, such as the Bankruptcy Court until their emergence from bankruptcy on December 15, 2017.
Subsequent tocollectability of accounts receivable, sales returns and allowances, the Petition Date, all expenses, gainsuse and losses directly associated with the reorganization proceedings were reported as Reorganization items, net in the accompanying Condensed Consolidated Statementsrecoverability of Operations. In addition, Liabilities subject to compromise during Chapter 11 proceedings were distinguished from liabilities of the non-debtors and
from post-petition liabilities in the accompanying Condensed Consolidated Balance Sheets. The Company's other subsidiaries that were not part of the Bankruptcy Filing ("non-debtors") continued to operate in the ordinary course of business.
Upon emergence from bankruptcy on December 15, 2017 (the "Emergence Date"), the Company applied fresh start accounting, which resulted in a new basis of accounting and the Company becoming a new entity for financial reporting purposes. As a result of the application of fresh start accounting and the effects of the implementation of the Second Amended Joint Plan of Reorganization filed by the Debtors on October 24, 2017 and approved by the Bankruptcy Court on November 28, 2017 (the "Plan of Reorganization"), the consolidated financial statements after the Emergence Date, are not comparable with the consolidated financial statements on or before that date. Refer to Note 5, "Fresh Start Accounting," for additional information.
The accompanying Condensed Consolidated Financial Statements of the Company have been prepared on a basis that assumes that the Company will continue as a going concern and contemplatesinventory, the realization of deferred tax assets, and the satisfaction of liabilities and commitments in the normal course of business. During the Chapter 11 proceedings, the Company's ability to continue as a going concern was contingent upon its ability to comply with the financial and other covenants contained in its debtor-in-possession credit agreement, the Bankruptcy Court's approval of the Company's Plan of Reorganization and the Company's ability to successfully implement the Plan of Reorganization, among other factors. As a result of the execution of the Plan of Reorganization, there is no longer substantial doubt about the Company's ability to continue as a going concern.
References to "Successor" or "Successor Company" relate to the financial position and results of operations of the reorganized Avaya Holdings after the Emergence Date. References to "Predecessor" or "Predecessor Company" refer to the financial position and results of operations of Avaya Holdings on or before the Emergence Date.
2. Accounting Policy Changes
The Company emerged from bankruptcy on December 15, 2017, and qualified for fresh start accounting. Fresh start accounting allows a company to set new accounting policies for the successor company independent of those followed by the predecessor company. As such, the following are the accounting policy changes the Successor Company has adopted.
Fair Value of Equity Awards
Successor Accounting Policy: The Black-Scholes-Merton option pricing model ("Black-Scholes") replaced the Cox-Ross-Rubinstein ("CRR") binomial option pricing model in calculatingannual effective tax rate, the fair value of equity awards,compensation, the recoverability of long-lived assets, useful lives and impairment of tangible and intangible assets including thegoodwill, business restructuring reserves and fair value of warrants to purchase common stock. In addition to the change in option pricing models,measurements. During fiscal 2020, the Company now accounts for forfeituresrecognized a significant goodwill impairment charge as incurred.
Predecessor Accounting Policy: The CRR binomial option pricing model was utilized to determine the grant date fair valuesa result of the equity awards, including the fair value of the Preferred Series A and B Stock warrants. Forfeitures was an input assumptionCOVID-19 pandemic which is further described in Note 7, “Goodwill, net” in the valuation model.
Uncollected Deferred Revenue
Successor Accounting Policy: The Company does not recognize deferred revenue relating to any sales transactions that have been billed, but for which the related account receivable has not yet been collected. The aggregate amount of unrecognized accounts receivable and deferred revenue was $100 million at December 31, 2017.
Predecessor Accounting Policy: The Company recorded the deferred revenue and related collectible accounts receivable in its consolidated balance sheets.
Foreign Currency
Successor Accounting Policy: Income and expense of non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars using an average rateCompany’s Annual Report on Form 10-K for the period.fiscal year ended September 30, 2020 filed with the SEC on November 25, 2020. The COVID-19 pandemic did not have a material impact on the Company's operating results during the first quarter of fiscal 2021.
Predecessor Accounting Policy: Income and expense of non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars at the spot rate for the transaction.
3.2. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In March 2016,December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-09, "Improvements to Employee Share-Based Payment Accounting.2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This standard simplifies the accounting for share-based paymentsincome taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and their presentationsimplify GAAP for other areas of ASC 740 by clarifying and amending existing guidance. The Company early adopted this standard as of October 1, 2020. The adoption of this standard did not have a material impact on the Company's Condensed Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract." This standard aligns the statementsrequirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software. The Company adopted this standard as of October 1, 20172020 on a prospective basis. The adoption of this standard did not have a material impact on itsthe Company's Condensed Consolidated Financial Statements.
Statements, however, the future impact of the standard will depend on the nature of future transactions within its scope.
In March 2017,August 2018, the FASB issued ASU No. 2017-07, "Improving2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirementDisclosure Requirements for Defined Benefit Cost.Plans." This standard changes howmodifies the disclosure requirements for employers that sponsor defined benefit pension andor other post-retirement benefit plans present net periodic benefitplans. This standard removes disclosures that are not considered cost in the income statement. This amendment requires that the service cost component be disaggregated from the other components of pensionbeneficial, clarifies certain required disclosures and post-retirement benefit costs on the income statement. The service cost component is reported in the same line items as other compensation costs and the other components of pension and post-retirement benefit costs (including interest cost, expected return on plan assets, amortization and curtailments and settlements) are reported in Other income (expense), net in the Company's Condensed Consolidated Financial Statements.adds additional disclosures. The Company early adopted this accounting standard as of October 1, 2017.2020 using the retrospective transition method. The adoption of this standard did not result in material changes to the Company’s benefit plan disclosures.
In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." This standard modifies the disclosure requirements on fair value measurements by removing or modifying certain existing disclosure requirements and adding additional disclosure requirements. The Company adopted this standard as of October 1, 2020. The adoption of this standard did not result in material changes to the Company's fair value disclosures.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This standard, along with other guidance subsequently issued by the FASB, requires entities to estimate expected credit losses for certain types of financial instruments, including trade receivables and contract assets, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The standard also expands the disclosure requirements to enable users of financial statements to understand the entity's assumptions, models and methods for estimating expected credit losses. The Company adopted the standard on October 1, 2020 using the modified retrospective transition method. On October 1, 2020, the beginning of the Company’s fiscal 2021, the Company recorded a net increase to the opening Accumulated deficit balance of $3 million, net of tax, due to the cumulative impact of adopting the standard. The impact was primarily related to the Company’s accounts receivable and contract asset balances on the adoption date.
Updates to Significant Accounting Policies for Recently Adopted Accounting Pronouncements
The Company's significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020 filed with the SEC on November 25, 2020 have been updated to include the following new policies as a result of adopting ASU Nos. 2018-15 and 2016-13:
Cloud Computing Arrangement Implementation Costs
The Company periodically enters into cloud computing arrangements to access and use third-party software in support of its operations. The Company assesses its cloud computing arrangements with vendors to determine whether the contract meets the definition of a service contract or software license. For cloud computing arrangements that meet the definition of a service contract, the Company capitalizes implementation costs incurred during the application development stage as a prepaid expense and amortizes the costs on a straight-line basis over the term of the contract. Costs related to data conversion, training and other maintenance activities are expensed as incurred. Implementation costs for cloud computing arrangements that meet the definition of a software license are accounted for consistent with software developed or obtained for internal use as detailed in the Company’s existing Property, Plant and Equipment accounting policy.
Allowance for Credit Losses
The Company performs ongoing credit evaluations of its customers and generally does not require collateral from its customers. The Company estimates an allowance for credit losses using relevant available information from internal and external sources that consider historical experience, current conditions and reasonable and supportable forecasts. A separate allowance is measured for the Company’s accounts receivable, short-term contract asset and long-term contract asset balances. Each allowance is assessed on a collective basis by pooling assets with similar risk characteristics. The Company pools its accounts receivable and short-term contract assets based on aging status and its long-term contract assets by customer credit rating as published by third-party credit agencies. Historical loss experience provides the basis for the estimation of expected credit losses for accounts receivables and short-term contract assets. The Company uses probability of default rates to estimate expected credit losses for its long-term contract assets based on customer credit ratings. The Company also identifies customer specific credit risks and evaluates each based on the specific facts and circumstances as of the reporting date. The risk of loss is assessed over the contractual life of the assets and the expected loss amounts are adjusted for current and future conditions based on management’s qualitative considerations. Financial assets are written off in whole, or in part, when no reasonable expectation of recovery exists, although collection efforts may continue. Subsequent recoveries of amounts previously written off are recognized as an adjustment to the allowance for credit loss.
Recent Standards Not Yet Effective
In August 2020, the FASB issued ASU No. 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity." This standard simplifies the accounting for convertible instruments and the application of the derivatives scope exception for contracts in an entity's own equity. The standard also amends the accounting for convertible instruments in the diluted earnings per share calculation and requires enhanced disclosures of convertible instruments and contracts in an entity's own equity. This standard is effective for the Company in the first quarter of fiscal 2023 with early adoption permitted in the first quarter of fiscal 2022. The adoption may be applied on a modified or fully retrospective basis. An entity may also irrevocably elect the fair value option in accordance with Accounting Standards Codification ("ASC") 825 for any financial instrument that is a convertible security upon adoption of this standard. The Company is currently assessing the impact the new guidance will have on its Condensed Consolidated Financial Statements have been applied retrospectively. AsStatements.
3. Contracts with Customers
Disaggregation of Revenue
The following tables provide the Company's disaggregated revenue for the periods presented:
| | | | | | | | | | | | | | |
| | Three months ended December 31, |
(In millions) | | 2020 | | 2019 |
Revenue: | | | | |
Products & Solutions | | $ | 266 | | | $ | 298 | |
Services | | 477 | | | 419 | |
Unallocated Amounts | | 0 | | | (2) | |
Total revenue | | $ | 743 | | | $ | 715 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended December 31, 2020 | | Three months ended December 31, 2019 |
(In millions) | Products & Solutions | | Services | | Unallocated | | Total | | Products & Solutions | | Services | | Unallocated | | Total |
Revenue: | | | | | | | | | | | | | | | |
U.S. | $ | 126 | | | $ | 288 | | | $ | 0 | | | $ | 414 | | | $ | 149 | | | $ | 246 | | | $ | (1) | | | $ | 394 | |
International: | | | | | | | | | | | | | | | |
Europe, Middle East and Africa | 92 | | | 103 | | | 0 | | | 195 | | | 93 | | | 94 | | | (1) | | | 186 | |
Asia Pacific | 29 | | | 46 | | | 0 | | | 75 | | | 34 | | | 43 | | | 0 | | | 77 | |
Americas International - Canada and Latin America | 19 | | | 40 | | | 0 | | | 59 | | | 22 | | | 36 | | | 0 | | | 58 | |
Total International | 140 | | | 189 | | | 0 | | | 329 | | | 149 | | | 173 | | | (1) | | | 321 | |
Total revenue | $ | 266 | | | $ | 477 | | | $ | 0 | | | $ | 743 | | | $ | 298 | | | $ | 419 | | | $ | (2) | | | $ | 715 | |
Unallocated amounts represent the fair value adjustment to deferred revenue recognized upon emergence from bankruptcy in December 2017 and excluded from segment revenue.
Transaction Price Allocated to the Remaining Performance Obligations
The transaction price allocated to remaining performance obligations that were wholly or partially unsatisfied as of December 31, 2020 was $2.5 billion, of which 56% and 26% is expected to be recognized within 12 months and 13-24 months, respectively, with the remaining balance expected to be recognized thereafter. This excludes amounts for remaining performance obligations that are (1) for contracts recognized over time using the "right to invoice" practical expedient, (2) related to sales or usage based royalties promised in exchange for a result,license of intellectual property and (3) related to variable consideration allocated entirely to a wholly unsatisfied performance obligation.
Contract Balances
The following table provides information about accounts receivable, contract assets and contract liabilities for the Company reclassified $(6) million of other pension and post-retirement benefit costs to other income (expense), net forperiods presented:
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | December 31, 2020 | | September 30, 2020 | | Increase (Decrease) |
Accounts receivable, net | | $ | 258 | | | $ | 275 | | | $ | (17) | |
| | | | | | |
Contract assets, net: | | | | | | |
Current | | $ | 325 | | | $ | 296 | | | $ | 29 | |
Non-current (Other assets) | | 75 | | | 71 | | | 4 | |
| | $ | 400 | | | $ | 367 | | | $ | 33 | |
| | | | | | |
Cost of obtaining a contract: | | | | | | |
Current (Contract costs) | | $ | 94 | | | $ | 92 | | | $ | 2 | |
Non-current (Other assets) | | 36 | | | 40 | | | (4) | |
| | $ | 130 | | | $ | 132 | | | $ | (2) | |
| | | | | | |
Cost to fulfill a contract: | | | | | | |
Current (Contract costs) | | $ | 34 | | | $ | 23 | | | $ | 11 | |
| | | | | | |
Contract liabilities: | | | | | | |
Current | | $ | 408 | | | $ | 446 | | | $ | (38) | |
Non-current | | 362 | | | 373 | | | (11) | |
| | $ | 770 | | | $ | 819 | | | $ | (49) | |
During the three months ended December 31, 2016 (Predecessor). For2020 and 2019, the period from December 16, 2017 throughCompany did not record any asset impairment charges related to contract assets. During the three months ended December 31, 2017 (Successor)2020 and 2019, the period fromCompany recognized revenue of $223 million and $251 million that had been previously recorded as a Contract liability as of October 1, 2017 through2020 and October 1, 2019, respectively. During the three months ended December 15, 2017 (Predecessor),31, 2020 and 2019, the Company recordedrecognized an increase (decrease) to revenue of $1 million and $(8)$(1) million, respectively, for performance obligations that were satisfied in prior periods.
Contract Costs
During the three months ended December 31, 2020, the Company recognized $44 million for amortization of costs to obtain customer contracts, of which $43 million was included within Selling, general and administrative expense and the remaining $1 million was recognized as a reduction to Revenue. During the three months ended December 31, 2019, the Company recognized $32 million for amortization of costs to obtain customer contracts all of which was included within Selling, general and administrative expense. During the three months ended December 31, 2020 and 2019, the Company recognized $4 million and $14 million of contract fulfillment costs within Costs, respectively.
Allowance for Credit Losses
The following table presents the change in the allowance for credit losses by portfolio segment for the period indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Accounts Receivable(1) | | Short-term Contract Assets(2) | | Long-term Contract Assets(3) | | Total |
Allowance for credit loss as of September 30, 2020 | | $ | 7 | | | $ | 0 | | | $ | 0 | | | $ | 7 | |
Adjustment to retained earnings upon adoption | | 1 | | | 1 | | | 1 | | | 3 | |
Adjustment to credit loss provision | | (2) | | | 0 | | | 0 | | | (2) | |
Allowance for credit loss as of December 31, 2020 | | $ | 6 | | | $ | 1 | | | $ | 1 | | | $ | 8 | |
(1) Recorded within Accounts receivable, net on the Condensed Consolidated Balance Sheets.
(2) Recorded within Contract assets, net on the Condensed Consolidated Balance Sheets.
(3) Recorded within Other assets on the Condensed Consolidated Balance Sheets.
4. Leases
The following table details the components of net lease expense for the periods indicated:
| | | | | | | | | | | | | | |
| | Three months ended December 31, |
In millions | | 2020 | | 2019 |
Operating lease cost (1) | | $ | 16 | | | $ | 18 | |
Short-term lease cost (1) | | 1 | | | 2 | |
Variable lease cost (1)(2) | | 4 | | | 5 | |
Finance lease amortization of right-of-use assets (1) | | 1 | | | 1 | |
Sublease income (3) | | 0 | | | (2) | |
Total lease cost | | $ | 22 | | | $ | 24 | |
(1)Allocated between Cost of products and services, and Operating expenses.
(2)Includes real estate taxes and other pensioncharges for non-lease services payable to lessors and post-retirement benefit costsrecognized in otherthe period incurred.
(3)Included in Other income, (expense)net.
The Company's right-of-use assets and lease liabilities for financing leases are included in the Condensed Consolidated Balance Sheets as follows:
| | | | | | | | | | | | | | |
In millions | | December 31, 2020 | | September 30, 2020 |
ASSETS | | | | |
Property, plant and equipment, net | | $ | 12 | | | $ | 12 | |
| | | | |
LIABILITIES | | | | |
Other current liabilities | | 4 | | | 8 |
Other liabilities | | 9 | | | 9 |
The following table summarizes the weighted average remaining lease term and weighted average interest rate for the Company's operating and financing leases for the periods indicated:
| | | | | | | | | | | | | | |
| | December 31, 2020 | | September 30, 2020 |
Weighted average remaining lease term | | | | |
Operating Leases | | 4.6 years | | 4.5 years |
Financing Leases | | 3.4 years | | 2.7 years |
| | | | |
Weighted average interest rate | | | | |
Operating Leases | | 5.9 | % | | 6.1 | % |
Financing Leases | | 4.4 | % | | 5.4 | % |
The following table presents the Company's annual maturity of lease payments for operating and financing leases as of December 31, 2020:
| | | | | | | | | | | | | | |
In millions | | Operating Leases | | Financing Leases |
Remaining nine months of 2021 | | $ | 44 | | | $ | 4 | |
2022 | | 52 | | | 4 | |
2023 | | 38 | | | 3 | |
2024 | | 28 | | | 2 | |
2025 | | 16 | | | 1 | |
2026 | | 11 | | | 0 | |
2027 and thereafter | | 16 | | | 0 | |
Total lease payments | | 205 | | | 14 | |
Less: imputed interest | | (25) | | | (1) | |
Total lease liability | | $ | 180 | | | $ | 13 | |
5. Strategic Partnership
On October 3, 2019, the Company entered into certain agreements that establish the framework for the Company's strategic partnership with RingCentral, Inc. ("RingCentral") a leading provider of global enterprise cloud communications, video meetings, collaboration and contact center ("CC") solutions, to accelerate the Company's transition to the cloud. Through this partnership, the Company introduced Avaya Cloud Office by RingCentral ("ACO"), net.a new global unified communications as a service ("UCaaS") solution. The transaction closed on October 31, 2019 and ACO was launched on March 31, 2020.
Recent Standards Not Yet Effective
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This standard supersedes mostAs part of the current revenue recognition guidance under GAAP and is intended to improve and converge with international standards the financial reporting requirements for revenue recognition. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. Subsequently, the FASB issued several standards that clarified certain aspects of the standard but did not change the original standard. This new guidance is effective forstrategic partnership, the Company beginning in the first quarter of fiscal 2019. The ASU may be applied retrospectively (a) to each reporting period presented or (b) with the cumulative effect in retained earnings at the beginning of the adoption period.
We currently anticipate adoption of the new standard effective October 1, 2018 using the modified retrospective method whereby the cumulative effect is recorded to retained earnings at the beginning of the adoption period. Adoption of the standard is dependent on completion of a detailed accounting assessment, the success of the design and implementation phase for changes to the Company's processes, internal controls and system functionality and the completion of our analysis of information necessary to assess the overall impact of adoption of this guidance on our consolidated financial statements.
We continue to make progress on the accounting assessment and implementation phases to identify and implement the required changes to accounting policies and disclosures in our consolidated financial statements. We have reached preliminary conclusions on certain accounting assessments and we will continue to monitor and assess the impact of changes to the standard and interpretations as they become available. We expect revenue recognition related to our stand-alone product shipments and maintenance services to remain substantially unchanged. However, we continue to evaluate our preliminary conclusion and assess the impact on our other sources of revenue recognition.
4. Emergence from Voluntary Reorganization under Chapter 11 Proceedings
Plan of Reorganization
On November 28, 2017, the Bankruptcy CourtRingCentral also entered into an order confirming the Plan of Reorganization. On the Emergence Date, the Plan of Reorganization became effective and the Debtors emerged from bankruptcy.
On or following the Emergence Date and pursuant toagreement governing the terms of the Plancommercial arrangement between the parties (the "Framework Agreement"). In accordance with the Framework Agreement, RingCentral paid Avaya $375 million, predominantly for future fees, as well as for certain licensing rights. The $375 million payment consisted of Reorganization,$361 million in shares of RingCentral common stock and $14 million in cash. During the following occurred:
Debtor-in-Possession Credit Agreement. three months ended December 31, 2019, the Company sold a significant portion of the RingCentral shares and realized a gain of $11 million. The Company paid in fullalso recorded an unrealized gain of $1 million for RingCentral shares retained by the debtor-in-possession credit agreement (the "DIP Credit Agreement")Company as of December 31, 2019. The realized and unrealized gains were recorded within Other income, net in the amountCondensed Consolidated Statements of $725 million;
Operations. The remaining RingCentral shares were sold by the Company by the end of fiscal 2020.Predecessor EquityIn connection with the strategic partnership, the Company and Indebtedness. The Debtors' obligations under stock certificates, equity interests, and / or any other instrument or document directly or indirectly evidencing or creating any indebtedness or obligation of, or ownership interest in, the Debtors or giving rise to any claim or equity interest were cancelled, except as provided under the Plan of Reorganization;
Successor Equity. The Company's certificate of incorporation was amended and restated to authorize the issuance of 605.0 millionRingCentral entered into an investment agreement, whereby RingCentral purchased 125,000 shares of Successor Company stock, consisting of 55.0 million shares of preferred stock,the Company's Series A 3% Convertible Preferred Stock, par value $0.01 per share and 550.0 million shares of common stock, par value $0.01 per share, of which 110.0 million shares of common stock were issued (as discussed below);
Exit Financing. The Successor Company entered into (1) a term loan credit agreement ("the Term Loan Credit Agreement"(the "Series A Preferred Stock"), for a principal amount of $2,925 million maturing on December 15, 2024, and (2) a $300 million asset-based revolving credit facility (the "ABL Credit Agreement") maturing on December 15, 2022;
First Lien Debt Claims. All of the Predecessor Company's outstanding obligations under the variable rate term B-3, B-4, B-6, and B-7 loans and the 7% and 9% senior secured notes (collectively, the "Predecessor first lien obligations") were cancelled, and the holders of claims under the Predecessor first lien obligations received 99.3 million shares of Successor Company common stock. In addition, the holders of the Predecessor first lien obligations received cash in the amount of $2,061 million;
Second Lien Debt Claims. All the Predecessor Company's outstanding obligations under the 10.50% senior secured notes (the "Predecessor second lien obligations") were cancelled, and the holders of claims under the Predecessor second lien obligations received 4.4 million shares of Successor Company common stock. In addition, holders of the Predecessor second lien obligations received warrants toan aggregate purchase 5.6 million shares of Successor Company common stock at an exercise price of $25.55 per warrant (the "Warrants");
Claims of Pension Benefit Guaranty Corporation ("PBGC"). The Predecessor Company's outstanding obligations under the Avaya Inc. Pension Plan$125 million. See Note 15, "Capital Stock" for Salaried Employees ("APPSE") were terminated and transferred to the PBGC. The PBGC received 6.1 million shares of Successor Company common stock and $340 million in cash; and
General Unsecured Claims. Holders of the Predecessor Company's general unsecured claims will receive their pro rata share of the general unsecured recovery pool. A liquidating trust was established in the amount of $58 million for the benefit of the general unsecured claims. Included in the 110.0 million Successor Company common stock issued are 0.2 million additional shares of common stock that have been issued (but are not outstanding) for the benefit of the general unsecured creditors. The general unsecured creditors will receive a total of $58 million in cash and common stock. Any excess cash and / or common stock not distributed to the general unsecured creditors will be distributed to the holders of the Predecessor first lien obligations.
Section 363 Asset Sales
In July 2017, the Company sold its networking business ("Networking" or the "Networking business") to Extreme Networks, Inc. ("Extreme"). The Networking business was comprised primarily of certain assets of the Company's Networking segment (which prior to the sale was a separate operating segment), along with the maintenance and professional services of the Networking business, which were part of the AGS segment. Under a Transition Services Agreement ("TSA"), the Company provides administrative services to Extreme for process support, maintenance services and product logistics on a fee basis. While the TSA can expire sooner, the agreement terminates after 2 years.
5. Fresh Start Accounting
In connection with the Company's emergence from bankruptcy and in accordance with FASB Accounting Standards Codification ("ASC") 852, "Reorganizations" ("ASC 852"), the Company applied the provisions of fresh start accounting to its Condensed Consolidated Financial Statementsinformation on the Emergence Date. The Company was required to use fresh start accounting since (i) the holdersSeries A Preferred Stock.
6. Goodwill, net and (ii) the reorganization value of the Company's assets immediately prior to confirmation of the Plan of Reorganization was less than the post-petition liabilities and allowed claims.Intangible Assets, net
ASC 852 prescribes that with the application of fresh start accounting, the Company allocated its reorganization value to its individual assets based on their estimated fair values in conformity with ASC 805, "Business Combinations". The reorganization value represents the fair value of the Successor Company's assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets is reported as goodwill. As a result of the application of fresh start accounting and the effects of the implementation of the Plan of Reorganization, the consolidated financial statements after December 15, 2017 are not comparable with the consolidated financial statements as of or prior to that date.Goodwill, net
Reorganization Value
As set forth in the Plan of Reorganization, the agreed upon enterprise value of the Company was $5,721 million. This value is within the initial range calculated by the Company of approximately $5,100 million to approximately $7,100 million using an income approach. The $5,721 million enterprise value was selected as it was the transaction price agreed to in the global settlement agreement with the Company’s creditor constituencies, including the PBGC. The reorganization value was then determined by adding back liabilities other than interest bearing debt, pension obligations and the deferred tax impact of the reorganization and fresh start adjustments.
The following table reconciles the enterprise value to the estimated fair value of the Successor stockholders' equity as of the Emergence Date:
|
| | | |
(In millions, except per share amount) | |
Enterprise value | $ | 5,721 |
|
Plus: | |
Cash and cash equivalents | 340 |
|
Less: | |
Minimum cash required for operations | (120 | ) |
Fair value of Term Loan Credit Agreement(1) | (2,896 | ) |
Fair value of capitalized leases | (20 | ) |
Fair value of pension and other post-retirement obligations, net of tax(2) | (856 | ) |
Change in net deferred tax liabilities from reorganization | (510 | ) |
Fair value of Successor warrants(3) | (17 | ) |
Fair value of Successor common stock | $ | 1,642 |
|
Shares issued at December 15, 2017 | 110.0 |
|
Per share value | $ | 14.93 |
|
| |
(1)
| The fair value of the Term Loan Credit Agreement was determined based on a market approach utilizing market-clearing data on the valuation date in addition to bid/ask prices and was estimated to be 99% of par value. |
| |
(2)
| The following assumptions were used when measuring the fair value of the U.S. pension, non-U.S. pension, and post-retirement benefit plans: weighted-average return on assets of 7.75%, 3.80% and 5.90%, and weighted-average discount rate to measure plan obligations of 3.70%, 1.52% and 3.77%, respectively. |
| |
(3)
| The fair value of the Warrants was estimated using the Black-Scholes pricing model. |
The following table reconciles the enterprise value to the estimated reorganization value as of the Emergence Date:
|
| | | |
(In millions) | |
Enterprise value | $ | 5,721 |
|
Plus: | |
Non-debt current liabilities | 955 |
|
Non-debt non-current liabilities | 2,090 |
|
Excess cash and cash equivalents | 220 |
|
Less: | |
Pension and other post-retirement obligations, net of deferred taxes | (856 | ) |
Capital lease obligations | (20 | ) |
Change in net deferred tax liabilities from reorganization | (510 | ) |
Warrants issued upon emergence | (17 | ) |
Reorganization value of Successor assets | $ | 7,583 |
|
Consolidated Balance Sheet
The adjustments set forth in the following consolidated balance sheet as of December 15, 2017 reflect the effect of the consummation of the transactions contemplated by the Plan of Reorganization (reflected in the column "Reorganization Adjustments") as well as fair value adjustments as a result of applying fresh start accounting (reflected in the column "Fresh Start Adjustments"). The explanatory notes highlight methods used to determine fair values or other amounts of the assets and liabilities, as well as significant assumptions or inputs.
|
| | | | | | | | | | | | | | | | | | | |
(In millions) | Predecessor Company | | Reorganization Adjustments | | | | Fresh Start Adjustments | | | | Successor Company December 15, 2017 |
ASSETS | | | | | | | | | | | |
Current assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | 744 |
| | $ | (404 | ) | | (1) | | $ | — |
| | | | $ | 340 |
|
Accounts receivable, net | 523 |
| | — |
| | | | (106 | ) | | (21,29) | | 417 |
|
Inventory | 98 |
| | — |
| | | | 29 |
| | (22) | | 127 |
|
Other current assets | 366 |
| | (58 | ) | | (2) | | (66 | ) | | (23) | | 242 |
|
TOTAL CURRENT ASSETS | 1,731 |
| | (462 | ) | | | | (143 | ) | | | | 1,126 |
|
Property, plant and equipment, net | 194 |
| | — |
| | | | 116 |
| | (24) | | 310 |
|
Deferred income taxes, net | — |
| | 48 |
| | (3) | | (17 | ) | | (25) | | 31 |
|
Intangible assets, net | 298 |
| | — |
| | | | 3,137 |
| | (26) | | 3,435 |
|
Goodwill | 3,541 |
| | — |
| | | | (909 | ) | | (27) | | 2,632 |
|
Other assets | 70 |
| | 6 |
| | (4) | | (27 | ) | | (28) | | 49 |
|
TOTAL ASSETS | $ | 5,834 |
| | $ | (408 | ) | | | | $ | 2,157 |
| | | | $ | 7,583 |
|
LIABILITIES | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | |
Debt maturing within one year | $ | 725 |
| | $ | (696 | ) | | (5) | | $ | — |
| | | | $ | 29 |
|
Accounts payable | 325 |
| | (49 | ) | | (6) | | — |
| | | | 276 |
|
Payroll and benefit obligations | 123 |
| | 23 |
| | (7) | | — |
| | | | 146 |
|
Deferred revenue | 627 |
| | 50 |
| | (8) | | (341 | ) | | (29) | | 336 |
|
Business restructuring reserve | 35 |
| | 3 |
| | (9) | | — |
| | | | 38 |
|
Other current liabilities | 97 |
| | 65 |
| | (6,10) | | (3 | ) | | (30) | | 159 |
|
TOTAL CURRENT LIABILITIES | 1,932 |
| | (604 | ) | | | | (344 | ) | | | | 984 |
|
Non-current liabilities: | | | | | | | | | | | |
Long-term debt, net of current portion | — |
| | 2,771 |
| | (11) | | 96 |
| | (31) | | 2,867 |
|
Pension obligations | 539 |
| | 246 |
| | (12) | | — |
| | | | 785 |
|
Other post-retirement obligations | — |
| | 212 |
| | (13) | | — |
| | | | 212 |
|
Deferred income taxes, net | 28 |
| | 113 |
| | (14) | | 548 |
| | (32) | | 689 |
|
Business restructuring reserve | 26 |
| | 4 |
| | (9) | | 4 |
| | (33) | | 34 |
|
Other liabilities | 180 |
| | 233 |
| | (8,15) | | (43 | ) | | (29,34) | | 370 |
|
TOTAL NON-CURRENT LIABILITIES | 773 |
| | 3,579 |
| | | | 605 |
| | | | 4,957 |
|
LIABILITIES SUBJECT TO COMPROMISE | 7,585 |
| | (7,585 | ) | | (16) | | — |
| | | | — |
|
TOTAL LIABILITIES | 10,290 |
| | (4,610 | ) | | | | 261 |
| | | | 5,941 |
|
Commitments and contingencies | | | | | | | | | | | |
Equity awards on redeemable shares | 6 |
| | (6 | ) | | (17) | | — |
| | | | — |
|
Preferred stock: | | | | | | | | | | | |
Series B | 397 |
| | (397 | ) | | (17) | | — |
| | | | — |
|
Series A | 186 |
| | (186 | ) | | (17) | | — |
| | | | — |
|
STOCKHOLDERS' (DEFICIT) EQUITY | | | | | | | | | | | |
Common stock (Successor) | — |
| | 1 |
| | (18) | | — |
| | | | 1 |
|
Additional paid-in capital (Successor) | — |
| | 1,641 |
| | (18) | | — |
| | | | 1,641 |
|
Common stock (Predecessor) | — |
| | — |
| | | | — |
| | | | — |
|
Additional paid-in capital (Predecessor) | 2,387 |
| | (2,387 | ) | | (17) | | — |
| | | | — |
|
(Accumulated deficit) retained earnings | (5,978 | ) | | 4,872 |
| | (19) | | 1,106 |
| | (36) | | — |
|
Accumulated other comprehensive (loss) income | (1,454 | ) | | 664 |
| | (20) | | 790 |
| | (35) | | — |
|
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY | (5,045 | ) | | 4,791 |
| | | | 1,896 |
| | | | 1,642 |
|
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | $ | 5,834 |
| | $ | (408 | ) | | | | $ | 2,157 |
| | | | $ | 7,583 |
|
Reorganization Adjustments
In accordance with the Plan of Reorganization, the following adjustments were made:
1.Sources and Uses of Cash. The following reflects the net cash payments recorded as of the Emergence Date as a result of implementing the Plan of Reorganization: |
| | | |
(In millions) | |
Sources: | |
Proceeds from Term Loan Credit Agreement, net of original issue discount | $ | 2,896 |
|
Release of restricted cash | 76 |
|
Total sources of cash | 2,972 |
|
Uses: | |
Repayment of DIP Credit Agreement | (725 | ) |
Payment of DIP accrued interest | (1 | ) |
Cash paid to Predecessor first lien debt-holders | (2,061 | ) |
Cash paid to PBGC | (340 | ) |
Payment for professional fees escrow account | (56 | ) |
Funding payment for Avaya represented employee pension plan | (49 | ) |
Payment of accrued professional & administrative fees | (27 | ) |
Costs incurred for Term Loan Credit Agreement and ABL Credit Agreement | (59 | ) |
Payment for general unsecured claims | (58 | ) |
Total uses of cash | (3,376 | ) |
Net uses of cash | $ | (404 | ) |
|
| | | |
(In millions) | |
Release of restricted cash | $ | (76 | ) |
Reclassification of prepaid debt issuance costs related to the Term Loan Credit Agreement | (42 | ) |
Payment of fees related to the ABL Credit Agreement | 5 |
|
Restricted cash for bankruptcy related professional fees | 55 |
|
Total other current assets | $ | (58 | ) |
| |
3. | Deferred Income Taxes. The adjustment represents the release of the valuation allowance on deferred tax assets for certain non-U.S. subsidiaries which management believes more likely than not will be realized as a result of the bankruptcy reorganization.
|
| |
4. | Other Assets. The adjustment represents the re-establishment of a foreign prepaid tax.
|
| |
5. | Debt Maturing Within One Year. The adjustment represents the net effect of the Company’s repayment of $725 million for the DIP Credit Agreement and Term Loan Credit Agreement principal payments of $29 million due over the next year.
|
| |
6. | Accounts Payable. The net decrease of $49 million includes $50 million for professional fees that were reclassified to Other current liabilities for accrued bankruptcy related professional fees that will be paid from an escrow account and the payment of $3 million of bankruptcy related professional fees, partially offset by reinstatement of $4 million contact cure costs from liabilities subject to compromise.
|
| |
7. | Payroll and Benefit Obligations. The Company reinstated $23 million of liabilities subject to compromise related to the post-employment and post-retirement benefit obligations.
|
| |
8. | Deferred Revenue. The reinstatement of liabilities subject to compromise was $79 million of which $50 million is included in deferred revenue and $29 million in other liabilities.
|
| |
9. | Business Restructuring Reserve. The reinstatement of liabilities subject to compromise was $7 million, of which $3 million is current and $4 million is non-current.
|
10.Other Current Liabilities. |
| | | |
(In millions) | |
Reclassification of accrued bankruptcy related professional fees | $ | 50 |
|
Reinstatement of other current liabilities | 16 |
|
Payment of accrued interest on the DIP Credit Agreement | (1 | ) |
Total other current liabilities | $ | 65 |
|
11.Exit Financing. In accordance with the Plan of Reorganization, the Company entered into the Term Loan Credit Agreement with a principal amount of $2,925 million maturing seven years from the date of issuance, and the ABL Credit Agreement, which allows borrowings up to an aggregate principal amount of $300 million, subject to borrowing base availability, maturing five years from the date of issuance. |
| | | |
(In millions) | |
Term Loan Credit Agreement | $ | 2,925 |
|
Less: | |
Discount | (29 | ) |
Upfront and underwriting fees | (54 | ) |
Cash received upon emergence from bankruptcy | 2,842 |
|
Reclassification of debt issuance cost incurred prior to emergence from bankruptcy | (42 | ) |
Current portion of Long-term debt | (29 | ) |
Long-term debt, net of current portion | $ | 2,771 |
|
| |
12. | Pension Obligations. In accordance with the Plan of Reorganization, the Company reinstated from liabilities subject to compromise $295 million related to the Avaya Pension Plan for represented employees and also contributed $49 million to the related pension trust.
|
| |
13. | Other Post-retirement Obligations. Other post-retirement benefit obligations of $212 million were reinstated from liabilities subject to compromise.
|
| |
14. | Deferred Income Taxes. The adjustment represents the reinstatement of the deferred tax liability that was included in liabilities subject to compromise.
|
| |
15. | Other Liabilities. The increase of $233 million primarily relates to the reinstatement of employee benefits, tax liabilities and deferred revenue from liabilities subject to compromise. Also included is the value of the Warrants issued to the holders of the Predecessor second lien obligations on the Emergence Date.
|
16.Liabilities Subject to Compromise. Liabilities subject to compromise were reinstated or settled as follows in accordance with the Plan of Reorganization: |
| | | | | | |
(In millions) | | | |
Liabilities subject to compromise | | | $ | 7,585 |
|
Less amounts settled per the Plan of Reorganization | | | |
Pre-petition first lien debt | | | (4,281 | ) |
Pre-petition second lien debt | | | (1,440 | ) |
Avaya Pension Plan for Salaried Employees | | | (620 | ) |
Amounts reinstated: | | | |
Accounts payable | (4 | ) | | |
Payroll and benefit obligations | (23 | ) | | |
Deferred revenue | (50 | ) | | |
Business restructuring reserves | (7 | ) | | |
Other current liabilities | (16 | ) | | |
Pension obligations | (295 | ) | | |
Other post-retirement obligations | (212 | ) | | |
Deferred income taxes, net | (118 | ) | | |
Other liabilities | (216 | ) | | |
Total liabilities reinstated at emergence | | | (941 | ) |
General unsecured credit claims(1) | | | (303 | ) |
Liabilities subject to compromise | | | $ | — |
|
(1) In settlement of allowed general unsecured claims, each claimant will receive a pro-rata distribution of $58 million of the general unsecured claims account.
The following table displays the detail on the gain on settlement of liabilities subject to compromise:
|
| | | |
(In millions) | |
Pre-petition first lien debt | $ | 734 |
|
Pre-petition second lien debt | 1,357 |
|
Avaya pension plan for salaried employees | (514 | ) |
General unsecured creditors' claims | 227 |
|
Net gain on settlement of Liabilities subject to compromise | $ | 1,804 |
|
| |
17. | Cancellation of Predecessor Preferred and Common Stock. All common stock, Series A and B preferred stock and all other equity awards of the Predecessor Company were cancelled on the Emergence Date without any recovery on account thereof.
|
| |
18. | Issuance of Successor Common Stock and Warrants. In settlement of the Company's $5,721 million Predecessor first lien obligations and Predecessor second lien obligations, the holders of the Predecessor first lien obligations received a total of 99.3 million shares of common stock (fair value of $1,486 million) and $2,061 million in cash and the holders of the Predecessor second lien obligations received a total of 4.4 million shares of common stock (fair value of $66 million) and 5.6 million of Warrants to purchase additional common shares (fair value of $17 million). In addition, as part of the Plan of Reorganization, the Company completed a distressed termination of the APPSE in accordance with the Stipulation Settlement with the PBGC, the PBGC received $340 million in cash and 6.1 million shares of common stock (fair value of $90 million).
|
|
| | | |
(In millions) | |
Accumulated deficit: | |
Net gain on settlement of liabilities subject to compromise | $ | 1,804 |
|
Expense for certain professional fees | (26 | ) |
Benefit from income taxes | 118 |
|
Cancellation of Predecessor equity awards | 6 |
|
Cancellation of Predecessor Preferred stock Series B | 397 |
|
Cancellation of Predecessor Preferred stock Series A | 186 |
|
Cancellation of Predecessor Common stock | 2,387 |
|
Total | $ | 4,872 |
|
| |
20. | Accumulated Comprehensive Loss. The changes to Accumulated comprehensive loss relate to the settlement of the APPSE and the Avaya Supplemental Pension Plan ("ASPP") and the associated taxes.
|
Fresh Start Adjustments
At the Emergence Date, the Company met the requirements under ASC 852 for fresh start accounting as (i) the holders of existing voting shares of the Predecessor Company received less than 50% of the voting shares of the emerging entity and (ii) the reorganization value of the Company's assets immediately prior to confirmation was less than the post-petition liabilities and allowed claims. These adjustments reflect actual amounts recorded as of the Emergence Date.
| |
21. | Accounts Receivable. This adjustment relates to a change in accounting policy for the way the Company will present uncollected deferred revenue upon emergence from bankruptcy. The Company will offset such deferred revenue against the related account receivable.
|
| |
22. | Inventory. This adjustment relates to the write-up of inventory to fair value based on estimated selling prices, less costs of disposal.
|
| |
23. | Other Current Assets. This adjustment reflects the write-off of certain prepaid commissions, deferred installation costs and debt issuance costs that do not meet the definition of an asset upon emergence.
|
| |
24. | Property, Plant and Equipment. An adjustment of $116 million was recorded to increase the net book value of property, plant and equipment to its estimated fair value based on estimated current acquisition price, plus costs to make the property fully operational.
|
The following table reflects the components of property, plant and equipment, net as of December 15, 2017:
|
| | | |
(In millions) | |
Buildings and improvements | $ | 82 |
|
Machinery and equipment | 38 |
|
Rental equipment | 85 |
|
Assets under construction | 13 |
|
Internal use software | 92 |
|
Total property, plant and equipment | 310 |
|
Less: accumulated depreciation and amortization | — |
|
Property, plant and equipment, net | $ | 310 |
|
| |
25. | Deferred Income Tax.The adjustment represents the release of the valuation allowance on deferred tax assets for certain non-U.S. subsidiaries which management believes more likely than not will be realized as a result of future taxable income from the reversal of deferred tax liabilities that were established as part of fresh start accounting.
|
| |
26. | Intangible Assets. The Company recorded an adjustment to intangible assets for $3,137 million as follows:
|
|
| | | | | | | | | | | | |
(In millions) | Successor | | | Predecessor | | |
| December 15, 2017 Post-emergence | | | December 15, 2017 Pre-emergence | | Difference |
Customer relationships and other intangible assets | $ | 2,155 |
| | | $ | 96 |
| | $ | 2,059 |
|
Technology and patents | 905 |
| | | 12 |
| | 893 |
|
Trademarks and trade names | 375 |
| | | 190 |
| | 185 |
|
Total | $ | 3,435 |
| | | $ | 298 |
| | $ | 3,137 |
|
The fair value of customer relationships was determined using the excess earnings method, a derivation of the income approach that calculates residual profit attributable to an asset after proper returns are paid to complementary or contributory assets.
The fair value of technology and patents and trademarks and trade names determined using the royalty savings method, a derivation of the income approach that estimates the royalties saved through ownership of the assets.
27.Goodwill. Predecessor goodwill of $3,541 million was eliminated and Successor goodwill of $2,632 million was established based on the calculated reorganization value. |
| | | |
(In millions) | |
Reorganization value of Successor Company | $ | 7,583 |
|
Less: Fair value of Successor Company assets | (4,951 | ) |
Reorganization value of Successor Company assets in excess of fair value - goodwill | $ | 2,632 |
|
| |
28. | Other Assets. The $27 million decrease to other assets is related to prepaid commissions that do not meet the definition of an asset upon emergence as there is no future benefit to the Successor Company.
|
| |
29. | Deferred Revenue. The fair value of deferred revenue, which principally relates to payments on annual maintenance contracts, was determined by deducting selling costs and associated profit from the Predecessor deferred revenue balance to arrive at the costs and profit associated with fulfilling the liability. Additionally, the decrease includes the impact of an accounting policy change whereby the Successor Company no longer presents uncollected deferred revenue.
|
| |
30. | Other Current Liabilities. The decrease of $3 million to other current liabilities is related to the fair value of real estate leases determined to be above or below market using the income approach based on the difference between the contractual rental rate and the estimated market rental rate, discounted utilizing a risk-related discount rate.
|
| |
31. | Long-term Debt. The fair value of the Term Loan Credit Agreement was determined based on a market approach utilizing market-clearing data on the valuation date in addition to bid/ask prices.
|
| |
32. | Deferred Income Taxes. The adjustment represents the establishment of deferred tax liabilities related to book/tax differences created by fresh start accounting adjustments. The amount is net of the release of the valuation allowance on deferred tax assets, which management believes more likely than not will be realized as a result of future taxable income from the reversal of such deferred tax liabilities.
|
| |
33. | Business Restructuring Reserve. The Company recorded an increase to its non-current business restructuring reserves based on estimated future cash flows applied to a current discount rate at emergence.
|
| |
34. | Other Liabilities. A decrease in other liabilities of $43 million relates to deferred revenue and real estate leases as previously discussed.
|
| |
35. | Accumulated Other Comprehensive Loss. The remaining balance in Accumulated comprehensive loss was reversed to Reorganization expenses, net.
|
| |
36. | Fresh Start Adjustments. The following table reflects the cumulative impact of the fresh start adjustments as discussed above, the elimination of the Predecessor Company's accumulated other comprehensive loss and the adjustments required to eliminate accumulated deficit.
|
|
| | | | | | | | |
(In millions) | | | | |
Eliminate Predecessor Intangible assets | $ | (298 | ) | | | |
Eliminate Predecessor Goodwill | (3,541 | ) | | | |
Establish Successor Intangible assets | 3,435 |
| | | |
Establish Successor Goodwill | 2,632 |
| | | |
Fair value adjustment to Inventory | 29 |
| | | |
Fair value adjustment to Other current assets | (66 | ) | | | |
Fair value adjustment to Property, plant and equipment | 116 |
| | | |
Fair value adjustment to Other assets | (27 | ) | | | |
Fair value adjustment to Deferred revenue | 235 |
| | | |
Fair value adjustment to Business restructuring reserves | (4 | ) | | | |
Fair value adjustment to Other current liabilities | 3 |
| | | |
Fair value adjustment to Long-term debt | (96 | ) | | | |
Fair value adjustment to Other liabilities | 43 |
| | | |
Release Predecessor Accumulated comprehensive loss | (790 | ) | | | |
Fresh start adjustments included in Reorganization items, net | | | | $ | 1,671 |
|
Tax impact of fresh start adjustments | | | | (565 | ) |
Gain on fresh start accounting | | | | $ | 1,106 |
|
| |
6. | Goodwill and Intangible Assets |
Goodwill
Goodwill is not amortized but is subject to periodic testing for impairment in accordance with GAAP at the reporting unit level, which is one level below the Company’s operating segments.level. The Company performsCompany's reporting units are subject to impairment testing annually, on July 1st, or more frequently if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The Company determined that no events occurred or circumstances changed during the period from December 16, 2017 throughthree months ended December 31, 2017 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor)2020 that would indicate that it is more likely than not reducethat its goodwill was impaired. To the fair value of any of the Company's reporting units below their respective carrying amounts. However, ifextent that business conditions deteriorate or there is a changeif changes in the business,key assumptions and estimates differ significantly from management's expectations, it may be necessary to record impairment charges in the future.
The Company adjusted the carrying value of goodwill upon application of fresh start accounting.Intangible Assets, net
The carrying valueCompany's intangible assets consist of goodwill by operating segmentsthe following for the periods indicated was as follows:indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Technology and Patents | | Customer Relationships and Other Intangibles | | Trademarks and Trade Names | | Total |
Balance as of December 31, 2020 | | | | | | | | |
Finite-lived intangible assets: | | | | | | | | |
Cost | | $ | 964 | | | $ | 2,155 | | | $ | 42 | | | $ | 3,161 | |
Accumulated amortization | | (527) | | | (472) | | | (19) | | | (1,018) | |
Finite-lived intangible assets, net | | 437 | | | 1,683 | | | 23 | | | 2,143 | |
| | | | | | | | |
Indefinite-lived intangible assets: | | | | | | | | |
Cost | | 0 | | | 0 | | | 333 | | | 333 | |
Accumulated impairment | | 0 | | | 0 | | | 0 | | | 0 | |
Indefinite-lived intangible assets, net | | 0 | | | 0 | | | 333 | | | 333 | |
Intangible assets, net | | $ | 437 | | | $ | 1,683 | | | $ | 356 | | | $ | 2,476 | |
Balance as of September 30, 2020 | | | | | | | | |
Finite-lived intangible assets: | | | | | | | | |
Cost | | $ | 961 | | | $ | 2,153 | | | $ | 42 | | | $ | 3,156 | |
Accumulated amortization | | (482) | | | (433) | | | (18) | | | (933) | |
Finite-lived intangible assets, net | | 479 | | | 1,720 | | | 24 | | | 2,223 | |
| | | | | | | | |
Indefinite-lived intangible assets: | | | | | | | | |
Cost | | 0 | | | 0 | | | 333 | | | 333 | |
Accumulated impairment | | 0 | | | 0 | | | 0 | | | 0 | |
Indefinite-lived intangible assets, net | | 0 | | | 0 | | | 333 | | | 333 | |
Intangible assets, net | | $ | 479 | | | $ | 1,720 | | | $ | 357 | | | $ | 2,556 | |
|
| | | | | | | | | | | |
(In millions) | Global Communications Solutions | | Avaya Global Services | | Total |
September 30, 2017 (Predecessor) | $ | 1,093 |
| | $ | 2,449 |
| | $ | 3,542 |
|
Adjustments | (1 | ) | | — |
| | (1 | ) |
Impact of fresh start accounting | 68 |
| | (977 | ) | | (909 | ) |
December 15, 2017 (Predecessor) | $ | 1,160 |
| | $ | 1,472 |
| | $ | 2,632 |
|
| | | | | |
| | | | | |
December 31, 2017 (Successor) | $ | 1,160 |
| | $ | 1,472 |
| | $ | 2,632 |
|
Intangible 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 three years to twenty years.
Long-lived assets, including intangibleassets. Intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.
Intangible assets determined to have indefinite useful lives are not amortized. The Company performsamortized but are tested for impairment testing annually, on July 1st, or more frequently if events occur or changes in circumstances change that indicate that it is more likely than not that thean asset ismay be impaired. The Avaya trade name is expected to generate cash flow indefinitely. Consequently, this asset is classified as an indefinite-lived intangible.
The Company determined that no events had occurred or circumstances changed during the period from December 16, 2017 throughthree months ended December 31, 2017 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor)2020 that would indicate that its long-lived assets, includingfinite-lived intangible assets with finite lives, may not be recoverable or that it is more likely than not that its indefinite-lived intangible assets with indefinite lives arewere impaired. However, ifTo the extent that business conditions deteriorate or there is a changeif changes in the business,key assumptions and estimates differ significantly from management's expectations, it may be necessary to record impairment charges in the future.
The Company adjusted the carrying value
7. Supplementary Financial Information
The gross carrying amount and accumulated amortization by major intangible asset category asfollowing table presents a summary of December 31, 2017 (Successor) and September 30, 2017 (Predecessor) were as follows:
|
| | | | | | | | | | | | | | | |
| Successor |
| As of December 31, 2017 |
(In millions) | Technology and patents | | Customer relationships and other intangibles | | Trademarks and trade names | | Total |
Gross Carrying Amount | $ | 905 |
| | $ | 2,155 |
| | $ | 375 |
| | $ | 3,435 |
|
Accumulated Amortization | (7 | ) | | (7 | ) | | — |
| | (14 | ) |
Net | $ | 898 |
| | $ | 2,148 |
| | $ | 375 |
| | $ | 3,421 |
|
| | | | | | | |
| | | | | | | |
| Predecessor |
| As of September 30, 2017 |
(In millions) | Technology and patents | | Customer relationships and other intangibles | | Trademarks and trade names | | Total |
Gross Carrying Amount | $ | 1,427 |
| | $ | 2,196 |
| | $ | 545 |
| | $ | 4,168 |
|
Accumulated Amortization | (1,411 | ) | | (2,091 | ) | | — |
| | (3,502 | ) |
Accumulated Impairment | — |
| | — |
| | (355 | ) | | (355 | ) |
Net | $ | 16 |
| | $ | 105 |
| | $ | 190 |
| | $ | 311 |
|
Amortization expense related to intangible assets was $14 million, $13 million and $62 millionOther income, net for the period from December 16, 2017 through December 31, 2017 (Successor), the period from October 1, 2017 through December 15, 2017 (Predecessor) andperiods indicated:
| | | | | | | | | | | |
| Three months ended December 31, |
(In millions) | 2020 | | 2019 |
OTHER INCOME, NET | | | |
Interest income | $ | 0 | | | $ | 3 | |
Foreign currency losses, net | (2) | | | (4) | |
Gain on investments in equity securities | 0 | | | 12 | |
Other pension and post-retirement benefit credits, net | 7 | | | 5 | |
Change in fair value of emergence date warrants | (5) | | | (3) | |
Sublease income | 0 | | | 2 | |
Other, net | 0 | | | (1) | |
Total other income, net | $ | 0 | | | $ | 14 | |
The gain on investments in equity securities for the three months ended December 31, 2016 (Predecessor), respectively.2019 reflects gains on shares of RingCentral common stock as further described in Note 5, "Strategic Partnership."
The technology and patents have useful lives that range between 3 years and 10 years with a weighted average remaining useful life of 5.7 years. Customer relationships have useful lives that range between 7 years and 20 years with a weighted average useful life of 14.5 years. Amortizable product trade names have useful lives of 10 years. The Avaya trade name is expected to generatefollowing table presents supplemental cash flows indefinitely and, consequently, this asset is classified as an indefinite-lived intangible.
Future amortization expense related to intangible assets as of December 31, 2017 are as follows:
|
| | | |
(In millions) | |
Remainder of fiscal 2018 | $ | 247 |
|
2019 | 326 |
|
2020 | 326 |
|
2021 | 325 |
|
2022 | 298 |
|
2023 and thereafter | 1,566 |
|
Total | $ | 3,088 |
|
| |
7. | Supplementary Financial Information |
Supplemental Operations Information
A summary of other (expense) income, netflow information for the periods indicated is presented inpresented:
| | | | | | | | | | | |
| Three months ended December 31, |
(In millions) | 2020 | | 2019 |
OTHER PAYMENTS | | | |
Interest payments | $ | 33 | | | $ | 58 | |
Income tax payments | 3 | | | 12 | |
| | | |
NON-CASH INVESTING ACTIVITIES | | | |
Decrease in Accounts payable for Capital expenditures | $ | (1) | | | $ | (5) | |
Acquisition of equipment under finance leases | 2 | | | 0 | |
During the following table:
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
(In millions) | Period from December 16, 2017 through December 31, 2017 | | | Period from October 1, 2017 through December 15, 2017 | | Three months ended December 31, 2016 |
OTHER (EXPENSE) INCOME, NET | | | | | | |
Interest income | $ | — |
| | | $ | 2 |
| | $ | — |
|
Foreign currency gains, net | 2 |
| | | — |
| | 11 |
|
Income from transition services agreement, net | — |
| | | 3 |
| | — |
|
Other pension and post-retirement benefit costs | 1 |
| | | (8 | ) | | (6 | ) |
Change in fair value of the warrant liability | (5 | ) | | | — |
| | — |
|
Other, net | — |
| | | 1 |
| | (1 | ) |
Total other (expense) income, net | $ | (2 | ) | | | $ | (2 | ) | | $ | 4 |
|
A summary of reorganization items, net forthree months ended December 31, 2020 and 2019, the periods indicated is presented in the following table:
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
(In millions) | Period from December 16, 2017 through December 31, 2017 | | | Period from October 1, 2017 through December 15, 2017 | | Three months ended December 31, 2016 |
REORGANIZATION ITEMS, NET | | | | | | |
Bankruptcy-related professional fees | $ | — |
| | | $ | (56 | ) | | $ | — |
|
Net gain on settlement of liabilities subject to compromise | — |
| | | 1,804 |
| | — |
|
Net gain on fresh start adjustments | — |
| | | 1,671 |
| | — |
|
Other items, net | — |
| | | (3 | ) | | — |
|
Reorganization items, net | $ | — |
| | | $ | 3,416 |
| | $ | — |
|
Cash payments for reorganization items | $ | 1 |
| | | $ | 2,524 |
| | $ | — |
|
Costs directly attributable to the implementation of the Plan of Reorganization were reported as reorganization items, net. The cashCompany made payments for reorganization items for the period from October 1, 2017 through December 15, 2017 (Predecessor) included $2,468 millionoperating lease liabilities of claims paid related to liabilities subject to compromise and $56 million for bankruptcy-related professional fees, including emergence and success fees paid on the Emergence Date.
| |
8. | Business Restructuring Reserves and Programs |
For the period from December 16, 2017 through December 31, 2017 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor), the Company recognized restructuring charges of $10$17 million and $14 million, respectively, including adjustmentsand recorded non-cash additions for operating lease right-of-use assets of $11 million and $9 million, respectively.
The following table presents a reconciliation of cash, cash equivalents, and restricted cash that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | December 31, 2020 | | September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH | | | | | | | | |
Cash and cash equivalents | | $ | 750 | | | $ | 727 | | | $ | 766 | | | $ | 752 | |
Restricted cash included in other assets | | 5 | | | 4 | | | 4 | | | 4 | |
Total cash, cash equivalents, and restricted cash | | $ | 755 | | | $ | 731 | | | $ | 770 | | | $ | 756 | |
8. Business Restructuring Reserves and Programs
The following table summarizes the restructuring charges by activity for the periods presented:
| | | | | | | | | | | | | | |
| | Three months ended December 31, |
(In millions) | | 2020 | | 2019 |
Employee separation costs | | $ | 1 | | | $ | 0 | |
Facility exit costs | | 3 | | | 3 | |
Total restructuring charges | | $ | 4 | | | $ | 3 | |
| | | | |
The restructuring charges include changes in estimates for increases and decreases in costs or changes in the timing of payments related to the restructuring programs of prior fiscal years primarily consisting of the termination/buyout of leases. As the Company continues to evaluate opportunities to streamline its operations, it may identify cost savings globally and take additional restructuring actions in the future and the costs of those actions could be material.
Fiscal 2018 Restructuring Program
During the period from December 16, 2017 through December 31, 2017 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor), recognized restructuring charges for the fiscal 2018 restructuring program were foryears. The Company's employee separation costs associated with employeegenerally consist of severance actions primarily in the U.S. and Europe, Middle East and Africa ("EMEA"), primarily the U.K. and forcharges which the related payments are expected to be completed by the beginning of fiscal 2020. These actions include workforce reductions of 206 employees including 120 in the U.S. and 25 in EMEA. The separation charges include, but are not limited to, termination payments, pension fund payments, and health care and unemployment insurance costs to be paid to, or on behalf of, the affected employees.
Facility exit costs primarily consist of lease obligation charges for exited facilities, including the impact of accelerated lease expense for right-of-use assets and accelerated depreciation expense for leasehold improvements with reductions in their estimated useful lives due to exited facilities. The Company does not allocate restructuring reserves to its operating segments.
