Exhibit 99.20
AVOCENT CORPORATION
COMMENTS BY MANAGEMENT ON FINANCIAL RESULTS
FOR THE QUARTER ENDED JUNE 30, 2006
AND OTHER MATTERS
Concurrently with the filing of this information, Avocent Corporation has issued
a press release containing financial information for the quarter ended June 30,
2006. The following commentary should be read in conjunction with that press
release (and the financial information attached to it).
About the Quarter
We were pleased with our results for the quarter. Revenue of $118 million was
within our guidance range and represents an increase of 31.8% from the second
quarter of 2005 and an increase of 25.7% from the first quarter of this year.
The Management Systems Division recorded revenue of $103 million, up 29.1% from
the second quarter of last year and up 22.1% from the first quarter of this
year. For the second quarter, revenue from the sale of KVM products was
approximately $84 million, while revenue from serial products was approximately
$14 million. Integration efforts with respect to the Cyclades acquisition went
well. As we previously announced, our engineers were able to accomplish the
first integration of the primary Cyclades products into our DSView Suite at the
beginning of the quarter, and this aided our sales efforts. We also were able to
move quickly on the integration of the two sales forces with people trained and
territories realigned for most of the quarter. We quickly identified areas of
workforce redundancy as a result of the acquisition and notified all the
affected employees within 30 days of the closing regarding our plans for their
position. We felt informing employees of their status as soon as possible was
important out of respect for the people whose jobs were eliminated and to focus
the attention of those remaining with us on the task of integration.
Just as important, we made good progress with the integration of the external
parts of our sales organization (systems integrators, VARs, resellers, etc.)
during the quarter.
Our operations group made significant progress in transferring the Cyclades
product lines. Completion of the transfer of the Cyclades products to the
Avocent contract manufacturing network remains on schedule to be completed by
the end of the year. We also continue on schedule with the integration of the
finance, administrative and human resources functions from Cyclades. We expect
all of those areas to be fully integrated by the end of the third quarter.
Other divisions met or exceeded expectations during the quarter. AESS exceeded
its revenue target and continues to be profitable. Our three other, smaller
divisions
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improved their revenue performance over the first quarter although we
need to make clear that we continue to consider their efforts "entrepreneurial"
in nature and do not expect profits from them at this time.
The quarter was characterized by more than normal product shortage issues,
primarily related to the effects of RoHS and related issues.
Gross Margin
Total gross profit was $71.6 million for the quarter. Our gross margin, at 60.6%
for the second quarter, was up 1.3 percentage points compared to 59.3% for the
first quarter of 2006, and was up 1.6 percentage points when compared to 59.0%
for Q2 2005. Our gross margin continues to be positively affected by higher
digital product sales and increased revenue from our Embedded Software and
Solutions Division. In addition, Cyclades products carry higher gross margins
since they are concentrated in branded markets.
We continue to experience good results from our efforts to engineer additional
value into our products and our operations group does an excellent job of
controlling our manufacturing costs.
Our sales of new products which were introduced or significantly refreshed
during the past 12 months contributed approximately $30 million to revenue in
the quarter at a combined gross margin significantly higher than our average
gross margin.
Operating Expenses
R&D costs were $13.6 million and represented 11.5% of sales. Sequentially, R&D
costs increased $650,000 as result of a full quarter's Cyclades expense, which
was somewhat offset by the savings from the R&D site closings and headcount
reductions completed last year. Compared to Q2 of 2005, R&D expenses decreased
$538,000, primarily due to the reduced headcount and site closings.
Selling, General and Administrative expenses were $30.8 million, or 26.1% of
sales, and increased by $8.0 million from the first quarter of 2006. As
expected, we experienced higher costs as a result of a full quarter of Cyclades
selling, general and administrative expenses and higher legal fees associated
with the protection of our intellectual property rights, particularly as we
approach the trial in the ClearCube case. We also had increased advertising and
promotion costs in Q2 to promote our newer products and to promote the addition
of Cyclades products.
We expensed almost $2.3 million in the second quarter of 2006 for integration
costs and severance charges related to the acquisition of Cyclades.
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Other Income Statement Items
Our operating profit increased $9.9 million compared to the second quarter of
2005 and increased $4.6 million, compared to the first quarter of 2006, to $25.0
million resulting in an operating margin of 21.2% for the second quarter of
2006.
Other income was $1.8 million for Q2, down $1.2 million over Q1, and down
$175,000 over Q2 2005. The reduction in other income is related directly to our
reduced amounts available for investment as we funded the acquisition of
Cyclades at the end of the first quarter of 2006. Also, we used approximately
$95.3 million of cash during the second quarter of 2006 for our share repurchase
program.
We recorded a one-time $5.0 million gain during the second quarter of 2005 as a
result of a settled patent infringement lawsuit.
