AVAYA CLEANSING MATERIALS April 2017
2 VALUE CONSIDERATIONS
3 Illustrative Waterfall Recovery Distributable TEV TEV (1) $5,915 Less US Pension (2) (494) $5,420 US Guarantors Encumbered Value Waterfall - Encumbered Value TBD Illustrative Domestic Split 70% Assets Claim Face Value Recovery % Recovery $ TEV $3,794 TEV $3,794 DIP $725 TBD TBD 65% Equity (5) TBD 1st Lien Debt 4,534 TBD TBD Cash on Hand (3) 318 2nd Lien Debt (6) 1,440 TBD TBD Foreign / US Non-Guarantors Cash Pool Support 75 Unsecured Claims 250 TBD TBD Illustrative Int'l Split 30% IP Value (4) 189 Residual Equity TBD TEV $1,626 Intercompany TBD TBD Liabilities OPEB TBD Total Recovery Foreign / US Non-Guarantors Foreign Pension - Claim Recovery $ Recovery % Equity Splits (7) Assets Capital Leases (18) DIP TBD TBD TBD TEV $1,626 TBD 1st Lien Debt TBD TBD TBD Cash on Hand (3) 125 Distributable Value 2nd Lien Debt TBD TBD TBD IP Value (4) 12 Net Value TBD Unsecured Claims TBD TBD TBD $1,763 Liabilities Unencumbered Value Intercompany TBD Assets Foreign Pension (500) 35% Equity (5) TBD Capital Leases (13) Cash on Hand - Waterfall - Unencumbered Value TBD TBD IP Value (4) - Claim Face Value Recovery % Recovery $ Equity Value TBD DIP TBD TBD TBD TBD Liabilities 1st Lien Deficiency TBD TBD TBD OPEB TBD 2nd Lien Deficiency TBD TBD TBD TBD Unsecured Claims TBD TBD TBD Distributable Value Residual Equity TBD TBD 5 42 3 1 6 5 ILLUSTRATIVE RECOVERY WATERFALL Tax Effected Pension Subtract US Pension Value from TEV Calculate Distributable Un/Encumbered Value Split Value Between US Guarantors and Foreign / US Non-Guarantors Create Un/Encumbered Waterfalls Deduct Foreign Pension from Foreign / US Non-Guarantor Value Determine Recoveries 11 12 13 14 15 16
4 Notes 1. TEV is pre intellectual property valuation which is subsequently allocated between US Guarantors (“USG”) and Foreign / US Non-Guarantors (“F / UNSG”). 2. Tax effected estimated book value of pension as of 9/30/17. Tax rate of 38.4% per Company and KPMG guidance. 3. Represents estimated total balance sheet cash as of 9/30/17. 4. Represents estimated IP value of $201 million which is subject to material change. Value is incremental to TEV and is broken down between CC, UC, Networking and Other at $40 million, $76 million, $37 million and $48 million, respectively. 5. Represents equity of Foreign / US Non-Guarantors. 6. Represents principal plus accrued interest at petition date. 7. Equity value calculated based on midpoint of TEV range plus IP value less net debt of $1,750 million, capital leases of $31 million, foreign pension underfunding of $500 million and the tax-effected US pension and OPEB obligations. NOTES TO ILLUSTRATIVE RECOVERY WATERFALL The recovery model is subject to material change. Value allocation and distribution among creditor classes are subject to many factors, including but not limited to, TEV, IP value, treatment of legacy liabilities, cash and treatment of cash at emergence, treatment of intercompany receivables and payables, USG versus F/USNG value splits, waterfall priority and rights and remedies of various creditors.
5 Reported Revenue Reported Adj. EBITDA Pension Adjustment Reported Adj. EBITDAP Pro Forma Adjustments PF Adj. EBITDAP PF Adj. EBITDAP Margin ($, in millions) (A) (B) (C) FY 2016 USG $2,096.5 $789.2 ($51.8) $737.4 ($45.6) $691.9 % of Total 56.6% 84.0% 81.4% 76.0% 33.0% Foreign $1,605.4 $150.5 $18.1 $168.6 $49.3 $217.9 % of Total 43.4% 16.0% 18.6% 24.0% 13.6% Total $3,701.8 $939.7 ($33.7) $906.1 $3.7 $909.8 FY 2016 (A) (B) (A) (B) (C) (A) (B) (C) Reported Revenue Reported Adj. EBITDAP Average Reported PF Adj. EBITDAP Average Illustrative Range USG 56.6% 81.4% 69.0% 76.0% 71.4% 75.0% 65.0% Foreign 43.4% 18.6% 31.0% 24.0% 28.6% 25.0% 35.0% Q1'17 LTM 12/31 USG $2,040.3 $776.8 ($55.0) $721.8 ($79.6) $642.2 % of Total 56.4% 81.8% 79.2% 70.2% 31.5% Foreign $1,579.2 $172.6 $16.9 $189.5 $83.4 $272.8 % of Total 43.6% 18.2% 20.8% 29.8% 17.3% Total $3,619.5 $949.4 ($38.1) $911.3 $3.7 $915.0 LTM Q1'17 (A) (B) (A) (B) (C) (A) (B) (C) Reported Revenue Reported Adj. EBITDAP Average PF Adj. EBITDAP Average Illustrative Range USG 56.4% 79.2% 67.8% 70.2% 68.6% 75.0% 65.0% Foreign 43.6% 20.8% 32.2% 29.8% 31.4% 25.0% 35.0% ILLUSTRATIVE VALUE SPLITS DETAIL Notes: General Note: Immaterial rounding differences from external financial reporting may exist 1. Includes various one time adjustments 2. US Guarantor entities 3. Foreign / US Non-Guarantor entities (1) (2) (2) (3) (3)
6 LEGACY LIABILITIES Higher estimated weighted average domestic pension discount rate range of 3.95% as of Sept. 30, 2017 vs. 3.55% at Sept. 30, 2016 Higher estimated weighted average domestic OPEB discount rate range of 4.04% as of Sept. 30, 2017 vs. 3.67% at Sept. 30, 2016 Higher estimated weighted average international liabilities discount rate range of 1.80% as of Sept. 30, 2017 vs. 1.22% at Sept. 30, 2016 Arrowhead assumed to pay all expected benefit payments through September 30, 2017 Source: Company filings, Aon Hewitt analysis dated March 29, 2017 General Notes: Dollars in millions Amounts shown do not represent an updated GAAP balance sheet calculation per Erisa / SEC filing guidelines but rather represent an estimate of the potential underfunding amounts as of Sept 2017, assuming current views on interest rate curves and discount rates per the Company’s pension advisors. Book Value U.S. Non-US PensionPension OPEB Total September 30, 2016 Assets $2,370 $172 $67 $2,609 Liabilities (3,558) (436) (650) (4,644) Surplus / (Deficit) ($1,188) ($264) ($583) ($2,035) September 30, 2017 Estimate Assets $2,426 $173 $58 $2,657 Liabilities (3,229) (407) (557) (4,193) Surplus / (Deficit) ($803) ($234) ($500) ($1,536) ∆ Assets $56 $1 ($9) $48 Liabilities 329 29 93 451 Surplus / (Deficit) $385 $30 $83 $499 Aon Hewitt has rolled forward the calculation of global book underfunding from September 30, 2016 to September 30, 2017.
7 AVAYA BUSINESS PLAN 2017
