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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

For the transition period from            to

Commission file number: 000-30575

AVOCENT CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

256-430-4000
(Registrant’s Telephone Number, Including Area Code)

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, as amended, 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.

x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes  o    No  ý

As of July 31, 2008, the number of outstanding shares of the Registrant’s Common Stock was 44,795,253.

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AVOCENT CORPORATION

FORM 10-Q

June 27, 2008

INDEX

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PART I —FINANCIAL INFORMATION

Item 1.  Financial Statements

AVOCENT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited, in thousands, except per share data)

See notes accompanying these condensed consolidated financial statements.

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AVOCENT CORPORATION

CONSOLIDATED BALANCE SHEET

(Unaudited, in thousands, except per share data)

See notes accompanying these condensed consolidated financial statements.

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AVOCENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

See notes accompanying these condensed consolidated financial statements.

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

Note 1.          Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods shown.  The results of operations for these periods are not necessarily indicative of the results expected for the full fiscal year nor for any future period.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates and assumptions.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2007, which is on file with the Securities and Exchange Commission and is available at our website, www.avocent.com. The consolidated balance sheet presented in the accompanying condensed consolidated financial statements for December 31, 2007, was derived from the audited financial statements filed in our 10-K for the period ended December 31, 2007, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

We report our annual results based on years ending December 31.  We report our quarterly results for the first three interim periods based on 13 week periods ending on Fridays and for the fourth interim period ending on December 31.  Beginning January 1, 2009 we will switch to reporting our quarterly periods based on three calendar months per quarter.

Our financial statements are consolidated and include the accounts of Avocent Corporation and our wholly owned subsidiaries.  All significant inter-company transactions and balances have been eliminated in consolidation.

Note 2.          Inventories

Inventories consisted of the following at:

Inventories above have been reduced by reserves for excess and obsolete inventories of $7,288 and $7,328 as of June 27, 2008 and December 31, 2007, respectively.

Note 3.          Equity and Treasury Stock

We issued common stock as a result of stock option exercise activity during the three and six months ended June 27, 2008 and June 29, 2007 as follows:

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

We issued common stock as a result of restricted stock unit (RSU) vesting activity during the three and six months ended June 27, 2008 and June 29, 2007 as follows:

Share repurchase activity during the three and six months ended June 27, 2008 and June 29, 2007 was as follows:

RSUs granted — During the first six months of 2008, our Compensation Committee approved the grant of 728,000 time-based and 426,000 market condition-based or performance conditioned-based restricted stock units to our employees, officers and directors (see note 15).

RSUs accelerated — During the three and six months ended June 27, 2008, we accelerated 131,000 and 163,000 RSUs, respectively, in relation to our restructuring program (see Note 13).

Note 4.          Accumulated Other Comprehensive Income

We record unrealized gains and losses on our foreign currency translation adjustments, unrealized gains and losses on derivatives accounting for as cash flow hedges, and unrealized holding gains or losses on our available-for-sale securities, net of tax, as accumulated other comprehensive income, which is included as a separate component of stockholders’ equity.  Comprehensive income for the six months ended June 27, 2008 and June 29, 2007 is as follows:

As of June 27, 2008 and December 31, 2007, total accumulated other comprehensive income was $4,943 and $2,130, respectively.

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

Note 5.          Earnings Per Share (share data in thousands)

Anti-dilutive options to purchase common stock outstanding and anti-dilutive RSUs were excluded from the calculations above. Anti-dilutive options and anti-dilutive RSUs totaled 4,451 and 4,169 for the three and six months ended June 27, 2008, respectively.  Anti-dilutive options and anti-dilutive RSUs totaled 2,203 and 2,207 for the three and six months ended June 29, 2007, respectively.

Note 6.          Segment Reporting

In the first quarter of 2008, we dissolved our Desktops Solutions Business Unit (DS) and transferred some of its personnel and a portion of its technology into Management Systems.  DS’ results were previously reported within our Other Business Units segment.  The related revenue and expenses of DS has not been material to our consolidated results, and this business unit was dissolved rather than being merged into another business unit.  Accordingly, we will continue to report historical results for DS within our Other Business Units segment.  In addition, no goodwill was allocated to this business unit and all related intangible assets were fully amortized prior to the dissolution of the business unit. Accordingly, there was no related write-off of goodwill or write-down of intangible assets as a result of the dissolution of this business unit. Costs associated with the dissolution of DS are included in retirement and restructuring expenses for the first quarter of 2008 (see Note 13).

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

We evaluate the performance of our segments based on revenue and operating income, which is calculated before corporate and unallocated costs, amortization of intangibles, acquired in-process research and development expense, and stock compensation costs.  We do not track or use assets by segment as a measure of performance, therefore, we have not presented assets by segment.  The following is a presentation of information for our two reportable segments, Management Systems and LANDesk:

Sales by product line for Management Systems and LANDesk for the three and six months ended June 27, 2008 and June 29, 2007 are as follows:

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

We sell our products internationally to customers in several countries; however no foreign country accounted for more than 10% of sales in the first half of 2008 or 2007.

Following is a presentation of long-lived tangible assets by geography as of June 27, 2008 and December 31, 2007:

Note 7.   Forward Contracts and Interest Rate Swap

We use forward contracts to reduce our foreign currency exposure related to the net cash flows from our international operations.  The majority of these contracts are short-term contracts (three months or less) and are marked-to-market each quarter and included in trade payables, with the offsetting gain or loss included in other income (expense) in the accompanying consolidated statements of income.  As of June 27, 2008, we had 3 open forward contracts with an approximate fair value of $2.  As of December 31, 2007, we had three open forward contracts with an approximate fair value of $8.

As of  June 27, 2008 we have two interest rate swaps, which are recorded on our balance sheet.  In 2006, we entered into an interest rate swap agreement with a notional amount of $125,000.  The notional amount of the interest rate swap was $40,000 as of June 27, 2008.    The swap was effective on August 31, 2006 and terminates on December 31, 2008.  The swap calls for us to make fixed rate payments of 5.42% over the term of the hedge and to receive floating rate payments based on LIBOR (matching the LIBOR rate in the line of credit above) from the counter-party.   On May 1, 2008, we entered into an interest rate swap agreement with a notional amount of $80,000.  The notional amount of the interest rate swap was $80,000 as of June 27, 2008.  The swap was effective on May 1, 2008 and terminates on December 31, 2009.  The swap calls for us to make fixed rate payments of 3.05% over the term of the hedge and to receive floating rate payments based on LIBOR (matching the LIBOR rate in the line of credit above) from the counter-party.

The objective of the rate swap agreements is to provide a hedge against rising LIBOR interest rates that would have a negative effect on our cash flows due to changes in interest rates on the line of credit. We anticipate that these hedges will be settled upon maturity and are being accounted for as a cash flow hedges.  The interest rate swaps are recorded at fair value each reporting period with the changes in the fair value of the hedge that take place through the date of maturity recorded in accumulated other comprehensive income (OCI).

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

At June 27, 2008, we recorded a net unrealized gain on the interest rate swaps, net of tax, of $446 in accumulated OCI. There was no significant ineffectiveness in the first half of 2008, and we anticipate no significant ineffectiveness throughout the remainder of 2008.

Note 8.          Goodwill and Other Intangible Assets

Other intangible assets subject to amortization were as follows:

For the three months ended June 27, 2008 and June 29, 2007, amortization expense for other intangible assets was $10,579 and $10,461, respectively.  For the six months ended June 27, 2008 and June 29, 2007, amortization expense for other intangible assets was $21,033 and $22,208, respectively.  The approximate estimated annual amortization for other intangibles is as follows:

We evaluate goodwill for impairment in the fourth quarter of each fiscal year, unless circumstances dictate measurement at an interim date.

Note 9.         Product Warranties and Deferred Revenue

We include an accrued liability for warranty returns in our balance sheet within accrued current liabilities. The activity within the liability for warranty returns for the six months ended June 27, 2008 is as follows:

Deferred revenue related to our extended warranty program for hardware products was $5,670 at June 27, 2008 and $5,388 at December 31, 2007.  We recorded earned revenue from the amortization of deferred revenue related to extended warranties of $1,962 during the six months ended June 27, 2008.  In addition, we recorded new extended warranties of $2,244 during the six months ended June 27, 2008.

