0001418100-19-000057.txt : 20190513 0001418100-19-000057.hdr.sgml : 20190513 20190513162724 ACCESSION NUMBER: 0001418100-19-000057 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 95 CONFORMED PERIOD OF REPORT: 20190331 FILED AS OF DATE: 20190513 DATE AS OF CHANGE: 20190513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Avaya Holdings Corp. CENTRAL INDEX KEY: 0001418100 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38289 FILM NUMBER: 19818720 BUSINESS ADDRESS: STREET 1: co Avaya Inc STREET 2: 4655 GREAT AMERICA PARKWAY CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: (908) 953-6000 MAIL ADDRESS: STREET 1: co Avaya Inc STREET 2: 4655 GREAT AMERICA PARKWAY CITY: SANTA CLARA STATE: CA ZIP: 95054 FORMER COMPANY: FORMER CONFORMED NAME: Sierra Holdings Corp DATE OF NAME CHANGE: 20071109 10-Q 1 avaya3-31x201910xq.htm 10-Q Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
 
 
 
FORM 10-Q
 
 
 
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38289
 
 
 
 
 
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.)
 
 
4655 Great America Parkway
Santa Clara, California
 
95054
(Address of Principal executive offices)
 
(Zip Code)
(908) 953-6000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    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  ý    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 x
 
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  ý
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  ý    No  ¨
As of April 30, 2019, 110,858,478 shares of Common Stock, $.01 par value, of the registrant were outstanding.
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbols(s)
Name of each exchange on which registered
Common Stock
AVYA
New York Stock Exchange ("NYSE")
 
 
 
 
 



TABLE OF CONTENTS 
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.
 





PART I—FINANCIAL INFORMATION

Item 1.
Financial Statements.
Avaya Holdings Corp.
Condensed Consolidated Statements of Operations (Unaudited)
(In millions, except per share amounts)
 
 
 
Successor
 
 
Predecessor
 
 
Three months ended
March 31, 2019
 
Three months ended
March 31, 2018
 
Six months ended
March 31, 2019
 
Period from December 16, 2017
through
March 31, 2018
 
 
Period from
October 1, 2017
through
December 15, 2017
REVENUE
 
 
 
 
 
 
 
 
 
 
 
Products
 
$
287

 
$
293

 
$
611

 
$
364

 
 
$
253

Services
 
422

 
379

 
836

 
456

 
 
351

 
 
709

 
672

 
1,447

 
820

 
 
604

COSTS
 
 
 
 
 
 
 
 
 
 
 
Products:
 
 
 
 
 
 
 
 
 
 
 
Costs
 
105

 
110

 
220

 
143

 
 
84

Amortization of technology intangible assets
 
44

 
41

 
87

 
48

 
 
3

Services
 
174

 
198

 
347

 
228

 
 
155

 
 
323

 
349

 
654

 
419

 
 
242

GROSS PROFIT
 
386

 
323

 
793

 
401

 
 
362

OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
251

 
282

 
508

 
332

 
 
264

Research and development
 
52

 
50

 
105

 
59

 
 
38

Amortization of intangible assets
 
41

 
40

 
81

 
47

 
 
10

Restructuring charges, net
 
4

 
40

 
11

 
50

 
 
14

 
 
348

 
412

 
705

 
488

 
 
326

OPERATING INCOME (LOSS)
 
38

 
(89
)
 
88

 
(87
)
 
 
36

Interest expense
 
(58
)
 
(47
)
 
(118
)
 
(56
)
 
 
(14
)
Other income (expense), net
 
1

 
(3
)
 
23

 
(5
)
 
 
(2
)
Reorganization items, net
 

 

 

 

 
 
3,416

(LOSS) INCOME BEFORE INCOME TAXES
 
(19
)
 
(139
)
 
(7
)
 
(148
)
 
 
3,436

Benefit from (provision for) income taxes
 
6

 
9

 
3

 
255

 
 
(459
)
NET (LOSS) INCOME
 
$
(13
)
 
$
(130
)
 
$
(4
)
 
$
107

 
 
$
2,977

(LOSS) EARNINGS PER SHARE
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
(0.12
)
 
$
(1.18
)
 
$
(0.04
)
 
$
0.97

 
 
$
5.19

Diluted
 
$
(0.12
)
 
$
(1.18
)
 
$
(0.04
)
 
$
0.96

 
 
$
5.19

Weighted average shares outstanding
 
 
 
 
 
 
 
 
 
 
 
Basic
 
110.8

 
109.8

 
110.5

 
109.8

 
 
497.3

Diluted
 
110.8

 
109.8

 
110.5

 
110.8

 
 
497.3


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

1


Avaya Holdings Corp.
Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
(In millions)
 
 
Successor
 
 
Predecessor
 
 
Three months ended
March 31, 2019
 
Three months ended
March 31, 2018
 
Six months ended
March 31, 2019
 
Period from December 16, 2017
through
March 31, 2018
 
 
Period from
October 1, 2017
through
December 15, 2017
Net (loss) income
 
$
(13
)
 
$
(130
)
 
$
(4
)
 
$
107

 
 
$
2,977

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Pension, post-retirement and postemployment benefit-related items, net of income taxes of $(58) for the period from October 1, 2017 through December 15, 2017
 

 

 

 

 
 
655

Cumulative translation adjustment
 
18

 
(12
)
 
19

 
(25
)
 
 
3

Change in interest rate swaps, net of income taxes of $4 and $11 for the three and six months ended March 31, 2019
 
(10
)
 

 
(31
)
 

 
 

Other comprehensive income (loss)
 
8

 
(12
)
 
(12
)
 
(25
)
 
 
658

Elimination of Predecessor Company accumulated other comprehensive loss
 

 

 

 

 
 
790

Total comprehensive (loss) income
 
$
(5
)
 
$
(142
)
 
$
(16
)
 
$
82

 
 
$
4,425

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


2


Avaya Holdings Corp.
Condensed Consolidated Balance Sheets (Unaudited)
(In millions, except per share and share amounts)
 
March 31, 2019
 
September 30, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
735

 
$
700

Accounts receivable, net
300

 
377

Inventory
66

 
81

Contract assets
146

 

Contract costs
127

 

Other current assets
136

 
170

TOTAL CURRENT ASSETS
1,510

 
1,328

Property, plant and equipment, net
236

 
250

Deferred income taxes, net
26

 
29

Intangible assets, net
3,066

 
3,234

Goodwill
2,764

 
2,764

Other assets
105

 
74

TOTAL ASSETS
$
7,707

 
$
7,679

LIABILITIES
 
 
 
Current liabilities:
 
 
 
Debt maturing within one year
$
29

 
$
29

Accounts payable
275

 
266

Payroll and benefit obligations
117

 
145

Contract liabilities
500

 
484

Business restructuring reserve
42

 
51

Other current liabilities
143

 
148

TOTAL CURRENT LIABILITIES
1,106

 
1,123

Non-current liabilities:
 
 
 
Long-term debt, net of current portion
3,093

 
3,097

Pension obligations
622

 
671

Other post-retirement obligations
174

 
176

Deferred income taxes, net
160

 
140

Business restructuring reserve
39

 
47

Other liabilities
378

 
374

TOTAL NON-CURRENT LIABILITIES
4,466

 
4,505

TOTAL LIABILITIES
5,572

 
5,628

Commitments and contingencies (Note 19)
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
Preferred stock, $0.01 par value; 55,000,000 shares authorized, no shares issued or outstanding at March 31, 2019 and September 30, 2018

 

Common stock, $0.01 par value; 550,000,000 shares authorized; 110,730,362 shares issued and 110,717,682 shares outstanding at March 31, 2019; and 110,218,653 shares issued and 110,012,790 shares outstanding at September 30, 2018
1

 
1

Additional paid-in capital
1,750

 
1,745

Retained earnings
378

 
287

Accumulated other comprehensive income
6

 
18

TOTAL STOCKHOLDERS' EQUITY
2,135

 
2,051

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
7,707

 
$
7,679




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

3


Avaya Holdings Corp.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Unaudited)
(In millions)
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders'
Equity
 
 
Shares
 
Par Value
 
 
 
 
Balance as of September 30, 2018 (Successor)
 
110.2

 
$
1

 
$
1,745

 
$
287

 
$
18

 
$
2,051

Issuance of common stock under the equity incentive plan
 
0.8

 
 
 
 
 
 
 
 
 

Shares repurchased and retired for tax withholding on vesting of restricted stock units
 
(0.3
)
 
 
 
(6
)
 
 
 
 
 
(6
)
Amortization of share-based compensation
 
 
 
 
 
6

 
 
 
 
 
6

Adjustment for adoption of new accounting standard (Note 2)
 
 
 
 
 
 
 
92

 
 
 
92

Net income
 
 
 
 
 
 
 
9

 
 
 
9

Other comprehensive loss
 
 
 
 
 
 
 
 
 
(20
)
 
(20
)
Balance as of December 31, 2018 (Successor)
 
110.7

 
1

 
1,745

 
388

 
(2
)
 
2,132

Amortization of share-based compensation
 
 
 
 
 
5

 
 
 
 
 
5

Adjustment for adoption of new accounting standard (Note 2)
 
 
 
 
 
 
 
3

 
 
 
3

Net loss
 
 
 
 
 
 
 
(13
)
 
 
 
(13
)
Other comprehensive income
 
 
 
 
 
 
 
 
 
8

 
8

Balance as of March 31, 2019 (Successor)
 
110.7

 
$
1

 
$
1,750

 
$
378

 
$
6

 
$
2,135

 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
 
Total
Stockholders'
(Deficit) Equity
 
 
Shares
 
Par Value
 
 
(Deficit) Retained Earnings
 
Other Comprehensive (Loss) Income
 
Balance as of September 30, 2017 (Predecessor)
 
494.8

 
$

 
$
2,389

 
$
(5,954
)
 
$
(1,448
)
 
$
(5,013
)
Amortization of share-based compensation
 
 
 
 
 
3

 
 
 
 
 
3

Accrued dividends on Series A preferred stock
 
 
 
 
 
(2
)
 
 
 
 
 
(2
)
Accrued dividends on Series B preferred stock
 
 
 
 
 
(4
)
 
 
 
 
 
(4
)
Reclassifications to equity awards on redeemable shares
 
 
 
 
 
1

 
 
 
 
 
1

Net income
 
 
 
 
 
 
 
2,977

 
 
 
2,977

Other comprehensive income
 
 
 
 
 
 
 
 
 
658

 
658

Balance as of December 15, 2017 (Predecessor)
 
494.8

 
$

 
$
2,387

 
$
(2,977
)
 
$
(790
)
 
$
(1,380
)
Cancellation of Predecessor equity
 
(494.8
)
 

 
(2,387
)
 
2,977

 
790

 
1,380

Balance as of December 15, 2017 (Predecessor)
 

 
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 15, 2017 (Predecessor)
 

 
$

 
$

 
$

 
$

 
$

Common stock issued for settlement of Predecessor debt
 
103.9

 
1

 
1,575

 
 
 
 
 
1,576

Common stock issued for Pension Benefit Guaranty Corporation
 
6.1

 

 
92

 
 
 
 
 
92

Balance as of December 15, 2017 (Predecessor)
 
110.0

 
$
1

 
$
1,667

 
$

 
$

 
$
1,668

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 16, 2017 (Successor)
 
110.0

 
$
1

 
$
1,667

 
$

 
$

 
$
1,668

Amortization of share-based compensation
 
 
 
 
 
1

 
 
 
 
 
1

Net income
 
 
 
 
 
 
 
237

 
 
 
237

Other comprehensive loss
 
 
 
 
 
 
 
 
 
(13
)
 
(13
)
Balance as of December 31, 2017 (Successor)
 
110.0

 
1

 
1,668

 
237

 
(13
)
 
1,893

Amortization of share-based compensation
 
 
 
 
 
5

 
 
 
 
 
5

Net loss
 
 
 
 
 
 
 
(130
)
 
 
 
(130
)
Other comprehensive loss
 
 
 
 
 
 
 
 
 
(12
)
 
(12
)
Balance as of March 31, 2018 (Successor)
 
110.0

 
$
1

 
$
1,673

 
$
107

 
$
(25
)
 
$
1,756


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

4


Avaya Holdings Corp.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
 
 
Successor
 
 
Predecessor
 
 
Six months ended
March 31, 2019
 
Period from December 16, 2017
through
March 31, 2018
 
 
Period from
October 1, 2017
through
December 15, 2017
OPERATING ACTIVITIES:
 
 
 
 
 
 
 
Net (loss) income
 
$
(4
)
 
$
107

 
 
$
2,977

Adjustments to reconcile net (loss) income to net cash provided by (used for) operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
 
225

 
145

 
 
31

Share-based compensation
 
11

 
6

 
 

Amortization of debt issuance costs
 
8

 

 
 

Accretion of debt discount
 
3

 
1

 
 

Deferred income taxes, net
 
3

 
(240
)
 
 
455

Change in fair value of emergence date warrants
 
(21
)
 
15

 
 

Unrealized loss (gain) on foreign currency transactions
 
12

 
(7
)
 
 

Other non-cash charges, net
 
7

 
1

 
 

Reorganization items:
 
 
 
 
 
 
 
Net gain on settlement of Liabilities subject to compromise
 

 

 
 
(1,778
)
Payment to Pension Benefit Guaranty Corporation
 

 

 
 
(340
)
Payment to pension trust
 

 

 
 
(49
)
Payment of unsecured claims
 

 

 
 
(58
)
Fresh start adjustments, net
 

 

 
 
(1,697
)
Non-cash and financing related reorganization items, net
 

 

 
 
26

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
 
74

 
29

 
 
40

Inventory
 
(9
)
 
22

 
 

Contract assets
 
(68
)
 

 
 

Contract costs
 
(30
)
 

 
 

Accounts payable
 
5

 
50

 
 
(40
)
Payroll and benefit obligations
 
(63
)
 
(34
)
 
 
16

Business restructuring reserve
 
(15
)
 
22

 
 
(7
)
Contract liabilities
 
50

 
74

 
 
28

Other assets and liabilities
 
(65
)
 
(97
)
 
 
(18
)
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES
 
123

 
94

 
 
(414
)
INVESTING ACTIVITIES:
 
 
 
 
 
 
 
Capital expenditures
 
(47
)
 
(18
)
 
 
(13
)
Acquisition of businesses, net of cash acquired
 

 
(158
)
 
 

Other investing activities, net
 
(1
)
 
1

 
 

NET CASH USED FOR INVESTING ACTIVITIES
 
(48
)
 
(175
)
 
 
(13
)
FINANCING ACTIVITIES:
 
 
 
 
 
 
 
Proceeds from Term Loan Credit Agreement
 

 

 
 
2,896

Repayment of debtor-in-possession financing
 

 

 
 
(725
)
Repayment of first lien debt
 

 

 
 
(2,061
)
Repayment of long-term debt, including adequate protection payments
 
(15
)
 
(7
)
 
 
(111
)
Debt issuance costs
 

 

 
 
(97
)
Payment of acquisition-related contingent consideration
 
(9
)
 

 
 

Payments related to sale-leaseback transactions
 
(8
)
 
(4
)
 
 
(4
)
Other financing activities, net
 
(7
)
 

 
 

NET CASH USED FOR FINANCING ACTIVITIES
 
(39
)
 
(11
)
 
 
(102
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
 
(1
)
 
9

 
 
(2
)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
 
35

 
(83
)
 
 
(531
)
Cash, cash equivalents, and restricted cash at beginning of period
 
704

 
435

 
 
966

Cash, cash equivalents, and restricted cash at end of period
 
$
739

 
$
352

 
 
$
435


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

5


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. Avaya builds open, converged and innovative solutions to enhance and simplify communications and collaboration in the cloud, on-premises 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. Currently, the Company manages its business operations in two segments, Products & Solutions and Services. The Company sells directly 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 Avaya Inc. and its subsidiaries. The accompanying unaudited interim Condensed Consolidated Financial Statements as of March 31, 2019 and for the six months ended March 31, 2019, the period from December 16, 2017 through March 31, 2018, and the period from October 1, 2017 through December 15, 2017, 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, and should be read in conjunction with the audited Consolidated Financial Statements and other financial information for the fiscal year ended September 30, 2018, included in the Company's Form 10-K filed with the SEC on December 21, 2018. In management's opinion, these unaudited interim Condensed Consolidated Financial Statements reflect all adjustments, consisting of normal and recurring adjustments, necessary to state fairly 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. These estimates include assessing the collectability of accounts receivable, sales returns and allowances, the use and recoverability of inventory, the realization of deferred tax assets, business restructuring reserves, pension and post-retirement benefit costs, the fair value of equity compensation, the fair value of assets and liabilities in connection with fresh start accounting as well as those acquired in business combinations, the recoverability of long-lived assets, useful lives and impairment of tangible and intangible assets including goodwill, the amount of exposure from potential loss contingencies, and fair value measurements, among others. The markets for the Company's products are characterized by intense competition, rapid technological development and frequent new product introductions, all of which could affect the future recoverability of the Company's assets. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results may differ from these estimates.
During the six months ended March 31, 2019, the Company recorded an out-of-period adjustment to correct sales and marketing expense. The impact resulted in a $5 million increase to Selling, general and administrative expense and a decrease to net income of $3 million for the six months ended March 31, 2019. Management concluded that the correction was not material to any previously issued consolidated financial statements or to the six months ended March 31, 2019.
The accompanying Condensed Consolidated Financial Statements of the Company have been prepared on a basis that assumes that the Company will continue as a going concern and contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
On January 19, 2017 (the "Petition Date"), Avaya Holdings, together with certain of its affiliates, namely Avaya CALA Inc., Avaya EMEA Ltd., Avaya Federal Solutions, Inc., Avaya Holdings LLC, Avaya Holdings Two, LLC, Avaya Inc., Avaya Integrated Cabinet Solutions Inc. (n/k/a Avaya Integrated Cabinet Solutions LLC), Avaya Management Services Inc., Avaya Services Inc., Avaya World Services Inc., Octel Communications LLC, Sierra Asia Pacific Inc., Sierra Communication International LLC, Technology Corporation of America, Inc., Ubiquity Software Corporation, VPNet Technologies, Inc. and Zang, Inc. (n/k/a Avaya Cloud Inc.) (the "Debtors"), filed voluntary petitions for relief (the "Bankruptcy Filing") under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The cases were jointly administered as Case No. 17-10089 (SMB). The Bankruptcy Court confirmed the Company's Second Amended Joint Chapter 11 Plan of Reorganization of Avaya Inc. and its Debtor Affiliates filed on October 24, 2017 (the "Plan of Reorganization") on November 28, 2017. Confirmation of the Plan of

6


Reorganization resulted in the discharge of certain claims against the Company that arose before the Petition Date and terminated all rights and interests of equity security holders as provided for in the Plan of Reorganization. The Debtors operated their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of Chapter 11 of the Bankruptcy Code and the orders of the Bankruptcy Court until the Plan of Reorganization was substantially consummated and they emerged from bankruptcy on December 15, 2017 (the "Emergence Date").
On the Emergence Date, the Company applied fresh start accounting, which resulted in a new basis of accounting and the Company becoming a new entity for financial reporting purposes. As a result of the application of fresh start accounting and the effects of the implementation of the Plan of Reorganization, the Condensed Consolidated Financial Statements after the Emergence Date, are not comparable with the Condensed Consolidated Financial Statements on or before that date.
References to "Successor" or "Successor Company" relate to the financial position and results of operations of the reorganized Avaya Holdings after the Emergence Date. References to "Predecessor" or "Predecessor Company" refer to the financial position and results of operations of Avaya Holdings on or before the Emergence Date.
2. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." This standard clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted this standard as of October 1, 2018 on a prospective basis. The adoption of this standard did not have an impact on the Company's Condensed Consolidated Financial Statements, however, the future impact of the standard will depend on the nature of any future acquisitions or dispositions made by the Company.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash." This standard requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard as of October 1, 2018 applying the retrospective transition method to each period presented. The adoption resulted in an increase of Net cash used for investing activities of $28 million and $21 million for the period from December 16, 2017 through March 31, 2018 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor), respectively.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This standard addresses the appropriate classification of certain cash flows as operating, investing, or financing. The Company adopted this standard as of October 1, 2018 applying the retrospective transition method to each accounting period presented. The adoption of the standard did not have a material impact on the Company's Condensed Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASC 606"). This standard superseded most of the previous revenue recognition guidance under GAAP and is intended to improve and converge with international standards the financial reporting requirements for revenue recognition. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. New disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. The Company adopted ASC 606 as of October 1, 2018 using the modified retrospective transition method applied to all open contracts with customers that were not completed as of September 30, 2018.
Upon adoption of ASC 606, sales that include professional services, are generally recognized as the services are performed as opposed to upon completion and acceptance of the project. When such arrangements include products, products revenue is generally recognized when the products are delivered as opposed to upon completion and acceptance of the project. Additionally, for cloud and managed services arrangements pursuant to which the customer purchases and owns the solution and Avaya provides the software as a service ("SaaS"), control of the software generally transfers to the customer and the related revenue is recognized, at the point-in-time the SaaS commences. Revenue recognition related to stand-alone product shipments, maintenance services, and certain cloud offerings remains substantially unchanged. In addition to the impacts on revenue recognition, the standard requires incremental contract acquisition costs (primarily sales commissions) to be capitalized and amortized on a systematic basis that is consistent with the transfer of goods or services to which the asset relates. These costs were formerly expensed as incurred. The impact of adopting ASC 606 is dependent upon contract-specific

7


terms and the Company has chosen to use the allowed practical expedient whereby, incremental contract acquisition costs with an amortization period of one year or less are expensed as incurred.
On October 1, 2018, the beginning of the Company's fiscal 2019, the Company recorded a net increase to the opening Retained earnings balance of $92 million, net of tax, due to the cumulative impact of adopting ASC 606. During the three and six months ended March 31, 2019, the Company recorded a $3 million adjustment to correct the ASC 606 impact that was recorded to Retained earnings on October 1, 2018. In connection with this adjustment, the Company also recorded an out-of-period adjustment during the six months ended March 31, 2019 to correct goodwill recognized upon the application of fresh start accounting, which resulted in a $2 million decrease to Contract liabilities and a $2 million decrease to Goodwill. Management concluded that these corrections were not material to previously issued consolidated financial statements and to the three and six months ended March 31, 2019.
The revised net increase to Retained earnings due to the cumulative impact of adopting ASC 606 was $95 million, net of tax. The increase to Retained earnings included $97 million for the portion of the transaction price that would have been recognized as revenue under prior guidance (ASC "605"). These amounts will not be recognized as revenue in future periods and are primarily attributable to open contracts that contained professional services, both on a stand-alone basis and when sold together with hardware and software, for which revenue recognition was deferred until project completion under ASC 605.
The impact of the adoption of ASC 606 on the September 30, 2018 Condensed Consolidated Balance Sheet was as follows:
 
 
September 30, 2018
 
 
 
Upon Adoption of ASC 606
(In millions)
 
As Reported
 
Adjustments
 
ASSETS
 
 
 
 
 
 
Accounts receivable, net
 
$
377

 
$
(1
)
 
$
376

Inventory
 
81

 
(24
)
 
57

Contract assets
 

 
78

 
78

Contract costs
 

 
109

 
109

Other current assets
 
170

 
(66
)
 
104

Property, plant and equipment, net
 
250

 
(1
)
 
249

Deferred income taxes, net
 
29

 
(2
)
 
27

Other assets
 
74

 
16

 
90

 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
Contract liabilities
 
484

 
(17
)
 
467

Other current liabilities
 
148

 
4

 
152

Deferred income taxes, net
 
140

 
29

 
169

Other liabilities
 
374

 
(2
)
 
372

 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
Retained earnings
 
287

 
95

 
382

For additional information refer to Note 3, "Revenue Recognition," for disclosures related to the adoption of ASC 606 and an updated accounting policy related to revenue recognition and contract costs.
Recent Standards Not Yet Effective
In August 2018, the FASB issued ASU 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 standard is effective for the Company in the first quarter of fiscal 2021, with early adoption permitted. The Company is currently assessing the impact the new guidance will have on its Condensed Consolidated Financial Statements.
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 update removes disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. This standard is effective for the Company beginning in fiscal 2021, with early adoption permitted. The

8


amendments in the standard need to be applied on a retrospective basis. The Company is currently assessing the impact of the standard on its 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 certain disclosures, modifying certain disclosures and adding additional disclosures. This standard is effective for the Company beginning in the first quarter of fiscal 2021. Certain disclosures in the standard need to be applied on a retrospective basis and others on a prospective basis. The Company is currently assessing the impact of the standard on its disclosures.
In February 2018, the FASB issued ASU No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This standard allows companies to reclassify from accumulated other comprehensive income to retained earnings any stranded tax benefits resulting from the enactment of the Tax Cuts and Jobs Act. This standard is effective for the Company beginning in the first quarter of fiscal 2020. The Company is currently evaluating the impact that the adoption of this standard may have on its Condensed Consolidated Financial Statements.
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 all expected credit losses for certain types of financial instruments, including trade receivables, 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. This standard is effective for the Company in the first quarter of fiscal 2021 on a prospective basis. The Company is currently evaluating the impact that the adoption of this standard may have on its Condensed Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." This standard, along with other guidance subsequently issued by the FASB, requires lessees to recognize lease assets and liabilities for all leases with lease terms of more than 12 months. The standard makes similar changes to lessor accounting and aligns key aspects of the lessor accounting model with the revenue recognition standard. Presentation of leases within the statements of operations and statements of cash flows will primarily depend on its classification as a finance or operating lease. This standard is effective for the Company in the first quarter of fiscal 2020 with early adoption permitted. The Company expects to adopt this standard using a modified retrospective approach in the first quarter of fiscal 2020 and is continuing to evaluate the impact of this standard on its Condensed Consolidated Financial Statements.
3. Revenue Recognition
On October 1, 2018, the Company adopted ASC 606 using the modified retrospective transition method. Accordingly, the impact of adoption is recorded as an adjustment to retained earnings as of October 1, 2018 and represents the difference between ASC 606 and ASC 605 applied to all open contracts with customers that were not completed as of September 30, 2018. Under the modified retrospective method, results for reporting periods beginning after September 30, 2018 are presented under ASC 606 while prior period financial information is not adjusted and continues to be reported in accordance with ASC 605. The Company elected to use the contract modification practical expedient whereby, all contract modifications for each contract before October 1, 2018 are aggregated and evaluated at the adoption date.

9


Impact of ASC 606 on Financial Statement Line Items
The impact of the adoption of ASC 606 by financial statement line item within the Condensed Consolidated Balance Sheet as of March 31, 2019 is as follows:
 
 
March 31, 2019
(In millions)
 
As Reported
 
Adjustments
 
Without Adoption of ASC 606
ASSETS
 
 
 
 
 
 
Accounts receivable, net
 
$
300

 
$
2

 
$
302

Inventory
 
66

 
43

 
109

Contract assets
 
146

 
(146
)
 

Contract costs
 
127

 
(127
)
 

Other current assets
 
136

 
102

 
238

Property, plant and equipment, net
 
236

 
1

 
237

Deferred income taxes, net
 
26

 
2

 
28

Other assets
 
105

 
(13
)
 
92

 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
Accounts payable
 
275

 
(1
)
 
274

Contract liabilities
 
500

 
35

 
535

Other current liabilities
 
143

 
(9
)
 
134

Deferred income taxes, net
 
160

 
(29
)
 
131

Other liabilities
 
378

 
2

 
380

 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
Retained earnings
 
378

 
(134
)
 
244


10


The impact of the adoption of ASC 606 by financial statement line item within the Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2019 is as follows:
 
 
Three months ended March 31, 2019
 
Six months ended March 31, 2019
(In millions)
 
As Reported
 
Adjustments
 
Without Adoption of ASC 606
 
As Reported
 
Adjustments
 
Without Adoption of ASC 606
REVENUE
 
 
 
 
 
 
 
 
 
 
 
 
Products
 
$
287

 
$
(15
)
 
$
272

 
$
611

 
$
(45
)
 
$
566

Services
 
422

 
(21
)
 
401

 
836

 
(41
)
 
795

 
 
709

 
(36
)
 
673

 
1,447

 
(86
)
 
1,361

COSTS
 
 
 
 
 
 
 
 
 
 
 
 
Products:
 
 
 
 
 
 
 
 
 
 
 
 
Costs
 
105

 
(3
)
 
102

 
220

 
(9
)
 
211

Amortization of technology intangible assets
 
44

 

 
44

 
87

 

 
87

Services
 
174

 
(7
)
 
167

 
347

 
(13
)
 
334

 
 
323

 
(10
)
 
313

 
654

 
(22
)
 
632

GROSS PROFIT
 
386

 
(26
)
 
360

 
793

 
(64
)
 
729

OPERATING EXPENSES
 
 
 
 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
251

 
(4
)
 
247

 
508

 
4

 
512

Research and development
 
52

 

 
52

 
105

 

 
105

Amortization of intangible assets
 
41

 

 
41

 
81

 

 
81

Restructuring charges, net
 
4

 

 
4

 
11

 

 
11

 
 
348

 
(4
)
 
344

 
705

 
4

 
709

OPERATING INCOME
 
38

 
(22
)
 
16

 
88

 
(68
)
 
20

Interest expense
 
(58
)
 

 
(58
)
 
(118
)
 

 
(118
)
Other income, net
 
1

 

 
1

 
23

 

 
23

LOSS BEFORE INCOME TAXES
 
(19
)
 
(22
)
 
(41
)
 
(7
)
 
(68
)
 
(75
)
Benefit from income taxes
 
6

 
11

 
17

 
3

 
29

 
32

NET LOSS
 
$
(13
)
 
$
(11
)
 
$
(24
)
 
$
(4
)
 
$
(39
)
 
$
(43
)
The adoption of ASC 606 did not impact net cash provided by or used for operating, investing, or financing activities within the Condensed Consolidated Statement of Cash Flows for the six months ended March 31, 2019.
Revenue Recognition Policy
The Company derives revenue primarily from the sale of products and services for communications systems and applications. The Company sells directly through its worldwide sales force and indirectly through its global network of channel partners, including distributors, service providers, dealers, value-added resellers, systems integrators and business partners that provide sales and services support.
In accordance with ASC 606, the Company accounts for a customer contract when both parties have approved the contract and are committed to perform their respective obligations, each party’s rights can be identified, payment terms can be identified, the contract has commercial substance and it is at least probable that the Company will collect the consideration to which it is entitled. Revenue is recognized upon the transfer of control of the promised products and services to customers. Judgment is required in instances where the Company’s contracts include multiple products and services to determine whether each should be accounted for as a separate performance obligation. The Company enters into contracts that include various combinations of products and services, each of which is generally capable of being distinct as well as distinct within the context of the contracts.
Customer contracts are typically made pursuant to purchase orders and statements of work based on master purchase or partner agreements. Invoicing typically occurs upon customer acceptance or monthly for a series of services. Payment is due based on the Company’s standard payment terms which is typically within 30 to 60 days of invoice issuance. The Company does not typically provide financing arrangements to customers. For certain services and customer types, customers will remit payment before the services are provided. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company determined that contracts do not include a significant financing component. The primary purpose of the invoicing terms is to provide customers with simplified and predictable ways of purchasing products and services, not to receive financing from or to provide financing to customers. Certain contracts include performance obligations accounted for as a