Our effective tax rate for the quarter was 30.1% compared to 25.5% for Q1 2006
and 27.9% for Q2 2005. The mix of pretax profit among our U.S. and foreign
companies affects the rate. Our pretax profits for the remainder of the year are
expected to be more heavily weighted towards our domestic operations and will
cause our effective tax rate for the year to increase.
Income before the effects of intangible asset amortization, stock-based
compensation and acquisition-related charges was $18.7 mi1lion or 15.8 % of
sales. This compares to $17.4 million for the first quarter of 2006.
Earnings per share, before the effects of intangibles amortization, stock-based
compensation and acquisition-related charges amounted to 38 cents per diluted
share for the quarter versus 31 cents for the same quarter in 2005. Our diluted
shares decreased year over year by about 1.8 million to 48.7 million this
quarter.
During the quarter, we bought back 3,963,000 shares of Avocent stock. As of July
18, 2006, we have repurchased approximately 8,063,000 shares of the 10 million
shares authorized for repurchase under our repurchase programs.
Balance Sheet Items
At the end of the second quarter we had approximately $194 million in cash and
investments. Cash flow from operations was approximately $13.5 million for the
quarter.
Our accounts receivable balance increased, as did our DSO (to 60.5), due to an
increased amount of sales occurring in the last month of the quarter and adding
Cyclades customer balances which tend to have longer payment terms than legacy
Avocent balances have.
Our inventories increased and our inventory turns decreased (to 5.1) as we added
more inventories in anticipation of the transition of Cyclades purchasing,
warehousing and order fulfillment functions from Fremont to Huntsville in the
United States and from
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Germany to Shannon in Europe. In addition, planned
product transitions in relation to the integration of the Avocent and Cyclades
product roadmaps and introduction of RoHS-compliant products affected
inventories.
During the quarter we invested approximately $1.5 million for capital
expenditures related to software acquisitions, implementing additional software
modules for internal use, upgrading an engineering test facility and various
other smaller projects.
During the second quarter of 2006, we obtained a five year unsecured revolving
bank line of credit facility. At June 30, 2006, the balance outstanding on this
line was approximately $12 million. We expect to borrow $100 to $125 million at
the date of closing the LANDesk acquisition. Additionally, we may borrow
additional amounts under the line to repurchase Avocent shares to offset the new
shares issued to the LANDesk shareholders. The line of credit currently bears
interest at LIBOR plus 112.5 basis points.
LANDesk
No amounts relating to LANDesk results are included in the amounts reported by
Avocent for the second quarter. The closing date had been anticipated to be late
July. That date now looks more like the second half of August as we await the
necessary governmental approvals. However, we are aware that there is
significant interest in the results LANDesk posted for the second quarter, so
that will be addressed in this section.
LANDesk management has told us that, on an unaudited basis, LANDesk posted
revenue of $25.6 million, reflecting growth of 25.5% over the second quarter of
2005 and 15.6% over the first quarter of 2006. LANDesk management has informed
us that they believe they would have seen even more significant growth had they
not experienced some hesitation in parts of their overseas sales channels due to
uncertainties surrounding the pending acquisition. The slowness seemed to be a
little more pronounced in European and Asian markets. LANDesk reported EBITDA of
approximately $2.0 million for the second quarter of 2006, up from $1.2 million
for the second quarter of 2005.
LANDesk showed a growth rate in revenue of 25.4% from the first half of 2005. If
that rate of growth were to continue for the full year, the earnout due the
LANDesk shareholders would be approximately $36.2 million, bringing the total
amount paid for LANDesk to approximately $452.2 million, composed of $200
million cash to be paid at closing, $200 million of Avocent common stock (of
which $60 million will be held in escrow), approximately $16 million for the
estimated intrinsic value of unvested options to be assumed by Avocent, and
$36.2 million to be paid in cash for the earnout.
Forward-Looking Statements
This commentary contains statements that are forward-looking statements as
defined within the Private Securities Litigation Reform Act of 1995. These
include statements regarding the acquisition and the expected closing, earnout,
and purchase price of
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LANDesk, the integration, operation, and synergies
expected from the Cyclades and LANDesk operations, products, and businesses,
future cash needs and borrowings under our line of credit, the size and growth
of the current and future markets our products and technologies. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from the statements made, including
the risks associated with general economic conditions, risks attributable to
future product demand, sales, and expenses, risks associated with reliance on a
limited number of customers, component suppliers, and single source components,
risks associated with acquisitions and acquisition integration, risks associated
with product design efforts and the introduction of new products and
technologies, and risks associated with obtaining and protecting intellectual
property rights. Other factors that could cause operating and financial results
to differ are described in our annual report on Form 10-K filed with the
Securities and Exchange Commission on March 6, 2006 and our quarterly report on
Form 10-Q filed with the SEC on May 10, 2006. Other risks may be detailed from
time to time in reports to be filed with the SEC. Avocent does not undertake any
obligation to publicly update its forward-looking statements based on events or
circumstances after the date hereof.
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