8 Actual Actual Actual Proj Proj Proj Proj Proj $ in millions 2014 2015 2016 2017 2018 2019 2020 2021 Revenue Product $2,196 $2,029 $1,755 $1,340 $1,116 $1,091 $1,116 $1,152 y-o-y growth (8%) (14%) (24%) (17%) (2%) 2% 3% Services $2,175 $2,052 $1,947 $1,835 $1,663 $1,601 $1,577 $1,569 y-o-y growth (6%) (5%) (6%) (9%) (4%) (1%) (1%) Total Revenue $4,371 $4,081 $3,702 $3,175 $2,778 $2,691 $2,693 $2,721 y-o-y growth (7%) (9%) (14%) (12%) (3%) 0% 1% Non-GAAP Gross Margin $2,574 $2,467 $2,278 $1,925 $1,726 $1,696 $1,714 $1,751 GM % 59% 60% 62% 61% 62% 63% 64% 64% Non-GAAP Operating Costs R&D $372 $338 $273 $238 $188 $175 $167 $160 SG&A $1,475 $1,411 $1,249 $1,116 $961 $902 $859 $825 Non-GAAP Operating Income $727 $718 $756 $571 $577 $618 $688 $766 Depreciation / other addbacks2 $120 $113 $121 $110 $93 $80 $77 $78 OCI addbacks $51 $69 $62 $95 $99 $100 $89 $76 Adjusted EBITDA3 $898 $900 $940 $777 $769 $798 $855 $920 Margin % 21% 22% 25% 24% 28% 30% 32% 34% Memo Adjusted EBITDAP4 $933 $903 $906 $729 $712 $731 $777 $833 Margin % 21% 22% 24% 23% 26% 27% 29% 31% Total ICE5 $2,999 $2,793 $2,460 $2,220 $1,923 $1,811 $1,741 $1,688 y-o-y growth (7%) (12%) (10%) (13%) (6%) (4%) (3%) AVAYA BUSINESS PLAN 2017 – OVERVIEW FINANCIAL SUMMARY: 2017-2021 NON-GAAP P&L OUTLOOK FY2017 is expected to be a challenging year for Avaya as it navigates the Chapter 11 restructuring process1. Post-emergence, however, the Company is expected to recommence the business model expansion achieved prior to the filing. 5 Notes: 1. Avaya Business Plan 2017 assumes a bankruptcy of approximately 6-9 months. 2. Includes $22 / $8 / $1 million of software amortization in FY14 / FY15 / FY16, respectively, and zero thereafter. 3. Adjusted EBITDA is defined as EBITDA adjusted to exclude certain charges and other adjustments, such as certain one-time charges and pension-related expenses. 4. Reflects Adjusted EBITDA less OCI addback plus pension/OPEB/LTD/FAS112 expense. 5. Total Incurred Costs and Expenses (“ICE”) reflects the Company’s total non-GAAP costs, excluding standard costs. For modeling and presentation purposes, the Company’s Networking business segment is assumed to be sold on 9/30/2017.
9 Actual Proj Proj Proj Proj $ in millions 1Q17 2Q17 3Q17 4Q17 2017 Revenue Product $401 $323 $300 $315 $1,340 y-o-y growth (14%) (24%) (25%) (33%) (24%) Services $474 $458 $450 $454 $1,835 y-o-y growth (4%) (5%) (7%) (7%) (6%) Total Revenue $875 $781 $750 $769 $3,175 y-o-y growth (9%) (14%) (15%) (20%) (14%) Non-GAAP Gross Margin $538 $466 $451 $470 $1,925 GM % 61% 60% 60% 61% 61% Non-GAAP Operating Costs R&D $62 $61 $58 $58 $238 SG&A $289 $287 $275 $264 $1,116 Non-GAAP Operating Income $187 $118 $117 $148 $571 Depreciation / other addbacks $30 $27 $27 $26 $110 OCI addbacks $21 $25 $25 $25 $95 Adjusted EBITDA $238 $170 $169 $199 $777 Margin % 27% 22% 23% 26% 24% Memo Adjusted EBITDAP $226 $158 $157 $187 $729 Margin % 26% 20% 21% 24% 23% AVAYA BUSINESS PLAN 2017 – OVERVIEW FINANCIAL SUMMARY: 2017 QUARTERLY NON-GAAP P&L OUTLOOK The Company is forecasting revenue of $3.175bn and Adjusted EBITDA of $777m in FY 2017.
10 AVAYA BUSINESS PLAN 2017 – OVERVIEW REVENUE AND EBITDA SUMMARY BY KEY BUSINESS SEGMENT1 Notes: Segmentation subject to ongoing management review and revision. Segment Adj. EBITDA and Segment Adj. EBITDAP represent a fully allocated view and do not include standalone/carve-out assumptions and methodologies. FY15-16 APS revenue segmentation reflects revisions based on internal sampling analysis and audits; FY14 was not within the scope of these revisions. 1. Business segment revenue estimates shown are internal company estimates and may not correspond to historical SEC filings. Actual Actual Actual Proj Proj Proj Proj Proj '17-'21 $ in millions 2014 2015 2016 2017 2018 2019 2020 2021 CAGR Contact Center Product $391 $396 $418 $379 $418 $456 $491 $530 9% APS $185 $161 $161 $154 $167 $184 $199 $214 9% Maintenance $380 $385 $392 $400 $412 $424 $439 $455 3% Total CC Revenue $956 $941 $971 $934 $996 $1,063 $1,129 $1,199 6% Segment Adj. EBITDA $261 $294 $345 $296 $305 $346 $394 $444 Margin 27% 31% 36% 32% 31% 33% 35% 37% Segment Adj. EBITDAP $270 $295 $335 $280 $282 $316 $358 $401 Margin 28% 31% 35% 30% 28% 30% 32% 33% Total APCS Revenue $287 $297 $304 $294 $292 $295 $297 $300 0% Segment Adj. EBITDA $38 $41 $62 $55 $52 $55 $59 $63 Margin 13% 14% 20% 19% 18% 19% 20% 21% Segment Adj. EBITDAP $40 $41 $60 $52 $48 $50 $53 $56 Margin 14% 14% 20% 18% 16% 17% 18% 19%
11 AVAYA BUSINESS PLAN 2017 – OVERVIEW REVENUE AND EBITDA SUMMARY BY KEY BUSINESS SEGMENT1 Notes: Segmentation subject to ongoing management review and revision. Segment Adj. EBITDA and Segment Adj. EBITDAP represent a fully allocated view and do not include standalone/carve-out assumptions and methodologies. FY15-16 APS revenue segmentation reflects revisions based on internal sampling analysis and audits; FY14 was not within the scope of these revisions. 1. Business segment revenue estimates shown are internal company estimates and may not correspond to historical SEC filings. 2. Unified Communications includes revenue from the Company’s GSMB segment. 3. For modeling and presentation purposes, the Company’s Networking business segment is assumed to be sold on 9/30/2017. Actual Actual Actual Proj Proj Proj Proj Proj '17-'21 $ in millions 2014 2015 2016 2017 2018 2019 2020 2021 CAGR Unified Communications2 Product $1,579 $1,419 $1,147 $811 $698 $635 $624 $622 (6%) APS $151 $161 $125 $97 $73 $61 $58 $56 (13%) Maintenance $1,038 $937 $865 $806 $692 $613 $563 $525 (10%) Other Services $58 $47 $40 $33 $28 $25 $21 $19 (13%) Total UC Revenue $2,826 $2,564 $2,176 $1,747 $1,491 $1,333 $1,267 $1,222 (9%) Segment Adj. EBITDA $682 $664 $635 $492 $413 $397 $402 $413 Margin 24% 26% 29% 28% 28% 30% 32% 34% Segment Adj. EBITDAP $704 $666 $615 $466 $382 $365 $367 $376 Margin 25% 26% 28% 27% 26% 27% 29% 31% Networking3 Product $226 $214 $190 $149 APS $5 $6 $8 $7 Maintenance $70 $59 $52 $45 Total Networking Revenue $301 $279 $251 $200 Segment Adj. EBITDA ($83) ($99) ($101) ($66) Margin (28%) (36%) (40%) (33%) Segment Adj. EBITDAP ($80) ($99) ($104) ($69) Margin (27%) (36%) (42%) (34%) Total WholeCo Revenue $4,371 $4,081 $3,702 $3,175 $2,778 $2,691 $2,693 $2,721 (4%) Adj. EBITDA $898 $900 $940 $777 $769 $798 $855 $920 Margin 21% 22% 25% 24% 28% 30% 32% 34% Adj. EBITDAP $933 $903 $906 $729 $712 $731 $777 $833 Margin 21% 22% 24% 23% 26% 27% 29% 31% Memo: Software & Services % of Total Revenue 71% 73% 76% 81% 88% 90% 90% 91%
12 $2,220 $1,923 $1,811 $1,741 $1,688 2017 2018 2019 2020 2021 ~$150m of ICE removed related to the sale of the Networking business. Transaction assumed to occur on 9/30/2017 for modeling purposes LONG RANGE COST OVERVIEW OPERATING COST OVERVIEW THRU 2021 Although the scope and timing of previously targeted cost reduction initiatives has been impacted in FY2017, post-emergence from Chapter 11 the Company is expected to continue its cost optimization and recommence its business model expansion. Long Range Cost Outlook $297M Reduction $62M Carryover $112M Reduction $52M Carryover $70M Reduction $24M Carryover $53M Reduction $12M Carryover
13 2017 ABP VS. LFO – ADJUSTED EBITDA BRIDGE RECENT CHANGES TO FOUNDATIONAL ASSUMPTIONS HAVE IMPACTED 2017 BUSINESS PLAN $40M $23M $8M 2017 Business Plan $777M Cost / Other Impact Revenue Mix Impact STD MarginSept LFO* $849M Volume and Mix Shift LFO: $3,198m vs. Business Plan: $3,175m Cost / Other* LFO ICE vs. Business Plan and updated pension addback assumption * ~$55M unfavorable ICE impact (ABP vs. LFO) offset by ~$15M favorable impact from updated pension OCI addback.
14 Cash Flow Metrics Actual Actual Actual Proj Proj Proj Proj Proj $ in millions FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 Adjusted EBITDA $898 $900 $940 $777 $769 $798 $855 $920 Change in Working Capital1 $33 $64 $110 $4 ($49) ($24) ($13) ($21) Restructuring Payments ($121) ($90) ($121) ($85) ($57) ($40) ($24) ($20) Pension / OPEB Payments1 ($233) ($147) ($160) ($192) ($178) ($165) ($102) ($101) Other Operating Activities2 ($30) ($34) ($175) ($160) ($81) ($91) ($95) ($107) Cash Interest3 ($454) ($421) ($428) ($120) ($120) ($120) ($120) ($120) Cash Taxes3 ($50) ($56) ($51) ($39) ($80) ($103) ($168) ($188) Operating CF $41 $216 $114 $184 $204 $254 $332 $363 Capital Expenditures ($135) ($124) ($95) ($68) ($67) ($66) ($64) ($63) Acquisitions ($16) ($24) ($20) ($4) $0 $0 $0 $0 Divestitures $127 $0 $0 $0 $0 $0 $0 $0 Proceeds from Sale of Assets $102 $23 $16 $60 $10 $0 $0 $0 IP Monetization Proceeds $0 $0 $0 $0 $125 $0 $0 $0 Other Activities4 ($20) ($34) ($24) ($21) ($24) ($1) $0 $0 Total Other CF $58 ($159) ($123) ($33) $44 ($67) ($64) ($63) FX ($14) ($32) ($10) ($11) $0 $0 $0 $0 Total CF $85 $25 ($19) $140 $248 $187 $268 $301 Memo Projected Ending Cash NA NA NA $350 $598 $785 $1,053 $1,354 Projected Ending Debt NA NA NA $2,000 $2,000 $2,000 $2,000 $2,000 Unlevered Cash Taxes5 NA NA NA ($39) ($209) ($219) ($244) ($263) CASH FLOW OUTLOOK FINANCIAL SUMMARY: 2017-2021 Key Assumptions Cash flow projections reflect ordinary course operations in terms of working capital, pension payments. ‒ To be updated and discussed with creditor advisors regarding Chpt.11 and emergence impacts. Near term restructuring payments primarily relate to pre-existing restructuring actions. Capex levels lower vs. history, reflecting lower APCS revenue levels, exit of Networking as well as ongoing footprint / spend optimization initiatives. Despite near-term headwinds, ongoing cost initiatives and outer years revenue stabilization are expected to result in ~$230 million of average annual cash flow in FY17-21. Notes: 1. Working capital, pension projections reflect ordinary course and do not include bankruptcy-related impacts. 2. Include cash flow adjustments related to pension, prepaid expenses, payroll, variable compensation and other assets / liabilities; also include ~$30M and $40M of restructuring related professional fees in FY16 and 1Q'17, respectively. 3. FY17+ estimates based on analysis from Company’s tax advisors; assumptions include $2.0 billion pro forma debt (at 6% cash interest) and tax treatment under 382(l)(6) with zero debt repayment in the projection period. 4. Historical amounts include investing cash flows as well as capital lease payments (primarily related to APCS); projections reflect a run-off of existing capital lease commitments. 5. Illustrative projections assuming a debt-free scenario based on analysis from Company’s tax advisors.
15 $96 $145 $139 $126 $62 $62 $81 $71 $57 $28 $41 $21 $16 $16 $16 $16 $16 $16 $16 $15 $24 $26 $24 $24 $24 $23 $24 $23 $24 $24 $160 $192 $178 $165 $102 $101 $120 $111 $96 $68 $- $50 $100 $150 $200 $250 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 US pension US OPEB Non-US pension PENSION OVERVIEW Avaya’s pension and OPEB (Other Postemployment Benefits) cash outflows, driven by required pension contributions in compliance with IRS guidelines, are forecasted to peak in 2017 at ~$190 million and then fall to ~$70 million by 2025. Avaya Pension and OPEB Cash Outflows FY16 FY25 1 Notes: 1. Germany comprises approximately 98% of Non-US pension for the FY 2016-2025 period.