Avaya Holdings Corp. - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38289

AVAYA HOLDINGS CORP.

(Exact name of registrant as specified in its charter)


Delaware		26-1119726
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2605 Meridian Parkway, Suite 200		27713
Durham,	North Carolina
(Address of Principal executive offices)		(Zip Code)

(908) 953-6000

(Registrant's telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act


Title of Each Class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	AVYA	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller Reporting Company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of July 31, 2021, 84,212,324 shares of common stock, $.01 par value, of the registrant were outstanding.

TABLE OF CONTENTS


Item	Description	Page

	PART I—FINANCIAL INFORMATION
1.	Financial Statements	1
2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
3.	Quantitative and Qualitative Disclosures About Market Risk	46
4.	Controls and Procedures	47

	PART II—OTHER INFORMATION
1.	Legal Proceedings	48
1A.	Risk Factors	48
2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
3.	Defaults Upon Senior Securities	48
4.	Mine Safety Disclosures	48
5.	Other Information	48
6.	Exhibits	49
7.	Signatures	50

When we use the terms "we," "us," "our," "Avaya" or the "Company," we mean Avaya Holdings Corp., a Delaware corporation, and its consolidated subsidiaries taken as a whole, unless the context otherwise indicates.

This Quarterly Report on Form 10-Q contains the registered and unregistered trademarks or service marks of Avaya and are the property of Avaya Holdings Corp. and/or its affiliates. This Quarterly Report on Form 10-Q also contains additional trade names, trademarks or service marks belonging to us and to other companies. We do not intend our use or display of other parties' trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

Table of Contents

PART I—FINANCIAL INFORMATION


Item 1.			Financial Statements.

Avaya Holdings Corp.

Condensed Consolidated Statements of Operations (Unaudited)

(In millions, except per share amounts)


	Three months ended June 30,				Nine months ended June 30,
	2021		2020		2021		2020
REVENUE
Products	$	254	$	261	$	746	$	804
Services	478		460		1,467		1,314
	732		721		2,213		2,118
COSTS
Products:
Costs	98		103		295		299
Amortization of technology intangible assets	43		43		129		130
Services	184		178		554		527
	325		324		978		956
GROSS PROFIT	407		397		1,235		1,162
OPERATING EXPENSES
Selling, general and administrative	266		232		785		763
Research and development	55		52		167		155
Amortization of intangible assets	40		40		119		122
Impairment of goodwill	—		—		—		624
Restructuring charges, net	5		20		17		27
	366		344		1,088		1,691
OPERATING INCOME (LOSS)	41		53		147		(529)
Interest expense	(54)		(51)		(169)		(162)
Other income, net	10		27		11		56
(LOSS) INCOME BEFORE INCOME TAXES	(3)		29		(11)		(635)
Benefit from (provision for) income taxes	46		(20)		(8)		(82)
NET INCOME (LOSS)	$	43	$	9	$	(19)	$	(717)
EARNINGS (LOSS) PER SHARE
Basic	$	0.45	$	0.08	$	(0.26)	$	(7.61)
Diluted	$	0.43	$	0.08	$	(0.26)	$	(7.61)
Weighted average shares outstanding
Basic	84.9		83.1		84.4		95.1
Diluted	88.0		83.3		84.4		95.1

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

Table of Contents

Avaya Holdings Corp.

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In millions)


	Three months ended June 30,				Nine months ended June 30,
	2021		2020		2021		2020
Net income (loss)	$	43	$	9	$	(19)	$	(717)
Other comprehensive (loss) income:
Pension, post-retirement and postemployment benefit-related items, net of income taxes of $(1) for the nine months ended June 30, 2021	(2)		—		44		—
Cumulative translation adjustment	(9)		(11)		6		(17)
Change in interest rate swaps	9		4		50		(35)
Other comprehensive (loss) income	(2)		(7)		100		(52)
Total comprehensive income (loss)	$	41	$	2	$	81	$	(769)

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

Table of Contents

Avaya Holdings Corp.

Condensed Consolidated Balance Sheets (Unaudited)

(In millions, except per share and share amounts)


	June 30, 2021		September 30, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	562	$	727
Accounts receivable, net	281		275
Inventory	50		54
Contract assets, net	447		296
Contract costs	117		115
Other current assets	113		112
TOTAL CURRENT ASSETS	1,570		1,579
Property, plant and equipment, net	288		268
Deferred income taxes, net	45		31
Intangible assets, net	2,311		2,556
Goodwill, net	1,482		1,478
Operating lease right-of-use assets	145		160
Other assets	193		159
TOTAL ASSETS	$	6,034	$	6,231
LIABILITIES
Current liabilities:
Accounts payable	$	279	$	242
Payroll and benefit obligations	170		198
Contract liabilities	387		446
Operating lease liabilities	51		49
Business restructuring reserves	20		21
Other current liabilities	192		181
TOTAL CURRENT LIABILITIES	1,099		1,137
Non-current liabilities:
Long-term debt	2,806		2,886
Pension obligations	714		749
Other post-retirement obligations	145		215
Deferred income taxes, net	43		38
Contract liabilities	326		373
Operating lease liabilities	114		129
Business restructuring reserves	19		28
Other liabilities	305		312
TOTAL NON-CURRENT LIABILITIES	4,472		4,730
TOTAL LIABILITIES	5,571		5,867
Commitments and contingencies (Note 20)
Preferred stock, $0.01 par value; 55,000,000 shares authorized at June 30, 2021 and September 30, 2020
Convertible series A preferred stock; 125,000 shares issued and outstanding at June 30, 2021 and September 30, 2020	130		128
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 550,000,000 shares authorized; 84,410,936 shares issued and outstanding at June 30, 2021; and 83,278,383 shares issued and outstanding at September 30, 2020	1		1
Additional paid-in capital	1,468		1,449
Accumulated deficit	(991)		(969)
Accumulated other comprehensive loss	(145)		(245)
TOTAL STOCKHOLDERS' EQUITY	333		236
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	6,034	$	6,231

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

Table of Contents

Avaya Holdings Corp.

Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(In millions)


	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									—
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
Issuance of common stock under the equity incentive plan	1.2			8						8
Issuance of common stock under the employee stock purchase plan	0.2			3						3
Shares repurchased and retired for tax withholding on vesting of restricted stock units	(0.3)			(7)						(7)
Shares repurchased and retired under share repurchase program	(0.2)			(7)						(7)
Share-based compensation expense				13						13
Preferred stock dividends accrued				(1)						(1)
Net loss						(58)				(58)
Other comprehensive income								85		85
Balance as of March 31, 2021	84.7	$	1	$	1,472	$	(1,034)	$	(143)	$	296
Issuance of common stock under the equity incentive plan	0.3									—
Issuance of common stock under the employee stock purchase plan	0.1			3						3
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	(0.6)			(15)						(15)
Share-based compensation expense				11						11
Preferred stock dividends paid				(1)						(1)
Net income						43				43
Other comprehensive loss								(2)		(2)
Balance as of June 30, 2021	84.4	$	1	$	1,468	$	(991)	$	(145)	$	333

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									—
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
Issuance of common stock under the equity incentive plan	0.6									—
Shares repurchased and retired for tax withholding on vesting of restricted stock units	(0.2)			(1)						(1)
Shares repurchased and retired under share repurchase program	(18.2)			(188)						(188)
Share-based compensation expense				8						8
Preferred stock dividends accrued				(1)						(1)
Net loss						(672)				(672)
Other comprehensive loss								(55)		(55)
Balance as of March 31, 2020	82.7	$	1	$	1,436	$	(1,015)	$	(218)	$	204
Issuance of common stock under the equity incentive plan	0.3									—
Shares repurchased and retired for tax withholding on vesting of restricted stock units	(0.1)			(1)						(1)
Share-based compensation expense				7						7
Preferred stock dividends accrued				(1)						(1)
Net income						9				9
Other comprehensive loss								(7)		(7)
Balance as of June 30, 2020	82.9	$	1	$	1,441	$	(1,006)	$	(225)	$	211

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

Table of Contents

Avaya Holdings Corp.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In millions)


	Nine months ended June 30,
	2021		2020
OPERATING ACTIVITIES:
Net loss	$	(19)	$	(717)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	314		319
Share-based compensation	41		21
Amortization of debt discount and issuance costs	19		19
Loss on extinguishment of debt	1		—
Deferred income taxes, net	(9)		(11)
Impairment of goodwill	—		624
Gain on post-retirement plan settlement	(14)		—
Change in fair value of emergence date warrants	27		—
Unrealized loss on foreign currency transactions	6		19
Impairment of debt securities	—		10
Realized gain on sale of equity securities	—		(59)
Other non-cash charges (credits), net	(1)		(7)
Changes in operating assets and liabilities:
Accounts receivable	(3)		50
Inventory	4		6
Operating lease right-of-use assets and liabilities	2		12
Contract assets	(172)		(122)
Contract costs	(8)		1
Accounts payable	35		(37)
Payroll and benefit obligations	(84)		5
Business restructuring reserves	(11)		(15)
Contract liabilities	(109)		(37)
Other assets and liabilities	16		(4)
NET CASH PROVIDED BY OPERATING ACTIVITIES	35		77
INVESTING ACTIVITIES:
Capital expenditures	(78)		(72)
Proceeds from sale of marketable securities	—		412
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES	(78)		340
FINANCING ACTIVITIES:
Shares repurchased under share repurchase program	(22)		(330)
Proceeds from issuance of Series A Preferred Stock, net of issuance costs of $4	—		121
Repayment of Term Loan Credit Agreement due to refinancing	(743)		—
Proceeds from Term Loan Credit Agreement due to refinancing	743		—
Repayment of Term Loan Credit Agreement	(100)		(250)
Borrowings under ABL Credit Agreement	—		50
Principal payments for financing leases	(10)		(8)
Payments for other financing arrangements	(1)		—
Proceeds from other financing arrangements	3		—
Payment of acquisition-related contingent consideration	—		(5)
Debt issuance costs	(2)		—
Proceeds from Employee Stock Purchase Plan	10		1
Proceeds from exercises of stock options	8		—
Preferred stock dividends paid	(1)		—
Shares repurchased for tax withholdings on vesting of restricted stock units	(11)		(4)
NET CASH USED FOR FINANCING ACTIVITIES	(126)		(425)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	4		(2)
NET DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	(165)		(10)
Cash, cash equivalents, and restricted cash at beginning of period	731		756
Cash, cash equivalents, and restricted cash at end of period	$	566	$	746

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

Table of Contents

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" or "Avaya"), is a global leader in digital communications products, solutions and services for businesses of all sizes delivering its technology predominantly through software and services. Avaya builds open, converged and innovative solutions to enhance and simplify communications and collaboration in the cloud, on-premise or a hybrid of both. The Company's global team of professionals delivers services from initial planning and design, to implementation and integration, to ongoing managed operations, optimization, training and support. The Company manages its business operations in two segments, Products & Solutions and 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 of direct wholly-owned subsidiary Avaya Inc. and its subsidiaries. The accompanying unaudited interim Condensed Consolidated Financial Statements 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") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim financial statements. 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, 2020, included in the Company's Annual Report on Form 10-K filed with the SEC on November 25, 2020. In management's opinion, these unaudited interim Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal and recurring adjustments, necessary to 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 the 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. 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 may differ from these estimates. 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 impact have created substantial disruption to the global economy. The duration of the pandemic and the long-term impacts on the global economy are uncertain, especially in light of the emergence of variants. 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 collectability of accounts receivable, sales returns and allowances, the use and recoverability of inventory, the realization of deferred tax assets, annual effective tax rate, the fair value of equity compensation, the recoverability of long-lived assets, useful lives and impairment of tangible and intangible assets including goodwill, business restructuring reserves and fair value measurements. During fiscal 2020, the Company recognized a significant goodwill impairment charge which is further described in Note 7, “Goodwill, net” 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. The COVID-19 pandemic did not have a material impact on the Company's operating results during the third quarter of fiscal 2021.

2. Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify 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 requirements 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, 2020 on a prospective basis. The adoption of this standard did

Table of Contents

not have a material impact on the Company's Condensed Consolidated Financial Statements, however, the future impact of the standard will depend on the nature of future transactions within its scope.

In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans." This standard modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. This standard removes disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The Company adopted this standard as of October 1, 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

Table of Contents

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.

3. Contracts with Customers

Disaggregation of Revenue

The following tables provide the Company's disaggregated revenue for the periods presented:


	Three months ended June 30,				Nine months ended June 30,
(In millions)	2021		2020		2021		2020
Revenue:
Products & Solutions	$	254	$	262	$	746	$	805
Services	478		460		1,468		1,317
Unallocated Amounts	—		(1)		(1)		(4)
Total revenue	$	732	$	721	$	2,213	$	2,118


	Three months ended June 30, 2021								Three months ended June 30, 2020
(In millions)	Products & Solutions		Services		Unallocated		Total		Products & Solutions		Services		Unallocated		Total
Revenue:
U.S.	$	131	$	287	$	—	$	418	$	138	$	277	$	—	$	415
International:
Europe, Middle East and Africa	76		105		—		181		77		101		—		178
Asia Pacific	27		45		—		72		32		44		(1)		75
Americas International - Canada and Latin America	20		41		—		61		15		38		—		53
Total International	123		191		—		314		124		183		(1)		306
Total revenue	$	254	$	478	$	—	$	732	$	262	$	460	$	(1)	$	721


	Nine months ended June 30, 2021								Nine months ended June 30, 2020
(In millions)	Products & Solutions		Services		Unallocated		Total		Products & Solutions		Services		Unallocated		Total
Revenue:
U.S.	$	359	$	886	$	—	$	1,245	$	406	$	789	$	(2)	$	1,193
International:
Europe, Middle East and Africa	241		323		(1)		563		248		289		(1)		536
Asia Pacific	86		138		—		224		92		131		(1)		222
Americas International - Canada and Latin America	60		121		—		181		59		108		—		167
Total International	387		582		(1)		968		399		528		(2)		925
Total revenue	$	746	$	1,468	$	(1)	$	2,213	$	805	$	1,317	$	(4)	$	2,118

Table of Contents

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 June 30, 2021 was $2.4 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 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, contract costs and contract liabilities for the periods presented:


(In millions)	June 30, 2021		September 30, 2020		Increase (Decrease)
Accounts receivable, net	$	281	$	275	$	6

Contract assets, net:
Current	$	447	$	296	$	151
Non-current (Other assets)	91		71		20
	$	538	$	367	$	171

Cost of obtaining a contract:
Current (Contract costs)	$	86	$	92	$	(6)
Non-current (Other assets)	47		40		7
	$	133	$	132	$	1

Cost to fulfill a contract:
Current (Contract costs)	$	31	$	23	$	8

Contract liabilities:
Current	$	387	$	446	$	(59)
Non-current	326		373		(47)
	$	713	$	819	$	(106)

The increase in Contract assets was mainly driven by growth in the Company's subscription offerings. The decrease in contract liabilities was mainly driven by planned declines in hardware maintenance and software support services as customers continue to transition to the Company's subscription offerings. The decrease was also driven by revenue earned from the consideration advance received in connection with the strategic partnership with RingCentral, Inc. as further described in Note 5, "Strategic Partnership".

During the three and nine months ended June 30, 2021 and 2020, the Company did not record any asset impairment charges related to contract assets. During the nine months ended June 30, 2021 and 2020, the Company recognized revenue of $503 million and $500 million that had been previously recorded as a Contract liability as of October 1, 2020 and October 1, 2019, respectively.

During the three months ended June 30, 2021 and 2020, the Company recognized an increase (decrease) to revenue of $1 million and $(1) million, respectively, for performance obligations that were satisfied in prior periods. During the nine months ended June 30, 2021, adjustments to revenue for performance obligations that were satisfied in prior periods were not material. During the nine months ended June 30, 2020, the Company recognized a decrease to revenue of $1 million for performance obligations that were satisfied in prior periods.

Table of Contents

Contract Costs

The following table provides information regarding the location and amount for amortization of costs to obtain and costs to fulfill customer contracts recognized in the Company's Condensed Consolidated Statements of Operations for the periods presented:


	Three months ended June 30,				Nine months ended June 30,
(In millions)	2021		2020		2021		2020
Costs to obtain customer contracts:
Selling, general and administrative	$	47	$	38	$	138	$	104
Revenue	3		1		7		1
Total Amortization	$	50	$	39	$	145	$	105

Costs to fulfill customer contracts:
Costs	$	7	$	8	$	21	$	28
Revenue	—		4		—		4
Total Amortization	$	7	$	12	$	21	$	32

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	$	—	$	—	$	7
Adjustment to retained earnings upon adoption	1		1		1		3
Adjustment to credit loss provision	(3)		—		—		(3)
Allowance for credit loss as of June 30, 2021	$	5	$	1	$	1	$	7

(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 June 30,				Nine months ended June 30,
In millions	2021		2020		2021		2020
Operating lease cost (1)	$	15	$	17	$	45	$	51
Short-term lease cost (1)	1		1		4		4
Variable lease cost (1)(2)	3		5		10		14
Finance lease amortization of right-of-use assets (1)	1		1		4		3
Sublease income (3)	—		(1)		(1)		(4)
Total lease cost	$	20	$	23	$	62	$	68

(1)Allocated between Cost of products and services, and Operating expenses.

(2)Includes real estate taxes and other charges for non-lease services payable to lessors and recognized in the period incurred.

(3)Included in Other income, net.

Table of Contents

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	June 30, 2021		September 30, 2020
ASSETS
Property, plant and equipment, net	$	16	$	12

LIABILITIES
Other current liabilities	5		8
Other liabilities	12		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:

June 30, 2021

September 30, 2020

Weighted average remaining lease term

Operating Leases

4.2 years

4.5 years

Financing Leases

3.7 years

2.7 years

Weighted average interest rate

Operating Leases

5.7

6.1

Financing Leases

4.7 %

5.4

The following table presents the maturities of lease payments for the Company's operating and financing leases as of June 30, 2021 (by fiscal year):


In millions	Operating Leases		Financing Leases
2021 (remaining three months)	$	17	$	1
2022	55		5
2023	41		5
2024	29		4
2025	17		2
2026	11		1
2027 and thereafter	15		—
Total lease payments	185		18
Less: imputed interest	(20)		(1)
Total lease liability	$	165	$	17

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"), 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.

As part of the strategic partnership, the Company and RingCentral also entered into an agreement governing the terms of the commercial 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 $361 million in shares of RingCentral common stock and $14 million in cash. During the nine months ended June 30, 2020, the Company sold all of its shares of RingCentral common stock. During the three and nine months ended June 30, 2020, the Company recognized gains on RingCentral shares of $29 million and $59 million, respectively, within Other income, net in the Condensed Consolidated Statements of Operations.

Table of Contents

In connection with the strategic partnership, the Company and RingCentral entered into an investment agreement, whereby RingCentral purchased 125,000 shares of the Company's Series A 3% Convertible Preferred Stock, par value $0.01 per share (the "Series A Preferred Stock"), for an aggregate purchase price of $125 million. See Note 15, "Capital Stock" for additional information on the Series A Preferred Stock.

Table of Contents

6. Goodwill, net and Intangible Assets, net

Goodwill, net

Goodwill is not amortized but is subject to periodic testing for impairment in accordance with GAAP at the reporting unit level. The Company'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.

Nine Months Ended June 30, 2021

The Company determined that no events occurred or circumstances changed during the nine months ended June 30, 2021 that would indicate that it is more likely than not that its goodwill was impaired. To the extent that business conditions deteriorate or if changes in key assumptions and estimates differ significantly from management's expectations, it may be necessary to record impairment charges in the future.

Nine Months Ended June 30, 2020

During the second quarter of fiscal 2020, the Company concluded that a triggering event occurred for both of its reporting units due to (i) the impact of the COVID-19 pandemic on the macroeconomic environment which led to revisions to the Company's long-term forecast during the second quarter of fiscal 2020 and (ii) the sustained decrease in the Company's stock price at the beginning stages of the pandemic which was caused by the resulting volatility in the financial markets. As a result, the Company performed an interim quantitative goodwill impairment test as of March 31, 2020 to compare the fair values of its reporting units to their respective carrying amounts, including the goodwill allocated to each reporting unit.

The results of the Company’s interim goodwill impairment test as of March 31, 2020 indicated that the estimated fair value of the Company’s Services reporting unit exceeded its carrying amount. The carrying amount of the Company's Products & Solutions reporting unit exceeded its estimated fair value primarily due to a reduction in the Company’s long-term forecast to reflect increased risk from higher market uncertainty and the accelerated reduction of product sales related to the Company’s historical on-premises perpetual licenses with a continued shift and acceleration of customers upgrading and acquiring new technology through the utilization of the Company’s subscription offering, which is included in the Services reporting unit. As a result, the Company recorded a goodwill impairment charge of $624 million to write down the full carrying amount of the Products & Solutions goodwill in the Condensed Consolidated Statement of Operations for the nine months ended June 30, 2020.

Intangible Assets, net

The Company's intangible assets consist of the following for the periods indicated:


(In millions)	Technology and Patents		Customer Relationships and Other Intangibles		Trademarks and Trade Names		Total
Balance as of June 30, 2021
Finite-lived intangible assets:
Cost	$	964	$	2,156	$	42	$	3,162
Accumulated amortization	(614)		(550)		(20)		(1,184)
Finite-lived intangible assets, net	350		1,606		22		1,978
Indefinite-lived intangible assets	—		—		333		333
Intangible assets, net	$	350	$	1,606	$	355	$	2,311
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	—		—		333		333
Intangible assets, net	$	479	$	1,720	$	357	$	2,556

Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets. 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

Table of Contents

amortized but are tested for impairment annually, on July 1st, or more frequently if events occur or circumstances change that indicate an asset may be impaired.

Nine Months Ended June 30, 2021

The Company determined that no events occurred or circumstances changed during the nine months ended June 30, 2021 that would indicate that its finite-lived intangible assets may not be recoverable or that it is more likely than not that its indefinite-lived intangible asset was impaired. To the extent that business conditions deteriorate or if changes in key assumptions and estimates differ significantly from management's expectations, it may be necessary to record impairment charges in the future.

Nine Months Ended June 30, 2020

As a result of the goodwill triggering events identified during the second quarter of fiscal 2020, the Company performed a recoverability test on all of its finite-lived asset groups as of March 31, 2020 before proceeding to the goodwill impairment review and concluded that no impairment charge was necessary. The Company also performed an interim quantitative impairment test for its indefinite lived intangible asset, the Avaya Trade Name, as of March 31, 2020 and determined that its estimated fair value exceeded its carrying value and no impairment existed. The Company determined that no other events occurred or circumstances changed during the nine months ended June 30, 2020 that indicated the Company’s finite-lived intangible assets may not be recoverable or that it was more likely than not that the Avaya Trade Name was impaired.

7. Supplementary Financial Information

The following table presents a summary of Other income, net for the periods indicated:


	Three months ended June 30,				Nine months ended June 30,
(In millions)	2021		2020		2021		2020
OTHER INCOME, NET
Interest income	$	—	$	1	$	1	$	6
Foreign currency gains (losses), net	4		(5)		3		(16)
Gain on investments in equity and debt securities, net	—		29		—		49
Gain on post-retirement plan settlement	—		—		14		—
Other pension and post-retirement benefit credits, net	7		5		21		16
Change in fair value of emergence date warrants	—		(3)		(27)		—
Sublease income	—		1		1		4
Other, net	(1)		(1)		(2)		(3)
Total other income, net	$	10	$	27	$	11	$	56

Table of Contents

For the three and nine months ended June 30, 2020, the gain on investments in equity and debt securities, net includes gains on shares of RingCentral common stock of $29 million and $59 million, respectively, as disclosed in Note 5, "Strategic Partnership". The gain on investments in equity and debt securities, net for the nine months ended June 30, 2020 also includes a $10 million impairment of debt securities mainly driven by a decline in the macroeconomic environment due to the COVID-19 pandemic and a decline in the expected operating results and cash flows for the investment company.

The gain on post-retirement plan settlement for the nine months ended June 30, 2021 is further described in Note 13, "Benefit Obligations."

The following table presents supplemental cash flow information for the periods presented:


	Three months ended June 30,				Nine months ended June 30,
(In millions)	2021		2020		2021		2020
OTHER PAYMENTS
Interest payments	$	34	$	47	$	126	$	151
Income tax payments	14		63		23		88

NON-CASH INVESTING ACTIVITIES
Increase in Accounts payable and Other liabilities for capital expenditures	$	4	$	1	$	2	$	5
Acquisition of equipment under finance leases	2		5		8		5

During the three months ended June 30, 2021 and 2020, the Company made payments for operating lease liabilities of $14 million and $17 million, respectively, and recorded non-cash additions for operating lease right-of-use assets of $4 million and $14 million, respectively. During the nine months ended June 30, 2021 and 2020, the Company made payments for operating lease liabilities of $47 million and $50 million, respectively, and recorded non-cash additions for operating lease right-of-use assets of $20 million and $29 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)	June 30, 2021		September 30, 2020		June 30, 2020		September 30, 2019
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
Cash and cash equivalents	$	562	$	727	$	742	$	752
Restricted cash included in other assets	4		4		4		4
Total cash, cash equivalents, and restricted cash	$	566	$	731	$	746	$	756

8. Business Restructuring Reserves and Programs

The following table summarizes the restructuring charges by activity for the periods presented:


	Three months ended June 30,				Nine months ended June 30,
(In millions)	2021		2020		2021		2020
Employee separation costs	$	4	$	5	$	6	$	6
Facility exit costs	1		15		11		21
Total restructuring charges	$	5	$	20	$	17	$	27

The Company's employee separation costs generally consist of severance charges which 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 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. The Company does not allocate restructuring reserves to its operating segments.

Table of Contents

The following table summarizes the activity for employee separation costs recognized under the Company's restructuring programs for the nine months ended June 30, 2021:


(In millions)	Fiscal 2021 Restructuring Program (2)		Fiscal 2020 Restructuring Program (2)		Fiscal 2008 through 2019 Restructuring Programs (2)		Total
Accrual balance as of September 30, 2020	$	—	$	8	$	41	$	49
Cash payments	(2)		(2)		(13)		(17)
Restructuring charges	6		—		—		6

Adjustments (1)	—		1		(1)		—
Impact of foreign currency fluctuations	—		—		1		1
Accrual balance as of June 30, 2021	$	4	$	7	$	28	$	39

(1)Includes changes in estimates for increases and decreases in costs related to the Company's restructuring programs, which are recorded in Restructuring charges, net in the Condensed Consolidated Statements of Operations in the period of the adjustment.

(2)Payments related to the fiscal 2021, 2020 and 2008 through 2019 restructuring programs are expected to be completed in fiscal 2026.

9. Financing Arrangements

The following table reflects principal amounts of debt and debt net of discounts and issuance costs for the periods presented:


	June 30, 2021				September 30, 2020
(In millions)	Principal amount		Net of discounts and issuance costs		Principal amount		Net of discounts and issuance costs
Senior 6.125% Notes due September 15, 2028	$	1,000	$	985	$	1,000	$	984
Tranche B Term Loans due December 15, 2024	—		—		843		835
Tranche B-1 Term Loans due December 15, 2027	800		779		800		776
Tranche B-2 Term Loans due December 15, 2027	743		736		—		—
Convertible 2.25% Senior Notes due June 15, 2023	350		306		350		291
Total Long-term debt	$	2,893	$	2,806	$	2,993	$	2,886

Term Loan and ABL Credit Agreements

As of June 30, 2021 and September 30, 2020, the Company maintained (i) its 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 (the “Term Loan Credit Agreement”), and (ii) its ABL Credit Agreement, 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 provides 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 $200 million from time to time, subject to borrowing base availability (the "ABL Credit Agreement"). The ABL Credit Agreement matures on September 25, 2025.

Prior to February 24, 2021, the Term Loan Credit Agreement matured in two tranches, with a principal amount of $843 million maturing on December 15, 2024 (the “Tranche B Term Loans”) and a principal amount of $800 million maturing on December 15, 2027 (the “Tranche B-1 Term Loans”). On February 24, 2021, the Company amended the Term Loan Credit Agreement (“Amendment No. 3”), pursuant to which the Company prepaid, replaced and refinanced the Tranche B Term Loans outstanding with $100 million in cash and $743 million in principal amount of new first lien term loans due December 2027 (the “Tranche B-2 Term Loans”). The Tranche B-2 Term Loans bear interest at a rate with applicable margin of 3.00% per annum with respect to base rate borrowings and 4.00% per annum with respect to LIBOR borrowings. Amendment No. 3 was primarily accounted for as a loan modification at the syndicated lender level. Based on the application of the loan modification guidance within ASC 470, the Company recorded $3 million of new debt issuance costs within Interest expense in the Consolidated Statements of Operations. Lenders who exited their positions in the Tranche B Term Loans as a result of Amendment No. 3 were accounted for as a loan extinguishment. Accordingly, the Company wrote-off a portion of the original underwriting discount of $1 million within Interest expense.

For the three months ended June 30, 2021 and 2020, the Company recognized interest expense of $18 million and $32 million, respectively, related to the Term Loan Credit Agreement, including the amortization of the debt discount and issuance costs. For the nine months ended June 30, 2021 and 2020, the Company recognized interest expense of $60 million and $118 million,

Table of Contents

respectively, related to the Term Loan Credit Agreement, including the expenses associated with Amendment No. 3 described above and the amortization of the debt discount and issuance costs.

As of June 30, 2021, the Company had no borrowings outstanding under the ABL Credit Agreement. Under the terms of the ABL Credit Agreement, the Company can issue letters of credit up to $150 million. At June 30, 2021, the Company had issued and outstanding letters of credit and guarantees of $39 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 $39 million of outstanding letters of credit and guarantees was $100 million at June 30, 2021. For both the three months ended June 30, 2021 and 2020, recognized interest expense related to the ABL Credit Agreement was not material. For both the nine months ended June 30, 2021 and 2020, the Company recognized interest expense of $1 million related to the ABL Credit Agreement.

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 and nine months ended June 30, 2021, the Company recognized interest expense of $16 million and $48 million, respectively, 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 each of the three months ended June 30, 2021 and 2020, the Company recognized interest expense of $7 million related to the Convertible Notes, which includes $5 million and $4 million of amortization of the debt discount and issuance costs, respectively. For the nine months ended June 30, 2021 and 2020, the Company recognized interest expense of $21 million and $20 million related to the Convertible Notes, respectively, which includes $15 million and $13 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)	June 30, 2021		September 30, 2020
Principal	$	350	$	350
Less:
Unamortized debt discount	(41)		(55)
Unamortized issuance costs	(3)		(4)
Net carrying amount	$	306	$	291

The weighted average contractual interest rate of the Company's outstanding debt was 6.5% as of both June 30, 2021 and September 30, 2020, respectively. The effective interest rate for the Term Loan Credit Agreement as of June 30, 2021 and September 30, 2020 was not materially different than its contractual interest rate including adjustments related to interest rate swap agreements designated as highly effective cash flow hedges. The effective interest rate for the Senior Notes as of June 30, 2021 and September 30, 2020 was not materially different than its contractual interest rate. The effective interest rate for the Convertible Notes was 9.2% as of June 30, 2021 and September 30, 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 June 30, 2021, 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.

Table of Contents

On May 16, 2018, the Company entered into interest rate swap agreements with six 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 the Offsetting Swap Agreement to maintain 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 a notional amount of $257 million were also de-designated from hedge accounting treatment. As of June 30, 2021, 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 four 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 June 30, 2021, 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 or equal to 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 June 30, 2021, the Company maintained open foreign currency forward contracts with a total notional value of $173 million, hedging the British Pound Sterling, Mexican Peso, Czech Koruna and Indian Rupee. As of September 30, 2020, the Company maintained open foreign currency forward contracts with a total notional value of $375 million, primarily hedging the British Pound Sterling, Euro, Chinese Renminbi and Indian Rupee.

Emergence Date Warrants

In accordance with the bankruptcy plan of reorganization adopted in connection with the Company's emergence from bankruptcy on December 15, 2017 (the "Plan of Reorganization"), the Company issued warrants to purchase 5,645,200 shares of the Company's common stock to the holders of the second lien obligations extinguished pursuant to the Plan of Reorganization (the "Emergence Date Warrants"). Each Emergence Date Warrant has an exercise price of $25.55 per share and expires on December 15, 2022. The Emergence Date Warrants contain certain derivative features that require them to be classified as a liability and for changes in the fair value of the liability to be recognized in earnings each reporting period. On November 14, 2018, the Company's Board of Directors approved a warrant repurchase program, authorizing the Company to repurchase up to $15 million worth of the Emergence Date Warrants. None of the Emergence Date Warrants have been exercised or repurchased as of June 30, 2021.

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 Emergence Date Warrants as of June 30,

Table of Contents

2021 and September 30, 2020 was determined using the input assumptions summarized below:


	June 30, 2021		September 30, 2020
Expected volatility	74.62	%	68.53	%
Risk-free interest rates	0.14	%	0.14	%
Contractual remaining life (in years)	1.46		2.21
Price per share of common stock	$26.90		$15.20

In determining the fair value of the 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.

Table of Contents

Financial Statement Information Related to Derivative Instruments

The following table summarizes the fair value of 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:


		June 30, 2021				September 30, 2020
(In millions)	Balance Sheet Caption	Asset		Liability		Asset		Liability
Derivatives Designated as Hedging Instruments:
Interest rate contracts	Other assets	$	7	$	—	$	—	$	—
Interest rate contracts	Other current liabilities	—		43		—		43
Interest rate contracts	Other liabilities	—		20		—		58
		7		63		—		101
Derivatives Not Designated as Hedging Instruments:
Interest rate contracts	Other current liabilities	—		7		—		7
Interest rate contracts	Other liabilities	—		4		—		9
Foreign exchange contracts	Other current assets	—		—		1		—
Foreign exchange contracts	Other current liabilities	—		1		—		2
Emergence Date Warrants	Other liabilities	—		35		—		8
		—		47		1		26
Total derivative fair value		$	7	$	110	$	1	$	127

The following tables provide information regarding the location and amount of pre-tax gains (losses) for interest rate swaps designated as cash flow hedges:


	Three months ended June 30,
	2021				2020
(In millions)	Interest Expense		Other Comprehensive (Loss) Income		Interest Expense		Other Comprehensive (Loss) Income
Financial Statement Line Item in which Cash Flow Hedges are Recorded	$	(54)	$	(2)	$	(51)	$	(7)

Impact of cash flow hedging relationships:
Loss recognized in AOCI on interest rate swaps	$	—	$	(4)	$	—	$	(7)
Interest expense reclassified from AOCI	(13)		13		(11)		11

Table of Contents


	Nine months ended June 30,
	2021				2020
(In millions)	Interest Expense		Other Comprehensive (Loss) Income		Interest Expense		Other Comprehensive (Loss) Income
Financial Statement Line Item in which Cash Flow Hedges are Recorded	$	(169)	$	100	$	(162)	$	(52)

Impact of cash flow hedging relationships:
Gain (loss) recognized in AOCI on interest rate swaps	$	—	$	12	$	—	$	(57)
Interest expense reclassified from AOCI	(38)		38		(22)		22

The following table provides information regarding the pre-tax gains (losses) for derivatives not designated as hedging instruments on the Condensed Consolidated Statements of Operations:


		Three months ended June 30,				Nine months ended June 30,
(In millions)	Location of Derivative Pre-tax (Loss) Gain	2021		2020		2021		2020
Emergence Date Warrants	Other income, net	$	—	$	(3)	$	(27)	$	—
Foreign exchange contracts	Other income, net	1		—		7		(3)

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:


	June 30, 2021				September 30, 2020
(In millions)	Asset		Liability		Asset		Liability
Gross amounts recognized in the Condensed Consolidated Balance Sheets	$	7	$	110	$	1	$	127
Gross amount subject to offset in master netting arrangements not offset in the Condensed Consolidated Balance Sheets	(7)		(7)		(1)		(1)
Net amounts	$	—	$	103	$	—	$	126

11. Fair Value Measurements

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'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.

Table of Contents

Level 3: Inputs that are unobservable to the extent that observable inputs are not available for the asset or liability at the measurement date.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of June 30, 2021 and September 30, 2020 were as follows:


	June 30, 2021								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:
Interest rate contracts	$	7	$	—	$	7	$	—	$	—	$	—	$	—	$	—
Foreign exchange contracts	—		—		—		—		1		—		1		—
Total assets	$	7	$	—	$	7	$	—	$	1	$	—	$	1	$	—

Liabilities:
Interest rate contracts	$	74	$	—	$	74	$	—	$	117	$	—	$	117	$	—
Foreign exchange contracts	1		—		1		—		2		—		2		—
Emergence Date Warrants	35		—		—		35		8		—		—		8
Total liabilities	$	110	$	—	$	75	$	35	$	127	$	—	$	119	$	8

Interest rate and foreign exchange contracts classified as Level 2 assets and liabilities are not actively traded and are valued using pricing models that use observable inputs.

Emergence Date Warrants classified as Level 3 liabilities are valued using a probability weighted Black-Scholes option pricing model which is further described in Note 10, "Derivative Instruments and Hedging Activities."

During the three and nine months ended June 30, 2021 and 2020, there were no transfers into or out of Level 3. The activity related to the Company's Level 3 liability, the Emergence Date Warrants, relates to a change in fair value which was recorded in Other income, net.

Fair Value of Financial Instruments

The estimated fair values of the Company's Senior Notes, Term Loans, and Convertible Notes as of June 30, 2021 and September 30, 2020 were as follows:


	June 30, 2021				September 30, 2020
(In millions)	Principal amount		Fair value		Principal amount		Fair value
Senior 6.125% Notes due September 15, 2028	$	1,000	$	1,072	$	1,000	$	1,022
Tranche B Term Loans due December 15, 2024	—		—		843		838
Tranche B-1 Term Loans due December 15, 2027	800		804		800		786
Tranche B-2 Term Loans due December 15, 2027	743		746		—		—
Convertible 2.25% Senior Notes due June 15, 2023	350		413		350		331
Total	$	2,893	$	3,035	$	2,993	$	2,977

The estimated fair value of the Term Loans and Senior Notes was determined using Level 2 inputs 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 extent the 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 and nine months ended June 30, 2021 differed from the U.S. federal tax rate by 1,512% and 94%, or $45 million and $10 million, respectively, principally related to nondeductible expenses, including expenses related to the change in fair value of the Emergence Date Warrants, and deferred taxes (including losses) for which no benefit was recorded because it is more likely than not that the tax benefits would not be realized.

Table of Contents

The Company's effective income tax rate for the three and nine months ended June 30, 2020 differed from the U.S. federal tax rate by 48% and 34%, or $14 million and $215 million, respectively, principally related to the goodwill impairment charge recorded in the second quarter of fiscal 2020 and deferred taxes (including losses) for which no benefit was recorded because it is more likely than not that the tax benefits would not be realized.

13. Benefit Obligations

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.

The components of the pension and post-retirement net periodic benefit (credit) cost for the periods indicated are provided in the table below:


	Three months ended June 30,				Nine months ended June 30,
(In millions)	2021		2020		2021		2020
Pension Benefits - U.S.
Components of net periodic benefit credit
Service cost	$	1	$	1	$	3	$	3
Interest cost	5		7		15		22
Expected return on plan assets	(14)		(14)		(40)		(42)
Amortization of actuarial loss	—		—		1		—
Net periodic benefit credit	$	(8)	$	(6)	$	(21)	$	(17)
Pension Benefits - Non-U.S.
Components of net periodic benefit cost
Service cost	$	1	$	2	$	5	$	6
Interest cost	2		1		4		3

Net periodic benefit cost	$	3	$	3	$	9	$	9
Post-retirement Benefits - U.S.
Components of net periodic benefit cost (credit)
Service cost	$	—	$	1	$	1	$	1
Interest cost	1		2		5		8
Expected return on plan assets	—		(2)		(4)		(7)
Amortization of prior service credit	(1)		—		(3)		(1)
Amortization of actuarial loss	—		—		1		—
Settlement gain	—		—		(14)		—
Net periodic benefit cost (credit)	$	—	$	1	$	(14)	$	1

The service components of net periodic benefit (credit) cost were recorded similar to compensation expense, while all other components were recorded in 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 law 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. The Company resumed making contributions to its U.S. pension plans during the second quarter of fiscal 2021. Contributions to U.S. pension plans were $11 million for the nine months ended June 30, 2021, which represented the amounts required to satisfy the minimum statutory funding requirements in the U.S. On March 11, 2021, the American Rescue Plan Act (the "ARP Act") was signed into law, providing limited interest-rate relief provisions and an extended shortfall amortization period for pension funding and retirement plan distributions. As a result, the Company does not expect to make any contributions to the U.S. pension plans during the remainder of fiscal 2021.

Contributions to the non-U.S. pension plans were $19 million for the nine months ended June 30, 2021. For the remainder of fiscal 2021, the Company estimates that it will make contributions totaling $5 million for its non-U.S. plans.

Table of Contents

Effective December 1, 2020, the post-retirement medical plan coverage provided through the Company'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 the private and public insurance marketplace. As a result, the U.S. represented post-retirement plan was remeasured as of November 30, 2020, which resulted in the recognition of a $12 million reduction to the 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.

In March 2021, the Company entered into an irrevocable buy-out agreement with an insurance company to transfer $209 million of its post-retirement life insurance projected benefit obligations related to certain salaried and represented retirees and their beneficiaries who were retired as of March 26, 2021. The transaction was funded with post-retirement life insurance plan assets with a value of $190 million. As a result of this transaction, a settlement gain of $14 million was recognized within Other income, net in the Condensed Consolidated Statements of Operations.

Most post-retirement medical benefits are not pre-funded. Consequently, the Company makes payments directly to the claims administrator as retiree medical benefit claims are disbursed. These payments are funded by the Company 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 the participants, if required. During the nine months ended June 30, 2021, the Company made payments for retiree medical and dental benefits of $9 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 payments for retiree medical and dental benefits totaling $3 million for the remainder of fiscal 2021.

14. Share-based Compensation

The Company maintains share-based compensation plans under which non-employee directors, employees of the Company or any of its affiliates, and certain consultants and advisors may be granted stock options, restricted stock, restricted stock units ("RSUs"), performance awards ("PRSUs") and other forms of awards granted or denominated in shares of the Company's common stock, as well as certain cash-based awards. Pre-tax share-based compensation expense for the three months ended June 30, 2021 and 2020 was $14 million and $7 million, respectively, and $41 million and $21 million for the nine months ended June 30, 2021 and 2020, respectively.

Restricted Stock Units

During the nine months ended June 30, 2021, the Company granted 1,797,062 RSUs with a weighted average grant date fair value of $21.68 per RSU and there were 1,225,889 RSUs that vested with a weighted average grant date fair value of $14.84 per RSU.

Performance Restricted Stock Units

During the nine months ended June 30, 2021, the Company granted 620,924 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 prior periods of a change in the estimated number of PRSUs that are expected to be 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 Performance PRSUs was determined using a Monte Carlo simulation model that incorporated multiple valuation assumptions, including the probability of achieving the total shareholder return market condition and the following assumptions presented on a weighted-average basis:


	Nine months ended June 30, 2021
Expected volatility(1)	63.56	%
Risk-free interest rate(2)	0.20	%
Dividend yield(3)	—	%

(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 remaining Performance Period as of the grant date.

(3)Dividend yield was assumed to be zero as the Company does not anticipate paying dividends.

Table of Contents

Stock Options

During the nine months ended June 30, 2021, there were 408,990 stock options exercised with a weighted average exercise price of $19.53. The intrinsic value of a stock option is the difference between the Company's common stock price and the option exercise price. The total pre-tax intrinsic value of stock options exercised during the nine months ended June 30, 2021 was $5 million.

Employee Stock Purchase Plan

During the nine months ended June 30, 2021, the Company withheld $10 million of eligible employee compensation for purchases of common stock and issued 573,023 shares of common stock under its employee stock purchase plan (the "ESPP").

The grant date fair value for shares issued under the ESPP is measured on the date that each offering period commences. The average grant date fair value for the offering periods that commenced during the nine months ended June 30, 2021 was $6.68 per share. The grant date fair value was determined using a Black-Scholes option pricing model with the following average grant date assumptions:


	Nine months ended June 30, 2021
Expected volatility(1)	55.27	%
Risk-free interest rate(2)	0.05	%
Dividend yield(3)	—	%

(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 length of the offering period.

(3)Dividend yield was assumed to be zero as the Company does not anticipate paying dividends.

15. Capital Stock

Preferred Stock

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 June 30, 2021, assuming no holders of options, warrants, convertible notes or similar instruments exercise their exercise or conversion rights.

As of June 30, 2021, the carrying value of the Series A Preferred Stock was $130 million, which includes $5 million of accreted dividends paid in kind. During the nine months ended June 30, 2021, the carrying value of the Series A Preferred Stock increased $2 million due to accreted dividends paid in kind.

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.

Common Stock

The Company maintains a share repurchase program authorizing the Company to repurchase the Company's common stock for an aggregate expenditure of up to $500 million. The repurchases may be made from time to time in the open market, through block trades or in privately negotiated transactions. The Company adopted 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 and may be terminated, increased or decreased by the Board of Directors in its discretion at any time. All shares that are repurchased under the program are retired by the Company. During the three and nine months ended June 30, 2021, the Company repurchased 548,456 and 793,662 shares of its common stock, respectively, at a weighted average price per share of $27.80 and $28.38, respectively, including transaction costs. As of June 30, 2021, the remaining authorized amount for share repurchases under this program was $147 million.

Table of Contents

16. Earnings (Loss) Per Common Share

Basic earnings (loss) per share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding. Diluted earnings (loss) per share reflects 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 income (loss) attributable to common stockholders and the computation of basic and diluted earnings (loss) per share for the periods indicated:


	Three months ended June 30,						Nine months ended June 30,
(In millions, except per share amounts)	2021			2020			2021			2020
Earnings (loss) per share:
Numerator
Net Income (loss)	$	43		$	9		$	(19)		$	(717)
Dividends and accretion to preferred stockholders	(1)			(1)			(3)			(7)
Undistributed Income (loss)	42			8			(22)			(724)
Percentage allocated to common stockholders(1)	91.3		%	91.2		%	100.0		%	100.0		%
Numerator for basic and diluted earnings (loss) per common share	$	38		$	7		$	(22)		$	(724)

Denominator
Denominator for basic earnings (loss) per weighted average common shares	84.9			83.1			84.4			95.1
Effect of dilutive securities
Restricted stock units	1.6			0.2			—			—
Performance restricted stock units	0.6			—			—			—
Emergence Date Warrants	0.5			—			—			—
Stock options	0.2			—			—			—
Convertible notes	0.2			—			—			—
Denominator for diluted earnings (loss) per weighted average common shares	88.0			83.3			84.4			95.1

Earnings (loss) per common share
Basic	$	0.45		$	0.08		$	(0.26)		$	(7.61)
Diluted	$	0.43		$	0.08		$	(0.26)		$	(7.61)

(1) Basic weighted average common stock outstanding	84.9			83.1			84.4			95.1
Basic weighted average common stock and common stock equivalents (preferred shares)	93.0			91.1			84.4			95.1
Percentage allocated to common stockholders	91.3		%	91.2		%	100.0		%	100.0		%

The Company's Series A 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 had been distributed. Basic earnings (loss) per common share is computed by dividing the net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Net

Table of Contents

income (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 June 30, 2021, the Company excluded 0.1 million shares issuable under the ESPP and 0.1 million shares of Series A Preferred Stock from the diluted earnings per share calculation as their effect would have been anti-dilutive. The Company also excluded 0.9 million PRSUs from the diluted earnings per share calculation as their performance metrics have not been attained.

For the nine months ended June 30, 2021, the Company excluded 3.1 million RSUs, 0.5 million stock options, 0.1 million shares issuable under the ESPP, 5.6 million Emergence Date Warrants, 12.6 million shares underlying the Convertible Notes 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 June 30, 2020, the Company excluded 2.1 million RSUs, 1.0 million stock options, 0.2 million shares issuable under the ESPP, 5.6 million Emergence Date Warrants, 12.6 million shares underlying the Convertible Notes and 0.1 million shares of Series A Preferred Stock from the diluted earnings per share calculation as their effect would have been anti-dilutive. The Company also excluded 1.0 million PRSUs from the diluted earnings per share calculation as their performance metrics had not yet been attained.

For the nine months ended June 30, 2020, the Company excluded 2.8 million RSUs, 1.0 million stock options, 0.2 million shares issuable under the ESPP, 5.6 million Emergence Date Warrants, 12.6 million shares underlying the Convertible Notes 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 not yet been attained.

The Company's Call Spread Warrants were excluded from the diluted earnings (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-premise, in the cloud, or as a hybrid solution. These integrate multiple forms of communications, including telephony, email, instant messaging and video. The Services segment develops, markets and sells comprehensive end-to-end global service offerings that enable customers to evaluate, plan, design, implement, monitor, manage and optimize complex enterprise communications networks. Revenue from customers who upgrade and acquire new technology through the Company's subscription offerings is reported within the Services segment.

The Company's chief operating decision maker makes financial decisions and allocates resources based on segment profit information obtained from the Company's internal management systems. Management does not include in its segment measures of profitability selling, general and administrative expenses, research and development expenses, amortization of intangible assets, and certain discrete items, such as 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.

Table of Contents

Summarized financial information relating to the Company's operating segments is shown in the following table for the periods indicated:


	Three months ended June 30,				Nine months ended June 30,
(In millions)	2021		2020		2021		2020
REVENUE
Products & Solutions	$	254	$	262	$	746	$	805
Services	478		460		1,468		1,317
Unallocated Amounts (1)	—		(1)		(1)		(4)
	$	732	$	721	$	2,213	$	2,118
GROSS PROFIT
Products & Solutions	$	156	$	159	$	451	$	507
Services	294		282		914		791
Unallocated Amounts (2)	(43)		(44)		(130)		(136)
	407		397		1,235		1,162
OPERATING EXPENSES
Selling, general and administrative	266		232		785		763
Research and development	55		52		167		155
Amortization of intangible assets	40		40		119		122
Impairment of goodwill	—		—		—		624
Restructuring charges, net	5		20		17		27
	366		344		1,088		1,691
OPERATING INCOME (LOSS)	41		53		147		(529)
INTEREST EXPENSE AND OTHER INCOME, NET	(44)		(24)		(158)		(106)
(LOSS) INCOME BEFORE INCOME TAXES	$	(3)	$	29	$	(11)	$	(635)

(1)Unallocated amounts in Revenue represent the fair value adjustment to deferred revenue recognized upon emergence from bankruptcy and excluded from segment revenue.

(2)Unallocated amounts in Gross Profit include the fair value adjustments recognized upon emergence from bankruptcy and the effect of the amortization of technology intangibles which are excluded from segment gross profit.

Table of Contents

18. Accumulated Other Comprehensive Loss

The components of Accumulated other comprehensive loss for the periods indicated were 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 March 31, 2021	$	(62)	$	(31)	$	(50)	$	(143)
Other comprehensive loss before reclassifications	—		(9)		(4)		(13)
Amounts reclassified to earnings	(2)		—		13		11

Balance as of June 30, 2021	$	(64)	$	(40)	$	(41)	$	(145)


(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 before reclassifications	62		6		12		80
Amounts reclassified to earnings	(17)		—		38		21
Provision for income taxes	(1)		—		—		(1)
Balance as of June 30, 2021	$	(64)	$	(40)	$	(41)	$	(145)


(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 March 31, 2020	$	(106)	$	(13)	$	(99)	$	(218)
Other comprehensive loss before reclassifications	—		(11)		(7)		(18)
Amounts reclassified to earnings	—		—		11		11
Balance as of June 30, 2020	$	(106)	$	(24)	$	(95)	$	(225)


(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 loss before reclassifications	—		(44)		(57)		(101)
Amounts reclassified to earnings	—		27		22		49
Balance as of June 30, 2020	$	(106)	$	(24)	$	(95)	$	(225)

Reclassifications from Accumulated other comprehensive loss related to changes in unamortized pension, post-retirement and postemployment benefit-related items are recorded in Other income, net. Reclassifications from Accumulated other comprehensive loss related to the unrealized loss on interest rate swap agreements are recorded in Interest expense. Reclassifications from Accumulated other comprehensive loss related to foreign currency translation reflect the impact of certain liquidated entities and are recorded in Other income, net.

19. Related Party Transactions

The Company's Board of Directors is comprised of eight directors, including the Company's Chief Executive Officer and seven non-employee directors.

Table of Contents

Specific Arrangements Involving the Company's Current Directors and Executive Officers

William D. Watkins is a Director and Chair of the Board of Directors of the Company and serves on the board of directors of Flex Ltd. ("Flex"), an electronics design manufacturer. For the nine months ended June 30, 2021 and 2020, the Company purchased goods and services from subsidiaries of Flex of $11 million and $20 million, respectively, and sales of goods and services to subsidiaries of Flex were not material for either period. As of June 30, 2021 and September 30, 2020, the Company had outstanding accounts payable due to Flex of $4 million and $3 million, respectively. As of June 30, 2021, 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.

Stephan Scholl is a Director of the Company and serves on the board of directors and as Chief Executive Officer of Alight Solutions LLC ("Alight"), a provider of integrated benefits, payroll and cloud solutions. For each of the nine months ended June 30, 2021 and 2020, the Company purchased goods and services from subsidiaries of Alight of $3 million. As of June 30, 2021, outstanding accounts payable due to Alight was not material. As of September 30, 2020, the Company had outstanding accounts payable due to Alight of $1 million.

Scott D. Vogel is a Director of the Company and began serving on the board of directors of iQor, a provider of business process outsourcing solutions, during the first quarter of fiscal 2021. For the nine months ended June 30, 2021, the Company sold goods and services to iQor of $1 million.

20. Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations and proceedings, including but not limited to, those relating to intellectual property, commercial, employment, environmental indemnity and regulatory matters. The Company records accruals for legal contingencies to the extent that it has concluded that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

In the opinion of the Company's management, while the outcome of these matters is uncertain, the likely results of these matters 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. However, an unfavorable resolution could have a material adverse effect on the Company's financial position, results of operations or cash flows in the periods in which the matters are ultimately resolved, or in the periods in which more information is obtained that changes management's opinion of the 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'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. As of both June 30, 2021 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 June 30, 2021, the maximum potential payment obligation with regards to letters of credit, guarantees and surety bonds was $61 million. The outstanding letters of credit are collateralized by restricted cash of $4 million, which is included in Other assets on the Condensed Consolidated Balance Sheet as of June 30, 2021.

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, 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.

Table of Contents

The Company's outsourcing agreements with its most significant contract manufacturers automatically renew in July and September for successive periods of twelve months each, subject to specific termination rights for the Company and the contract manufacturers. All manufacturing of the Company's products is performed in accordance with either detailed requirements or specifications and product designs furnished by the Company and is subject to quality control standards.

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. ("Lucent")) contributed to the Company substantially all of the assets, liabilities and operations associated with its enterprise networking businesses (the "Contributed Businesses") and distributed the Company's stock pro-rata to the shareholders of Lucent ("distribution"). The Contribution and Distribution Agreement, among other things, provides that, in general, the Company will indemnify Nokia for all liabilities including certain pre-distribution tax obligations of Nokia relating to the Contributed Businesses and all contingent liabilities primarily relating to the Contributed 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's and the Company's respective rights, responsibilities and obligations after the distribution with respect to taxes for the periods ending on or before the distribution. Generally, pre-distribution taxes or benefits that are clearly attributable to the business of one party will be borne solely by that party and other pre-distribution taxes or benefits will be shared by the parties based on a formula set forth in the Tax Sharing Agreement. The Company may be subject to additional taxes or benefits pursuant to the Tax Sharing Agreement related to future settlements of audits by state and local and foreign taxing authorities for the periods prior to the Company's separation from Nokia.

Table of Contents


Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations

Unless the context otherwise indicates, as used in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the terms "we," "us," "our," "the Company," "Avaya" and similar terms refer to Avaya Holdings Corp. and its consolidated subsidiaries. "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the unaudited interim Condensed Consolidated Financial Statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our Consolidated Financial Statements and other financial information for the fiscal year ended September 30, 2020, included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020 filed with the Securities and Exchange Commission on November 25, 2020.

Our accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the rules and regulations of the United States Securities and Exchange Commission ("SEC") for interim financial statements. In our opinion, the unaudited interim Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal and recurring adjustments, necessary to state fairly the financial position, results of operations and cash flows for the periods indicated.

The matters discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See "Cautionary Note Regarding Forward-Looking Statements" at the end of this discussion.

Overview

Avaya is a global leader in digital communications products, solutions and services for businesses of all sizes delivering its technology predominantly through software and services. We enable organizations around the globe to succeed by creating intelligent communications experiences for our clients, their employees and their customers. Avaya builds open, converged and innovative solutions to enhance and simplify communications and collaboration in the cloud, on-premise or a hybrid of both. Our global, experienced team of professionals delivers award-winning services from initial planning and design, to seamless implementation and integration, to ongoing managed operations, optimization, training and support.

During fiscal 2020, the Company shifted its entire comprehensive portfolio of capabilities to Avaya OneCloud, which offers significant capabilities across contact center, unified communications and collaboration, and communications platform as a service. Avaya OneCloud provides the full spectrum of cloud and on-premise deployment options. This enables organizations to deploy the Company’s solutions in the way that best serves their business requirements and complements their existing investments, while moving with the speed and agility they require.

The Company also offers one of the broadest portfolios of business devices in the industry, including handsets, video conferencing units and headsets to meet the needs of every type of worker across a customer’s organization and help them get the most out of their communications investments. Avaya IP-enabled handsets, multimedia devices and conferencing systems enhance collaboration and productivity, and position organizations to incorporate future technological advancements.

Our business has two operating segments: Products & Solutions and Services.

Products & Solutions

Products & Solutions encompasses our unified communications and contact center platforms, applications and devices.

The Company's unified communications and collaboration ("UCC") solutions enable organizations to reimagine collaborative work environments and help companies increase employee productivity, improve customer service and reduce costs. With Avaya's UCC solutions, organizations can provide their workers with a single app for all-channel calling, messaging, meetings and team collaboration with the same ease of use they receive from consumer apps. Avaya embeds communications directly into the apps, browsers and devices employees use every day giving them a more natural, efficient and flexible way to connect, engage, respond and share - where and how they want. During fiscal 2020, the Company expanded its UCC portfolio to include cloud-based solutions.

The Company's industry-leading digital contact center ("CC") solutions enable the Company's clients to build a customized portfolio of applications, driving stronger customer engagement and higher customer lifetime value. Our reliable, secure and scalable communications solutions include voice, email, chat, social media, video, performance management and third-party integration that can improve customer service and help companies compete more effectively. Like the UCC business, the Company is evolving CC solutions for cloud deployment and, in fiscal 2020, the Company expanded its CC portfolio to include cloud-based solutions.

Avaya also focuses on ensuring an outstanding experience for mobile callers by integrating transformative technologies, including Artificial Intelligence, mobility, big data analytics and cybersecurity into our CC solutions. As organizations use these solutions to gain a deeper understanding of their customer needs, we believe that their teams become more efficient and effective and, as a result, their customer loyalty grows.

Table of Contents

Services

Services consists of a portfolio of offerings created to help customers achieve better business outcomes, including global support services, enterprise cloud and managed services and professional services. We classify customers who upgrade and acquire new technology through the Company's subscription offerings as part of our Services segment.

The Company's global support services provide offerings that help businesses protect their technology investments and address the risk of system outages. We help our customers gain a competitive edge through proactive problem prevention, rapid issue resolution and continual solution optimization. Most of our global support services revenue is recurring in nature.

Enterprise cloud and managed services enable customers to take advantage of our technology via the cloud, on-premise, or a hybrid of both, depending on the solution and the needs of the customer. Most of our enterprise cloud and managed services revenue is recurring in nature and based on multi-year services contracts.

The Company's professional services enable our customers to take full advantage of their IT and communications solution investments to drive measurable business results. Our experienced consultants and engineers partner with customers at each step of the solution lifecycle to deliver services that add value and drive business transformation. Most of our professional services revenue is one-time in nature.

Together, these comprehensive services enable clients to leverage communications technology to maximize their business results. Our global team of professionals delivers services from initial planning and design, to seamless implementation and integration, to ongoing managed operations, optimization, training and support. We help our customers use communications to minimize the risk of outages, enable employee productivity and deliver a differentiated customer experience.

Our services teams also help our customers transition at their desired pace to next generation communications technology solutions, either via the cloud, on-premise, or a hybrid of both. Customers can select the support levels for their communications solutions best suited for their needs, which may include deployment, training, monitoring, solution management optimization, and more. Our systems and service team's performance monitoring can quickly identify and address issues before they arise. Remote diagnostics and resolutions focus on fixing existing problems and avoiding potential issues in order to help our customers save time and reduce the risk of an outage.

Factors and Trends Affecting Our Results of Operations

There are several trends and uncertainties affecting our business. Most importantly, we are dependent on general economic conditions, the willingness of our customers to invest in technology and the manner in which our customers procure such technology and services.

Industry Trends

As a result of a growing market trend preferring cloud consumption, more customers are exploring subscription and pay-per-use based models, rather than capex 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 proposals 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 reduces our associated maintenance support opportunities. We are evolving 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.

Table of Contents

Coronavirus ("COVID-19") Pandemic

Instability in the geopolitical environment of our customers, instability in the global credit markets and other disruptions, such as the COVID-19 pandemic, have put pressure on the global economy causing uncertainties.

The COVID-19 pandemic, and the responses of governments worldwide to COVID-19, are having a significant impact on regional, national and global economies. The ultimate impact of the COVID-19 pandemic on our business, financial performance and liquidity, including our ability to execute our near-term and long-term business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and severity of the pandemic, the speed with which vaccines can be distributed globally and the emergence of new variants, which are uncertain and cannot be predicted. During fiscal 2020, the Company recognized a significant goodwill impairment charge as a result of the COVID-19 pandemic which is further described in Note 7, “Goodwill, net” in the Company’s Annual Report on Form 10-K filed with the SEC on November 25, 2020.

The health and safety of our employees has been our highest priority throughout the COVID-19 pandemic, and we have implemented several preventative and protective measures, including requiring, to the extent possible, all employees to work remotely, and cancelling conventions and conferences where social distancing would not be possible. We have also implemented business continuity plans and have continued to support our clients primarily by providing our services remotely instead of onsite.

While the pandemic and its effect on the global economy have not materially impacted the Company or its financial condition to date, the Company will continue to evaluate its financial position in light of future developments.

We believe that the current macroeconomic environment has accelerated a developing trend in the way people work, with more employees working remotely, and believe this could increase demand for certain of the Company's products and services.

The Company has maintained its focus on profitability levels and investing in future results and has implemented programs designed to streamline its operations, generate cost savings and eliminate overlapping processes and resources. 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 any future actions could be material.

Table of Contents

Financial Results Summary

The following table displays our consolidated net income (loss) for the three and nine months ended June 30, 2021 and 2020:


	Three months ended June 30,				Nine months ended June 30,
(In millions)	2021		2020		2021		2020
REVENUE
Products	$	254	$	261	$	746	$	804
Services	478		460		1,467		1,314
	732		721		2,213		2,118
COSTS
Products:
Costs	98		103		295		299
Amortization of technology intangible assets	43		43		129		130
Services	184		178		554		527
	325		324		978		956
GROSS PROFIT	407		397		1,235		1,162
OPERATING EXPENSES
Selling, general and administrative	266		232		785		763
Research and development	55		52		167		155
Amortization of intangible assets	40		40		119		122
Impairment of goodwill	—		—		—		624
Restructuring charges, net	5		20		17		27
	366		344		1,088		1,691
OPERATING INCOME (LOSS)	41		53		147		(529)
Interest expense	(54)		(51)		(169)		(162)
Other income, net	10		27		11		56
(LOSS) INCOME BEFORE INCOME TAXES	(3)		29		(11)		(635)
Benefit from (provision for) income taxes	46		(20)		(8)		(82)
NET INCOME (LOSS)	$	43	$	9	$	(19)	$	(717)

Three months ended June 30, 2021 compared with the Three months ended June 30, 2020

Revenue

Revenue for the three months ended June 30, 2021 was $732 million compared to $721 million for the three months ended June 30, 2020. The increase was primarily driven by higher revenue from the Company's subscription offerings; revenue growth from the Company's Avaya Cloud Office offering which launched on March 31, 2020; and the favorable impact of foreign currency exchange rates. The increase was partially offset by lower demand for the Company's on-premise product solutions and higher revenue from the fulfillment of certain obligations related to a new government contract in the prior period.

The following table displays revenue and the percentage of revenue to total sales by operating segment for the periods indicated:


					Percentage of Total Revenue				Yr. to Yr. Percentage Change		Yr. to Yr. Percentage Change, net of Foreign Currency Impact
	Three months ended June 30,				Three months ended June 30,
(In millions)	2021		2020		2021		2020
Products & Solutions	$	254	$	262	35	%	36	%	(3)	%	(5)	%
Services	478		460		65	%	64	%	4	%	1	%
Unallocated amounts	—		(1)		—	%	—	%	(1)		(1)
Total revenue	$	732	$	721	100	%	100	%	2	%	(1)	%

(1)Not meaningful.

Table of Contents

Products & Solutions revenue for the three months ended June 30, 2021 was $254 million compared to $262 million for the three months ended June 30, 2020. The decrease was primarily attributable to lower demand for the Company's on-premise product solutions; and higher revenue from the fulfillment of certain obligations related to a new government contract in the prior period, partially offset by revenue from the Company's Avaya Cloud Office offering; and the favorable impact of foreign currency exchange rates.

Services revenue for the three months ended June 30, 2021 was $478 million compared to $460 million for the three months ended June 30, 2020. The increase was primarily driven by higher revenue from the Company's subscription and OneCloud Private offerings and the favorable impact of foreign currency exchange rates, partially offset by higher revenue from the fulfillment of certain obligations related to a new government contract in the prior period; and planned declines in hardware maintenance and software support services which continue to face headwinds driven by lower new product sales over the past several years.

Unallocated amounts for the three months ended June 30, 2020 represents the fair value adjustment to deferred revenue recognized upon emergence from bankruptcy in December 2017 which is excluded from segment revenue.

The following table displays revenue and the percentage of revenue to total sales by location for the periods indicated:


					Percentage of Total Revenue				Yr. to Yr. Percentage Change		Yr. to Yr. Percentage Change, net of Foreign Currency Impact
	Three months ended June 30,				Three months ended June 30,
(In millions)	2021		2020		2021		2020
U.S.	$	418	$	415	57	%	58	%	1	%	1	%
International:
EMEA	181		178		25	%	25	%	2	%	(4)	%
APAC - Asia Pacific	72		75		10	%	10	%	(4)	%	(8)	%
Americas International - Canada and Latin America	61		53		8	%	7	%	15	%	3	%
Total international	314		306		43	%	42	%	3	%	(3)	%
Total revenue	$	732	$	721	100	%	100	%	2	%	(1)	%

Revenue in the U.S. was $418 million for the three months ended June 30, 2021 compared to $415 million for the three months ended June 30, 2020. U.S. revenue increased as a result of higher revenue from the Company's subscription offerings; revenue growth from the Company's Avaya Cloud Office and OneCloud Private offerings, partially offset by higher revenue from the fulfillment of certain obligations related to a new government contract in the prior period and lower demand for the Company's on-premise product solutions. Revenue in Europe, Middle East and Africa ("EMEA") for the three months ended June 30, 2021 was $181 million compared to $178 million for the three months ended June 30, 2020. The increase in EMEA revenue was mainly driven by higher revenue from the Company's subscription offerings; revenue growth from the Company's Avaya Cloud Office offering; and the favorable impact of foreign currency exchange rates. Revenue in Asia Pacific ("APAC") for the three months ended June 30, 2021 was $72 million compared to $75 million for the three months ended June 30, 2020. The decrease in APAC revenue was primarily attributable to lower demand for the Company's on-premise product solutions, partially offset by higher revenue from the Company's subscription offerings and the favorable impact of foreign currency exchange rates. Revenue in Americas International for the three months ended June 30, 2021 was $61 million compared to $53 million for the three months ended June 30, 2020. The increase in Americas International revenue was primarily driven by higher revenue from the Company's professional services and on-premise product solutions and the favorable impact of foreign currency exchange rates.

Table of Contents

Gross Profit

The following table sets forth gross profit and gross margin by operating segment for the periods indicated:


					Gross Margin				Change
	Three months ended June 30,				Three months ended June 30,
(In millions)	2021		2020		2021		2020		Amount		Percent
Products & Solutions	$	156	$	159	61.4	%	60.7	%	$	(3)	(2)	%
Services	294		282		61.5	%	61.3	%	12		4	%
Unallocated amounts	(43)		(44)		(1)		(1)		1		(1)
Total	$	407	$	397	55.6	%	55.1	%	$	10	3	%

(1)Not meaningful.

Products & Solutions gross profit for the three months ended June 30, 2021 was $156 million compared to $159 million for the three months ended June 30, 2020. The decrease was mainly attributable to the decline in revenue described above. Products & Solutions gross margin increased from 60.7% to 61.4% for the three months ended June 30, 2021 mainly driven by a more favorable product mix.

Services gross profit for the three months ended June 30, 2021 was $294 million compared to $282 million for the three months ended June 30, 2020. The increase was mainly driven by the growth in revenue described above. Services gross margin increased from 61.3% to 61.5% for the three months ended June 30, 2021 due to the favorable impact of higher revenue from the Company's subscription offerings and lower accrued incentive compensation, partially offset by higher third party expenses.

Unallocated amounts for the three months ended June 30, 2021 and 2020 include the amortization of technology intangibles and the fair value adjustments recognized upon emergence from bankruptcy which are excluded from segment gross profit.

Operating Expenses

The following table sets forth operating expenses and the percentage of operating expenses to total revenue for the periods indicated:


					Percentage of Total Revenue				Change
	Three months ended June 30,				Three months ended June 30,
(In millions)	2021		2020		2021		2020		Amount		Percent
Selling, general and administrative	$	266	$	232	36.3	%	32.2	%	$	34	15	%
Research and development	55		52		7.5	%	7.2	%	3		6	%
Amortization of intangible assets	40		40		5.5	%	5.5	%	—		—	%

Restructuring charges, net	5		20		0.7	%	2.8	%	(15)		(75)	%
Total operating expenses	$	366	$	344	50.0	%	47.7	%	$	22	6	%

Selling, general and administrative expenses for the three months ended June 30, 2021 were $266 million compared to $232 million for the three months ended June 30, 2020. The increase was primarily attributable to higher channel compensation; higher share-based compensation expense; and the unfavorable impact of foreign currency exchange rates, partially offset by lower accrued incentive compensation.

Research and development expenses for the three months ended June 30, 2021 were $55 million compared to $52 million for the three months ended June 30, 2020. The increase was primarily attributable to investments in cloud technology development, partially offset by lower accrued incentive compensation.

Amortization of intangible assets were $40 million for each of the three months ended June 30, 2021 and 2020.

Restructuring charges, net were $5 million for the three months ended June 30, 2021 compared to $20 million for the three months ended June 30, 2020. Restructuring charges during the three months ended June 30, 2021 consisted of $1 million for facility exit costs and $4 million for employee separation actions primarily in the U.S. and EMEA. Restructuring charges for the three months ended June 30, 2020 consisted of $15 million for facility exit costs primarily in the U.S. and $5 million for employee separation actions in EMEA.

Table of Contents

Operating Income

Operating income for the three months ended June 30, 2021 was $41 million compared to operating income of $53 million for the three months ended June 30, 2020. Our operating results for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 reflect, among other things:

•higher revenue and gross profit for the three months ended June 30, 2021;

•higher selling, general and administrative costs for the three months ended June 30, 2021; and

•lower net restructuring charges for the three months ended June 30, 2021.

Interest Expense

Interest expense for the three months ended June 30, 2021 was $54 million compared to $51 million for the three months ended June 30, 2020. The increase was mainly driven by higher average interest rates primarily attributable to changes in the Company's debt portfolio which occurred in September 2020, partially offset by the impact of lower average principal amounts outstanding during the three months ended June 30, 2021.

Other Income, Net

Other income, net for the three months ended June 30, 2021 was $10 million compared to $27 million for the three months ended June 30, 2020. The decrease was mainly driven by gains on the sale of RingCentral shares during the three months ended June 30, 2020, all of which were sold by June 30, 2020, partially offset by the net impact of foreign currency gains (losses).

Benefit from (Provision for) Income Taxes

The benefit from income taxes was $46 million for the three months ended June 30, 2021 compared to a provision for income taxes of $20 million for the three months ended June 30, 2020.

The Company's effective income tax rate for the three months ended June 30, 2021 differed from the U.S. federal tax rate by 1,512% or $45 million principally related to nondeductible expenses, including expenses related to the change in fair value of the Emergence Date Warrants, and deferred taxes (including losses) for which no benefit was recorded because it is more likely than not that the tax benefits would not be realized.

The Company's effective income tax rate for the three months ended June 30, 2020 differed from the U.S. federal tax rate by 48% or $14 million principally related to deferred taxes (including losses) for which no benefit was recorded because it is more likely than not that the tax benefits would not be realized.

Net Income

Net income was $43 million for the three months ended June 30, 2021 compared to net income of $9 million for the three months ended June 30, 2020, as a result of the items discussed above.

Nine months ended June 30, 2021 compared with the Nine months ended June 30, 2020

Revenue

Revenue for the nine months ended June 30, 2021 was $2,213 million compared to $2,118 million for the nine months ended June 30, 2020. The increase was primarily driven by higher revenue from the Company's subscription offerings; revenue growth from the Company's Avaya Cloud Office offering which launched on March 31, 2020; revenue from the fulfillment of certain obligations related to a new government contract; and the favorable impact of foreign currency exchange rates. The increase was partially offset by lower demand for the Company's on-premise product solutions.

The following table displays revenue and the percentage of revenue to total sales by operating segment for the periods indicated:


					Percentage of Total Revenue				Yr. to Yr. Percentage Change		Yr. to Yr. Percentage Change, net of Foreign Currency Impact
	Nine months ended June 30,				Nine months ended June 30,
(In millions)	2021		2020		2021		2020
Products & Solutions	$	746	$	805	34	%	38	%	(7)	%	(9)	%
Services	1,468		1,317		66	%	62	%	11	%	10	%
Unallocated amounts	(1)		(4)		—	%	—	%	(1)		(1)
Total revenue	$	2,213	$	2,118	100	%	100	%	4	%	3	%

(1)Not meaningful.

Table of Contents

Products & Solutions revenue for the nine months ended June 30, 2021 was $746 million compared to $805 million for the nine months ended June 30, 2020. The decrease was primarily attributable to lower demand for the Company's on-premise product solutions, partially offset by revenue from the Company's Avaya Cloud Office offering which launched on March 31, 2020; and the favorable impact of foreign currency exchange rates.

Services revenue for the nine months ended June 30, 2021 was $1,468 million compared to $1,317 million for the nine months ended June 30, 2020. The increase was primarily driven by higher revenue from the Company's subscription and OneCloud Private offerings; revenue from the fulfillment of certain obligations related to a new government contract; and the favorable impact of foreign currency exchange rates, partially offset by the planned declines in hardware maintenance and software support services which continue to face headwinds driven by lower new product sales over the past several years.

Unallocated amounts for the nine months ended June 30, 2021 and 2020 represent the fair value adjustment to deferred revenue recognized upon emergence from bankruptcy in December 2017 which is excluded from segment revenue.

The following table displays revenue and the percentage of revenue to total sales by location for the periods indicated:


					Percentage of Total Revenue				Yr. to Yr. Percentage Change		Yr. to Yr. Percentage Change, net of Foreign Currency Impact
	Nine months ended June 30,				Nine months ended June 30,
(In millions)	2021		2020		2021		2020
U.S.	$	1,245	$	1,193	56	%	56	%	4	%	4	%
International:
EMEA	563		536		26	%	25	%	5	%	1	%
APAC - Asia Pacific	224		222		10	%	11	%	1	%	(2)	%
Americas International - Canada and Latin America	181		167		8	%	8	%	8	%	5	%
Total international	968		925		44	%	44	%	5	%	1	%
Total revenue	$	2,213	$	2,118	100	%	100	%	4	%	3	%

Revenue in the U.S. was $1,245 million for the nine months ended June 30, 2021 compared to $1,193 million for nine months ended June 30, 2020. The increase in U.S. revenue was mainly driven by higher revenue from the Company's subscription and OneCloud Private offerings; revenue from the fulfillment of certain obligations related to a new government contract; and revenue growth from the Company's Avaya Cloud Office offering which launched on March 31, 2020, partially offset by lower demand for the Company's on-premise product solutions. Revenue in EMEA for the nine months ended June 30, 2021 was $563 million compared to $536 million for the nine months ended June 30, 2020. The increase in EMEA revenue was mainly driven by higher revenue from the Company's subscription offerings; revenue growth from the Company's Avaya Cloud Office offering; and the favorable impact of foreign currency exchange rates, partially offset by lower demand for the Company's on-premise product solutions. Revenue in APAC for the nine months ended June 30, 2021 was $224 million compared to $222 million for the nine months ended June 30, 2020. The increase in APAC revenue was primarily attributable to higher revenue from the Company's subscription offerings; revenue growth from the Company's Avaya Cloud Office offering; and the favorable impact of foreign currency exchange rates, partially offset by lower demand for the Company's on-premise product solutions. Revenue in Americas International for the nine months ended June 30, 2021 was $181 million compared to $167 million for the nine months ended June 30, 2020. The increase in Americas International revenue was primarily driven by higher revenue from the Company's subscription offerings; higher revenue from the Company's professional services; and the favorable impact of foreign currency exchange rates.

Gross Profit

The following table sets forth gross profit and gross margin by operating segment for the periods indicated:


					Gross Margin				Change
	Nine months ended June 30,				Nine months ended June 30,
(In millions)	2021		2020		2021		2020		Amount		Percent
Products & Solutions	$	451	$	507	60.5	%	63.0	%	$	(56)	(11)	%
Services	914		791		62.3	%	60.1	%	123		15	%
Unallocated amounts	(130)		(136)		(1)		(1)		6		(1)
Total	$	1,235	$	1,162	55.8	%	54.9	%	$	73	6	%

(1)Not meaningful.

Table of Contents

Products & Solutions gross profit for the nine months ended June 30, 2021 was $451 million compared to $507 million for the nine months ended June 30, 2020. The decrease was mainly attributable to the decline in revenue described above. Products & Solutions gross margin decreased from 63.0% to 60.5% for the nine months ended June 30, 2021 mainly driven by a less favorable product mix.

Services gross profit for the nine months ended June 30, 2021 was $914 million compared to $791 million for the nine months ended June 30, 2020. The increase was mainly driven by the growth in revenue described above. Services gross margin increased from 60.1% to 62.3% for the nine months ended June 30, 2021 due to the favorable impact of higher revenue from the Company's subscription offerings.

Unallocated amounts for the nine months ended June 30, 2021 and 2020 include the amortization of technology intangibles and the fair value adjustments recognized upon emergence from bankruptcy which are excluded from segment gross profit.

Operating Expenses

The following table sets forth operating expenses and the percentage of operating expenses to total revenue for the periods indicated:


					Percentage of Total Revenue				Change
	Nine months ended June 30,				Nine months ended June 30,
(In millions)	2021		2020		2021		2020		Amount		Percent
Selling, general and administrative	$	785	$	763	35.5	%	36.0	%	$	22	3	%
Research and development	167		155		7.5	%	7.3	%	12		8	%
Amortization of intangible assets	119		122		5.4	%	5.8	%	(3)		(2)	%
Impairment of goodwill	—		624		—	%	29.5	%	(624)		(100)	%
Restructuring charges, net	17		27		0.8	%	1.3	%	(10)		(37)	%
Total operating expenses	$	1,088	$	1,691	49.2	%	79.9	%	$	(603)	(36)	%

Selling, general and administrative expenses for the nine months ended June 30, 2021 were $785 million compared to $763 million for the nine months ended June 30, 2020. The increase was primarily attributable to higher channel compensation; higher share-based compensation expense; and the unfavorable impact of foreign currency exchange rates, partially offset by higher advisory fees incurred in the prior period associated with executing the strategic partnership with RingCentral; lower accrued incentive compensation; lower bad debt expense; and lower travel costs as a result of the COVID-19 pandemic.

Research and development expenses for the nine months ended June 30, 2021 were $167 million compared to $155 million for the nine months ended June 30, 2020. The increase was primarily attributable to investments in cloud technology development.

Amortization of intangible assets for the nine months ended June 30, 2021 were $119 million compared to $122 million for the nine months ended June 30, 2020.

Impairment of goodwill for the nine months ended June 30, 2020 was $624 million. During the nine months ended June 30, 2020, the Company performed an interim impairment test of its goodwill and indefinite-lived intangible assets due to (i) the impact of the COVID-19 pandemic on the macroeconomic environment which led to revisions to the Company's long-term forecast during the second quarter of fiscal 2020 and (ii) the sustained decrease in the Company's stock price at the beginning stages of the pandemic which was caused by the resulting volatility in the financial markets. The results of the Company’s interim goodwill impairment test indicated that the estimated fair value of the Company’s Services reporting unit exceeded its carrying amount. The carrying amount of the Company's Products & Solutions reporting unit exceeded its estimated fair value primarily due to a reduction in the Company’s long-term forecast to reflect increased risk from higher market uncertainty and the accelerated reduction of product sales related to the Company’s historical on-premises perpetual licenses with a continued shift and acceleration of customers upgrading and acquiring new technology innovation through the utilization of the Company’s subscription offering, which is included in the Services reporting unit. As a result, the Company recorded a goodwill impairment charge of $624 million to write down the full carrying amount of the Products & Solutions goodwill. The results of the indefinite-lived intangible asset impairment test indicated that no impairment existed. To the extent business conditions deteriorate or if changes in key assumptions and estimates differ significantly from management's expectations included in the long-term forecast, it may be necessary to record additional impairment charges in the future.

Restructuring charges, net were $17 million for the nine months ended June 30, 2021 compared to $27 million for the nine months ended June 30, 2020. Restructuring charges during the nine months ended June 30, 2021 consisted of $11 million for facility exit costs and $6 million for employee separation actions in the U.S. and EMEA. Restructuring charges for the nine

Table of Contents

months ended June 30, 2020 consisted of $21 million for facility exit costs primarily in the U.S. and $6 million for employee separation actions in EMEA.

Operating Income (Loss)

Operating income for the nine months ended June 30, 2021 was $147 million compared to an operating loss of $529 million for the nine months ended June 30, 2020. Our operating results for the nine months ended June 30, 2021 as compared to the nine months ended June 30, 2020 reflect, among other things:

•higher revenue and gross profit for the nine months ended June 30, 2021;

•higher selling, general and administrative and research and development costs for the nine months ended June 30, 2021;

•lower net restructuring charges for the nine months ended June 30, 2021; and

•a $624 million goodwill impairment charge during the nine months ended June 30, 2020, with no comparable charge for the nine months ended June 30, 2021.

Interest Expense

Interest expense for the nine months ended June 30, 2021 was $169 million compared to $162 million for the nine months ended June 30, 2020. The increase was mainly driven by higher average interest rates primarily attributable to changes in the Company's debt portfolio which occurred in September 2020 and new debt issuance costs incurred as a result of the Company's Term Loan amendment described in the "Liquidity and Capital Resources" section below, partially offset by the impact of lower average principal amounts outstanding during the nine months ended June 30, 2021.

Other Income, Net

Other income, net for the nine months ended June 30, 2021 was $11 million compared to $56 million for the nine months ended June 30, 2020. The decrease was mainly driven by gains on the sale of RingCentral shares during the nine months ended June 30, 2020, all of which were sold by June 30, 2020; and the change in fair value of the Emergence Date Warrants, partially offset by a non-cash settlement gain recorded during the nine months ended June 30, 2021 related to the Company's other post-retirement plan; and the net impact of foreign currency gains (losses).

Provision for Income Taxes

The provision for income taxes was $8 million for the nine months ended June 30, 2021 compared to a provision for income taxes of $82 million for the nine months ended June 30, 2020.

The Company's effective income tax rate for the nine months ended June 30, 2021 differed from the U.S. federal tax rate by 94% or $10 million principally related to nondeductible expenses, including expenses related to the change in fair value of the Emergence Date Warrants, and deferred taxes (including losses) for which no benefit was recorded because it is more likely than not that the tax benefits would not be realized.

The Company's effective income tax rate for the nine months ended June 30, 2020 differed from the U.S. federal tax rate by 34% or $215 million principally related to the goodwill impairment charge recorded in the second quarter of fiscal 2020 and deferred taxes (including losses) for which no benefit was recorded because it is more likely than not that the tax benefits would not be realized.

Net Loss

Net loss was $19 million for the nine months ended June 30, 2021 compared to a net loss of $717 million for the nine months ended June 30, 2020, as a result of the items discussed above.

Liquidity and Capital Resources

We expect our existing cash balance, cash generated by operations and borrowings available under our ABL Credit Agreement to be our primary sources of short-term liquidity. Our ability to meet our cash requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, as well as our current estimates of the impact that the COVID-19 pandemic will have on our business and cash flow, we believe these sources will be adequate to meet our liquidity needs for at least the next twelve months.

Table of Contents

Cash Flow Activity

The following table provides a summary of the statements of cash flows for the periods indicated:


	Nine months ended June 30,
(In millions)	2021		2020
Net cash provided by (used for):
Operating activities	$	35	$	77
Investing activities	(78)		340
Financing activities	(126)		(425)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	4		(2)
Net decrease in cash, cash equivalents, and restricted cash	(165)		(10)
Cash, cash equivalents, and restricted cash at beginning of period	731		756
Cash, cash equivalents, and restricted cash at end of period	$	566	$	746

Operating Activities

Cash provided by operating activities for the nine months ended June 30, 2021 and 2020 was $35 million and $77 million, respectively. The decrease was primarily due to higher incentive compensation payments; the timing of customer cash payments as the Company continues its rapid transition to a cloud and subscription model; and higher contributions to the Company's pension and post-retirement benefit plans, partially offset by higher advisory fees incurred in the prior year period associated with executing the strategic partnership with RingCentral; the timing of vendor payments; higher cash earnings; lower income tax payments; and lower interest payments.

Investing Activities

Cash used for investing activities for the nine months ended June 30, 2021 was $78 million compared to cash provided by investing activities of $340 million for the nine months ended June 30, 2020. The change was primarily due to proceeds in the prior year period from the sale of shares of RingCentral common stock, which were received by the Company upon entry into the strategic partnership in October 2019, partially offset by an increase in capital expenditures.

Financing Activities

Cash used for financing activities for the nine months ended June 30, 2021 and 2020 was $126 million and $425 million, respectively. The decrease was primarily due to lower repurchases of shares of common stock under the Company's share repurchase program; lower principal prepayments under the Term Loan Credit Agreement; and higher proceeds from the Employee Stock Purchase Plan and exercise of stock options, partially offset by proceeds from issuance of Series A Preferred Stock to RingCentral upon entry into the strategic partnership in the prior period and borrowings under the ABL Credit Agreement in the prior period with no comparable borrowings in the current period.

Term Loan Credit Agreement

On February 24, 2021, the Company amended the Term Loan Credit Agreement, pursuant to which the Company prepaid, replaced and refinanced all first lien term loans due December 2024 outstanding under the Term Loan Credit Agreement with $100 million in cash and $743 million in principal amount of new first lien term loans due December 2027. See Note 9, “Financing Arrangements,” to our unaudited interim Condensed Consolidated Financial Statements for additional information regarding the Company’s Term Loan Credit Agreement refinancing.

As of June 30, 2021, the Company was in compliance with all covenants and other requirements under its debt agreements.

Future Cash Requirements

Our primary future cash requirements will be to fund operations, debt service, capital expenditures, benefit obligations and restructuring payments. In addition, we may use cash in the future to make strategic acquisitions.

Specifically, we expect our primary cash requirements for the remainder of fiscal 2021 to be as follows:

•Debt service—We expect to make payments of approximately $60 million during the remainder of fiscal 2021 in interest associated with the Term Loan Credit Agreement, Senior Notes and Convertible Notes, and interest and fees associated with our ABL Credit Agreement. In the ordinary course of business, we may from time to time borrow and repay amounts under our ABL Credit Agreement.

•Capital expenditures—We expect to spend approximately $30 million for capital expenditures during the remainder of fiscal 2021.

Table of Contents

•Benefit obligations—We estimate we will make payments under our pension and post-retirement benefit obligations of approximately $8 million during the remainder of fiscal 2021. These payments include $5 million for our non-U.S. benefit plans, which are predominantly not pre-funded; and $3 million for salaried and represented retiree post-retirement benefits. As a result of the American Rescue Plan Act, we do not expect to make any contributions to satisfy the minimum statutory funding requirements of our U.S. qualified pension plans during the remainder of fiscal 2021. See discussion in Note 13, "Benefit Obligations," to our unaudited interim Condensed Consolidated Financial Statements for further details.

•Restructuring payments—We expect to make payments of approximately $5 million to $10 million during the remainder of fiscal 2021 for employee separation costs and lease termination obligations associated with restructuring actions. The Company continues to evaluate opportunities to streamline its operations and identify additional cost savings globally.

In addition to the matters identified above, in the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations and proceedings, relating to intellectual property, commercial, employment, environmental and regulatory matters, which may require us to make cash payments. In the opinion of the Company's management, while the outcome of these matters is uncertain, the likely results of these matters are not expected, either individually or in the aggregate, to have a material adverse effect on the Company's financial position, results of operations or cash flows.

We and our subsidiaries and affiliates may from time to time seek to repurchase or prepay our outstanding equity (common stock and warrants) and/or debt (including our Term Loans, Senior Notes and Convertible Notes) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, tender offers, redemptions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors.

Future Sources of Liquidity

We expect our cash balance, cash generated by operations and borrowings available under our ABL Credit Agreement to be our primary sources of short-term liquidity.

As of June 30, 2021 and September 30, 2020, our cash and cash equivalent balances held outside the U.S. were $269 million and $227 million, respectively. As of June 30, 2021, the Company's cash and cash equivalents held outside the U.S. are not expected to be needed to be repatriated to fund the Company's operations in the U.S. based on our expected future sources of liquidity.

Under the terms of the ABL Credit Agreement, the Company can issue letters of credit up to $150 million. At June 30, 2021, the Company had issued and outstanding letters of credit and guarantees of $39 million under the ABL Credit Agreement and had no borrowings outstanding. The aggregate additional principal amount that may be borrowed under the ABL Credit Agreement, based on the borrowing base less $39 million of outstanding letters of credit and guarantees, was $100 million at June 30, 2021.

We believe that our existing cash and cash equivalents of $562 million as of June 30, 2021, expected future cash provided by operating activities and borrowings available under the ABL Credit Agreement will be sufficient to meet our future cash requirements for at least the next twelve months from the filing of this quarterly report on Form 10-Q. Our ability to meet these requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We also believe that our financial resources, along with appropriate management of discretionary expenses, will allow us to manage the anticipated impact of COVID-19 on our business operations, and specifically our liquidity, for the foreseeable future. However, the challenges posed by COVID-19 on our business constantly and rapidly evolve and could result in the need for additional liquidity. Consequently, we will continue to evaluate our financial position in light of future developments.

Off-Balance Sheet Arrangements

See discussion in Note 20, "Commitments and Contingencies," to our unaudited interim Condensed Consolidated Financial Statements for further details.

Debt Ratings

Our ability to obtain additional external financing and the related cost of borrowing may be affected by our ratings, which are periodically reviewed by the major credit rating agencies. The ratings are subject to change or withdrawal at any time by the respective credit rating agencies.

On June 2, 2021, Standard and Poor's upgraded both the Company's definitive corporate credit rating and the rating applicable to the Company's Senior Notes and the Term Loan Credit Agreement from "B" to "B+" with a stable outlook.

Table of Contents

As of June 30, 2021, Moody's Investors Service issued a corporate family rating of "B2" with a stable outlook and a rating of "B2" applicable to the Senior Notes and the Term Loan Credit Agreement.

On July 23, 2021, Fitch Ratings Inc. (“Fitch”) upgraded the rating applicable to the Company's Senior Notes and the Term Loan Credit Agreement from "BB-" to "BB." Fitch also affirmed the Company’s definitive corporate credit rating of “B” and upgraded the outlook from stable to positive.

Critical Accounting Policies and Estimates

Management has reassessed the critical accounting policies and estimates disclosed in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 25, 2020 and determined that there were no significant changes to our critical accounting policies and estimates during the nine months ended June 30, 2021, except for the recently adopted accounting policy changes discussed in Note 2, "Recent Accounting Pronouncements," to our unaudited interim Condensed Consolidated Financial Statements.

New Accounting Pronouncements

See discussion in Note 2, "Recent Accounting Pronouncements," to our unaudited interim Condensed Consolidated Financial Statements for further details.

EBITDA and Adjusted EBITDA

We present below the Company's EBITDA and Adjusted EBITDA, each of which is a non-GAAP measure.

EBITDA is defined as net income (loss) before income taxes, interest expense, interest income and depreciation and amortization and excludes the results of discontinued operations. EBITDA provides us with a measure of operating performance that excludes certain non-operating and/or non-cash expenses, which can differ significantly from company to company depending on capital structure, the tax jurisdictions in which companies operate and capital investments.

Adjusted EBITDA is EBITDA as further adjusted by the items noted in the reconciliation table below. We believe Adjusted EBITDA provides a measure of our financial performance based on operational factors that management can impact in the short-term, such as our pricing strategies, volume, costs and expenses of the organization, and therefore presents our financial performance in a way that can be more easily compared to prior quarters or fiscal years. In addition, Adjusted EBITDA serves as a basis for determining certain management and employee compensation. We also present EBITDA and Adjusted EBITDA because we believe analysts and investors utilize these measures in analyzing our results. Under the Company's debt agreements, the ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied in part to ratios based on a measure of Adjusted EBITDA.

EBITDA and Adjusted EBITDA have limitations as analytical tools. EBITDA measures do not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. While EBITDA measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Further, Adjusted EBITDA excludes the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations that still affect our net income (loss). In particular, our formulation of Adjusted EBITDA adjusts for certain amounts that are included in calculating net income (loss) as set forth in the following table including, but not limited to, restructuring charges, impairment charges, resolution of certain legal matters and a portion of our pension costs and post-retirement benefits costs, which represents the amortization of prior service costs (credits) and actuarial (gains) losses associated with these benefits. However, these are expenses that may recur, may vary and/or may be difficult to predict.

Table of Contents

The reconciliation of net income (loss), which is a GAAP measure, to EBITDA and Adjusted EBITDA, which are non-GAAP measures, is presented below for the periods indicated:


	Three months ended June 30,				Nine months ended June 30,
(In millions)	2021		2020		2021		2020
Net income (loss)	$	43	$	9	$	(19)	$	(717)
Interest expense	54		51		169		162
Interest income	—		(1)		(1)		(6)
(Benefit from) provision for income taxes	(46)		20		8		82
Depreciation and amortization	105		107		314		319
EBITDA	156		186		471		(160)
Impact of fresh start accounting adjustments(a)	1		1		2		—
Restructuring charges(b)	5		14		15		18
Advisory fees(c)	—		—		—		40
Acquisition-related costs	2		—		2		—
Share-based compensation	14		7		41		21
Impairment of goodwill	—		—		—		624
Pension and post-retirement benefit costs	(1)		—		(1)		—
Gain on post-retirement plan settlement	—		—		(14)		—
Change in fair value of Emergence Date Warrants	—		3		27		—
(Gain) loss on foreign currency transactions	(4)		5		(3)		16
Gain on investments in equity and debt securities, net(d)	—		(29)		—		(49)
Adjusted EBITDA	$	173	$	187	$	540	$	510

(a)The impact of fresh start accounting adjustments in connection with the Company's emergence from bankruptcy.

(b)Restructuring charges represent employee separation costs and facility exit costs (excluding the impact of accelerated depreciation expense) related to the Company's restructuring programs, net of sublease income.

(c)Advisory fees represent costs incurred to assist in the assessment of strategic and financial alternatives to improve the Company's capital structure.

(d)Realized and unrealized gains on investments in equity securities, net of impairment of investments in debt securities.

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q, including statements containing words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "model," "can," "could," "may," "should," "will," "would" or similar words or the negative thereof, constitute "forward-looking statements." These forward-looking statements, which are based on our current plans, expectations, estimates and projections about future events, should not be unduly relied upon. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance and achievements to materially differ from any future results, performance and achievements expressed or implied by such forward-looking statements. We caution you therefore against relying on any of these forward-looking statements.

The forward-looking statements included herein are based upon our assumptions, estimates and beliefs and involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements and may be affected by a variety of risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Risks, uncertainties and other factors that may cause these forward-looking statements to be inaccurate include, among others: the risks and factors discussed in Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and our Quarterly Report filed with the SEC on February 9, 2021, as well as Part I, Item 1A "Risk Factors" and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K filed with the SEC on November 25, 2020.

All forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and the risk that actual results will differ materially from the expectations expressed in this Quarterly Report will increase with the passage of time. Except as otherwise required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements after the date of this Quarterly Report, whether as a result of new information, future events, changed circumstances or any other reason. In light of the significant uncertainties inherent in the forward-looking statements included in this Quarterly Report, the inclusion of such forward-looking statements should not be regarded as a representation by us or any other person that the objectives and plans set forth in this Quarterly Report will be achieved.


Item 3.			Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The Company has exposure to changing interest rates primarily under the Term Loan Credit Agreement and ABL Credit Agreement, each of which bears interest at variable rates based on LIBOR. As of June 30, 2021, the Company had interest rate swap agreements, which mature on December 15, 2022, to pay a fixed rate of 2.935% on its $1,543 million of variable rate loans outstanding (the "Swap Agreements").

The Company maintains additional interest rate swap agreements to fix a portion of the variable rate interest due on its Term Loan Credit Agreement (the "Forward Swap Agreements") from December 15, 2022 (the maturity date of the 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 Forward Swap Agreements have a total notional amount of $1,400 million.

It is management's intention that the net notional amount of interest rate swap agreements be less than or equal to the variable rate loans outstanding during the life of the derivatives. For the three months ended June 30, 2021 and 2020, the Company recognized a loss on the Swap Agreements of $13 million and $11 million, respectively, which is reflected in Interest expense in the Condensed Consolidated Statements of Operations. For the nine months ended June 30, 2021 and 2020, the Company recognized a loss on the Swap Agreements of $38 million and $22 million, respectively, which is also reflected in Interest expense. At June 30, 2021, the Company maintained a $41 million deferred loss on its interest rate swap agreements designated as highly effective cash flow hedges within Accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets.

See Note 10, “Derivative Instruments and Hedging Activities,” to our Condensed Consolidated Financial Statements included in Part I, Item I of this quarterly report on Form 10-Q for additional information related to the Company’s interest rate swap agreements.

Foreign Currency Risk

Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of our non-U.S. ("foreign") operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Each foreign operation may conduct business in its local currency, as well

Table of Contents

as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are Euros, Canadian Dollars, British Pound Sterling, Chinese Renminbi, Australian Dollars and Indian Rupee.

Non-U.S. denominated revenue was $155 million and $498 million for the three and nine months ended June 30, 2021, respectively. We estimate a 10% change in the value of the U.S. dollar relative to all foreign currencies would have affected our revenue for the three and nine months ended June 30, 2021 by $16 million and $50 million, respectively.

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 underlying assets and liabilities. As of June 30, 2021, the Company maintained open foreign exchange contracts with a total notional value of $173 million, hedging the British Pound Sterling, Mexican Peso, Czech Koruna and Indian Rupee. At June 30, 2021, the fair value of open foreign exchange contracts was an unrealized loss of $1 million which is recorded in Other current liabilities in the Condensed Consolidated Balance Sheet. For the three months ended June 30, 2021, the Company's gain on foreign exchange contracts was $1 million and was recorded within Other income, net in the Condensed Consolidated Statement of Operations. For the three months ended June 30, 2020, the Company's loss on foreign exchange contracts was not material. For the nine months ended June 30, 2021 and 2020, the Company's gain (loss) on foreign exchange contracts was $7 million and $(3) million, respectively, which was also recorded within Other income, net.


Item 4.			Controls and Procedures

Disclosure Controls and Procedures

As of June 30, 2021, the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Chief Financial Officer, that evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2021 to provide reasonable assurance that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION


Item 1.			Legal Proceedings

The information set forth under Note 20, "Commitments and Contingencies," to the unaudited interim Condensed Consolidated Financial Statements is incorporated herein by reference.


Item 1A.			Risk Factors

There have been no material changes during the quarterly period ended June 30, 2021 to the risk factors previously disclosed in the Company's Form 10-K for the year ended September 30, 2020 and Form 10-Q for the quarter ended December 31, 2020 filed with the Securities and Exchange Commission on November 25, 2020 and February 9, 2021, respectively.


Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer

The following table provides information with respect to purchases by the Company of shares of common stock during the three months ended June 30, 2021:


Period	Total Number of Shares (or Units) Purchased(1)	Average Price Paid per Share (or Unit) (4)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under Plans or Programs(2)(3)
April 1 - 30, 2021	88,359	$	29.2644	87,510	$	175,157,617
May 1 - 31, 2021	245,180	$	26.9791	164,324	$	170,677,476
June 1 - 30, 2021	296,622	$	27.6583	296,622	$	162,473,422
Total	630,161	$	27.6192	548,456

(1)April and May 2021 include 849 and 80,856 shares of common stock withheld for taxes on restricted stock units that vested, respectively.

(2)The Company maintains a warrant repurchase program authorizing it to repurchase the Company's outstanding warrants to purchase shares of the Company's common stock 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.

(3)The Company maintains a share repurchase program authorizing it to repurchase the Company's common stock for an aggregate expenditure of up to $500 million. The repurchases may be made from time to time in the open market, through block trades or in privately negotiated transactions. Share repurchases presented in the table above are based on the transaction settlement date.

(4)Average price paid per share includes transaction costs associated with the repurchases.


Item 3.			Defaults Upon Senior Securities

None.


Item 4.			Mine Safety Disclosures

Not applicable.


Item 5.			Other Information

None.

Table of Contents


Item 6.			Exhibits


Exhibit Number						Exhibit Description
3.1						Second Amended and Restated Bylaws of Avaya Holdings Corp., effective May 12, 2021, incorporated herein by reference to Exhibit 3.1 in the Company's Form 8-K filed on May 13, 2021
31.1						Certification of James M. Chirico, Jr. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2						Certification of Kieran J. McGrath pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1						Certification of James M. Chirico, Jr. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2						Certification of Kieran J. McGrath pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS						XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH						XBRL Taxonomy Extension Schema
101.CAL						XBRL Taxonomy Extension Calculation Linkbase
101.DEF						XBRL Taxonomy Extension Definition Linkbase
101.LAB						XBRL Taxonomy Extension Labels Linkbase
101.PRE						XBRL Taxonomy Extension Presentation Linkbase
104						Cover Page Interactive Data File (formatted as Inline XBRL in Exhibit 101)

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


			AVAYA HOLDINGS CORP.

			By:			/s/ KEVIN SPEED
			Name:			Kevin Speed
			Title:			Global Vice President, Controller and Chief Accounting Officer

August 9, 2021