11


series which also include variable consideration (primarily usage-based fees). For these arrangements, variable consideration is not estimated and allocated to the entire performance obligation, rather the variable fees are recognized in the period in which the usage occurs in accordance with the "right to invoice" practical expedient.
The total transaction price for each contract is determined based on the total consideration specified in the contract, including variable consideration such as sales incentives and other discounts. The expected value method is generally used when estimating variable consideration, which typically reduces the total transaction price due to the nature of the elements to which the variable consideration relates. These estimates reflect the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying patterns. The Company excludes from the transaction price all taxes assessed by governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. Accordingly, such tax amounts are not included as a component of net sales or cost of sales. The expected value method requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each performance obligation. Depending on the facts and circumstances, a change in variable consideration estimate will either be accounted for at the contract level or using the portfolio method, in accordance with the prescribed practical expedient. Reserves for contractual stock rotation rights to channel partners to support the management of inventory and certain other sales incentives are determined using the portfolio method. The Company also considers the customers’ rights of return in determining the transaction price where applicable.
The Company allocates the transaction price to each performance obligation based on its relative standalone selling price and recognizes revenue as each performance obligation is satisfied. Judgment is required to determine the standalone selling price for each distinct performance obligation. The Company uses a range of selling prices to estimate standalone selling price when each of the products and services is sold separately. The Company typically has more than one standalone selling price for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, the Company may use information such as the size of the customer and geographic region in determining the standalone selling price. In instances where standalone selling price is not directly observable, such as when we do not sell the product or service separately, the Company determines the standalone selling price using information that may include market conditions and other observable inputs.
Amounts billed to customers for shipping and handling activities are considered contract fulfillment activities and not a separate performance obligation of the contract. Shipping and handling fees are recorded as revenue and the related cost is a cost to fulfill the contract.
Contract modifications are accounted for as separate contracts if the additional products and services are distinct and priced at standalone selling prices. If the additional products and services are distinct, but not priced at standalone selling prices, the modification is treated as a termination of the existing contract and the creation of a new contract. Lastly, if the additional products and services are not distinct within the context of the contract, the modification is combined with the original contract and either an increase or decrease in revenue is recognized on the modification date.
Software
The Company’s software licenses provide users with access to capabilities such as voice, video, conferencing, messaging and collaboration. Software licenses also add functionality to the Company’s hardware. The Company’s software licenses for on-premise customer software provide the customer with a right to use the software as it exists when it is made available to the customer and are accounted for as distinct performance obligations. The Company’s software licenses are sold through both direct and indirect channels with terms that are either perpetual or time based, both of which provide the end-user with the same functionality. The main difference between perpetual and term licenses is the duration over which the customer benefits from the software. Revenue from on-premise customer software licenses is generally recognized at the point-in-time the software is made available to the customer, via direct sale to the end-user or indirect sale to a channel partner, based on the fixed minimum revenue commitment under the arrangement. However, revenue cannot be recognized before the beginning of the period during which the customer can use and benefit from the license. In instances where the Company’s software licenses include a usage-based fee, revenue associated with the incremental usage is recognized at the point-in-time the incremental usage occurs.
Hardware
The Company’s hardware, phones, gateways, and servers, each of which has a stand-alone functionality, are generally considered distinct performance obligations. Hardware is sold through both direct and indirect channels and revenue is recognized at the point-in-time at which control of the product is transferred to the customer, via direct sale to the end-user or indirect sale to a channel partner, generally upon delivery, as defined in the contract.

12


Global Support Services
The Company’s global support services provide supplemental maintenance options to end-users in support of the Company’s products and solutions, including when and if available upgrade rights and maintenance for hardware. These services are typically accounted for as distinct performance obligations. Given that global support services consist of a series of distinct promises that are satisfied over time in the form of a single performance obligation comprised of a stand-ready obligation, these services are generally recognized ratably over the period during which the services are performed as customers simultaneously consume and receive benefits. Maintenance contracts typically have terms that range from one to five years.
Professional Services
The Company’s professional services include the design, implementation and development of communication solutions. Professional services are sold through the Company’s direct and indirect channels either on a stand-alone basis or with other hardware, software and services and are generally accounted for as distinct performance obligations. Revenue for professional services is generally recognized over time based on the cost of effort incurred to date relative to the total cost of effort expected to be incurred as customers simultaneously consume and receive benefits. Effort incurred generally represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contracts for professional services typically have terms that range from four to six weeks for simple engagements and from six months to one year for more complex engagements.
Cloud and Managed Services
The Company’s managed services provide additional support options to end-users on top of the Company’s supplemental maintenance services, including hardware support, help-desk routing and system monitoring services. The Company’s managed services are sold either on a stand-alone basis or together with the Company’s hardware, software and other services, and are generally accounted for as distinct performance obligations. The Company’s managed services are provided through both direct and indirect channels. Managed services consist of a series of distinct promises that are satisfied over time in the form of a single performance obligation comprised of a stand-ready obligation. Contracts for managed services typically have terms that range from one to five years.
The Company’s cloud offerings enable customers to take advantage of our technology via the cloud, on-premises, or a hybrid of both. The software that enables the core communications functionality is offered both as a sale of perpetual or time based licenses or through a SaaS. Cloud offerings can include supplemental maintenance and managed services and are sold through the Company’s direct and indirect channels.
Cloud and managed services offerings consist of a series of distinct promises that are satisfied over time as a single performance obligation and are generally recognized ratably over the period during which the services are performed as customers simultaneously consume and receive the benefits. The amount allocated to each performance obligation is based on the fixed contractual amount, which is recognized ratably over the period during which the services are performed as customers simultaneously consume and receive benefits. Variable consideration from incremental usage above the fixed fee is recognized at the point-in-time at which the usage occurs.
Warranties
The Company offers standard limited warranties that provide the customer with assurance that its products will function in accordance with contract specifications. The Company’s standard limited warranties are not sold separately but are included with each customer purchase. Warranties are not considered separate performance obligations, and therefore, warranty expense is accrued at the time the related revenue is recognized.
Disaggregation of Revenue
The following tables provide the Company's disaggregated revenue for the three and six months ended March 31, 2019:
(In millions)
 
Three months ended March 31, 2019
 
Six months ended March 31, 2019
REVENUE
 
 
 
 
Products & Solutions
 
$
289

 
$
615

Services
 
425

 
847

Unallocated Amounts 
 
(5
)
 
(15
)
 
 
$
709

 
$
1,447



13


 
 
Three months ended March 31, 2019
(In millions)
 
 Products & Solutions
 
 Services
 
 Unallocated
 
Total
Revenue:
 
 
 
 
 
 
 
 
U.S.
 
$
130

 
$
248

 
$
(3
)
 
$
375

International:
 
 
 
 
 
 
 
 
Europe, Middle East and Africa
 
93

 
96

 
(1
)
 
188

Asia Pacific
 
37

 
43

 
(1
)
 
79

Americas International - Canada and Latin America
 
29

 
38

 

 
67

Total International
 
159

 
177

 
(2
)
 
334

Total revenue
 
$
289

 
$
425

 
$
(5
)
 
$
709

 
 
Six months ended March 31, 2019
(In millions)
 
 Products & Solutions
 
 Services
 
 Unallocated
 
Total
Revenue:
 
 
 
 
 
 
 
 
U.S.
 
$
280

 
$
499

 
$
(10
)
 
$
769

International:
 
 
 
 
 
 
 
 
Europe, Middle East and Africa
 
199

 
190

 
(2
)
 
387

Asia Pacific
 
75

 
84

 
(2
)
 
157

Americas International - Canada and Latin America
 
61

 
74

 
(1
)
 
134

Total International
 
335

 
348

 
(5
)
 
678

Total revenue
 
$
615

 
$
847

 
$
(15
)
 
$
1,447

Unallocated amounts represent the fair value adjustment to deferred revenue recognized upon emergence from bankruptcy and excluded from segment revenue.
Transaction Price Allocated to the Remaining Performance Obligations
Transaction price allocated to remaining performance obligations that are wholly or partially unsatisfied as of March 31, 2019 is $2.7 billion, of which 55% and 27% is expected to be recognized within 12 months and 13-24 months, respectively, with the remaining balance 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 Company records a contract asset when revenue is recognized in advance of the right to bill, pursuant to customer contract terms. The contract asset decreases when the Company has the right to bill the customer which is generally triggered by the satisfaction of additional performance obligations or contract milestones. The Company records a contract liability when payment is received from the customer in advance of the Company satisfying a performance obligation and the contract liability is reduced as performance obligations are satisfied and revenue is recognized. The Company records the net contract asset or liability position for each customer contract.

14


The following table provides information about accounts receivable, contract assets and contract liabilities for the periods presented:
(In millions)
 
March 31, 2019
 
October 1, 2018
 
Increase (Decrease)
Accounts receivable, net
 
$
300

 
$
376

 
$
(76
)
 
 
 
 
 
 
 
Contract assets:
 
 
 
 
 
 
Current
 
$
146

 
$
78

 
$
68

Non-current (Other assets)
 
3

 
3

 

 
 
$
149

 
$
81

 
$
68

 
 
 
 
 
 
 
Cost of obtaining a contract:
 
 
 
 
 
 
Current (Contract costs)
 
$
84

 
$
64

 
$
20

Non-current (Other assets)
 
48

 
36

 
12

 
 
$
132

 
$
100

 
$
32

 
 
 
 
 
 
 
Cost to fulfill a contract:
 
 
 
 
 
 
Current (Contract costs)
 
$
43

 
$
45

 
$
(2
)
 
 
 
 
 
 
 
Contract liabilities:
 
 
 
 
 
 
Current
 
$
500

 
$
467

 
$
33

Non-current (Other liabilities)
 
69

 
52

 
17

 
 
$
569

 
$
519

 
$
50

The change in contract assets and contract liabilities primarily results from the timing difference between the Company’s satisfaction of a performance obligation and the timing of the payment from the customer. Accounts receivable are recorded when the customer has been billed or the right to consideration is unconditional. The Company recognizes a contract asset when it transfers products and services to a customer in advance of scheduled billings. Contract assets decrease when the Company invoices the customer or the right to receive consideration is unconditional. The Company did not record any asset impairment charges related to contract assets during the six months ended March 31, 2019. Contract liabilities are recorded when the Company receives payment from the customer in advance of the Company’s completion of performance obligation(s). During the six months ended March 31, 2019, the Company recognized revenue of $396 million that had been recorded as a Contract liability at October 1, 2018.
Contract Costs
The Company capitalizes direct and incremental costs incurred to obtain and to fulfill a contract, such as sales commissions and products and services, respectively. These costs are recognized as an asset if the Company expects to recover them and are amortized consistent with the transfer to the customer of the underlying performance obligations. Costs to obtain a contract are amortized using the portfolio approach over the average term of the customer contracts, which corresponds to the period of benefit. Costs incurred to obtain a contract with an amortization period of one year or less are expensed as incurred, in accordance with the prescribed practical expedient. For the three months ended March 31, 2019, the Company recognized $24 million for amortization of costs to obtain customer contracts, of which $23 million was included in Selling, general and administrative expense and the remaining $1 million was a reduction to Revenue. For the six months ended March 31, 2019, the Company recognized $46 million for amortization of costs to obtain customer contracts, of which $43 million was included in Selling, general and administrative expense and the remaining $3 million was a reduction to Revenue.
Contract fulfillment costs are recognized consistent with the transfer to the customer of the underlying performance obligations based on the specific contracts to which they relate. For the three and six months ended March 31, 2019, the Company recognized $6 million and $20 million of contract fulfillment costs within Costs, respectively.
4. Business Combinations
Spoken Communications
On March 9, 2018 (the "Acquisition Date"), the Company acquired Intellisist, Inc. ("Spoken"), a United States-based private technology company, which provides cloud-based Contact Center as a Service solutions and customer experience management and automation applications. The total purchase price was $172 million, consisting of $157 million in cash, $14 million in

15


contingent consideration and a $1 million settlement of Spoken’s net payable to the Company which mainly related to services provided by the Company to Spoken under a co-development partnership prior to the acquisition.
Upon the achievement of three specified performance targets ("Earn-outs"), the Company is required to pay up to $16 million of contingent consideration to Spoken's former owners and employees and up to $4 million in discretionary earn-out bonuses ("Earn-out Bonuses") to Spoken employees who have contributed to the achievement of the Earn-outs. The fair value of the Earn-outs at the Acquisition Date was $14 million, which was calculated using a probability-weighted discounted cash flow model and is remeasured to fair value at each subsequent reporting period. The Earn-out Bonuses, which are intended to incentivize continuing employees to assist in achieving the Earn-outs, are excluded from the acquisition consideration and are recognized as compensation expense in the Company's Condensed Consolidated Financial Statements ratably over the estimated Earn-out periods. During the six months ended March 31, 2019, the Company paid $11 million and $2 million for Earn-outs and Earn-out Bonuses, respectively, related to the achievement of two of the three Earn-out targets. The third Earn-out target is expected to be completed and the corresponding Earn-out and Earn-out Bonuses are expected to be paid by the Company during the remainder of fiscal 2019. As of March 31, 2019, the fair value of the Earn-out liability was $5 million.
In connection with this acquisition, the Company recorded goodwill of $117 million, which has been assigned to the Products & Solutions segment, identifiable intangible assets with a fair value of $64 million, and other net liabilities of $9 million. The goodwill recognized is attributable primarily to the potential that the Spoken technology, cloud platform and assembled workforce will accelerate the Company's growth in cloud-based solutions. The Company has determined that the goodwill is not deductible for tax purposes.
The acquired intangible assets of $64 million included technology and patents of $56 million with a weighted average useful life of 4.9 years, $5 million of in-process research and development ("IPR&D") activities, which are considered indefinite lived until projects are completed or abandoned, and customer relationships of $3 million with a weighted average useful life of 7.5 years. During the six months ended March 31, 2019, certain IPR&D activities have been completed and are being amortized over a weighted average useful life of 5.0 years.
Spoken became a wholly-owned subsidiary of the Company on March 9, 2018. The Company's Condensed Consolidated Financial Statements reflect the financial results of the operations of Spoken beginning on March 9, 2018. Spoken’s revenue and operating loss included in the Company’s results for the six months ended March 31, 2019, was $5 million and $13 million, respectively. As of March 31, 2019, the Company finalized its purchase accounting for the Spoken acquisition.
5. Goodwill and Intangible Assets
Goodwill
Goodwill is not amortized but is subject to periodic testing for impairment in accordance with GAAP at the reporting unit level, which is one level below the Company’s operating segments. The Company has five reporting units, all of which are subject to impairment testing annually 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.
As a result of lower than planned financial results for the three and six months ended March 31, 2019, the Company evaluated whether it is more likely than not that the fair value of one or more reporting units is below the respective carrying amount.  As a result of this evaluation, the Company determined that an interim impairment test was not required.  However, if conditions deteriorate further or if changes in key assumptions and estimates differ significantly from management’s expectations, the Company will reassess its conclusion and it may be necessary to record impairment charges in the future.
Intangible Assets
Intangible assets include technology and patents, customer relationships and trademarks and trade names. 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 amortized but are tested for impairment annually and more frequently if events occur or circumstances change that indicate an asset may be impaired.
The Company determined that no events occurred or circumstances changed during the six months ended March 31, 2019 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 assets are impaired. However, if conditions deteriorate or there is a change in the business, it may be necessary to record impairment charges in the future.

16


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 March 31, 2019
 
 
 
 
 
 
 
 
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
Cost
 
$
962

 
$
2,157

 
$
43

 
$
3,162

Accumulated amortization
 
(222
)
 
(202
)
 
(6
)
 
(430
)
Finite-lived intangible assets, net
 
740

 
1,955

 
37

 
2,732

Indefinite-lived intangible assets
 
2

 

 
332

 
334

Intangible assets, net
 
$
742

 
$
1,955

 
$
369

 
$
3,066

Balance as of September 30, 2018
 
 
 
 
 
 
 
 
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
Cost
 
$
959

 
$
2,157

 
$
43

 
$
3,159

Accumulated amortization
 
(135
)
 
(124
)
 
(3
)
 
(262
)
Finite-lived intangible assets, net
 
824

 
2,033

 
40

 
2,897

Indefinite-lived intangible assets
 
5

 

 
332

 
337

Intangible assets, net
 
$
829

 
$
2,033

 
$
372

 
$
3,234

Amortization expense for the three months ended March 31, 2019 and 2018 (Successor) was $85 million and $81 million, respectively. Amortization expense for the six months ended March 31, 2019 (Successor), the period from December 16, 2017 through March 31, 2018 (Successor) and the period from October 1, 2017 through December 15, 2017 (Predecessor) was $168 million, $95 million and $13 million, respectively.
6. Supplementary Financial Information
Condensed Consolidated Statements of Operations Information
The following table presents a summary of Other income (expense), net for the periods indicated:
 
 
Successor
 
 
Predecessor
(In millions)
 
Three months ended
March 31, 2019
 
Three months ended
March 31, 2018
 
Six months ended
March 31, 2019
 
Period from December 16, 2017
through
March 31, 2018
 
 
Period from
October 1, 2017
through
December 15, 2017
OTHER INCOME (EXPENSE), NET
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
4

 
$
1

 
$
7

 
$
1

 
 
$
2

Foreign currency losses, net
 
(6
)
 
(3
)
 
(7
)
 
(1
)
 
 

Income from transition services agreement, net
 

 
4

 

 
4

 
 
3

Other pension and post-retirement benefit credits (costs), net
 
2

 
4

 
4

 
5

 
 
(8
)
Change in fair value of emergence date warrants
 
3

 
(10
)
 
21

 
(15
)
 
 

Other, net
 
(2
)
 
1

 
(2
)
 
1

 
 
1

Total other income (expense), net
 
$
1

 
$
(3
)
 
$
23

 
$
(5
)
 
 
$
(2
)

17


A summary of Reorganization items, net for the periods indicated is presented in the following table:
 
 
Predecessor
(In millions)
 
Period from
October 1, 2017
through
December 15, 2017
REORGANIZATION ITEMS, NET
 
 
Net gain on settlement of Liabilities subject to compromise
 
$
1,778

Net gain on fresh start adjustments
 
1,697

Bankruptcy-related professional fees
 
(56
)
Other items, net
 
(3
)
Reorganization items, net
 
$
3,416

Cash payments for reorganization items
 
$
2,524

Costs directly attributable to the implementation of the Plan of Reorganization were reported as Reorganization items, net. The cash payments for reorganization items for the period from October 1, 2017 through December 15, 2017 (Predecessor) included $2,468 million of claims paid related to Liabilities subject to compromise and $56 million for bankruptcy-related professional fees, including emergence and success fees paid on the Emergence Date.
Supplemental Cash Flow Information
 
 
Successor
 
 
Predecessor
(In millions)
 
Three months ended March 31, 2019