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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 December 31, 2021
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)
Delaware26-1119726
(State or other jurisdiction of incorporation or organization) 
(I.R.S. Employer Identification No.)
2605 Meridian Parkway, Suite 20027713
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 ClassTrading Symbol(s)Name of each exchange on which registered
Common StockAVYANew 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 filerAccelerated filer 
Non-accelerated filerSmaller 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 January 31, 2022, 84,927,867 shares of common stock, $.01 par value, of the registrant were outstanding.

1


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.
 


2

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
December 31,
20212020
REVENUE
Products$231 $266 
Services482 477 
713 743 
COSTS
Products:
Costs111 105 
Amortization of technology intangible assets42 43 
Services191 179 
344 327 
GROSS PROFIT369 416 
OPERATING EXPENSES
Selling, general and administrative262 255 
Research and development61 55 
Amortization of intangible assets40 40 
Restructuring charges, net7 4 
370 354 
OPERATING (LOSS) INCOME(1)62 
Interest expense(54)(56)
Other income, net7  
(LOSS) INCOME BEFORE INCOME TAXES(48)6 
Provision for income taxes(18)(10)
NET LOSS$(66)$(4)
LOSS PER SHARE
Basic$(0.79)$(0.06)
Diluted$(0.79)$(0.06)
Weighted average shares outstanding
Basic84.7 83.8 
Diluted84.7 83.8 
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)
Three months ended
December 31,
20212020
Net loss$(66)$(4)
Other comprehensive income:
Pension, post-retirement and post-employment benefit-related items(1)12 
Cumulative translation adjustment13 (6)
Change in interest rate swaps28 11 
Other comprehensive income40 17 
Total comprehensive (loss) income$(26)$13 
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)
December 31, 2021September 30, 2021
ASSETS
Current assets:
Cash and cash equivalents$354 $498 
Accounts receivable, net350 307 
Inventory49 51 
Contract assets, net548 518 
Contract costs121 117 
Other current assets124 100 
TOTAL CURRENT ASSETS1,546 1,591 
Property, plant and equipment, net296 295 
Deferred income taxes, net38 40 
Intangible assets, net2,154 2,235 
Goodwill1,480 1,480 
Operating lease right-of-use assets126 135 
Other assets247 209 
TOTAL ASSETS$5,887 $5,985 
LIABILITIES
Current liabilities:
Accounts payable$339 $295 
Payroll and benefit obligations131 193 
Contract liabilities332 360 
Operating lease liabilities48 49 
Business restructuring reserves18 19 
Other current liabilities201 181 
TOTAL CURRENT LIABILITIES1,069 1,097 
Non-current liabilities:
Long-term debt2,820 2,813 
Pension obligations630 648 
Other post-retirement obligations154 153 
Deferred income taxes, net48 53 
Contract liabilities304 305 
Operating lease liabilities95 102 
Business restructuring reserves22 25 
Other liabilities235 267 
TOTAL NON-CURRENT LIABILITIES4,308 4,366 
TOTAL LIABILITIES5,377 5,463 
Commitments and contingencies (Note 18)
Preferred stock, $0.01 par value; 55,000,000 shares authorized at December 31, 2021 and September 30, 2021
Convertible series A preferred stock; 125,000 shares issued and outstanding at December 31, 2021 and September 30, 2021
130 130 
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 550,000,000 shares authorized; 84,927,867 shares issued and outstanding at December 31, 2021; and 84,115,602 shares issued and outstanding at September 30, 2021
1 1 
Additional paid-in capital1,481 1,467 
Accumulated deficit(1,051)(985)
Accumulated other comprehensive loss(51)(91)
TOTAL STOCKHOLDERS' EQUITY 380 392 
TOTAL LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY $5,887 $5,985 
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 (Unaudited)
(In millions)
Common StockAdditional
Paid-In
Capital
Accumulated DeficitAccumulated
Other
Comprehensive
Loss
Total
Stockholders'
Equity
SharesPar Value
Balance as of September 30, 202184.1 $1 $1,467 $(985)$(91)$392 
Issuance of common stock under the equity incentive plan and the Stock Bonus Program0.9 5 5 
Issuance of common stock under the employee stock purchase plan0.2 3 3 
Shares repurchased and retired for tax withholding on vesting of restricted stock units and Stock Bonus Program shares(0.3)(7)(7)
Share-based compensation expense14 14 
Preferred stock dividends paid(1)(1)
Net loss(66)(66)
Other comprehensive income40 40 
Balance as of December 31, 202184.9 $1 $1,481 $(1,051)$(51)$380 
Balance as of September 30, 202083.3 $1 $1,449 $(969)$(245)$236 
Issuance of common stock under the equity incentive plan0.3  
Issuance of common stock under the employee stock purchase plan0.3 3 3 
Shares repurchased and retired for tax withholding on vesting of restricted stock units(0.1)(2)(2)
Share-based compensation expense14 14 
Preferred stock dividends accrued(1)(1)
Adjustment for adoption of new accounting standard(3)(3)
Net loss (4)(4)
Other comprehensive income17 17 
Balance as of December 31, 202083.8 $1 $1,463 $(976)$(228)$260 
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)
Three months ended
December 31,
20212020
OPERATING ACTIVITIES:
Net loss$(66)$(4)
Adjustments to reconcile net loss to net cash (used for) provided by operating activities:
Depreciation and amortization104 103 
Share-based compensation14 14 
Amortization of debt discount and issuance costs7 7 
Deferred income taxes, net(4)2 
Change in fair value of emergence date warrants(1)5 
Unrealized (gain) loss on foreign currency transactions(2)11 
Other non-cash charges, net2  
Changes in operating assets and liabilities:
Accounts receivable(44)23 
Inventory1 2 
Contract assets(57)(32)
Contract costs(1)(8)
Accounts payable46 51 
Payroll and benefit obligations(70)(57)
Business restructuring reserves(3)(4)
Contract liabilities(28)(56)
Other assets and liabilities(9)(9)
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES(111)48 
INVESTING ACTIVITIES:
Capital expenditures(27)(27)
NET CASH USED FOR INVESTING ACTIVITIES(27)(27)
FINANCING ACTIVITIES:
Principal payments for financing leases(2)(7)
Proceeds from other financing arrangements 1 
Debt issuance costs (2)
Proceeds from Employee Stock Purchase Plan4 4 
Proceeds from exercises of stock options1  
Preferred stock dividends paid(1) 
Shares repurchased for tax withholdings on vesting of restricted stock units and Stock Bonus Program shares(7)(2)
NET CASH USED FOR FINANCING ACTIVITIES(5)(6)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash(1)9 
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH(144)24 
Cash, cash equivalents, and restricted cash at beginning of period502 731 
Cash, cash equivalents, and restricted cash at end of period$358 $755 
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 delivering its technology predominantly through software and services. Avaya builds innovative open, converged software 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 its 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, 2021, included in the Company's Annual Report on Form 10-K filed with the SEC on November 22, 2021. 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. The Company uses estimates to assess expected credit losses on its financial assets, sales returns and allowances, the use and recoverability of inventory, the realization of deferred tax assets, annual effective tax rate, the recoverability of long-lived assets, useful lives and impairment of tangible and intangible assets including goodwill, business restructuring reserves, pension and post-retirement benefit costs, the fair value of assets and liabilities in business combinations and the amount of exposure from potential loss contingencies, among others. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the Condensed Consolidated Financial Statements in the period they are determined to be necessary. Actual results could differ from these estimates. The spread of COVID-19, the effects on the Company's employees and the actions required to mitigate its impact have created substantial disruption to the global economy, which 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. The COVID-19 pandemic did not have a material impact on the Company's operating results during the first quarter of fiscal 2022.
2. Recent Accounting Pronouncements
Recent Standards Not Yet Effective
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. 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.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): “Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” This standard requires contract assets and contract liabilities acquired in a business combination to be recognized in accordance with Topic 606 as if the acquirer had originated the contracts. This
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standard is effective for the Company in the first quarter of fiscal 2024, with early adoption permitted. 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
December 31,
(In millions)20212020
Revenue:
Products & Solutions$231 $266 
Services482 477 
Total revenue$713 $743 
Three months ended December 31, 2021Three months ended December 31, 2020
(In millions)Products & SolutionsServicesTotalProducts & SolutionsServicesTotal
Revenue:
U.S.$114 $261 $375 $126 $288 $414 
International:
Europe, Middle East and Africa65 127 192 92 103 195 
Asia Pacific
32 49 81 29 46 75 
Americas International - Canada and Latin America20 45 65 19 40 59 
Total International117 221 338 140 189 329 
Total revenue$231 $482 $713 $266 $477 $743 
Transaction Price Allocated to the Remaining Performance Obligations
The transaction price allocated to remaining performance obligations that were wholly or partially unsatisfied as of December 31, 2021 was $2.3 billion, of which 51% 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.
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Contract Balances
The following table provides information about accounts receivable, contract assets, contract costs and contract liabilities for the periods presented:
(In millions)December 31, 2021September 30, 2021Increase (Decrease)
Accounts receivable, net$350 $307 $43 
Contract assets, net:
Current$548 $518 $30 
Non-current (Other assets)116 88 28 
$664 $606 $58 
Cost of obtaining a contract:
Current (Contract costs)$91 $89 $2 
Non-current (Other assets)50 53 (3)
$141 $142 $(1)
Cost to fulfill a contract:
Current (Contract costs)$30 $28 $2 
Contract liabilities:
Current$332 $360 $(28)
Non-current304 305 (1)
$636 $665 $(29)
The increase in Accounts receivable is mainly related to the timing of customer payments. 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 anticipated declines in hardware maintenance and software support services as customers continue to transition to the Company's subscription hybrid offering. The decrease was also driven by revenue earned from the consideration advance received in connection with the strategic partnership with RingCentral, Inc. ("RingCentral"). During the three months ended December 31, 2021 and 2020, the Company did not record any asset impairment charges related to contract assets.
During the three months ended December 31, 2021 and 2020, the Company recognized revenue of $162 million and $223 million that had been previously recorded as a Contract liability as of October 1, 2021 and October 1, 2020, respectively. During the three months ended December 31, 2021 and 2020, the Company recognized a net (decrease) increase to revenue of $(2) million and $1 million, respectively, for performance obligations that were satisfied, or partially satisfied, in prior periods.
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
December 31,
(In millions)20212020
Costs to obtain customer contracts:
Selling, general and administrative$44 $43 
Revenue4 1 
Total Amortization$48 $44 
Costs to fulfill customer contracts:
Costs$8 $4 

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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, 2021$4 $1 $1 $6 
Adjustment to credit loss provision1   1 
Allowance for credit loss as of December 31, 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. Goodwill and Intangible Assets, net
Goodwill
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.
The Company determined that no events occurred or circumstances changed during the three months ended December 31, 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.
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 NamesTotal
Balance as of December 31, 2021
Finite-lived intangible assets:
Cost$972 $2,154 $42 $3,168 
Accumulated amortization(698)(627)(22)(1,347)
Finite-lived intangible assets, net274 1,527 20 1,821 
Indefinite-lived intangible assets  333 333 
Intangible assets, net$274 $1,527 $353 $2,154 
Balance as of September 30, 2021
Finite-lived intangible assets:
Cost$971 $2,154 $42 $3,167 
Accumulated amortization(656)(588)(21)(1,265)
Finite-lived intangible assets, net315 1,566 21 1,902 
Indefinite-lived intangible assets  333 333 
Intangible assets, net$315 $1,566 $354 $2,235 
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, on July 1st, or 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 three months ended December 31, 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, the Avaya Trade Name, 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.
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5. Supplementary Financial Information

The following table presents a summary of Other income, net for the periods indicated:
Three months ended
December 31,
(In millions)20212020
OTHER INCOME, NET
Foreign currency losses, net (2)
Other pension and post-retirement benefit credits, net6 7 
Change in fair value of emergence date warrants1 (5)
Total other income, net$7 $ 

The following table presents supplemental cash flow information for the periods presented:
Three months ended
December 31,
(In millions)20212020
OTHER PAYMENTS
Interest payments$33 $33 
Income tax payments7 3 
NON-CASH INVESTING ACTIVITIES
Decrease in Accounts payable for Capital expenditures
$(2)$(1)
Acquisition of equipment under finance leases 2 
During the three months ended December 31, 2021 and 2020, the Company made payments for operating lease liabilities of $15 million and $17 million, respectively, and recorded non-cash additions for operating lease right-of-use assets of $7 million and $11 million, respectively.
The following table presents a reconciliation of cash, cash equivalents, and restricted cash that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows for the periods presented:
(In millions)December 31, 2021September 30, 2021December 31, 2020September 30, 2020
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
Cash and cash equivalents$354 $498 $750 $727 
Restricted cash included in other assets4 4 5 4 
Total cash, cash equivalents, and restricted cash$358 $502 $755 $731 

6. Business Restructuring Reserves and Programs
The following table summarizes the restructuring charges by activity for the periods presented:
Three months ended
December 31,
(In millions)20212020
Employee separation costs$2 $1 
Facility exit costs5 3 
Total restructuring charges$7 $4 
The Company's employee separation costs generally consist of severance charges which include, but are not limited to, termination payments, pension fund payments, and health care and unemployment insurance costs to be paid to, or on behalf of, the affected employees. Facility exit costs primarily consist of lease obligation charges for exited facilities, including the impact of accelerated lease expense for right-of-use assets and accelerated depreciation expense for leasehold improvements with reductions in their estimated useful lives due to exited facilities. The restructuring charges include changes in estimates for
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increases and decreases in costs or changes in the timing of payments related to the restructuring programs of prior fiscal years. The Company does not allocate restructuring reserves to its operating segments.
The following table summarizes the activity for employee separation costs recognized under the Company's restructuring programs for the three months ended December 31, 2021:
(In millions)
Fiscal 2022 Restructuring Program(2)
Fiscal 2021 Restructuring Program(3)
Fiscal 2020 and prior Restructuring Programs(3)
Total
Accrual balance as of September 30, 2021$ $14 $30 $44 
Cash payments (1)(4)(5)
Restructuring charges1   1 
Adjustments(1)
  1 1 
Impact of foreign currency fluctuations  (1)(1)
Accrual balance as of December 31, 2021$1 $13 $26 $40 
(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 2022 restructuring program are expected to be completed in fiscal 2022.
(3) Payments related to the fiscal 2021 and fiscal 2020 and prior restructuring programs are expected to be completed in fiscal 2027.
7. Financing Arrangements
The following table reflects principal amounts of debt and debt net of discounts and issuance costs for the periods presented:
December 31, 2021September 30, 2021
(In millions)Principal amountNet of discounts and issuance costsPrincipal amountNet of discounts and issuance costs
Senior 6.125% Notes due September 15, 2028$1,000 $986 $1,000 $986 
Tranche B-1 Term Loans due December 15, 2027800 781 800 780 
Tranche B-2 Term Loans due December 15, 2027743 737 743 736 
Convertible 2.25% Senior Notes due June 15, 2023350 316 350 311 
Total Long-term debt$2,893 $2,820 $2,893 $2,813 
Term Loan and ABL Credit Agreements
As of December 31, 2021 and September 30, 2021, 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 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, 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.
For the three months ended December 31, 2021 and 2020, the Company recognized interest expense of $18 million and $20 million, respectively, related to the Term Loan Credit Agreement, including the amortization of the debt discount and issuance costs.
As of December 31, 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 December 31, 2021, the Company had issued and outstanding letters of credit and guarantees of $35 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
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$35 million of outstanding letters of credit and guarantees was $119 million at December 31, 2021. For both the three months ended December 31, 2021 and 2020, recognized interest expense related to the ABL Credit Agreement was not material.
Senior Notes
The Company’s Senior 6.125% First Lien Notes have an aggregate principal amount outstanding of $1,000 million and mature on September 15, 2028 (the “Senior Notes”). The Senior Notes were issued on September 25, 2020, pursuant to an indenture among the Company, the Company's subsidiaries that are guarantors of the Senior Notes and party thereto and Wilmington Trust, National Association, as trustee and notes collateral agent.
For both the three months ended December 31, 2021 and 2020, the Company recognized interest expense of $16 million related to the Senior Notes, including the amortization of debt issuance costs.
Convertible Notes
The Company's 2.25% Convertible Notes have an aggregate principal amount outstanding of $350 million (including notes issued in connection with the underwriters' exercise in full of an over-allotment option of $50 million) and mature on June 15, 2023 (the "Convertible Notes"). The Convertible Notes were issued under an indenture, by and between the Company and the Bank of New York Mellon Trust Company N.A., as Trustee.
For both the three months ended December 31, 2021 and 2020, the Company recognized interest expense of $7 million related to the Convertible Notes, which includes $5 million of amortization of the debt discount and issuance costs.
The net carrying amount of the Convertible Notes for the periods indicated was as follows:
(In millions)December 31, 2021September 30, 2021
Principal$350 $350 
Less:
Unamortized debt discount(31)(36)
Unamortized issuance costs(3)(3)
Net carrying amount$316 $311 
The weighted average contractual interest rate of the Company's outstanding debt was 6.5% as of both December 31, 2021 and September 30, 2021, including adjustments related to the Company's interest rate swap agreements (see Note 8, "Derivative Instruments and Hedging Activities"). The effective interest rate for the Term Loan Credit Agreement as of December 31, 2021 and September 30, 2021 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 December 31, 2021 and September 30, 2021 was not materially different than its contractual interest rate. The effective interest rate for the Convertible Notes as of both December 31, 2021 and September 30, 2021 was 9.2%, reflecting the separation of the conversion feature in equity. The effective interest rates include interest on the debt and amortization of discounts and issuance costs.
As of December 31, 2021, the Company was not in default under any of its debt agreements.
8. Derivative Instruments and Hedging Activities
The Company accounts for derivative financial instruments in accordance with FASB ASC Topic 815, "Derivatives and Hedging," ("ASC 815") and does not enter into derivatives for trading or speculative purposes.
Interest Rate Contracts
The Company, from time to time, enters into interest rate swap contracts as a hedge against changes in interest rates on its outstanding variable rate loans.
On May 16, 2018, the Company entered into interest rate swap agreements with 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
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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 December 31, 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 December 31, 2021, approximately $43 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 December 31, 2021, the Company maintained open foreign currency forward contracts with a total notional value of $190 million, primarily hedging the British Pound Sterling, Japanese Yen, Mexican Peso, Czech Koruna, and Indian Rupee. As of September 30, 2021, the Company maintained open foreign currency forward contracts with a total notional value of $191 million, primarily hedging the British Pound Sterling, Indian Rupee, Czech Koruna and Mexican Peso.
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 December 31, 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 December 31, 2021 and September 30, 2021 was determined using the input assumptions summarized below:
December 31,
2021
September 30, 2021
Expected volatility52.53 %49.63 %
Risk-free interest rates0.37 %0.13 %
Contractual remaining life (in years)0.961.21
Price per share of common stock$19.80$19.79
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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 on its common stock throughout the term of the warrants.
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:
December 31, 2021September 30, 2021
(In millions)Balance Sheet CaptionAssetLiabilityAssetLiability
Derivatives Designated as Hedging Instruments:
Interest rate contractsOther assets$18 $ $6 $ 
Interest rate contractsOther current liabilities 39  43 
Interest rate contractsOther liabilities   10 
18 39 6 53 
Derivatives Not Designated as Hedging Instruments:
Interest rate contractsOther current liabilities 7  7 
Interest rate contractsOther liabilities   2 
Foreign exchange contractsOther current assets1    
Foreign exchange contractsOther current liabilities   2 
Emergence Date WarrantsOther current liabilities 8   
Emergence Date WarrantsOther liabilities   9 
1 15  20 
Total derivative fair value$19 $54 $6 $73 
The following table provides information regarding the location and amount of pre-tax gains (losses) for interest rate swaps designated as cash flow hedges:
Three months ended
December 31,
20212020
(In millions)Interest ExpenseOther Comprehensive IncomeInterest ExpenseOther Comprehensive Income
Financial Statement Line Item in which Cash Flow Hedges are Recorded$(54)$40 $(56)$17 
Impact of cash flow hedging relationships:
Gain (loss) recognized in AOCI on interest rate swaps 15  (1)
Interest expense reclassified from AOCI(13)13 (12)12