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

We defer revenue for subscription, service and maintenance contracts until earned, which is generally over the term of the contract or when services are performed. As of June 27, 2008, deferred revenue was $63,395, of which approximately $61,730 related to LANDesk.  As of December 31, 2007, deferred revenue was $60,647, of which approximately $59,078 related to LANDesk.

Note 10. Income Taxes

The effective tax rate in the second quarter of 2008 was a provision of 23.5% compared to a benefit of 19.8% in the second quarter of 2007.  The provision for income taxes was $1,100 for the second quarter of 2008, compared to a benefit of $2,500 in the second quarter of 2007.  The effective tax rate for the first six months of 2008 was a provision of 32.2% compared to a benefit of 17.8% for the first six months of 2007.  The provision for income taxes was an expense of $1,985 for the first six months of 2008, compared to a benefit of $2,385 for the first six months of 2007.  The increase in the effective tax rate was primarily the result of the change in the amount and mix of our pre-tax book income and a tax benefit recognized during the second quarter of 2007 associated with in-process R&D previously charged to book expense.

During the second quarter of 2007, we made certain elections under the Internal Revenue Code Sec. 338(g) related to the LANDesk acquisition in August 2006.  As a result of making these elections, the acquisition was treated for U.S. tax purposes as an asset acquisition where we stepped up the tax basis in assets and liabilities previously recognized in the purchase accounting.  We had previously accounted for this acquisition as a qualified stock purchase, with carryover tax basis in the assets and liabilities recorded.  Our preliminary purchase price allocation was based upon the initial structure of the transaction and did not take into consideration the tax impacts should those elections be made within the required time period, including the tax impacts associated with the amount assigned to in-process R&D that was charged to expense at acquisition.  During the second quarter of 2007, we reconsidered the measurement of deferred taxes related to this business combination to take into consideration the tax impacts of the elections made.  As a result, we adjusted the deferred tax accounts with the offset reducing the amount of goodwill previously recognized from this transaction.  In addition, we recognized a tax benefit of $6,500 during the quarter ended June 29, 2007 to take into consideration the tax impacts associated with the in-process R&D previously charged to expense on a gross basis at acquisition.

As of June 27, 2008, we had total reserves for uncertain tax positions related to gross unrecognized tax benefits of $5,541, of which $3,779, if recognized, would affect our effective tax rate.  We recognize potential accrued interest and penalties related to unrecognized tax benefits from our global operations within income tax expense. We recorded $416 of such expenses during the first six months of 2008.  As of June 27, 2008, we had accrued interest payable related to the unrecognized tax benefits of $850.

We conduct business globally, and as a result our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.  In the normal course of business we are subject to examinations by taxing authorities throughout the world including the U.S.  With few exceptions, we are no longer subject to U.S. federal, state, and local, and non-U.S. income tax examinations for tax years prior to 2004.

The Internal Revenue Service (IRS) commenced an examination in 2006 of our U.S. income tax returns for 2004 and 2005.  During the first quarter of 2008, the IRS proposed certain adjustments relating primarily to transfer pricing, increasing our tax liabilities for those periods.  We reached a negotiated settlement with the IRS related to those adjustments resulting in an additional tax payment of $6,600, which we had accrued prior to 2008 and was paid during the first quarter of 2008.   A payment for interest of $1,430, which we had previously accrued, associated with the additional tax liability was paid during the second quarter of 2008.

Note 11. Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (SFAS 157), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value, and expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model. We adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to nonfinancial assets and nonfinancial liabilities. Nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of SFAS 157 include those measured at fair value in goodwill impairment testing, indefinite lived intangible assets measured at fair value for impairment testing, and those initially measured at fair value in a business combination.

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in thousands, except share data)

Relative to SFAS 157, the FASB issued FASB Staff Positions (FSP) 157-1 and 157-2. FSP 157-1 amends SFAS 157 to exclude SFAS No. 13, “Accounting for Leases,” (SFAS 13) and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the effective date of the application of SFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.   We are currently evaluating these FSP’s, but do not believe they will have a material impact on our financial statements.

SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 27, 2008: