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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   No o

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  x

As of August 4, 2009, the number of outstanding shares of the Registrant’s Common Stock was 44,351,911.

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AVOCENT CORPORATION

FORM 10-Q

June 30, 2009

INDEX

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PART I —FINANCIAL INFORMATION

Item 1.  Financial Statements

AVOCENT CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)

See notes accompanying these condensed consolidated financial statements.

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Avocent Corporation

Consolidated Balance Sheets

(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, CONTINUED

(Unaudited, in thousands, except share data)

Note 1.   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles 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, 2008, 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, 2008, was derived from the audited financial statements filed in our 10-K for the period ended December 31, 2008, 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.  Prior to 2009, we reported 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 began reporting our quarterly periods based on the calendar month end to better align our quarter ends with those of our customers and others within our industry.

Certain reclassifications have been made to the prior year’s condensed consolidated financial statements in order to conform to the 2009 presentation. These reclassifications had no effect on previously reported net income, net cash provided by operating activities, net cash provided by investing activities nor total stockholders’ equity.

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 $5,508 and $6,401 as of June 30, 2009 and December 31, 2008, respectively.

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Unaudited, in thousands, except share data)

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 30, 2009 and June 27, 2008 as follows:

We issued common stock as a result of restricted stock unit (RSU) vesting activity during the three and six months ended June 30, 2009 and June 27, 2008 as follows:

Share repurchase activity during the three and six months ended June 30, 2009 and June 27, 2008 was as follows:

RSUs granted — During the first six months of 2009, our Compensation Committee approved the grant of 779,000 restricted stock units to our employees, officers and directors.  Of these grants, 479,000 were time-based and 300,000 were based on market or performance conditions.  During the first six months of 2008, our Compensation Committee approved the grant of 1,154,000 restricted stock units to our employees, officers and directors.  Of these grants, 728,000 were time-based and 426,000 were based on market or performance conditions.

Note 4.   Accumulated Other Comprehensive Income (Loss)

We record our foreign currency translation adjustments and unrealized gains and losses on derivatives which are cash flow hedges, net of tax, within accumulated other comprehensive income (loss), which is included as a separate component of stockholders’ equity.  Comprehensive income (loss) for the six months ended June 30, 2009 and June 27, 2008 is as follows:

As of June 30, 2009 and December 31, 2008, total accumulated other comprehensive income (loss) was $1,172 and $(1,606), respectively.

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Unaudited, in thousands, except share data)

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

Anti-dilutive options to purchase common stock outstanding were excluded from the calculations above.  Anti-dilutive options and anti-dilutive RSUs totaled 4,627 and 4,840 for the three and six months ended June 30, 2009, respectively. Anti-dilutive options and anti-dilutive RSUs totaled 4,451 and 4,169 for the three and six months ended June 27, 2008, respectively.

Note 6.   Segment Reporting

In the third quarter of 2008, we began the process of dissolving the Connectivity and Control business unit and merging its products into our remaining business units. We divided this business unit into its three product lines: the Equinox branded serial business, the Broadcast business and the Pro Audio Visual business.  We folded the broadcast product line into Management Systems in the third quarter of 2008.  We folded the serial product line into Corporate in the second quarter of

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Unaudited, in thousands, except share data)

2009.  We will fold the Pro Audio Visual product line into Managements Systems during Q3 2009.  Due to the immateriality of the last remaining product line in the second quarter of 2009, we have combined this residual business unit’s results with Corporate and other in the tables below.   As a result of these actions, all revenues and costs associated with our Connectivity and Control business are included within either Management Systems or combined with Corporate and other in the tables below.  Additionally, historical segment results for both Management Systems and Corporate have been adjusted to reflect these changes and the Connectivity and Control business unit has now been effectively dissolved.

We evaluate the performance of our segments based on revenue and operating profit, which are calculated before corporate and unallocated costs, amortization and impairment of intangibles, acquired in-process research and development expense, restructuring, integration and retirement expenses and stock compensation costs.  We do not track nor 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 30, 2009 and June 27, 2008 are as follows:

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(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 six months of 2009 or 2008.

Following is a presentation of long-lived assets as of June 30, 2009 and December 31, 2008:

Note 7.   Forward Contracts and Interest Rate Swaps

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 30, 2009, we had six open forward contracts with an approximate fair value of ($35).  As of December 31, 2008, we had four open forward contracts with an approximate fair value of $26.

There was $140,000 outstanding under our credit facility, which includes both our line of credit and term loan, as of June 30, 2009.  The line of credit and term loan contain affirmative and negative covenants, including limitations on our ability to (i) make distributions, investments, and other payments unless we satisfy certain financial tests or other criteria, (ii) incur additional indebtedness, (iii) restructure our subsidiaries, and (iv) make acquisitions and capital expenditures.  The financial tests include an interest coverage ratio and a total leverage ratio.  We are in compliance with these covenants and related tests as of June 30, 2009.  Failure to comply with these covenants could result in an event of default which, if not cured or waived, could have a material adverse effect on us.  We pay a commitment fee on the unused portion of the line of credit based on the results of a leverage ratio computation. As of June 30, 2009, the commitment fee rate is 20 basis points per quarter. The fair value of our unsecured bank credit facility approximates its carrying value at June 30, 2009, in accordance with SFAS No. 107 “Disclosures about Fair Value of Financial Instruments.”

As of June 30, 2009, we have two interest rate swaps, which are recorded on our balance sheet.  On May 1, 2008, we entered into an interest rate swap agreement with a notional amount of $80,000.  The remaining notional amount of this interest rate swap was $40,000 as of June 30, 2009.  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.  On November 6, 2008 we entered into an additional interest rate swap agreement with a notional amount of $90,000.  The notional amount of this interest rate swap will remain at $90,000 until the termination on June 16, 2011.   The swap was effective on December 31, 2008.  The swap calls for us to make fixed rate payments of 2.75% over the term of the hedge and to receive floating rate payments based on LIBOR (matching the LIBOR rate in the term loan above) from the counter-party.

The objective of the interest rate swap agreements is to provide a hedge against LIBOR interest rate changes that could have an effect on our cash flows and borrowing costs. We anticipate these hedges will be settled upon maturity and they are accounted for as 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 (loss).

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Unaudited, in thousands, except share data)

These interest rate swaps qualify as derivative instruments and are designated as cash flow hedges.  We do not expect any material amounts to be reclassified into earnings, as a result of interest rate swap ineffectiveness,  within the next twelve months. The cash flow hedges were in a liability position as of June 30, 2009 and were included in other non-current liabilities in the consolidated balance sheet, as follows:

For the six months ended June 30, 2009, the activity related to our interest rate swaps designated as cash flow hedges is included in our condensed consolidated financial statements as follows:

Note 8.   Goodwill and Other Intangible Assets

Other intangible assets subject to amortization were as follows:

For the three months ended June 30, 2009 and June 27, 2008, amortization expense for other intangible assets was $12,255 and $10,579, respectively.  For the six months ended June 30, 2009 and June 27, 2008, amortization expense for other intangible assets was $27,007 and $21,033, respectively.  The approximate estimated annual amortization for other intangibles is as follows:

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Unaudited, in thousands, except share data)

In accordance with FASB Statement No. 142, Goodwill and Intangible Assets (SFAS 142), we evaluate the carrying value of goodwill for potential impairment annually during the fourth quarter of each year or on an interim basis if an event occurs or circumstances change that indicate that the fair value of a reporting unit is likely to be below its carrying value.  Our fourth quarter 2008 impairment test concluded that there had been no impairment of goodwill; however there were certain factors noted during the 2008 testing that would require continued monitoring, especially related to any potential future decline in our market capitalization.  During the first quarter of 2009, we concluded that interim impairment testing was required due to the continued deterioration in the global economic environment, the resulting decrease in our market capitalization to less than the book value of our shareholders’ equity, and declining market valuations for many other companies in our peer group.  Additionally, we revisited our five year forecast in light of the continuing global recession.  Based on that trend, we revised our five year forecast to reduce our estimated revenues and expenses.

As of June 30, 2009 we have three reporting units: Management Systems (MS), LANDesk and AESS, which is combined with MS for segment reporting purposes.   We perform our goodwill impairment test in two steps. Step one compares the fair value of each reporting unit to its carrying amount. If step one indicates that an impairment potentially exists, the second step is performed to measure the amount of impairment, if any.  Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value.

For purposes of the interim step one analysis, the fair value of our reporting units was determined through the use of a combination of a discounted cash flow analysis, utilizing the income approach, and the guideline public company method, utilizing a market approach.  The result of each valuation was weighted in determining the fair value of the reporting units. Under the market approach, the fair value of each reporting unit is determined based upon comparisons to public companies engaged in similar businesses. Under the income approach, the fair value of each reporting unit was based on the present value of estimated future cash flows. The income approach is dependent on a number of significant management assumptions including estimated demand in each geographic market and the discount rate. The discount rate is commensurate with the risk inherent in the projected cash flows and reflects an assumed rate of return required by an investor in the current economic conditions.  Based on our assessment of the market conditions, the weighting applied to the market approach for the March 1, 2009 valuation was decreased from 50% to 40% and the weighting for the income approach was increased from 50% to 60%, as compared to the assumptions as of October 1, 2008, the date used for our most recent prior impairment testing.  We believe that this change was appropriate as it reflects our longer term view, including our revised cash flow projections based on current expectations, while continuing to reflect the impact of declining equity values in this highly volatile equity market impacting our stock price and the stock price of many of our peers.

The results of our step one test as of March 1, 2009 indicated that the fair value of each of our reporting units had declined from 2008, however the estimated fair values exceeded their carrying value, with the exception of LANDesk.  We estimated the fair value of our largest reporting unit, Management Systems, to be $184 million higher, or approximately 35%, than its carrying value of $520 million.  Our remaining reporting units are not material to our financial statements, however we estimated the combined fair value of these reporting units to be $49 million higher, or well over double, their combined carrying value of $20 million.

As a result of our step one testing, we then performed step two testing for potential goodwill impairment on the LANDesk business unit.  This testing identifies the identifiable tangible and intangible assets associated business unit and estimates the fair market value a potential acquirer would assign them.  Any residual amount is considered to be applicable to goodwill and is compared to the current carrying value of the related goodwill.  Any unfavorable variance is considered as the impairment amount.  Our step two testing resulted in an $80,000 impairment charge during our three months ended March 31, 2009 and is reflected in the following table.

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AVOCENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(Unaudited, in thousands, except share data)

The changes in the carrying amount of goodwill (see note 11) for the six months ended June 30, 2009, are as follows: