Avocent Reports Third Quarter 2009 Results

October 21, 2009 4:18 PM EDT

HUNTSVILLE, Ala.--(BUSINESS WIRE)-- Avocent Corporation (NASDAQ: AVCT) today reported results for the third quarter and nine months ended September 30, 2009. The Company reported net sales of $137.6 million for the third quarter of 2009, compared to $128.6 million for the second quarter of 2009. Operational earnings per diluted share was $0.45 compared to $0.32 in the second quarter of 2009 while GAAP net income per diluted share was $0.16 compared to a net loss of $0.08 in the second quarter of 2009. (See "Use of Non-GAAP Financial Measures" discussion below.)

Third Quarter Results

Avocent's third quarter sales increased sequentially from the second quarter of 2009 by approximately $9.0 million. Sales, however, declined 25% to $137.6 million compared with $183.0 million in the third quarter of 2008 due to ongoing weaker IT spending, particularly for our server-linked products. Total branded product sales were $100.5 million for the third quarter of 2009, a decrease of 19% from $124.6 million in the third quarter 2008. Branded product sales rose to 73% of total third quarter 2009 net sales compared with 68% in the third quarter of 2008. Total OEM product sales were $37.1 million for the third quarter of 2009, a decrease of 36% from $58.4 million in the third quarter 2008. OEM product sales represented 27% of third quarter 2009 net sales compared with 32% in the third quarter of 2008. U.S. sales declined 21% to $74.9 million and international sales were down 29% to $62.7 million compared with the third quarter of 2008.

"As we expected, our third quarter revenue increased from the second quarter due primarily to higher government product sales, and we continued to experience a soft market for our server-linked products," stated Mike Borman, Avocent's CEO.

Third quarter 2009 operational net income, which is income prior to acquired in-process research and development, intangible amortization, restructuring and integration costs, and stock compensation expenses, decreased 34% to $20.1 million, or $0.45 per diluted share, compared with operational net income of $30.4 million, or $0.67 per diluted share, in the third quarter of 2008. (See "Use of Non-GAAP Financial Measures" discussion below.)

GAAP net income for the third quarter of 2009 was $7.1 million, or $0.16 per diluted share, compared with GAAP net income of $11.0 million, or $0.24 per diluted share, in the third quarter of 2008. Net adjustments to reconcile operational net income to GAAP net income were $13.1 million in the third quarter of 2009, compared to $19.5 million in the third quarter of 2008.

Operational gross profit for the third quarter of 2009 was $89.3 million compared with $118.6 million in the third quarter of 2008. Operational gross margin rose to 64.9% in the third quarter of 2009 compared with 64.8% in the third quarter of 2008. GAAP gross profit for the third quarter of 2009 was $84.6 million compared with $114.0 million in the third quarter of 2008. GAAP gross margin was 61.5% in the third quarter of 2009 compared with 62.3% in the third quarter of 2008.

Research and development expenses excluding stock-based compensation, were down 18.3% to $18.7 million ($19.6 million on a GAAP basis, which includes stock-based compensation of $869,000), or 13.6% of sales, compared with $22.9 million ($24.4 million on a GAAP basis, which includes stock based compensation of $1.5 million), or 12.5% of sales, in the third quarter of 2008.

Selling, general and administrative expenses, excluding stock-based compensation declined 16.5% to $47.0 million ($52.2 million on a GAAP basis, which includes stock-based compensation of $5.2 million), or 34.2% of sales, compared with $56.3 million ($60.3 million on a GAAP basis, which includes stock-based compensation of $4.0 million), or 30.7% of sales, in the third quarter of 2008.

Operational operating income, excluding restructuring and integration costs, stock-based compensation and intangible asset amortization, was $23.7 million in the third quarter of 2009 compared with $19.2 million in the second quarter of 2009 and $39.4 million in the third quarter of 2008. GAAP operating income was $2.3 million in the third quarter of 2009 compared with $693,000 in the second quarter of 2009 and $13.8 million in the third quarter of 2008.

"Our operating income benefited from the restructuring programs we implemented earlier in 2009," continued Mr. Borman.

Operational net income for the third quarter of 2009 includes the benefit of certain one-time items. Other income for the third quarter of 2009 included a foreign exchange gain of approximately $1.5 million, primarily the result of migrating our Touchpaper United Kingdom business to Ireland. Our income tax rate provision for the quarter included benefits of approximately $1.6 million related to receiving regulatory approvals for favorable tax treatments on certain deductions and revenues in Ireland.

Avocent's cash flow from operations was $23.4 million in the third quarter of 2009 compared to $25.9 million in the second quarter of 2009. At the end of the third quarter, Avocent's cash and cash equivalents totaled approximately $110 million and the outstanding balance on Avocent's credit facility was $125 million.

Third Quarter Business Unit Results

Revenue from Management Systems was $100.3 million in the third quarter of 2009 compared to $91.0 million in the second quarter of 2009, while operating income from this unit improved to $23.5 million in the third quarter of 2009 from $18.4 million in the second quarter of 2009.

Revenue from LANDesk totaled $36.5 million in the third quarter of 2009 and contributed $4.9 million in operating profit for the quarter. This compares with revenue of $36.7 million and a contribution of $6.6 million in operating profit for the second quarter of 2009.

Use of Non-GAAP Financial Measures

To supplement Avocent's consolidated financial statements presented in accordance with GAAP, we present investors with certain non-GAAP operational measures, including gross profit, operating expenses, and the resulting operating income, income before taxes, operational net income, and operational earnings per share, all of which primarily exclude the effects of restructuring, CEO retirement and integration costs, amortization related to purchase accounting adjustments, stock-based compensation and acquired in-process research and development expenses. Specifically, we use the following non-GAAP measures:

    --  The non-GAAP gross profit operational measure consists of the non-GAAP
        net sales operational measure described above, less cost of sales
        excluding the impact of stock-based compensation and intangible
        amortization related to purchase accounting adjustments as they relate
        to cost of sales.
    --  The non-GAAP operating expense operational measure consists of GAAP
        operating expenses, excluding the impact of restructuring and
        integration costs, stock-based compensation, goodwill impairment expense
        and amortization of intangible assets arising from purchase accounting.
    --  The non-GAAP operating income operational measure consists of GAAP
        operating income adjusted for the non-GAAP operational measures
        described above.
    --  The non-GAAP net income operational measure consists of GAAP net income,
        adjusted by the non-GAAP operational measures described above and the
        tax effects of these non-GAAP operational measures, plus the income tax
        benefit realized from deducting the amortization of LANDesk goodwill for
        tax purposes (which is not amortized under GAAP).
    --  The non-GAAP earnings per share operational measure is calculated by
        dividing the non-GAAP net income operational measure described above by
        weighted average basic and diluted shares outstanding.

We believe that excluding amortization associated with purchase accounting adjustments and the estimated goodwill impairment, as well as the tax impact of certain purchase accounting elections for prior acquisitions provides important supplemental information and an alternative presentation useful to investors' understanding Avocent's core operating results and trends between periods. Not only are these amortization and tax impact adjustments based on amounts assigned in purchase accounting that may have little bearing on present or future replacement costs, but they also are based on management's estimates of remaining useful lives.

We believe that excluding restructuring, CEO retirement and integration costs (which consist primarily of one time severance compensation and related employee benefits) provides important supplemental information and an alternative presentation useful to investors' understanding Avocent's core operating results and trends between periods as these costs are not part of our ongoing operating expenses.

Similarly, we believe that excluding stock-based compensation expense provides important supplemental information and an alternative presentation useful to investors' understanding of our core operating results and trends, especially when comparing those results on a consistent basis to results for previous periods and anticipated results for future periods.

We also believe that, in excluding restructuring, CEO retirement and integration costs, stock-based compensation expense, estimated goodwill impairment expense and amortization associated with purchase accounting adjustments (together with the related tax effects), our non-GAAP financial measures provide investors with transparency into the information and basis used by management and our board of directors to measure and forecast our results of operations, to compare on a consistent basis our results of operations for the current period to that of prior periods, to compare our results of operations on a more consistent basis against that of other companies in making financial and operating decisions, and to establish targets for management incentive compensation.

These non-GAAP operational measures have historically been used as internal operating targets and key performance metrics by Avocent's senior management and board of directors as they evaluate both the performance of the consolidated financial results as well as those of individual business segments. These non-GAAP operational measures are reviewed individually as well as in total in measuring our performance against internal and external expectations for the period and the expectations for such key non-GAAP operational measures are the basis for any financial guidance provided by management for future periods. We believe that the use of each of these non-GAAP financial measures provides enhanced consistency and comparability with our past financial reports, and also facilitates comparisons with other companies in our industry, many of which use similar non-GAAP financial measures to supplement their GAAP results. We provide this information to investors to enable them to perform additional analyses of past, present and future operating performance, compare us to other companies, and evaluate our ongoing financial operations.

These non-GAAP operational measures are not calculated in accordance with GAAP, and should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. These operational measures have limitations in that they do not reflect all of the costs or reductions to revenue associated with the operations of our business as determined in accordance with GAAP. In addition, these operational measures may not be comparable to non-GAAP financial measures reported by other companies. As a result, one should not consider these measures in isolation or as a substitute for analysis of Avocent's results as reported under GAAP. We compensate for these limitations by analyzing current and future results on a GAAP basis as well as a non-GAAP basis, prominently disclosing GAAP results and providing reconciliations from GAAP results to operational measures. We expect to continue to incur expenses similar to the non-GAAP adjustments described above, and the exclusion or inclusion of these items from our non-GAAP financial measures should not be construed as an inference that these costs are unusual or infrequent. The non-GAAP operational measures are limited in that they do not include the impact of stock-based compensation expense or amortization of intangible purchase accounting adjustments.

About Avocent Corporation

Avocent delivers IT operations management solutions that reduce operating costs, simplify management and increase the availability of critical IT environments 24/7 via integrated, centralized software. Additional information is available at www.avocent.com.

AVOCENT CORPORATION
GAAP Condensed Consolidated Statements of Income
(Unaudited, in thousands, except per share data)

                  For the Three Months Ended      For the Nine Months Ended

                  Sept. 30, 2009  Sept. 26, 2008  Sept. 30, 2009  Sept. 26, 2008

Net sales         $ 137,554       $ 183,048       $ 392,248       $ 483,629

Cost of sales       52,911          69,001          148,971         178,559
(1) (2)

Gross profit        84,643          114,047         243,277         305,070

Research and
development         19,551          24,398          61,077          72,126
expenses (1)

Acquired
research and        -               700             -               700
development
expense

Selling, general
and                 52,179          60,266          149,521         172,830
administrative
expenses (1)

Restructuring,
integration and     2,883           5,926           9,709           13,627
retirement
expenses (1)

Amortization of
intangible          7,780           8,971           25,843          24,123
assets (2)

Impairment of       -               -               80,000          -
goodwill

Operating income    2,250           13,786          (82,873 )       21,664
(loss)

Other income        148             389             (4,965  )       (1,330  )
(expense), net

Income (loss)
before income       2,398           14,175          (87,838 )       20,334
taxes

Provision
(benefit) for       (4,653  )       3,214           (31,617 )       5,199
income taxes

Net income        $ 7,051         $ 10,961        $ (56,221 )     $ 15,135
(loss)

Earnings (loss)
per share:

Basic             $ 0.16          $ 0.24          $ (1.27   )     $ 0.33

Diluted           $ 0.16          $ 0.24          $ (1.27   )     $ 0.33

Weighted average shares and
common equivalents outstanding:

Basic               44,341          44,792          44,383          45,241

Diluted             44,801          45,467          44,383          45,868

(1) Includes stock-based compensation related to expensing of stock options,
restricted stock units, and performance shares pursuant to SFAS 123R:

                  For the Three Months Ended      For the Nine Months Ended

                  Sept. 30, 2009  Sept. 26, 2008  Sept. 30, 2009  Sept. 26, 2008

Cost of sales     $ 552           $ 298           $ 1,014         $ 797

Research and
development         869             1,523           2,727           3,878
expenses

Selling, general
and                 5,194           3,986           10,992          9,288
administrative
expenses

Restructuring
and retirement      (142    )       480             (138    )       2,999
expenses, net

Total
stock-based       $ 6,473         $ 6,287         $ 14,595        $ 16,962
compensation

(2) Includes amortization of certain intangibles recorded as the result of
acquisitions as detailed below. Please reference the reconciliation of GAAP to
non-GAAP operational measures for each period included elsewhere in this
release.

                  For the Three Months Ended      For the Nine Months Ended

                  Sept. 30, 2009  Sept. 26, 2008  Sept. 30, 2009  Sept. 26, 2008

Cost of sales     $ 4,133         $ 4,219         $ 12,823        $ 9,753

Amortization of
intangible          7,780           8,971           25,843          24,123
assets

Total
amortization of   $ 11,913        $ 13,190        $ 38,666        $ 33,876
intangible
assets

Non-GAAP
Operational
Measures (3)

                  For the Three Months Ended      For the Nine Months Ended

                  Sept. 30, 2009  Sept. 26, 2008  Sept. 30, 2009  Sept. 26, 2008

Operational       $ 89,328        $ 118,564       $ 257,114       $ 315,620
gross profit

Operational       $ 23,661        $ 39,410        $ 60,235        $ 83,997
operating income

Operational net   $ 20,134        $ 30,441        $ 45,401        $ 63,289
income

Operational
diluted earnings  $ 0.45          $ 0.67          $ 1.01          $ 1.38
per share

(3) See reconciliation of GAAP to Non-GAAP operational measures included
elsewhere in this release.

AVOCENT CORPORATION
Reconciliation of GAAP to Non-GAAP Operational Measures
(Unaudited, in thousands, except per share data)

                                        Impairment   Restructuring,
                                        &

             GAAP                       Purchase     Retirement      Non-GAAP

             Financial    Stock-based   Accounting   & Integration   Operational

             Measures     Compensation  Adjustments  Expenses (4)    Measures
             (5)          (1)           (2)                          (5)

For the
Three
Months
Ended
September
30, 2009

Operational
gross        $ 84,643     552           4,133        -               $ 89,328
profit

Operational
operating    $ 2,250      6,473         11,913       3,025           $ 23,661
income

Operational
net income   $ 7,051      5,474         5,007        2,602           $ 20,134
(3)

Operational
diluted
earnings     $ 0.16       0.12          0.11         0.06            $ 0.45
per share
(3)

For the
Three
Months
Ended
September
26, 2008

Operational
gross        $ 114,047    298           4,219        -               $ 118,564
profit

Operational
operating    $ 13,786     6,287         13,891       5,446           $ 39,410
income

Operational  $ 10,961     4,802         10,518       4,160           $ 30,441
net income

Operational
diluted      $ 0.24       0.11          0.23         0.09            $ 0.67
earnings
per share

For the
Nine Months
Ended
September
30, 2009

Operational
gross        $ 243,277    1,014         12,823       -               $ 257,114
profit

Operational
operating    $ (82,873 )  14,595        118,666      9,847           $ 60,235
income
(loss)

Operational
net income   $ (56,221 )  11,989        81,483       8,150           $ 45,401
(loss) (3)

Operational
diluted
earnings     $ (1.27   )  0.27          1.83         0.18            $ 1.01
per share
(3)

For the
Nine Months
Ended
September
26, 2008

Operational
gross        $ 305,070    797           9,753        -               $ 315,620
profit

Operational
operating    $ 21,664     16,962        34,743       10,628          $ 83,997
income

Operational  $ 15,135     12,978        27,044       8,132           $ 63,289
net income

Operational
diluted      $ 0.33       0.28          0.59         0.18            $ 1.38
earnings
per share

(1) Includes stock-based compensation related to expensing of stock options,
restricted stock units, and performance shares pursuant to SFAS 123R.

(2) Includes impairment write-off of goodwill and purchase accounting
adjustments related to amortization of intangibles and the tax affects of these
adjustments.

(3) Operational income tax expense includes benefit of $1,541 and $1,445 for the
three months ended September 30, 2009 and September 26, 2008, respectively.
Operational income tax expense includes benefit of $4,414 and $4,335 for the
nine months ended September 30, 2009 and September 26, 2008, respectively. The
tax benefit relates to the deduction of amortization of LANDesk goodwill for tax
purposes, which is not amortized for GAAP.

(4) Includes approximately $730,000 related to the Emerson acquisition of
Avocent for the three and nine months ended September 30, 2009.

(5) Reconciliation of GAAP to Non-GAAP financial measures for the three and six
months ended June 30, 2009, are included in the press release filed on form 8-K
July 23, 2009.

AVOCENT CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)

                                                   September 30,  December 31,

                                                   2009           2008

Cash, cash equivalents and short-term investments  $ 110,103      $ 126,858

Accounts receivable, net                             101,842        122,133

Inventories, net                                     24,236         31,516

Other current assets                                 15,623         17,490

Deferred income tax                                  7,544          6,885

Total current assets                                 259,348        304,882

Property and equipment, net                          35,266         38,197

Goodwill                                             535,529        616,326

Intangible assets, net                               142,088        180,276

Deferred tax asset                                   46,198         10,873

Other assets                                         3,399          3,616

Total assets                                       $ 1,021,828    $ 1,154,170

Accounts payable and other accrued expenses        $ 36,710       $ 48,460

Income tax payable                                   15,034         11,678

Deferred revenue                                     67,521         66,248

Other current liabilities                            29,484         42,027

Total current liabilities                            148,749        168,413

Line of credit obligation                            125,000        170,000

Deferred revenue, net of current portion             5,291          9,572

Other non-current liabilities                        3,480          4,028

Total liabilities                                    282,520        352,013

Total stockholders' equity                           739,308        802,157

Total liabilities and stockholders' equity         $ 1,021,828    $ 1,154,170

AVOCENT CORPORATION
Additional Operational Financial Information
(Unaudited, in thousands)

                  Quarter Ended                   Nine Months Ended

                  Sept. 30, 2009  Sept. 26, 2008  Sept. 30, 2009  Sept. 26, 2008

Revenue by
Distribution
Channel

Branded           $ 100,409       $ 124,613       $ 276,862       $ 325,147

OEM                 37,145          58,435          115,385         158,482

Total             $ 137,554       $ 183,048       $ 392,247       $ 483,629

Revenue by
Business Unit

Management        $ 100,322       $ 140,983       $ 282,289       $ 378,995
Systems

LANDesk             36,459          41,559          107,625         102,954

Corporate and       773             506             2,333           2,040
unallocated

Total             $ 137,554       $ 183,048       $ 392,247       $ 483,989

Management
Systems Revenue
by Product Line

KVM               $ 67,314        $ 97,101        $ 191,706       $ 271,379

Serial              7,706           13,517          22,327          39,572
Management

Embedded
Software and        7,493           10,229          19,731          26,981
Solutions

Other               17,809          20,136          48,525          41,063

Total             $ 100,322       $ 140,983       $ 282,289       $ 378,995

LANDesk Revenues
by Type

Licenses and      $ 18,069        $ 22,092        $ 52,790        $ 57,919
royalties

Maintenance and     18,390          19,467          54,835          44,675
services

Total             $ 36,459        $ 41,559        $ 107,625       $ 102,594

Operating Profit
by Business Unit

Management        $ 23,924        $ 38,634        $ 57,477        $ 93,351
Systems

LANDesk             4,931           7,620           17,152          12,161

Corporate and       (5,190  )       (6,844  )       (14,391 )       (21,515 )
unallocated

Total             $ 23,665        $ 39,410        $ 60,238        $ 83,997

Cash Flow
Highlights

Cash provided by  $ 23,431        $ 27,284        $ 51,440        $ 66,161
operations

Depreciation      $ 1,750         $ 2,137         $ 6,113         $ 7,027
expense

Capital           $ 2,099         $ 1,762         $ 3,823         $ 6,773
expenditures

Purchase of       $ 3,203         $ -             $ 15,474        $ 64,449
treasury shares

    Source: Avocent Corporation

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