The following table summarizes the components of the fiscal 2018 restructuring program for the period from December 16, 2017 through December 31, 2017 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor):
|
| | | | | | | | | | | |
(In millions) | Employee Separation Costs | | Lease Obligations | | Total |
2018 restructuring charges | $ | 12 |
| | $ | — |
| | $ | 12 |
|
Cash payments | (3 | ) | | — |
| | (3 | ) |
Balance as of December 15, 2017 (Predecessor) | $ | 9 |
| | $ | — |
| | $ | 9 |
|
| | | | | |
| | | | | |
2018 restructuring charges(1) | $ | — |
| | $ | 10 |
| | $ | 10 |
|
Cash payments | (2 | ) | | (10 | ) | | (12 | ) |
Balance as of December 31, 2017 (Successor) | $ | 7 |
| | $ | — |
| | $ | 7 |
|
(1) Charges incurred in connection with the termination of the Santa Clara lease.
Fiscal 2017 Restructuring Program
During fiscal 2017, the Company identified opportunities to streamline operations and generate costs savings, which included eliminating employee positions. These obligations are primarilyactivity for employee separation costs associated withrecognized under the Company's restructuring programs for the three months ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Fiscal 2021 Restructuring Program (1) | | Fiscal 2020 Restructuring Program (2) | | Fiscal 2008 through 2019 Restructuring Programs (3) | | Total |
Accrual balance as of September 30, 2020 | $ | 0 | | | $ | 8 | | | $ | 41 | | | $ | 49 | |
Cash payments | 0 | | | 0 | | | (5) | | | (5) | |
Restructuring charges | 1 | | | 0 | | | 0 | | | 1 | |
| | | | | | | |
Impact of foreign currency fluctuations | 0 | | | 0 | | | 2 | | | 2 | |
Accrual balance as of December 31, 2020 | $ | 1 | | | $ | 8 | | | $ | 38 | | | $ | 47 | |
(1)Payments related to the fiscal 2017 employee severance actions in the U.S. and EMEA, for which the related payments2021 restructuring program are expected to be completed in fiscal 2023. The separation charges include, but are not limited2021.
(2)Payments related to pension fund payments and health care and unemployment insurance costs to be paid to or on behalf of the affected employees.
The following table summarizes the components of the fiscal 20172020 restructuring program for the period from December 16, 2017 through December 31, 2017 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor):
|
| | | | | | | | | | | |
(In millions) | Employee Separation Costs | | Lease Obligations | | Total |
Balance as of September 30, 2017 (Predecessor) | $ | 4 |
| | $ | 1 |
| | $ | 5 |
|
Cash payments | (1 | ) | | (1 | ) | | (2 | ) |
Balance as of December 15, 2017 (Predecessor) | $ | 3 |
| | $ | — |
| | $ | 3 |
|
| | | | | |
| | | | | |
Balance as of December 31, 2017 (Successor) | $ | 3 |
| | $ | — |
| | $ | 3 |
|
Fiscal 2008 through 2016 Restructuring Programs
During fiscal years 2008 through 2016, the Company identified opportunities to streamline operations and generate cost savings, which included eliminating employee positions and exiting facilities. The remaining obligations related to these restructuring programs are for employee severance costs are primarily associated with EMEA plans expected to be completed byin fiscal 2023.2027.
The following table aggregates the components of(3)Payments related to the fiscal 2008 through 20162019 restructuring programs for the period from December 16, 2017 through December 31, 2017 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor):are expected to be completed in fiscal 2026.
|
| | | | | | | | | | | |
(In millions) | Employee Separation Costs | | Lease Obligations | | Total |
Balance as of September 30, 2017 (Predecessor) | $ | 51 |
| | $ | 24 |
| | $ | 75 |
|
Cash payments | (3 | ) | | (17 | ) | | (20 | ) |
Expense | 1 |
| | 1 |
| | 2 |
|
Adjustments - fresh start and reorganization items | $ | 4 |
| | $ | (1 | ) | | $ | 3 |
|
Balance as of December 15, 2017 (Predecessor) | $ | 53 |
| | $ | 7 |
| | $ | 60 |
|
| | | | | |
| | | | | |
Cash Payments | (2 | ) | | — |
| | (2 | ) |
Impact of foreign currency fluctuations | 2 |
| | — |
| | 2 |
|
Balance as of December 31, 2017 (Successor) | $ | 53 |
| | $ | 7 |
| | $ | 60 |
|
9. Financing Arrangements
The following table reflects principal amounts of debt and debt net of discounts and issuance costs asfor the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
(In millions) | Principal amount | | Net of discounts and issuance costs | | Principal amount | | Net of discounts and issuance costs |
Term Loan Credit Agreement due December 15, 2024 and 2027 | $ | 1,643 | | | $ | 1,613 | | | $ | 1,643 | | | $ | 1,611 | |
Senior 6.125% Notes due September 15, 2028 | 1,000 | | | 984 | | | 1,000 | | | 984 | |
Convertible 2.25% Senior Notes due June 15, 2023 | 350 | | | 296 | | | 350 | | | 291 | |
Total Long-term debt | $ | 2,993 | | | $ | 2,893 | | | $ | 2,993 | | | $ | 2,886 | |
Term Loan and ABL Credit Agreements
As of December 31, 2017 (Successor)2020 and principal amounts of debt and debt net of discounts and issuance costs as of September 30, 2017 (Predecessor), which includes2020, the impact of adequate protection payments and accrued interest as of January 19, 2017:
|
| | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 31, 2017 | | | September 30, 2017 |
(In millions) | Principal amount | | Net of discounts and issuance costs | | | Principal amount | | Net of discounts and issuance costs |
Term Loan Credit Agreement | $ | 2,925 |
| | $ | 2,896 |
| | | $ | — |
| | $ | — |
|
DIP Credit Agreement due January 19, 2018 | — |
| | — |
| | | 725 |
| | 725 |
|
First lien debt: | | | | | | | | |
Senior secured term B-3 loans | — |
| | — |
| | | 594 |
| | 594 |
|
Senior secured term B-4 loans | — |
| | — |
| | | 1 |
| | 1 |
|
Senior secured term B-6 loans | — |
| | — |
| | | 519 |
| | 519 |
|
Senior secured term B-7 loans | — |
| | — |
| | | 2,012 |
| | 2,012 |
|
7% senior secured notes | — |
| | — |
| | | 982 |
| | 982 |
|
9% senior secured notes | — |
| | — |
| | | 284 |
| | 284 |
|
Second lien debt: | | | | | | | | |
10.50% senior secured notes | — |
| | — |
| | | 1,440 |
| | 1,440 |
|
Total debt | $ | 2,925 |
| | 2,896 |
| | | $ | 6,557 |
| | 6,557 |
|
Debt maturing within one year | | | (29 | ) | | | | | (725 | ) |
Long-term debt, net of current portion(1) | | | $ | 2,867 |
| | | | | $ | 5,832 |
|
(1) Pre-petition long-term debt as of September 30, 2017 (Predecessor) was included in liabilities subject to compromise.
On the Emergence Date:
| |
1. | the Successor Company entered into the Term Loan Credit Agreement and the ABL Credit Agreement; |
| |
2. | the DIP Credit Agreement was paid in full; |
| |
3. | the holders of the Predecessor first lien obligations received cash and Successor Company common stock (aggregate fair value of $3,547 million) and the Company cancelled $4,281 million of the Predecessor Company first lien obligations; and |
| |
4. | the holders of the Predecessor second lien obligations received Successor Company common stock and Warrants to purchase common stock (aggregate fair value of $83 million) and the Company cancelled $1,440 million of the Predecessor Company second lien obligations. |
Successor Financing
On the Emergence Date, Avaya Inc. entered intoCompany maintained (i) theits Term Loan Credit Agreement among Avaya Inc., as borrower, Avaya Holdings, the lending institutions from time to time party thereto, and Goldman Sachs Bank USA, as administrative agent and collateral agent which provided a $2,925 million term loan facility maturing on December 15, 2024(the “Term Loan Credit Agreement”), and (ii) theits ABL Credit Agreement, maturing on December 15, 2022, among Avaya Inc., as borrower, Avaya Holdings, the several other borrowers party thereto, the several lenders from time to time party thereto, and Citibank, N.A., as administrative agent and collateral agent, which providedprovides a revolving credit facility consisting of a U.S. tranche and a foreign tranche allowing for borrowings of up to an aggregate principal amount of $300$200 million from time to time, subject to borrowing base availability (the "ABL Credit Agreement").The Term Loan Credit Agreement matures in two tranches, with a principal amount of $843 million maturing on December 15, 2024 and a principal amount of $800 million maturing on December 15, 2027. The ABL Credit Agreement together withmatures on September 25, 2025.
For the three months ended December 31, 2020 and 2019, the Company recognized interest expense of $20 million and $44 million, respectively, related to the Term Loan Credit Agreement, including the “Credit Agreements”). The Term Loan Credit Agreement, in the case of ABR Loans, bears interest at a rate per annum equal to 3.75% plus the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the U.S. prime rate as publicly announced in the Wall Street Journal and (iii) the LIBOR Rate for an interest period of one month and in the case of LIBOR Loans, bears interest at a rate per annum equal to 4.75% plus the applicable LIBOR Rate, subject to a 1% floor. The ABL Credit Agreement bears interest:
| |
1. | In the case of Base Rate Loans denominated in U.S. dollars, at a rate per annum equal to 0.75% (subject to a 0.25% step-up or step-down based on availability) plus the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the U.S. prime rate as publicly announced by Citibank, N.A. and (iii) the LIBOR Rate for an interest period of one month; |
| |
2. | In the case of LIBOR Rate Loans denominated in U.S. dollars, at a rate per annum equal to 1.75% (subject to a 0.25% step-up or step-down based on availability) plus the applicable LIBOR Rate; |
| |
3. | In the case of Canadian Prime Rate Loans denominated in Canadian dollars, at a rate per annum equal to 0.75% (subject to a 0.25% step-up or step-down based on availability) plus the highest of (i) the “Base Rate” as publicly announced by Citibank, N.A., Canadian branch and (ii) the CDOR Rate for an interest period of 30 days; |
| |
4. | In the case of CDOR Rate Loans denominated in Canadian dollars, at a rate per annum equal to 1.75% (subject to a 0.25% step-up or step-down based on availability) plus the applicable CDOR Rate; |
| |
5. | In the case of LIBOR Rate Loans denominated in Sterling, at a rate per annum equal to 1.75% (subject to a 0.25% step-up or step-down based on availability) plus the applicable LIBOR Rate; |
| |
6. | In the case of EURIBOR Rate Loans denominated in Euro, at a rate per annum equal to 1.75% (subject to a 0.25% step-up or step-down based on availability) plus the applicable LIBOR Rate; and |
| |
7. | In the case of Overnight LIBOR Rate Loans, at a rate per annum equal to 1.75% (subject to a 0.25% step-up or step-down based on availability) plus the applicable Overnight LIBOR Rate. |
The Credit Agreements limit, among other things, Avaya Inc.’s ability to (i) incur indebtedness, (ii) incur liens, (iii) dispose of assets, (iv) make investments, (v) make dividends, or conduct redemptions and repurchases of capital stock, (vi) prepay junior indebtedness or amend junior indebtedness documents, (vii) enter into restricted agreements, (viii) enter into transactions with affiliates and (ix) modify the terms of any of its organizational documents.
The Term Loan Credit Agreement does not contain any financial covenants. The ABL Credit Agreement does not contain any financial covenants other than a requirement to maintain a minimum fixed charge coverage ratio of 1:1 that becomes applicable only in the event that the net borrowing availability under the ABL Credit Agreement is less than the greater of $25 million and 10%amortization of the lesser of the total borrowing base and the ABL commitments (commonly known as the "line cap").debt discount.
As of December 31, 2017,2020, the Company was not in defaulthad no borrowings outstanding under any of its debt agreements.
the ABL Credit Agreement. Under the terms of the ABL Credit Agreement, the Company can issue letters of credit up to $150 million. At December 31, 2017,2020, the Company had issued and outstanding letters of credit and guarantees of $74 million.$41 million under the ABL Credit Agreement. The aggregate additional principal amount that may be borrowed under the ABL Credit Agreement, based on the borrowing base less $74$41 million of outstanding letters of credit and guarantees was $139$115 million at December 31, 2017.2020. For the three months ended December 31, 2020 and 2019, recognized interest expense related to the ABL Credit Agreement was not material.
Senior Notes
The Company’s Senior 6.125% First Lien Notes have an aggregate principal amount outstanding of $1,000 million and mature on September 15, 2028 (the “Senior Notes”).The Senior Notes were issued on September 25, 2020, pursuant to an indenture among the Company, the Company's subsidiaries that are guarantors of the Senior Notes and party thereto and Wilmington Trust, National Association, as trustee and notes collateral agent.
For the three months ended December 31, 2020, the Company recognized interest expense of $16 million related to the Senior Notes, including the amortization of debt issuance costs.
Convertible Notes
The Company's 2.25% Convertible Notes have an aggregate principal amount outstanding of $350 million (including notes issued in connection with the underwriters' exercise in full of an over-allotment option of $50 million) and mature on June 15, 2023 (the "Convertible Notes"). The Convertible Notes were issued under an indenture, by and between the Company and the Bank of New York Mellon Trust Company N.A., as Trustee.
For the three months ended December 31, 2020 and 2019, the Company recognized interest expense of $7 million and $6 million related to the Convertible Notes, respectively, which includes $5 million and $4 million of amortization of the debt discount and issuance costs, respectively.
The net carrying amount of the Convertible Notes for the periods indicated was as follows:
| | | | | | | | | | | | | | |
(In millions) | | December 31, 2020 | | September 30, 2020 |
Principal | | $ | 350 | | | $ | 350 | |
Less: | | | | |
Unamortized debt discount | | (50) | | | (55) | |
Unamortized issuance costs | | (4) | | | (4) | |
Net carrying amount | | $ | 296 | | | $ | 291 | |
The weighted average contractual interest rate of the Company’sCompany's outstanding debt was 6.5% as of both December 31, 2020 and September 30, 2020, respectively. The effective interest rate for the Term Loan Credit Agreement as of December 31, 20172020 and September 30, 2020 was 6.2%.
Predecessor Financing
Debt Covenants and Default. not materially different than its contractual interest rate including adjustments related to interest rate swap agreements designated as highly effective cash flow hedges. The indentures governingeffective interest rate for the Predecessor senior secured notes contained a number of covenants that, among other things and subject to certain exceptions, restricted the ability of the Predecessor and certain of its subsidiaries to (a) incur or guarantee additional debt and issue or sell certain preferred stock, (b) pay dividends on, redeem or repurchase capital stock, (c) make certain acquisitions or investments, (d) incur or assume certain liens, (e) enter into transactions with affiliates, (f) merge or consolidate with another company, (g) transfer or otherwise dispose of assets, (h) redeem subordinated debt, (i) incur obligations that restricted the ability of the Company’s subsidiaries to pay dividends or make other payments to the Company, and (j) create or designate unrestricted subsidiaries. They also contained customary affirmative covenants and events of default.
The Bankruptcy Filing constituted an event of default that accelerated the Predecessor’s payment obligations under the senior secured credit agreements and the senior secured notes. As a result of the Bankruptcy Filing, the principal and interest due under the Predecessor’s debt agreements became due and payable. However, any efforts to enforce such payment obligations were automatically stayed as a result of the Bankruptcy Filing, and the creditors’ rights of enforcement were subject to the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Consequently, all debt outstanding was classified as liabilities subject to compromise and all unamortized debt issuance costs and unaccreted debt discounts were expensed.
DIP Credit Agreement. In connection with the Bankruptcy Filing, on the Petition Date, the Predecessor entered into the DIP Credit Agreement, which provided a $725 million term loan facility due January 2018, and a cash collateralized letter of credit facility in an aggregate amount equal to $150 million. All letters of credit were cash collateralized in an amount equal to 101.5% of the face amount of such letters of credit denominated in U.S. dollars and 103% of the face amount of letters of credit denominated in alternative currencies. The DIP Credit Agreement, in the case of the Base Rate Loans, bore interest at a rate per annum equal to 6.5% plus the highest of (i) Citibank, N.A.’s prime rate, (ii) the Federal Funds Rate plus 0.5% and (iii) the Eurocurrency Rate for an interest period of one month, subject to a 2% floor, and in the case of the Eurocurrency Loans, bore interest at a rate per annum equal to 7.5% plus the applicable Eurocurrency Rate, subject to a 1% floor.
Capital Lease Obligations
Included in other liabilities is $22 million and $14 million of capital lease obligations, net of imputed interestSenior Notes as of December 31, 2017 (Successor)2020 and September 30, 2017 (Predecessor), respectively, and excluded amounts included in liabilities subject to compromise of $12 million2020 was not materially different than its contractual interest rate. The effective interest rate for the Convertible Notes was 9.2% as of December 31, 2020 and September 30, 2017.2020 reflecting the separation of the conversion feature in equity. The effective interest rates include interest on the debt and amortization of discounts and issuance costs.
As of December 31, 2020, the Company was not in default under any of its debt agreements.
10. Derivative Instruments and Hedging Activities
The Company accounts for derivative financial instruments in accordance with FASB ASC Topic 815, "Derivatives and Hedging," ("ASC 815") and does not enter into derivatives for trading or speculative purposes.
Interest Rate Contracts
The Company, from time to time, enters into interest rate swap contracts as a hedge against changes in interest rates on its outstanding variable rate loans.
On May 16, 2018, the Company entered into interest rate swap agreements with 6 counterparties, which fix a portion of the variable interest due under its Term Loan Credit Agreement (the "Original Swap Agreements"). Under the terms of the Original Swap Agreements, which mature on December 15, 2022, the Company pays a fixed rate of 2.935% and receives a variable rate of interest based on one-month LIBOR. Through September 23, 2020, the total $1,800 million notional amount of the Original Swap Agreements were designated as cash flow hedges and deemed highly effective as defined under ASC 815.
On September 23, 2020, the Company entered into an interest rate swap agreement for a notional amount of $257 million (the “Offsetting Swap Agreement”). Under the terms of the Offsetting Swap Agreement, which matures on December 15, 2022, the Company pays a variable rate of interest based on one-month LIBOR and receives a fixed rate of 0.1745%. The Company entered into an agreementthe Offsetting Swap Agreement to outsource certain delivery services associatedmaintain a net notional amount less than the amount of the Company’s variable rate loans outstanding. The Offsetting Swap Agreement was not designated for hedge accounting treatment. On September 23, 2020, Original Swap Agreements with the Avaya Private Cloud Services business. That agreementa notional amount of $257 million were also included the salede-designated from hedge accounting
treatment. As of December 31, 2017 (Successor)2020, Original Swap Agreements with a notional amount of $1,543 million continue to be designated as cash flow hedges and deemed highly effective as defined under ASC 815.
On July 1, 2020, the Company entered into interest rate swap agreements with 4 counterparties, which fix a portion of the variable interest due on its Term Loan Credit Agreement (the "Forward Swap Agreements") from December 15, 2022 (the maturity date of the Original Swap Agreements) through December 15, 2024. Under the terms of the Forward Swap Agreements, the Company will pay a fixed rate of 0.7047% and receive a variable rate of interest based on one-month LIBOR. The total notional amount of the Forward Swap Agreements is $1,400 million. Since their execution, the Forward Swap Agreements have been designated as cash flow hedges and deemed highly effective as defined by ASC 815.
The Company records changes in the fair value of interest rate swap agreements designated as cash flow hedges initially within Accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets. As interest expense is recognized on the Term Loan Credit Agreement, the corresponding deferred gain or loss on the cash flow hedge is reclassified from Accumulated other comprehensive loss to Interest expense in the Condensed Consolidated Statements of Operations. The Company records changes in the fair value of interest rate swap agreements not designated for hedge accounting within Interest expense. On September 23, 2020, the Company froze a $15 million deferred loss within Accumulated other comprehensive loss for the de-designated Original Swap Agreements, which is reclassified to Interest expense over the term of the Original Swap Agreements.
Based on the amount in Accumulated other comprehensive loss at December 31, 2020, approximately $50 million would be reclassified to Interest expense in the next twelve months.
It is management's intention that the net notional amount of interest rate swap agreements be less than the variable rate loans outstanding during the life of the derivatives.
Foreign Currency Forward Contracts
The Company, from time to time, utilizes foreign currency forward contracts primarily to hedge fluctuations associated with certain monetary assets and liabilities including receivables, payables and certain intercompany balances. These foreign currency forward contracts are not designated for hedge accounting treatment. As a result, changes in the fair value of these contracts are recorded as a component of Other income, net to offset the change in the value of the hedged assets and liabilities. As of December 31, 2020 and September 30, 2017 (Predecessor), capital lease obligations associated2020, the Company maintained open foreign currency forward contracts with this agreement were $21a total notional value of $369 million and $24$375 million, respectively, primarily hedging the British Pound Sterling, Chinese Renminbi, Euro and include $10 million within liabilities subject to compromise as of September 30, 2017.Indian Rupee.
| |
10. | Derivative Warrant Liability |
In accordance with the Planbankruptcy plan of Reorganization,reorganization adopted in connection with the Company's emergence from bankruptcy on the Emergence DateDecember 15, 2017 (the "Plan of Reorganization"), the Company issued Warrantswarrants to purchase 5,645,200 shares of Successorthe Company's common stock to the holders of the Predecessor second lien obligations extinguished pursuant to a warrant agreement (“Warrant Agreement”the Plan of Reorganization (the "Emergence Date Warrants"). Each Emergence Date Warrant has an exercise price of $25.55 per share and expires five years from the date of issuance. We account for derivative financial instruments in accordance with FASB ASC 815, "Derivatives and Hedging."on December 15, 2022. The Emergence Date Warrants contain certain derivative features that require the Warrantsthem to be classified as a liability and for changes in the fair value of the liability to be recognized in earnings each reporting period. The SuccessorOn November 14, 2018, the Company's Board of Directors approved a warrant repurchase program, authorizing the Company had no other derivative instruments atto repurchase up to $15 million worth of the Emergence Date Warrants. None of the Emergence Date Warrants have been exercised or repurchased as of December 31, 2017.2020.
The fair value of the Emergence Date Warrants was determined using a probability weighted Black-Scholes option pricing model. This model requires certain input assumptions including risk-free interest rates, volatility, expected life and dividend rates. Selection of these inputs involves significant judgment.
The fair value of the Warrants, on the Emergence Date and atWarrants as of December 31, 2017,2020 and September 30, 2020 was determined by using the Black-Scholes option pricing model with the input assumptions summarized below. Accordingly, we recorded a loss of $5 million forbelow:
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
Expected volatility | 72.94 | % | | 68.53 | % |
Risk-free interest rates | 0.13 | % | | 0.14 | % |
Contractual remaining life (in years) | 1.96 | | 2.21 |
Price per share of common stock | $19.15 | | $15.20 |
In determining the period from December 16, 2017 through December 31, 2017 (Successor) related to the change in fair value of the warrant liability. Emergence Date Warrants, the dividend yield was assumed to be zero as the Company does not anticipate paying dividends throughout the term of the warrants.
Financial Statement Information Related to Derivative Instruments
The following table summarizes the fair value loss was recognized in Other (expense) income, net inof the Company's derivatives on a gross basis, including accrued interest, segregated between those that are designated as hedging instruments and those that are not designated as hedging instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2020 | | September 30, 2020 |
(In millions) | | Balance Sheet Caption | | Asset | | Liability | | Asset | | Liability |
Derivatives Designated as Hedging Instruments: | | | | | | | | | | |
Interest rate contracts | | Other current liabilities | | $ | 0 | | | $ | 43 | | | $ | 0 | | | $ | 43 | |
Interest rate contracts | | Other liabilities | | 0 | | | 48 | | | 0 | | | 58 | |
| | | | 0 | | | 91 | | | 0 | | | 101 | |
Derivatives Not Designated as Hedging Instruments: | | | | | | | | | | |
Interest rate contracts | | Other current liabilities | | 0 | | | 7 | | | 0 | | | 7 | |
Interest rate contracts | | Other liabilities | | 0 | | | 7 | | | 0 | | | 9 | |
Foreign exchange contracts | | Other current assets | | 2 | | | 0 | | | 1 | | | 0 | |
Foreign exchange contracts | | Other current liabilities | | 0 | | | 1 | | | 0 | | | 2 | |
Emergence Date Warrants | | Other liabilities | | 0 | | | 13 | | | 0 | | | 8 | |
| | | | 2 | | | 28 | | | 1 | | | 26 | |
Total derivative fair value | | | | $ | 2 | | | $ | 119 | | | $ | 1 | | | $ | 127 | |
The following table provides information regarding the location and amount of pre-tax (losses) gains for interest rate swaps designated as cash flow hedges:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended December 31, |
| | 2020 | | 2019 |
(In millions) | | Interest Expense | | Other Comprehensive Loss | | Interest Expense | | Other Comprehensive Loss |
Financial Statement Line Item in which Cash Flow Hedges are Recorded | | $ | (56) | | | $ | 17 | | | $ | (58) | | | $ | 10 | |
| | | | | | | | |
Impact of cash flow hedging relationships: | | | | | | | | |
(Loss) gain recognized in AOCI on interest rate swaps | | 0 | | | (1) | | | 0 | | | 4 | |
Interest expense reclassified from AOCI | | (12) | | | 12 | | | (5) | | | 5 | |
The following table provides information regarding the pre-tax (losses) gains for derivatives not designated as hedging instruments on the Condensed Consolidated Statements of Operations.Operations:
| | | | | | | | | | | | | | | | | | | | |
| | | | Three months ended December 31, |
(In millions) | | Location of Derivative Pre-tax (Loss) Gain | | 2020 | | 2019 |
Emergence Date Warrants | | Other income, net | | $ | (5) | | | $ | (3) | |
Foreign exchange contracts | | Other income, net | | 5 | | | 5 | |
The Company records its derivatives on a gross basis in the Condensed Consolidated Balance Sheets. The Company has master netting agreements with several of its financial institution counterparties. The following table provides information on the Company's derivative positions as if those subject to master netting arrangements were presented on a net basis, allowing for the right to offset by counterparty per the master netting agreements:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | September 30, 2020 |
(In millions) | | Asset | | Liability | | Asset | | Liability |
Gross amounts recognized in the Condensed Consolidated Balance Sheets | | $ | 2 | | | $ | 119 | | | $ | 1 | | | $ | 127 | |
Gross amount subject to offset in master netting arrangements not offset in the Condensed Consolidated Balance Sheets | | (2) | | | (2) | | | (1) | | | (1) | |
Net amounts | | $ | 0 | | | $ | 117 | | | $ | 0 | | | $ | 126 | |
11. Fair Value Measurements
|
| | | | | |
| December 31, 2017 | | December 15, 2017 |
Expected volatility | 52.38 | % | | 54.57 | % |
Risk free interest rates | 2.20 | % | | 2.20 | % |
Expected life (in years) | 4.96 |
| | 5.00 |
|
Price per share of common stock | $17.55 | | $14.93 |
| | | |
Fair value of warrant liability | $22 million | | $17 million |
Pursuant to the accounting guidance for fair value measurements, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.Considerable judgment was required in developing certain of the estimates of fair value including the consideration of the COVID-19 pandemic that has caused significant volatility in U.S. and international markets, and accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
Fair Value Hierarchy
The accounting guidance for fair value measurements also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’sinstrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The inputs are prioritized into three levels that may be used to measure fair value:
Level 1: Inputs that reflect quoted prices for identical assets or liabilities in active markets that are observable.
Level 2: Inputs that reflect quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3: Inputs that are unobservable to the extent that observable inputs are not available for the asset or liability at the measurement date.
AssetAssets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 (Successor)2020 and September 30, 2017 (Predecessor)2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
| Fair Value Measurements Using | | Fair Value Measurements Using |
(In millions) | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | | | | | | | | |
Foreign exchange contracts | $ | 2 | | | $ | 0 | | | $ | 2 | | | $ | 0 | | | $ | 1 | | | $ | 0 | | | $ | 1 | | | $ | 0 | |
Total assets | $ | 2 | | | $ | 0 | | | $ | 2 | | | $ | 0 | | | $ | 1 | | | $ | 0 | | | $ | 1 | | | $ | 0 | |
| | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | |
Interest rate contracts | $ | 105 | | | $ | 0 | | | $ | 105 | | | $ | 0 | | | $ | 117 | | | $ | 0 | | | $ | 117 | | | $ | 0 | |
Foreign exchange contracts | 1 | | | 0 | | | 1 | | | 0 | | | 2 | | | 0 | | | 2 | | | 0 | |
Emergence Date Warrants | 13 | | | 0 | | | 0 | | | 13 | | | 8 | | | 0 | | | 0 | | | 8 | |
Total liabilities | $ | 119 | | | $ | 0 | | | $ | 106 | | | $ | 13 | | | $ | 127 | | | $ | 0 | | | $ | 119 | | | $ | 8 | |
|
| | | | | | | | | | | | | | | |
| Successor |
| December 31, 2017 |
| Fair Value Measurements Using |
(In millions) | Total | | Level 1 | | Level 2 | | Level 3 |
Other Non-Current Assets: | | | | | | | |
Investments | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
|
Other Non-Current Liabilities: | | | | | | | |
Warrants | $ | 22 |
| | $ | — |
| | $ | — |
| | $ | 22 |
|
|
| | | | | | | | | | | | | | | |
| Predecessor |
| September 30, 2017 |
| Fair Value Measurements Using |
(In millions) | Total | | Level 1 | | Level 2 | | Level 3 |
Other Non-Current Assets: | | | | | | | |
Investments | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
|
Investments
InvestmentsInterest rate and foreign exchange contracts classified as Level 12 assets and liabilities are pricednot actively traded and are valued using quoted market prices for identical assets in active marketspricing models that are observable.use observable inputs.
Warrants
Emergence Date Warrants classified as Level 3 liabilities are pricedvalued using thea probability weighted Black-Scholes option pricing model.model which is further described in Note 10, "Derivative Instruments and Hedging Activities."
During the three months ended December 31, 2020 and 2019, there were no transfers into or out of Level 3. The activity related to the Company's Level 3 liability, the Emergence Date Warrants, related to a change in fair value of the Warrants is recognizedwhich was recorded in Other (expense) income, net in the Condensed Consolidated Statements of Operations.net.
Fair Value of Financial Instruments
The estimated fair values of amounts borrowed under the Company’s financing arrangementsCompany's Term Loan Credit Agreement, Senior Notes and Convertible Notes at December 31, 2017 (Successor)2020 and September 30, 2017 (Predecessor)2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
(In millions) | Principal amount | | Fair value | | Principal amount | | Fair value |
Term Loan Credit Agreement due December 15, 2024 and 2027 | $ | 1,643 | | | $ | 1,647 | | | $ | 1,643 | | | $ | 1,624 | |
Senior 6.125% Notes due September 15, 2028 | 1,000 | | | 1,068 | | | 1,000 | | | 1,022 | |
Convertible 2.25% Senior Notes due June 15, 2023 | 350 | | | 363 | | | 350 | | | 331 | |
Total | $ | 2,993 | | | $ | 3,078 | | | $ | 2,993 | | | $ | 2,977 | |
The estimated based on afair value of the Term Loan Credit Agreement and Senior Notes was determined using Level 2 inputinputs based on a market approach utilizing market-clearing data on the valuation date in addition to bid/ask prices.
The estimated fair value of the Convertible Notes was determined based on the quoted price of the Convertible Notes in an inactive market on the last trading day of the reporting period and has been classified as Level 2.
The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, to the amounts borrowed underextent the Company’s financing agreements at underlying liability will be settled in cash, approximate their carrying values because of the short-term nature of these instruments.
12. Income Taxes
The Company's effective income tax rate for the three months ended December 31,
2017 (Successor) and September 30, 2017 (Predecessor) are as follows: |
| | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 31, 2017 | | | September 30, 2017 |
(In millions) | Principal Amount | | Fair Value | | | Principal Amount | | Fair Value |
Term Loan Credit Agreement due December 15, 2024 | $ | 2,925 |
| | $ | 2,896 |
| | | $ | — |
| | $ | — |
|
DIP Credit Agreement due January 19, 2018 | — |
| | — |
| | | 725 |
| | 732 |
|
Variable rate Term B-3 Loans due October 26, 2017 | — |
| | — |
| | | 594 |
| | 503 |
|
Variable rate Term B-4 Loans due October 26, 2017 | — |
| | — |
| | | 1 |
| | 1 |
|
Variable rate Term B-6 Loans due March 31, 2018 | — |
| | — |
| | | 519 |
| | 440 |
|
Variable rate Term B-7 Loans due May 29, 2020 | — |
| | — |
| | | 2,012 |
| | 1,709 |
|
7% senior secured notes due April 1, 2019 | — |
| | — |
| | | 982 |
| | 832 |
|
9% senior secured notes due April 1, 2019 | — |
| | — |
| | | 284 |
| | 241 |
|
10.50% senior secured notes due March 1, 2021 | — |
| | — |
| | | 1,440 |
| | 67 |
|
Total | $ | 2,925 |
| | $ | 2,896 |
| | | $ | 6,557 |
| | $ | 4,525 |
|
The Company adjusted the carrying value of debt to fair value upon application of fresh start accounting.
For the Predecessor period ended December 15, 2017, the difference between the Company’s recorded provision and the provision that would result2020 differed from applying the U.S. statutoryfederal tax rate of 35% is primarily attributable to: (1) income and losses taxed at different foreign tax rates, (2) lossesby 146% or $9 million principally related to deferred taxes (including losses) generated within certain foreign jurisdictions for which no benefit was recorded because it is more likely than not that the tax benefits would not be realized (3) non-U.S. withholding taxes on foreign earnings, (4) current period changes to unrecognizedand nondeductible expenses.
The Company's effective income tax positions, (5) U.S. state and local income taxes, and (6)rate for the impact of reorganization and fresh start adjustments.
For the Successor periodthree months ended December 31, 2017,2019 differed from the difference between the Company’s recorded benefit and the benefit that would result from applying the new U.S. statutoryfederal tax rate of 24.5%, is primarily attributable to: (1) income and losses taxed at different foreign tax rates, (2) lossesby (107)% or $(31) million principally related to deferred taxes (including losses) generated within certain foreign jurisdictions for which no benefit was recorded because it is more likely than not that the tax benefits would not be realized (3) non-U.S. withholding taxes on foreign earnings, (4) current period changes to unrecognized tax positions, (5) U.S. state and local income taxes, and (6) the impactnondeductible expenses.
For the three months ended December 31, 2016, the difference between the Company’s recorded provision and the benefit that would result from applying the U.S. statutory rate of 35% is primarily attributable to: (1) income and losses taxed at different foreign tax rates, (2) changes in the valuation allowance established against the Company’s deferred tax assets, and (3) current period changes to unrecognized tax positions.
Under the Plan of Reorganization a substantial amount of the Company’s debt was extinguished. Absent an exception, a debtor recognizes cancellation of indebtedness income (“CODI”) upon discharge of its outstanding indebtedness for an amount of consideration that is less than its adjusted issue price. The Internal Revenue Code of 1986, as amended, provides that a debtor in a bankruptcy case may exclude CODI from taxable income but must reduce certain of its tax attributes by the amount of any CODI recognized as a result of the consummation of a plan of reorganization. The amount of CODI recognized by a taxpayer is the adjusted issue price of any indebtedness discharged less the sum of (i) the amount of cash paid, (ii) the issue price of any new indebtedness issued and (iii) the fair market value of any other consideration, including equity, issued. The reduction in tax attributes does not occur until the first day of the Company’s first tax year subsequent to the date of emergence, which is October 1, 2018. The Company estimates that the U.S. federal net operating loss (“NOL”) and tax credits disclosed in its September 30, 2017 Condensed Consolidated Financial Statements and the tax loss generated during the September 30, 2018 tax year will be entirely eliminated on October 1, 2018. The Company estimates that $196 million of the tax loss generated during the Predecessor period ended December 15, 2017 will be absorbed by taxable income generated during the Successor period ending September 30, 2018. These estimates are subject to revision and any changes in the estimates will affect income or loss from continuing operations in the Successor period ending September 30, 2018.13. Benefit Obligations
Prior to September 30, 2017, a full valuation allowance was established in any jurisdiction that had a net deferred tax asset. A portion of the U.S. valuation allowance in the amount of $787 million was reversed as part of the reorganization adjustments as it was previously established against (i) the NOL and tax credits which will be eliminated as a result of the CODI rules and (ii) other deferred tax assets that were previously established for liabilities that were discharged in the Plan of Reorganization and eliminated as part of the reorganization adjustments. The valuation allowance in the amount of $47 million was reversed in certain non U.S. jurisdictions as part of the reorganization adjustments as management concluded it is more likely than not that the related deferred tax assets will be realized. The remaining U.S. valuation allowance in the amount of $461 million was reversed as part of the fresh start adjustments because management concluded it is more likely than not that the deferred tax assets will be realized primarily due to future sources of taxable income that will be generated by the reversal of deferred tax liabilities established in the fresh start adjustments.
On December 22, 2017, the Act was signed into law. The Act lowered the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. Corporations with a fiscal year-end that is not a calendar year but includes January 1, 2018 are subject to a blended tax rate based on the number of days in the fiscal year before and after January 1, 2018. The Company has a September 30th tax year-end and therefore the U.S. federal tax rate for the year ending September 30, 2018 is 24.5%.
The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017 which provided guidance to registrants on the accounting for tax related impacts under the Act. The guidance provides a measurement period of up to one year after the enactment date for companies to complete the tax accounting implications of the Act. As of the first quarter, the Company has provided a provisional estimate related to the revaluation of its deferred taxes and the deemed repatriation of unremitted foreign earnings. We will continue to refine our estimate, which could result in a material adjustment, given additional guidance under the Act, interpretations, available information and assumptions made by the Company. As a fiscal year-end tax filer, we are subject to various provisions under the Act for fiscal year 2018, including the change to the U.S. federal statutory tax rate and the mandatory deemed repatriation of unremitted foreign earnings. Beginning in our 2019 fiscal year, various other newly enacted provisions will become effective, including provisions that may result in the current U.S. taxation of certain income earned by the Company’s foreign subsidiaries. The FASB has published guidance (Topic 740, No. 5), regarding how to account for the Global Intangible Low-Taxed Income (“GILTI”) provisions included in the Act. The guidance states th
at a company may make a policy decision with respect to the accounting for taxes related to GILTI and whether deferred taxes should be established. The Company estimates that it will generate income that may be taxed as GILTI beginning in fiscal 2019. On a provisional basis, no deferred taxes have been established for GILTI as of December 31, 2018.
The Company does not expect to incur a cash tax liability with respect to the one-time tax on foreign earnings due to historical foreign deficits. The Company previously established a deferred tax liability for non-U.S. withholding taxes to be incurred upon the remittance of foreign earnings. The Condensed Consolidated Financial Statements for the Predecessor and Successor periods include an adjustment for such withholding taxes attributable to current period earnings. In prior periods, the Company established a U.S. deferred income tax liability for certain foreign earnings under the assumption that such earnings would be remitted to the U.S. This deferred tax liability has been adjusted in the Successor period based on the taxation of such earnings under the Act.
A net deferred tax liability was established at the U.S. federal tax rates in effect on December 15, 2017 as part of fresh start accounting for U.S. book-to-tax differences. These deferred taxes are primarily related to differences arising from recording intangible and other assets at fair market value. As of the December 22, 2017 enactment date of the Act, deferred taxes were adjusted to reflect the new tax rates in effect as of the date the deferred tax amounts are expected to be realized.
The provisional amount of the reduction to the net deferred tax liability as a result of the ACT is $245 million and has been recorded as an income tax benefit from continuing operations in the Successor period.
The Company sponsors non-contributory defined benefit pension plans covering a portion of its U.S. employees and retirees, and post-retirement benefit plans covering a portion of its U.S. employees and 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.
Effective January 25, 2018, the Company and the Communications Workers of America (“CWA”) and the International Brotherhood of Electrical Workers (“IBEW”), agreed to extend the 2009 Collective Bargaining Agreement (“CBA”), previously extended through June 14, 2018, until September 21, 2019. The contract extensions did not affect the Company’s obligation for pension and post-retirement benefits available to U.S. employees of the Company who are represented by the CWA or IBEW (“represented employees”).
In September 2015, the Company amended the post-retirement medical plan for represented retirees effective January 1, 2017, to replace medical coverage through the Company’s group plan for represented retirees who are retired as of October 15, 2015 and their eligible dependents, with medical coverage through the private and public insurance marketplace. The change allows the existing retirees to choose insurance from the marketplace and receive financial support from the Company toward the cost of coverage through a Health Reimbursement Arrangement ("HRA").
The components of the pension and post-retirement net periodic benefit (credit) cost (credit) for the periods indicated are provided in the tablestable below:
| | | | | | | | | | | | | | |
| | Three months ended December 31, |
(In millions) | | 2020 | | 2019 |
Pension Benefits - U.S. | | | | |
Components of net periodic benefit credit | | | | |
Service cost | | $ | 1 | | | $ | 1 | |
Interest cost | | 5 | | | 7 | |
Expected return on plan assets | | (13) | | | (13) | |
Net periodic benefit credit | | $ | (7) | | | $ | (5) | |
Pension Benefits - Non-U.S. | | | | |
Components of net periodic benefit cost | | | | |
Service cost | | $ | 2 | | | $ | 2 | |
Interest cost | | 1 | | | 1 | |
Net periodic benefit cost | | $ | 3 | | | $ | 3 | |
Post-retirement Benefits - U.S. | | | | |
Components of net periodic benefit cost | | | | |
Interest cost | | $ | 2 | | | $ | 3 | |
Expected return on plan assets | | (2) | | | (3) | |
Amortization of prior service cost | | (1) | | | 0 | |
Amortization of actuarial gain | | 1 | | | 0 | |
Net periodic benefit cost | | $ | 0 | | | $ | 0 | |
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
(In millions) | Period from December 16, 2017 through December 31, 2017 | | | Period from October 1, 2017 through December 15, 2017 | | Three months ended December 31, 2016 |
Pension Benefits - U.S. | | | | | | |
Components of Net Periodic Benefit Cost | | | | | | |
Service cost | $ | — |
| | | $ | 1 |
| | $ | 1 |
|
Interest cost | 1 |
| | | 22 |
| | 24 |
|
Expected return on plan assets | (2 | ) | | | (38 | ) | | (45 | ) |
Amortization of previously unrecognized net actuarial loss | — |
| | | 20 |
| | 26 |
|
Settlement loss(1) | — |
| | | — |
| | — |
|
Net periodic benefit cost | $ | (1 | ) | | | $ | 5 |
| | $ | 6 |
|
(1) Excludes PlanThe service components of Reorganization related settlements discussed below thatnet periodic benefit (credit) cost were recorded similar to compensation expense, while all other components were recorded in Reorganization items, net in the Condensed Consolidated Statements of Operations.
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
(In millions) | Period from December 16, 2017 through December 31, 2017 | | | Period from October 1, 2017 through December 15, 2017 | | Three months ended December 31, 2016 |
Pension Benefits - Non-U.S. | | | | | | |
Components of Net Periodic Benefit Cost | | | | | | |
Service cost | $ | — |
| | | $ | 2 |
| | $ | 2 |
|
Interest cost | — |
| | | 3 |
| | 2 |
|
Amortization of previously unrecognized net actuarial loss | — |
| | | 1 |
| | 3 |
|
Net periodic benefit cost | $ | — |
| | | $ | 6 |
| | $ | 7 |
|
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
(In millions) | Period from December 16, 2017 through December 31, 2017 | | | Period from October 1, 2017 through December 15, 2017 | | Three months ended December 31, 2016 |
Post-retirement Benefits - U.S. | | | | | | |
Components of Net Periodic Benefit Cost | | | | | | |
Interest cost | $ | — |
| | | $ | 3 |
| | $ | 3 |
|
Expected return on plan assets | — |
| | | (2 | ) | | (2 | ) |
Amortization of unrecognized prior service cost | — |
| | | (3 | ) | | (4 | ) |
Amortization of previously unrecognized net actuarial loss | — |
| | | 2 |
| | 3 |
|
Curtailment | — |
| | | — |
| | (4 | ) |
Net periodic benefit cost | $ | — |
| | | $ | — |
| | $ | (4 | ) |
On December 15, 2017, the APPSE, a qualified pension plan, was settled with the PBGC. At that time, the Company and the PBGC executed a termination and trusteeship agreement to terminate the APPSE and to appoint the PBGC as the statutory trustee of the plan. The Company also paid settlement consideration to the PBGC consisting of $340 million in cash and 6.1 million shares of Successor Company common stock (fair value of $90 million). With this payment, any accrued but unpaid minimum funding contributions due were deemed to have been paid in full. As a result of the plan termination on December 15, 2017, the Company's projected benefit obligation and pension trust assets were reduced by $2,192 million and $1,573 million, respectively. Including the settlement consideration and $703 million of Accumulated other comprehensive loss recorded in the Condensed Consolidated Balance Sheet, a settlement loss of $514 million was recorded in Reorganization items, net in the Condensed Consolidated Statement of Operations.
On December 15, 2017, the unfunded ASPP, a non-qualified excess benefit pension plan, was also terminated and settled. Benefit liabilities for ASPP participants were included as allowed claims in the general unsecured recovery pool. Settlement consideration of $17 million in the form of allowed claims payable to ASPP participants was estimated based upon claims data as of the Emergence Date as amounts due to individual general unsecured creditors had not been finalized and paid. As a result of the termination, the Company's projected benefit obligation was reduced by $88 million. Including the settlement consideration and $18 million of Accumulated other comprehensive loss recorded in the Condensed Consolidated Balance Sheet, a settlement gain of $53 million was recorded in Reorganization items, net in the Condensed Consolidated Statements of Operations.Other income, net.
The Company's general funding policy with respect to its U.S. qualified pension plans is to contribute amounts at least sufficient to satisfy the minimum amount required by applicable lawslaw and regulations, or to directly pay benefits where appropriate. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law, providing limited relief for pension funding and retirement plan distributions. Under the CARES Act, employers were permitted to delay contributions for single employer defined benefit pension plans until January 4, 2021. As a result, of the Bankruptcy Filing in January 2017, there was an automatic stay on the Company'sCompany did not make any contributions to theits U.S. pension plans during the three months ended December 31, 2020. For the remainder of fiscal 2017. Therefore, the minimum funding requirements for the U.S. pension plans were not met during fiscal 2017.
The Plan of Reorganization included contributions to or settlements of all U.S. pension plans, which are the Avaya Pension Plan for Represented Employees ("APP"), the APPSE and the ASPP. On December 15, 2017,2021, the Company paid the aggregate unpaid required minimum funding for the APP, a qualified plan, of $49 million.
Remeasurement as a result of fresh start accounting increased the APP and other post-retirement benefit plan obligations by $3estimates that it will make contributions totaling $18 million on December 15, 2017.
The Company made no contributions to satisfy the minimum statutory funding requirements for its U.S. funded defined benefitqualified pension plans.
Contributions to the non-U.S. pension plans were $3 million for the period from December 16, 2017 throughthree months ended December 31, 2017 (Successor) and for the period from October 1, 2017 through December 15, 2017 (Predecessor), exclusive of the payments discussed above as part of the Plan of Reorganization for the APP and settlement consideration to the PBGC for the APPSE. Estimated payments to satisfy minimum statutory funding requirements for2020. For the remainder of fiscal 2018 are $43 million.
The Company provided pension benefits for U.S. employees, which were not pre-funded. Consequently,2021, the Company made payments asestimates that it will make contributions totaling $21 million for its non-U.S. plans.
Effective December 1, 2020, the benefits were disbursed or claims were paid. Forpost-retirement medical plan coverage provided through the period from December 16, 2017Company's group plan for retirees who retired after April 30, 2019 and their eligible dependents and future represented retirees and their eligible dependents was replaced with coverage through December 31, 2017 (Successor)the private and the period from October 1, 2017 through December 15, 2017 (Predecessor), the Company made payments forpublic insurance marketplace. As a result, the U.S. pension benefitsrepresented post-retirement plan was remeasured as of November 30, 2020, which resulted in eachthe recognition of the periods of amounts totaling less than $1 million.
The Company provides for certain pension benefits for non-U.S. employees, the majority of which are not pre-funded. The Company made payments for these non-U.S. pension benefits for the period from December 16, 2017 through December 31, 2017 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor) totaling $1a $12 million and $3 million, respectively. Estimated payments for these non-U.S. pension benefits for the remainder of fiscal 2018 are $24 million.
During the period from December 16, 2017 through December 31, 2017 (Successor), the Company was reimbursed $3 million from the represented employees’ post-retirement health trust for claims paid that exceeded the Company's obligations. During the period from October 1, 2017 through December 15, 2017 (Predecessor), the Company contributed $2 millionreduction to the represented employees’accumulated benefit obligation with an offset to the Accumulated other comprehensive loss within the Condensed Consolidated Balance Sheet. The decrease was mainly driven by the change in medical coverage, partially offset by changes in actuarial assumptions.
Most post-retirement health trust to fund current benefit claims and costs of administration in compliance with the terms of the CBA, as extended through September 21, 2019. Estimated payments under the terms of the 2009 agreement as extended are $12 million for the remainder of fiscal 2018.
The Company also provides certain retiree medical benefits for U.S. employees through an HRA, which are not pre-funded. Consequently, the Company makes payments directly to the claims administrator as these benefitsretiree medical benefit claims are disbursed. ForThese payments are funded by the periodCompany up to the maximum contribution amounts specified in the plan documents and contract with the Communications Workers of America and the International Brotherhood of Electrical Workers, and contributions from December 16, 2017 throughthe participants, if required. During the three months ended December 31, 2017 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor),2020, the Company made payments in each of the periods totaling less than $1 million for these retiree medical benefits. Estimatedand dental benefits of $2 million and received a $2
million reimbursement from the represented employees' post-retirement health trust related to payments in prior periods. The Company estimates it will make contributions for these retiree medical and dental benefits totaling $8 million for the remainder of fiscal 2018 are less than $1 million.2021.
14. Share-based Compensation
The Predecessor Company's common and preferred stock were cancelled and new common stock was issued on the Emergence Date. Accordingly, the Predecessor Company's then existingCompany maintains share-based compensation awards were also cancelled,plans under which resulted in the recognition of any previously unamortized expense on the date of cancellation. Share-based compensation for the Successor and Predecessor periods are not comparable.
Successor
Pursuant to terms of the Plan of Reorganization, the Avaya Holdings Corp. 2017 Equity Incentive Plan ("2017 Equity Incentive Plan") became effective on the Emergence Date.
The Successor Company's Board of Directors or any committee duly authorized thereby, will administer the 2017 Equity Incentive Plan. The administrator has broad authority to, among other things: (i) select participants; (ii) determine the types of awards that participants are to receive and the number of shares that are to be granted under such awards; and (iii) establish the terms and conditions of awards, including the price to be paid for the shares or the award.
Persons eligible to receive awards under the 2017 Equity Incentive Plan include non-employee directors, employees of the Successor Company or any of its affiliates, and certain consultants and advisors to the Successor Company or any of its affiliates. The types of awards that may be granted under the 2017 Equity Incentive Plan include stock options, restricted stock, restricted stock units ("RSUs"), performance awards ("PRSUs") and other forms of awards granted or denominated in shares of Successorthe Company's common stock, as well as certain cash-based awards.
The maximum number of shares of common stock that may be issued or granted under the 2017 Equity Incentive Plan is 7.4 million shares. If any option or other stock-based award granted under the 2017 Equity Incentive Plan expires, terminates or is cancelled for any reason without having been exercised in full, the number of shares of common stock underlying any unexercised award will again be available Pre-tax share-based compensation expense for the purpose of awards underthree months ended December 31, 2020 and 2019 was $14 million and $6 million, respectively.
Restricted Stock Units
During the 2017 Equity Incentive Plan. If any shares of restricted stock, performance awards or other stock-based awards denominated in shares of common stock awarded under the 2017 Equity Incentive Plan to a participant are forfeited for any reason, the number of forfeited shares of restricted stock, performance awards or other stock-based awards denominated in shares of common stock will again be available for purposes of awards under the 2017 Equity Incentive Plan. Any award under the 2017 Equity Incentive Plan settled in cash will not be counted against the foregoing maximum share limitations. Shares withheld bythree months ended December 31, 2020, the Company in satisfaction of the applicable exercise price or withholding taxes upon the issuance, vesting or settlement of awards, in each case, shall not be available for future issuance under the 2017 Equity Incentive Plan.
The aggregategranted 1,399,516 RSUs with a weighted average grant date fair value of all awards granted to any non-employee director during any calendar year (excluding awards made pursuant to deferred compensation arrangements made in lieu$19.61 per RSU and there were 299,465 RSUs that vested with a weighted average grant date fair value of all or a portion of cash retainers and any dividends payable in respect of outstanding awards) may not exceed $750,000.$15.40 per RSU.
OnPerformance Restricted Stock Units
During the Emergence Date,three months ended December 31, 2020, the Company granted 3.4 million restricted stock units620,924 PRSUs with a weighted average grant date fair value of $22.27 per PRSU. These PRSUs will vest based upon the attainment of specified performance metrics for each of the next three separate fiscal years (collectively the "Performance Period"), as well as the achievement of total shareholder return over the Performance Period for the Company as compared to the total shareholder return for a specified index of companies over the same period. During the Performance Period, the Company will adjust compensation expense for the PRSUs based on its best estimate of attainment of the specified annual performance metrics. The cumulative effect on current and 1.2 million stock options to executives and other employees. The awardsprior periods of a change in the estimated number of PRSUs that are subject to time based vesting. There are 2.8 million shares remaining under the 2017 Equity Incentive Plan availableexpected to be granted.earned during the Performance Period will be recognized as an adjustment to earnings in the period of the revision.
The grant date fair value of the premium-priced stock options granted on the Emergence DatePerformance PRSUs was determined using a lattice option pricingMonte Carlo simulation model withthat incorporated multiple valuation assumptions, including the probability of achieving the total shareholder return market condition and the following assumptions:assumptions presented on a weighted-average basis:
| | | | | | | | |
| | Three months ended December 31, 2020 |
Expected volatility(1) | | 63.56 | % |
Risk-free interest rate(2) | | 0.20 | % |
Dividend yield(3) | | 0 | % |
|
| | | | |
Exercise price | | $ | 19.46 |
|
Expected term (in years)(1) | | 8.54 |
|
Volatility(2) | | 65.37 | % |
Risk-free rate(3) | | 2.35 | % |
Dividend yield(4) | | — | % |
(1)(1)Expected termvolatility based on the vesting terms of the option and a contractual life of ten years.Company's historical data.
(2)Volatility based on peer group companies adjusted for the Company's leverage.
(3)Risk-free interest rate based on U.S. Treasury yields with a term equal to the expected option term.remaining Performance Period as of the grant date.
(4)(3)Dividend yield was assumed to be zero as the Company does not anticipate paying dividends.
AtEmployee Stock Purchase Plan
During the three months ended December 31, 2017, all share-based awards granted by2020, the Successor Company were unvestedwithheld $4 million of eligible employee compensation for purchases of common stock and issued 251,394 shares of common stock under its employee stock purchase plan (the "ESPP").
The grant date fair value for shares issued under the related share-based compensation expense recordedESPP is measured on the date that each offering period commences. The grant date fair value for the offering period from December 16, 2017 throughthat commenced during the three months ended December 31, 2017 (Successor)2020 was $1 million.$4.80 per share. The grant date fair value was determined using a Black-Scholes option pricing model with the following assumptions:
Predecessor | | | | | | | | |
| | Three months ended December 31, 2020 |
Expected volatility(1) | | 54.25 | % |
Risk-free interest rate(2) | | 0.09 | % |
Dividend yield(3) | | 0 | % |
Prior(1)Expected volatility based on the Company's historical data.
(2)Risk-free interest rate based on U.S. Treasury yields with a term equal to the Emergence Date,length of the Predecessoroffering period.
(3)Dividend yield was assumed to be zero as the Company had granted share-based awards that were cancelled upon emergence from bankruptcy. In conjunction with the cancellation, the Predecessor Company accelerated the unrecognized share-based compensation expense and recorded $3 milliondoes not anticipate paying dividends.
15. Capital Stock
SuccessorPreferred Stock
Preferred Stock. The Successor Company's certificate of incorporation authorizes it to issue up to 55.0 million55,000,000 shares of preferred stock with a par value of $0.01 per share.
On October 31, 2019, the Company issued 125,000 shares of its 3% Series A Convertible Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"), to RingCentral for an aggregate purchase price of $125 million. The Series A Preferred Stock is convertible into shares of the Company's common stock at an initial conversion price of $16.00 per share, which represents an approximately 9% interest in the Company's common stock on an as-converted basis as of December 31, 2020, assuming no holders of options, warrants, convertible notes or similar instruments exercise their exercise or conversion rights. The holders of the Series A Preferred Stock are entitled to vote, on an as-converted basis, together with holders of the Company's common stock on all matters submitted to a vote of the holders of the common stock. Holders of the Series A Preferred Stock are entitled to receive dividends, in preference and priority to holders of the Company's common stock, which accrue on a daily basis at the rate of 3% per annum of the stated value of the Series A Preferred Stock. The stated value of the Series A Preferred Stock was initially $1,000 per share and will be increased by the sum of any dividends on such shares not paid in cash. These dividends are cumulative and compound quarterly. The holders of the Series A Preferred Stock participate in any dividends the Company pays on its common stock, equal to the dividend which holders would have received if their Series A Preferred Stock had been converted into common stock on the date such common stock dividend was declared. In the event the Company is liquidated or dissolved, the holders of the Series A Preferred Stock are entitled to receive an amount equal to the liquidation preference (which equals the then stated value plus any accrued and unpaid dividends) for each share of Series A Preferred Stock before any distribution is made to holders of the Company's common stock.
The Series A Preferred Stock are redeemable at the Company's election upon the termination of the Framework Agreement. In addition, the holders of the Series A Preferred Stock have certain rights to require the Company to redeem or put rights to require the Company to repurchase all or any portion of the Series A Preferred Stock. The holders can exercise such redemption rights, upon at least 21 days' notice, after the termination of the Framework Agreement or upon the occurrence of certain events. If and to the extent the redemption right is exercised, the Company would be required to purchase each share of Series A Preferred Stock at the per share price equal to the stated value of the Series A Preferred Stock which will be increased by the sum of any dividends on such shares that have accrued and have been paid in kind, plus all accrued but unpaid dividends. Given that the holders of the Series A Preferred Stock may require the Company to redeem all or a portion of its shares, the Series A Preferred Stock is classified in the mezzanine section of the Condensed Consolidated Balance Sheets between Total liabilities and Stockholders' equity. As of December 31, 2017,2020, the carrying value of the Series A Preferred Stock was $129 million, which includes $4 million of accreted dividends paid in kind. During both the three months ended December 31, 2020 and 2019, the carrying value of the Series A Preferred Stock increased $1 million due to accreted dividends paid in kind each period.
In connection with the issuance of the Series A Preferred Stock, the Company granted RingCentral certain customary consent rights with respect to certain actions by the Company, including amending the Company's organizational documents in a manner that would have an adverse effect on the Series A Preferred Stock and issuing securities that are senior to, or equal in priority with, the Series A Preferred Stock. In addition, pursuant to an Investor Rights Agreement, until such time when RingCentral and its affiliates hold or beneficially own less than 4,759,339 shares of the Company's common stock (on an as-converted basis), RingCentral has the right to nominate one person for election to the Company's Board of Directors. The director designated by RingCentral has the option (i) to serve on the Company's Audit and Nominating and Corporate Governance Committees or (ii) to attend (but not vote at) all of the Company's Board of Directors' committee meetings. On November 6, 2020, Robert Theis was elected to join the Company's Board of Directors as RingCentral's designee.
As of December 31, 2020 and September 30, 2020, there were no125,000 shares of preferred shares issued orstock outstanding.
Common Stock. Stock
The Successor Company's certificate of incorporation authorizes it to issue up to 550.0 million550,000,000 shares of common stock with a par value of $0.01 per share. As of December 31, 2017,2020 and September 30, 2020, there were 110.0 million83,781,354 and 83,278,383 shares issued and 109.8 million outstanding. outstanding, respectively.
The outstanding sharesCompany maintains a warrant repurchase program that authorizes the Company to repurchase Emergence Date Warrants for an aggregate expenditure of up to $15 million. The repurchases may be made from time to time in the open market, through block trades or in privately negotiated transactions. The Company may adopt one or more purchase plans pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, in order to implement the warrant repurchase program. The warrant repurchase program does not obligate the Company to purchase any warrants and may be terminated, increased or decreased by the Board of Directors in its discretion at any time. As of December 31, 2020, there were issuedno warrant repurchases under the program.
The Company also maintains a share repurchase program authorizing the Company to (1) holders of Predecessor first lien obligations (99.3 million shares); (2) holders of Predecessor second lien obligations (4.4 million shares); and (3) PBGC (6.1 million shares). Issued but not outstanding are the shares held on behalf of the general unsecured creditor reserve or the holders of Predecessor first lien debt obligations (0.2 million shares).
Predecessor
In connection withrepurchase the Company's Plancommon stock for an aggregate expenditure of Reorganization and emergenceup to $500 million. The repurchases may be made from bankruptcy, all equity intereststime to time in the Predecessoropen market, through block trades or in privately negotiated transactions. The Company were cancelled, including preferred andadopted a purchase plan pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, to implement the share repurchase program. The share repurchase program does not obligate the Company to purchase any common stock warrants and equity-based awards.may be terminated, increased or decreased by the Board in its discretion at any time. All shares that are repurchased under the program are retired by the Company. During the three months ended December 31, 2020, there were no shares repurchased under the program. As of December 31, 2020, the remaining authorized amount for share repurchases under this program was $170 million.
16. Earnings (Loss)Loss Per Common Share
All outstanding shares of common stock and common stock equivalents of the Predecessor Company were cancelled pursuant to the Plan of Reorganization.
Upon emergence, the Successor Company authorized and issued 110.0 million shares of common stock of which 109.8 million shares were outstanding at December 31, 2017 and used as the basis for determining earnings per share.
Basic earningsloss per share areis calculated by dividing net incomeloss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted earningsloss per share reflectreflects the potential dilution that would occur if equity awards granted under the Company's various share-based compensation plans were vested or exercised; if the Company's Series A Preferred Stock were converted into shares of the Company's common stock; if the Company's Convertible Notes or the warrants the Company sold to purchase up to 12.6 million shares of its common stock in connection with the issuance of Convertible Notes ("Call Spread Warrants") were exercised; and/or if the Emergence Date Warrants were exercised, resulting in the issuance of common shares that would participate in the earnings of the Company.
The following table sets forth the calculation of net incomeloss attributable to common shareholdersstockholders and the computation of basic and diluted earnings (loss)loss per share for the periods indicated:
| | | | | | | | | | | | | | |
| | Three months ended December 31, |
(In millions, except per share amounts) | | 2020 | | 2019 |
Loss per share: | | | | |
Numerator | | | | |
Net loss | | $ | (4) | | | $ | (54) | |
Dividends and accretion to preferred stockholders | | (1) | | | (5) | |
Undistributed loss | | (5) | | | (59) | |
Percentage allocated to common stockholders(1) | | 100.0 | % | | 100.0 | % |
Numerator for basic and diluted loss per common share | | $ | (5) | | | $ | (59) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Denominator for basic and diluted loss per weighted average common shares | | 83.8 | | | 109.0 | |
| | | | |
Loss per common share | | | | |
Basic | | $ | (0.06) | | | $ | (0.54) | |
Diluted | | $ | (0.06) | | | $ | (0.54) | |
| | | | |
(1) Basic weighted average common stock outstanding | | 83.8 | | | 109.0 | |
Basic weighted average common stock and common stock equivalents (preferred shares) | | 83.8 | | | 109.0 | |
Percentage allocated to common stockholders | | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | |
| | Successor | | | Predecessor |
(In millions, except per share amounts) | | Period from December 16, 2017 through December 31, 2017 | | | Period from October 1, 2017 through December 15, 2017 | | Three months ended December 31, 2016 |
Net income (loss) per share: | | | | | | | |
Numerator | | | | | | | |
Net income (loss) | | $ | 237 |
| | | $ | 2,977 |
| | $ | (103 | ) |
Dividends to preferred stockholders | | — |
| | | (6 | ) | | (8 | ) |
Undistributed earnings | | 237 |
| | | 2,971 |
| | (111 | ) |
Percentage allocated to common stockholders(1) | | 100.0 | % | | | 86.9 | % | | 100.0 | % |
Numerator for basic and diluted earnings per common share | | $ | 237 |
| | | $ | 2,582 |
| | $ | (111 | ) |
| | | | | | | |
Denominator | | | | | | | |
Denominator for basic earnings per weighted average common shares | | 109.8 |
| | | 497.3 |
| | 497.0 |
|
Effect of dilutive securities | | | | | | | |
Restricted stock units | | 0.5 |
| | | — |
| | — |
|
Stock options | | — |
| | | — |
| | — |
|
Warrants | | — |
| | | — |
| | — |
|
Denominator for diluted earnings per weighted average common shares | | 110.3 |
| | | 497.3 |
| | 497.0 |
|
| | | | | | | |
Per common share net income (loss) | | | | | | | |
Basic | | $ | 2.16 |
| | | $ | 5.19 |
| | $ | (0.22 | ) |
Diluted | | $ | 2.15 |
| | | $ | 5.19 |
| | $ | (0.22 | ) |
| | | | | | | |
(1) Basic weighted average common stock outstanding | | 109.8 |
| | | 497.3 |
| | 497.0 |
|
Basic weighted average common stock and common stock equivalents (preferred shares) | | 109.8 |
| | | 572.4 |
| | 497.0 |
|
Percentage allocated to common stockholders | | 100.0 | % | | | 86.9 | % | | 100.0 | % |
There were 0.5 million dilutiveThe Company's preferred stock are participating securities, which requires the application of the two-class method to calculate basic and diluted earnings per share. Under the two-class method, undistributed earnings are allocated to common stock and participating securities according to their respective participating rights in undistributed earnings, as if all the earnings for the period from December 16, 2017 throughhad been distributed. Basic loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Net loss attributable to common stockholders is reduced for preferred stock dividends earned and accretion recognized during the period. No allocation of undistributed earnings to participating securities was performed for periods with net losses as such securities do not have a contractual obligation to share in the losses of the Company.
For the three months ended December 31, 2017 (Successor).
On July 14, 2017,2020, the Company sold its Networking business to Extreme. Prior toexcluded 3.8 million RSUs, 0.9 million stock options, 0.1 million shares issuable under the sale,ESPP, 5.6 million Emergence Date Warrants and 0.1 million shares of Series A Preferred Stock from the diluted loss per share calculation as their effect would have been anti-dilutive. The Company also excluded 1.6 million PRSUs from the diluted loss per share calculation as their performance metrics have not been attained or their effect would have been anti-dilutive.
For the three months ended December 31, 2019, the Company excluded 3.7 million RSUs, 1.0 million stock options, 5.6 million Emergence Date Warrants and 0.1 million shares of Series A Preferred Stock from the diluted loss per share calculation as their effect would have been anti-dilutive. The Company also excluded 1.0 million PRSUs from the diluted loss per share calculation as their performance metrics had three separate operating segments. After the sale, the Company has two operating segments, GCS representing the Company's products portfolio and AGS representing the Company's services portfolio. Both GCS and Networking made up the Company’s Enterprise Collaboration Solutions ("ECS") products portfolio.not yet been attained.
The GCSCompany's Convertible Notes and Call Spread Warrants were excluded from the diluted loss per share calculation for all periods presented as their effect would have been anti-dilutive.
17. Operating Segments
The Products & Solutions segment primarily develops, markets, and sells unified communications and contact center solutions, offered on premises,on-premise, in the cloud, or as a hybrid solution. These integrate multiple forms of communications, including telephony, e-mail,email, instant messaging and video. The AGSServices segment develops, markets and sells comprehensive end-to-end global service offerings that enable customers to evaluate, plan, design, implement, monitor, manage and optimize even complex enterprise communications networks. The Networking segment portfolio of softwareRevenue from customers who upgrade and hardware products offered integrated networking products.acquire new technology through the Company's subscription offerings is reported within the Services segment.
The Company’sCompany's chief operating decision maker makes financial decisions and allocates resources based on segment profit information obtained from the Company’sCompany's internal management systems. Management does not include in its segment measures of profitability selling, general and administrative expenses, research and development expenses, amortization of intangible assets, and certain discrete items, such as fair value adjustments recognized upon emergence from bankruptcy, charges relating to restructuring actions, impairment charges, and merger-related costs as these costs are not core to the measurement of segment performance, but rather are controlled at the corporate level.
Summarized financial information relating to the Company’sCompany's operating segments is shown in the following table for the periods indicated:
| | | | | | | | | | | | | | |
| | Three months ended December 31, |
(In millions) | | 2020 | | 2019 |
REVENUE | | | | |
Products & Solutions | | $ | 266 | | | $ | 298 | |
Services | | 477 | | | 419 | |
Unallocated Amounts (1) | | 0 | | | (2) | |
| | $ | 743 | | | $ | 715 | |
GROSS PROFIT | | | | |
Products & Solutions | | $ | 161 | | | $ | 194 | |
Services | | 298 | | | 246 | |
Unallocated Amounts (2) | | (43) | | | (46) | |
| | 416 | | | 394 | |
OPERATING EXPENSES | | | | |
Selling, general and administrative | | 255 | | | 283 | |
Research and development | | 55 | | | 52 | |
Amortization of intangible assets | | 40 | | | 41 | |
Restructuring charges, net | | 4 | | | 3 | |
| | 354 | | | 379 | |
OPERATING INCOME | | 62 | | | 15 | |
INTEREST EXPENSE AND OTHER INCOME, NET | | (56) | | | (44) | |
INCOME (LOSS) BEFORE INCOME TAXES | | $ | 6 | | | $ | (29) | |
|
| | | | | | | | | | | | |
| Successor | | | Predecessor |
(In millions) | Period from December 16, 2017 through December 31, 2017 | | | Period from October 1, 2017 through December 15, 2017 | | Three months ended December 31, 2016 |
REVENUE | | | | | | |
Global Communications Solutions | $ | 71 |
| | | $ | 253 |
| | $ | 343 |
|
Avaya Networking (1) | — |
| | | — |
| | 58 |
|
Enterprise Collaboration Solutions | 71 |
| | | 253 |
| | 401 |
|
Avaya Global Services | 77 |
| | | 351 |
| | 474 |
|
| $ | 148 |
| | | $ | 604 |
| | $ | 875 |
|
GROSS PROFIT | | | | | | |
Global Communications Solutions | $ | 41 |
| | | $ | 169 |
| | $ | 231 |
|
Avaya Networking (1) | — |
| | | — |
| | 25 |
|
Enterprise Collaboration Solutions | 41 |
| | | 169 |
| | 256 |
|
Avaya Global Services | 50 |
| | | 196 |
| | 284 |
|
Unallocated Amounts (2) | (13 | ) | | | (3 | ) | | (5 | ) |
| 78 |
| | | 362 |
| | 535 |
|
OPERATING EXPENSES | | | | | | |
Selling, general and administrative | 50 |
| | | 264 |
| | 336 |
|
Research and development | 9 |
| | | 38 |
| | 62 |
|
Amortization of intangible assets | 7 |
| | | 10 |
| | 57 |
|
Restructuring charges, net | 10 |
| | | 14 |
| | 10 |
|
| 76 |
| | | 326 |
| | 465 |
|
OPERATING INCOME | 2 |
| | | 36 |
| | 70 |
|
INTEREST EXPENSE, OTHER (EXPENSE) INCOME, NET AND REORGANIZATION ITEMS, NET | (11 | ) | | | 3,400 |
| | (170 | ) |
(LOSS) INCOME BEFORE INCOME TAXES | $ | (9 | ) | | | $ | 3,436 |
| | $ | (100 | ) |
(1)Unallocated amounts in Revenue represent the fair value adjustment to deferred revenue recognized upon emergence from bankruptcy and excluded from segment revenue.(1) The Networking business was sold on July 14, 2017.
(2)Unallocated Amountsamounts in Gross Profit include the fair value adjustments recognized upon emergence from bankruptcy and excluded from segment gross profit; the effect of the amortization of technology intangiblesintangibles; and costs that are not core to the measurement of segment management’smanagement's performance, but rather are controlled at the corporate level.
| |
18. | Accumulated Other Comprehensive Loss |
18. Accumulated Other Comprehensive Loss
The components of accumulatedAccumulated other comprehensive income (loss)loss for the periods indicated are summarizedwere as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Change in Unamortized Pension, Post-retirement and Postemployment Benefit-related Items | | Foreign Currency Translation | | Unrealized Loss on Interest Rate Swaps | | Accumulated Other Comprehensive Loss |
Balance as of September 30, 2020 | $ | (108) | | | $ | (46) | | | $ | (91) | | | $ | (245) | |
Other comprehensive income (loss) before reclassifications | 12 | | | (6) | | | (1) | | | 5 | |
Amounts reclassified to earnings | 0 | | | 0 | | | 12 | | | 12 | |
Balance as of December 31, 2020 | $ | (96) | | | $ | (52) | | | $ | (80) | | | $ | (228) | |
|
| | | | | | | | | | | | | | | |
(In millions) | Change in unamortized pension, post-retirement and postemployment benefit-related items | | Foreign Currency Translation | | Other | | Accumulated Other Comprehensive Income (Loss) |
Beginning balance September 30, 2016 (Predecessor) | $ | (1,627 | ) | | $ | (33 | ) | | $ | (1 | ) | | $ | (1,661 | ) |
Other comprehensive income before reclassifications | — |
| | 19 |
| | — |
| | 19 |
|
Amounts reclassified to earnings | 20 |
| | — |
| | — |
| | 20 |
|
(Provision for) benefit from income taxes | (6 | ) | | 4 |
| | — |
| | (2 | ) |
Ending balance December 31, 2016 (Predecessor) | $ | (1,613 | ) | | $ | (10 | ) | | $ | (1 | ) | | $ | (1,624 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Change in Unamortized Pension, Post-retirement and Postemployment Benefit-related Items | | Foreign Currency Translation | | Unrealized Loss on Interest Rate Swaps | | Accumulated Other Comprehensive Loss |
Balance as of September 30, 2019 | $ | (106) | | | $ | (7) | | | $ | (60) | | | $ | (173) | |
Other comprehensive income before reclassifications | 0 | | | 3 | | | 4 | | | 7 | |
Amounts reclassified to earnings | 0 | | | 0 | | | 5 | | | 5 | |
Provision for income taxes | 0 | | | 0 | | | (2) | | | (2) | |
Balance as of December 31, 2019 | $ | (106) | | | $ | (4) | | | $ | (53) | | | $ | (163) | |
|
| | | | | | | | | | | | | | | |
(In millions) | Change in unamortized pension, post-retirement and postemployment benefit-related items | | Foreign Currency Translation | | Other | | Accumulated Other Comprehensive Income (Loss) |
Beginning balance October 1, 2017 (Predecessor) | $ | (1,375 | ) | | $ | (72 | ) | | $ | (1 | ) | | $ | (1,448 | ) |
Other comprehensive (loss) income before reclassifications | (24 | ) | | 3 |
| | — |
| | (21 | ) |
Amounts reclassified to earnings | 16 |
| | — |
| | — |
| | 16 |
|
Pension settlement | 721 |
| | — |
| | — |
| | 721 |
|
Provision for income taxes | (58 | ) | | — |
| | — |
| | (58 | ) |
Ending balance December 15, 2017 (Predecessor) | (720 | ) | | (69 | ) | | (1 | ) | | (790 | ) |
Elimination of Predecessor Company accumulated other comprehensive loss | 720 |
| | 69 |
| | 1 |
| | 790 |
|
Ending balance December 15, 2017 (Predecessor) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | |
| | | | | | | |
Beginning balance December 15, 2017 (Successor) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Other comprehensive loss before reclassifications | — |
| | (13 | ) | | — |
| | (13 | ) |
Ending balance December 31, 2017 (Successor) | $ | — |
| | $ | (13 | ) | | $ | — |
| | $ | (13 | ) |
The amounts reclassified out of accumulatedReclassifications from Accumulated other comprehensive loss are reclassified to Other (expense) income, net in the Condensed Consolidated Statements of Operations priorrelated to the impact of income taxes.unrealized loss on interest rate swap agreements are recorded in Interest expense.
19. Related Party Transactions
Pursuant to the Plan of Reorganization confirmed by the Bankruptcy Court, the SuccessorThe Company's Board of Directors is comprised of seven8 directors, including the Successor Company's Chief Executive Officer James M. Chirico, Jr., and six7 non-employee directors, William D. Watkins, Ronald A. Rittenmeyer, Stephan Scholl, Susan L. Spradley, Stanley J. Sutula, III and Scott D. Vogel.directors.
Specific Arrangements Involving the Company’sCompany's Current Directors and Executive Officers
Laurent Philonenko is a Senior Vice President of Avaya Holdings and became an Advisor to Koopid, Inc., a software development company specializing in mobile applications, in February 2017. For the period from December 16, 2017 through December 31, 2017 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor), the Company purchased goods and services from Koopid, Inc. for each of the periods for less than $1 million.
Ronald A. RittenmeyerWilliam D. Watkins is a Director and Chair of Avaya Holdings. Mr. Rittenmeyer serves on the boardBoard of directorsDirectors of Tenet Healthcare Corporation (“Tenet Healthcare”), a healthcare services company,the Company and serves on the board of directors of American International Group, Inc. (“AIG”), a global insurance organization. For the period from December 16, 2017 through December 31, 2017 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor), sales of the Company’s products and services to Tenet Healthcare for each of the periods were less than $1 million. For the period from December 16, 2017 through December 31, 2017 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor), sales of the Company’s products and services to AIG were less than $1 million and $2 million, respectively.
Stanley J. Sutula III is a director of Avaya Holdings and he is Executive Vice President and Chief Financial Officer of Pitney Bowes Inc., a business-to-business provider of equipment, software and services. For the period from December 16, 2017 through December 31, 2017 (Successor), there were no sales of the Company's products and services to Pitney Bowes Inc. For the period from October 1, 2017 through December 15, 2017 (Predecessor) and for fiscal 2017 (Predecessor), sales of the Company’s products and services to Pitney Bowes Inc. for each of the periods were less than $1 million.
William D. Watkins is a director and Chair of the Board of Directors of Avaya Holdings. Mr. Watkins currently serves on the board of directors of Flex Ltd. ("Flex"), an electronics design manufacturer. For the period from December 16, 2017 throughthree months ended December 31, 2017 (Successor), the period from October 1, 2017 through December 15, 2017 (Predecessor)2020 and for fiscal 2017,2019, the Company purchased goods and services from subsidiaries of Flex Ltd. of $2 million, $6$4 million and $38$9 million, respectively. For the three months ended December 31, 2020 and 2019, sales of goods and services to subsidiaries of Flex were not material. As of both December 31, 2020 and September 30, 2020, the Company had outstanding accounts payable due to Flex of $3 million. As of December 31, 2020, outstanding accounts receivable due from Flex were not material. As of September 30, 2020, the Company had outstanding accounts receivable due from Flex of $1 million.
Specific Arrangements AmongEffective April 13, 2020, Stephan Scholl, a Director of the Predecessor Company, Silver Lake Partnersassumed the role of Chief Executive Officer of Alight Solutions LLC ("Alight"), a provider of integrated benefits, payroll and TPG Capitalcloud solutions. For the three months ended December 31, 2020, the Company purchased goods and their Affiliatesservices from subsidiaries of Alight of $1 million. As of December 31, 2020, outstanding accounts payable due to Alight were not material. As of September 30, 2020, the Company had outstanding accounts payable due to Alight of $1 million.
In connection with the Plan of Reorganization, all agreements between the Predecessor Company and Silver Lake Partners, TPG Capital and their affiliates (collectively, the "Predecessor Sponsors") were terminated on the Emergence Date, including the stockholders' agreement, registration rights agreement and management services agreement. In addition, all Predecessor
Company equity held by the Predecessor Sponsors was cancelled. Predecessor Sponsor fees paid were less than $1 million for the period from October 1, 2017 through December 15, 2017 (Predecessor).
20. Commitments and Contingencies
Legal Proceedings
General
The Company records accruals for legal contingencies to the extent that it has concluded it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described below because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors, including: (i) the damages sought in the proceedings are unsubstantiated or indeterminate; (ii) discovery is not complete; (iii) the proceeding is in its early stages; (iv) the matters present legal uncertainties; (v) there are significant facts in dispute; (vi) there are a large number of parties (including where it is uncertain how liability, if any, will be shared among multiple defendants); or (vii) there is a wide range of potential outcomes.
In the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations and proceedings, including but not limited to, those identified below, relating to intellectual property, commercial, employment, environmental indemnity and regulatory matters.
The Company believesrecords accruals for legal contingencies to the extent that it has meritorious defenses in connection with its current lawsuitsconcluded that it is probable that a liability has been incurred and material claims and disputes, and intends to vigorously contest each of them.
Based on the Company's experience, management believes that the damages amounts claimed in a case are not a meaningful indicatoramount of the potential liability. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of cases.loss can be reasonably estimated.
Other than as described below, inIn the opinion of the Company's management, based upon information currently available to the Company, while the outcome of these lawsuits, claims and disputesmatters is uncertain, the likely results of these lawsuits, claims and disputesmatters are not expected, either individually or in the aggregate, to have a material adverse effect on the Company's financial position,
annual results of operations or cash flows, although the effectflows. However, an unfavorable resolution could be material to the Company's consolidated results of operations or consolidated cash flows for any interim reporting period.
During the period December 16, 2017 through December 31, 2017 (Successor), October 1, 2017 through December 15, 2017 (Predecessor) and the three months ended December 31, 2016 (Predecessor), costs incurred in connection with certain legal matters was $0 million, $37 million and $0 million, respectively.
Antitrust Litigation
In 2006, the Company instituted an action in the U.S. District Court, District of New Jersey, against defendants Telecom Labs, Inc., TeamTLI.com Corp. and Continuant Technologies, Inc. (“TLI/Continuant”) and subsequently amended its complaint to include certain individual officers of these companies as defendants. Defendants purportedly provide maintenance services to customers who have purchased or leased the Company's communications equipment. The Company asserted in its amended complaint that, among other things, defendants, or each of them, engaged in tortious conduct by improperly accessing and utilizing the Company's proprietary software, including passwords, logins and maintenance service permissions, to perform certain maintenance services on the Company's customers' equipment. TLI/Continuant filed counterclaims against the Company alleging that the Company has violated the Sherman Act's prohibitions against anticompetitive conduct through the manner in which the Company sells its products and services. TLI/Continuant sought to recover the profits they claim they would have earned from maintaining Avaya's products, and asked for injunctive relief prohibiting the conduct they claim is anticompetitive.
The trial commenced on September 9, 2013. On January 7, 2014, the Court issued an order dismissing the Company's affirmative claims. With respect to TLI/Continuant’s counterclaims, on March 27, 2014, a jury found against the Company on two of eight claims and awarded damages of $20 million. Under the federal antitrust laws, the jury’s award is subject to automatic trebling, or $60 million.
Following the jury verdict, TLI/Continuant sought an injunction regarding the Company’s ongoing business operations. On June 30, 2014, a federal judge rejected the demands of TLI/Continuant’s proposed injunction and stated that “only a narrow injunction is appropriate.” Instead, the judge issued an order relating to customers who purchased an Avaya PBX system between January 1, 1990 and April 30, 2008 only. Those customers and their agents will have free access to the on demand maintenance commands that were installed on their systems at the time of the purchase transaction. The court specified that this right “does not extend to access on a system purchased after April 30, 2008.” Consequently, the injunction affected only
systems sold prior to April 30, 2008. The judge denied all other requests TLI/Continuant made in its injunction filing. The Company complied with the injunction although it has now been vacated by the September 30, 2016 decision discussed below.
The Company and TLI/Continuant filed post-trial motions seeking to overturn the jury’s verdict, which motions were denied. In September 2014, the Court entered judgment in the amount of $63 million, which included the jury's award of $20 million, subject to automatic trebling, or $60 million, plus prejudgment interest in the amount of $3 million. On October 10, 2014, the Company filed a Notice of Appeal, and on October 23, 2014, TLI/Continuant filed a Notice of Conditional Cross-Appeal. On October 23, 2014, the Company filed its supersedeas bond with the Court in the amount of $63 million. The Company secured posting of the bond through the issuance of a letter of credit under its then existing credit facilities.
On November 10, 2014, TLI/Continuant made an application for attorney's fees, expenses and costs, which the Company contested. TLI/Continuant’s application for attorneys’ fees, expenses and costs was approximately $71 million and represented activity through February 28, 2015. On February 22, 2016, the Company posted a bond in the amount of $8 million in connection with TLC/Continuant's attorneys' fees application.
In September 2016, a Special Master appointed by the trial court to assist in evaluating TLI/Continuant's application rendered a Recommendation, finding that TLI/Continuant should receive approximately $61 million in attorneys' fees, expenses and costs. Subsequently, the parties submitted letters to the Special Master seeking an Amended Recommendation. However, in light of the Third Circuit's favorable opinion, outlined below, the trial court proceedings relating to TLI/Continuant's application have not proceeded. TLI/Continuant is no longer entitled to attorneys' fees, expenses and costs, because it no longer is a prevailing party, subject to further proceedings on appeal or retrial.
On September 30, 2016, the Third Circuit issued a favorable ruling for the Company, which included: (1) reversing the mid-trial decision to dismiss four of the Company’s affirmative claims and reinstated them; (2) vacating the jury verdict on the two claims decided in TLI/Continuant’s favor; (3) entering judgment in the Company’s favor on a portion of TLI/Continuant’s claim relating to attempted monopolization; (4) dismissing TLI/Continuant’s PDS patches claim as a matter of law; (5) vacating the damages award to TLI/Continuant; (6) vacating the award of prejudgment interest to TLI/Continuant; and (7) vacating the injunction. On October 28, 2016, TLI/Continuant sought panel rehearing or rehearing en banc review of the opinion, which was denied on November 16, 2016. On November 22, 2016, TLI/Continuant filed a Motion for Stay of Mandate, which was denied. On December 5, 2016, the Third Circuit issued a certified judgment in lieu of a formal mandate, returning jurisdiction to the trial court.
As a result of the Third Circuit’s opinion, on November 23, 2016, the Company filed a Notice of Motion to Release the Supersedeas Bonds, which the court granted on December 23, 2016. On December 12, 2016, the Court issued an Order Upon Mandate and For Status Conference, which i) vacated the Court’s January 7, 2014 order dismissing Avaya’s claims against TLI/Continuant and the order of judgment entered on September 17, 2014 and ii) scheduled a status conference for January 6, 2017 to discuss the Joint Plan for Retrial. On January 13, 2017, the Court entered an Order staying the matter pending mediation. On January 20, 2017, the Company filed a Notice of Suggestion on Pendency of Bankruptcy For Avaya Inc., et. al. and Automatic Stay of Proceedings. TLI/Continuant filed a proof of claim in the Bankruptcy Court. On November 30, 2017, the Company filed a motion in the Bankruptcy Court seeking to estimate TLI/Continuant’s claim.
A loss reserve has been provided for this matter. The Company continues to believe that TLI/Continuant’s claims are without merit and unsupported by the facts and law, and the Company continues to defend this matter. At this time an outcome cannot be predicted and, as a result, the Company cannot be assured that this case will not have a material adverse effect on the manner in which it does business, itsCompany's financial position, results of operations or cash flows.
Patent Infringement
In July 2016, BlackBerry Limited (“BlackBerry”) filed a complaint for patent infringement against the Companyflows in the Northern District of Texas, alleging infringement of multiple patents with respect to a variety of technologies including user interface design, encoding/decoding and call routing. In September 2016,periods in which the Company filed a motion to dismiss these claims and in October 2016, the Company also filed a motion to transfer this matter to the Northern District of California. In January 2017, the Company filed a notice of Suggestion of Pendency of Bankruptcy, which initially stayed the proceedings. The stay was partially lifted to allow the court in Texas to rule on the two pending motions. The Company’s motion to transfer the case from Texas to California has been denied. The Company’s motion to dismiss BlackBerry’s indirect infringement and willfulness claims was granted, although BlackBerry was provided an opportunity to file an Amended Complaint to cure the deficiencies, which it did on October 19, 2017. BlackBerry filed a proof of claimmatters are ultimately resolved, or in the Bankruptcy Court. On February 20, 2018, the Company and BlackBerry entered into a settlement agreement resolving this dispute, and the Company shortly expects the Courtperiods in the Northern District of Texas to enter an order dismissing the lawsuit, with prejudice. A loss reserve has been established for this matter. The Company considers this matter closed, except for distributionwhich more information is obtained that changes management's opinion of the pre-petition allowed claim in accordance with the general unsecured claims procedure pursuant to the Company's Plan of Reorganization.
In September 2011, Network-1 Security Solutions, Inc. (“Network-1”) filed a complaint for patent infringement against the Company and other corporations in the Eastern District of Texas (Tyler Division), alleging infringement of its patent with respect to power over Ethernet technology. Network-1 seeks to recover for alleged reasonable royalties, enhanced damages and attorneys’ fees. In January 2017, the Company filed a Notice of Suggestion of Pendency of Bankruptcy, which informed the Court of the Company’s voluntary bankruptcy petition filing and stay of proceedings. On October 16, 2017, the Bankruptcy Court entered an order approving a settlement agreement with Network-1 and on November 7, 2017 the Tyler Division district court entered an order dismissing the lawsuit, with prejudice. The Company considers this matter closed, except for distribution of the pre-petition allowed claim in accordance with the general unsecured claims procedure in the Company's Plan of Reorganization.
Intellectual Property and Commercial Disputes
In January 2010, SAE Power Incorporated and SAE Power Company (“SAE”) filed a complaint in the New Jersey Superior Court asserting various claims including breach of contract, unjust enrichment, promissory estoppel, and breach of the covenant of good faith and fair dealing arising out of Avaya’s relationship with SAE as a supplier of various power supply products. SAE has since asserted additional claims against Avaya for fraud, negligent misrepresentation, misappropriation of trade secrets, and civil conspiracy. SAE seeks to recover for alleged losses stemming from Avaya’s termination of its power supply purchases from SAE, including for Avaya’s alleged disclosure of SAE’s alleged trade secret and/or confidential information to another power supply vendor. On July 19, 2016, the Court entered an order granting Avaya’s motion for partial summary judgment, dismissing certain of SAE’s claims regarding the alleged disclosure of trade secrets. In January 2017, the Company filed a Notice of Suggestion of Pendency of Bankruptcy, which informed the Court of the Company’s voluntary bankruptcy petition filing and stay of proceedings. SAE filed a proof of claim in the Bankruptcy Court. On September 28, 2017, the Company filed a motion in the Bankruptcy Court seeking to estimate SAE’s claim, and the estimation hearing took place on February 15, 2018. The Bankruptcy Court has not yet decided the estimation motion. A loss reserve has been established for this matter. At this time an outcome cannot be predicted and, as a result, the Company cannot be assured that this case will not have a material adverse effect on the manner in which it does business, its financial position, results of operations or cash flows.
In the ordinary course of business, the Company is involved in litigation alleging it has infringed upon third parties’ intellectual property rights, including patents and copyrights; some litigation may involve claims for infringement against customers, distributors and resellers by third parties relating to the use of Avaya’s products, as to which the Company may provide indemnifications of varying scope to certain parties. The Company is also involved in litigation pertaining to general commercial disputes with customers, suppliers, vendors and other third parties including royalty disputes. Much of the pending litigation against the Debtors has been stayed as result of the Chapter 11 filing and will be subject to resolution in accordance with the Bankruptcy Code and the orders of the Bankruptcy Court. Based on discussions with parties that have filed claims against the Debtors, the Company provided loss provisions for certain matters. However, these matters are on-going and the outcomes are subject to inherent uncertainties. As a result, the Company cannot be assured that any such matter will not have a material adverse effect on its financial position, results of operations or cash flows.ultimate disposition.
Product Warranties
The Company recognizes a liability for the estimated costs that may be incurred to remedy certain deficiencies of quality or performance of the Company’sCompany's products. These product warranties extend over a specified period of time, generally ranging up to two years from the date of sale depending upon the product subject to the warranty. The Company accrues a provision for estimated future warranty costs based upon the historical relationship of warranty claims to sales. The Company periodically reviews the adequacy of its product warranties and adjusts, if necessary, the warranty percentage and accrued warranty reserve, which is included in other current and non-current liabilities in the Condensed Consolidated Balance Sheets, for actual experience.
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(In millions) | |
Accrued warranty obligations as of September 30, 2017 (Predecessor) | $ | 2 |
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Reductions for payments and costs to satisfy claims | (1 | ) |
Accruals for warranties issued during the period | 1 |
|
Accrued warranty obligations as of December 15, 2017 (Predecessor) | $ | 2 |
|
| |
| |
Reductions for payments and costs to satisfy claims | $ | (1 | ) |
Accruals for warranties issued during the period | 1 |
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Accrued warranty obligations as of December 31, 2017 (Successor) | $ | 2 |
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As of December 31, 2020 and September 30, 2020, the amount reserved for product warranties was $2 million.Guarantees of Indebtedness and Other Off-Balance Sheet Arrangements
Letters of Credit and Guarantees
The Company provides guarantees, letters of credit and surety bonds to various parties as required for certain transactions initiated during the ordinary course of business to guarantee the Company's performance in accordance with contractual or legal obligations. As of December 31, 2017 (Successor),2020, the maximum potential payment obligation with regards to letters of credit, guarantees and surety bonds was $61$67 million. The outstanding letters of credit are collateralized by restricted cash of $4$5 million, which is included in otherOther assets on the Condensed Consolidated Balance Sheets as of December 31, 2017 (Successor).2020.
Purchase Commitments and Termination Fees
The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and to help assure adequate component supply, the Company enters into agreements with contract manufacturers and suppliers that allow them to produce and procure inventory based upon forecasted requirements provided by the Company. If the Company does not meet these specified purchase commitments, it could be required to purchase the inventory, or in the case of certain agreements, pay an early termination fee. Historically, the Company has not been required to pay a charge for not meeting its designated purchase commitments with these suppliers, but has been obligated to purchase certain excess inventory levels from its outsourced manufacturers due to actual sales of product varying from forecast and due to transition of manufacturing from one vendor to another.
The Company’sCompany's outsourcing agreements with its most significant contract manufacturers automatically renew in July and September for successive periods of twelve months each, subject to specific termination rights for the Company and the contract manufacturers. All manufacturing of the Company’sCompany's products is performed in accordance with either detailed requirements or specifications and product designs furnished by the Company and is subject to rigorous quality control standards.
Long-Term Incentive Cash Bonus Plan
The Predecessor Company had established a long-term incentive cash bonus plan (“LTIP”). Under the LTIP, the Predecessor Company would pay cash awards and recognize compensation expense to certain key employees upon specific triggering events. As of the Emergence Date, no triggering event had occurred, therefore no cash awards were paid and no compensation expense recognized. Upon emergence from bankruptcy, all awards to persons deemed "insiders" for purposes of Chapter 11 proceedings were cancelled.
Credit Facility Indemnification
In connection with the Successor Company's obligations under its post-emergence credit facilities, the Company has agreed to indemnify the third-party lending institutions for costs incurred by the institutions related to non-compliance with environmental law and other liabilities that may arise with respect to the execution, delivery, enforcement, performance and administration of the financing documentation. As of December 31, 2017 (Successor), no amounts were paid or accrued pursuant to this indemnity.
Transactions with Nokia
Pursuant to the Contribution and Distribution Agreement effective October 1, 2000 (the "Contribution and Distribution Agreement"), Nokia Corporation ("Nokia", formerly known as Lucent Technologies, Inc. (now Nokia)("Lucent")) contributed to the Company substantially all of the assets, liabilities and operations associated with its enterprise networking businesses (the “Company’s Businesses”"Contributed Businesses") and distributed the Company’sCompany's stock pro-rata to the shareholders of Lucent (“distribution”("distribution"). The Contribution and Distribution Agreement, among other things, provides that, in general, the Company will indemnify Nokia for all liabilities including certain pre-distribution tax obligations of Nokia relating to the Company’sContributed Businesses and all contingent liabilities primarily relating to the Company’sContributed Businesses or otherwise assigned to the Company. In addition, the Contribution and Distribution Agreement provides that certain contingent liabilities not allocated to one of the
parties will be shared by Nokia and the Company in prescribed percentages. The Contribution and Distribution Agreement also provides that each party will share specified portions of contingent liabilities based upon agreed percentages related to the business of the other party that exceed $50 million. The Company is unable to determine the maximum potential amount of other future payments, if any, that it could be required to make under this agreement.
In addition, in connection with the distribution, the Company and Lucent entered into a Tax Sharing Agreement effective October 1, 2000 (the "Tax Sharing Agreement") that governs Nokia’sNokia's and the Company’sCompany's respective rights, responsibilities and obligations after the distribution with respect to taxes for the periods ending on or before the distribution. Generally, pre-distribution taxes or benefits that are clearly attributable to the business of one party will be borne solely by that party and other pre-distribution taxes or benefits will be shared by the parties based on a formula set forth in the Tax Sharing Agreement. The Company may be subject to additional taxes or benefits pursuant to the Tax Sharing Agreement related to future settlements of audits by state and local and foreign taxing authorities for the periods prior to the Company’sCompany's separation from Nokia.
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21. | Condensed Financial Information of Parent Company |
Avaya Holdings has no material assets or stand-alone operations other than its ownership in Avaya Inc. and its subsidiaries.
These condensed financial statements have been presented on a "Parent Company only" basis. Under a Parent Company only presentation, the Company's investments in its consolidated subsidiaries are presented using the equity method of accounting. These Parent Company only condensed financial statements should be read in conjunction with the Company's Condensed Consolidated Financial Statements.
The following present:
(1) the Successor Company, Parent Company only, statements of financial position as of December 31, 2017, and the statements of operations, comprehensive income (loss) and cash flows for the period from December 16, 2017 through December 31, 2017, and;
(2) the Predecessor Company, Parent Company only, statements of financial position as of September 30, 2017, and the statements of operations, comprehensive income (loss) and cash flows for the period from October 1, 2017 through December 15, 2017 and for the three months ended December 31, 2016.
Avaya Holdings Corp.
Parent Company Only
Condensed Balance Sheets (unaudited)
(In millions)
As a result of a growing market trend preferring cloud consumption, more customers are exploring subscription and pay-per-use based models, rather than CapExcapex models, for procuring technology. The shift to subscription and pay-per-use models enables customers to manage costs and efficiencies by paying a subscription or a per minute or per message fee for business communications services rather than purchasing the underlying products and services, infrastructure and personnel, which are owned and managed by the equipment vendor or a cloud and managed services provider. We believe the market trend toward these flexible consumption models will continue as we see an increasing number of opportunities and requests for proposalproposals based on subscription and pay-per-use models. This trend has driven an increase in the proportion of total Company revenues attributable to software and services.
In addition, we believe customers are moving away from owned and operated infrastructure, preferring cloud offerings and virtualized server defined networks, which provide us with reducedreduce our associated maintenance support opportunities. DespiteWe continue to evolve into a software and services business and focus our go-to-market efforts by introducing new solutions and innovations, particularly on workflow automation, multi-channel customer engagement and cloud-enabled communications applications. The Company is focused on growing products and services with a recurring revenue stream. Recurring revenue includes products and services that are delivered pursuant to multi-period contracts and include revenue from sales of its software, global support services, enterprise cloud and managed services and other cloud offerings.
The Company has maintained its focus on profitability levels and investing in future results. As the Company continues its transformation to a softwareresults and service-led organization, it has implemented programs designed to streamline its operations, generate cost savings and eliminate overlapping processes and resources. These cost savings programs include: (1) reducing headcount, (2) eliminating real estate costs associated with unused or under-utilized facilities and (3) implementing gross margin improvement and other cost reduction initiatives. The Company continues to evaluate opportunities to streamline its operations and identify cost savings globally in addition to those implemented in response to the COVID-19 pandemic and may take additional restructuring actions in the future. The costs of thoseany future actions could be material.
The following table displays revenue and the percentage of revenue to total sales by operating segment for the periods indicated:
The following table displays revenue and the percentage of revenue to total sales by location for the periods indicated: