American Power Conversion 10Q 2006 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 26, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-12432

AMERICAN POWER CONVERSION CORPORATION

(Exact name of registrant as specified in its charter)

MASSACHUSETTS	04-2722013
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification no.)

132 FAIRGROUNDS ROAD, WEST KINGSTON, RHODE ISLAND 02892
401-789-5735
(Address and telephone number of principal executive offices)

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 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.

YES x NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO x

Registrant’s Common Stock outstanding, $0.01 par value, at April 27, 2006 —192,772,000 shares.

AMERICAN POWER CONVERSION CORPORATION

INDEX

		Page No.
Part I - Financial Information:
Item 1.	Consolidated Condensed Financial Statements:

	Consolidated Condensed Balance Sheets - March 26, 2006 and December 31, 2005 (Unaudited)	3 - 4

	Consolidated Condensed Statements of Income - Three Months Ended March 26, 2006 and March 27, 2005 (Unaudited)	5

	Consolidated Condensed Statements of Cash Flows - Three Months Ended March 26, 2006 and March 27, 2005 (Unaudited)	6

	Notes to Consolidated Condensed Financial Statements (Unaudited)	7 - 14

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15 - 27

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	28

Part II - Other Information:

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 6.	Exhibits	31

Signatures		32

Exhibit Index		33

PART I - - CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

ITEM 1. FINANCIAL STATEMENTS

AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
In thousands except per share amount
(Unaudited)

ASSETS

	March 26, 2006		December 31, 2005
Current assets:
Cash and cash equivalents	$	224,794	$	262,414
Short term investments (Note 3)	425,574		511,181
Accounts receivable, less allowance for doubtful accounts of $15,077 in 2006 and $14,995 in 2005	366,553		374,694
Inventories:
Raw materials	243,546		215,260
Work-in-process and finished goods	346,017		326,563
Total inventories	589,563		541,823

Prepaid expenses and other current assets	60,462		59,181
Deferred income taxes	63,808		60,139

Total current assets	1,730,754		1,809,432

Property, plant and equipment:
Land, buildings and improvements	76,556		75,549
Machinery and equipment	238,686		229,768
Office equipment, furniture and fixtures	103,145		101,144
Purchased software	57,479		53,275
	475,866		459,736
Less accumulated depreciation and amortization	303,572		293,692
Net property, plant and equipment	172,294		166,044

Long term investments (Note 3)	587		562
Goodwill (Note 4)	17,951		15,781
Other intangibles, net (Note 4)	32,810		36,115
Deferred income taxes	50,789		42,427
Other assets	4,891		5,101

Total assets	$	2,010,076	$	2,075,462

See accompanying notes to consolidated condensed financial statements.

LIABILITIES AND SHAREHOLDERS’ EQUITY

	March 26, 2006		December 31, 2005
Current liabilities:
Accounts payable	$	173,555	$	176,345
Accrued compensation	43,858		41,798
Accrued sales and marketing programs	48,668		47,826
Accrued warranty (Note 5)	13,229		13,272
Other accrued expenses	57,844		60,013
Deferred revenue	42,671		41,793
Income taxes payable	44,387		39,755

Total current liabilities	424,212		420,802

Deferred tax liability	11,380		14,911

Total liabilities	435,592		435,713

Shareholders’ equity (Notes 6, 7, 8 and 9):
Common stock, $0.01 par value;
authorized 450,000 shares in 2006 and 2005;
issued 192,697 shares in 2006 and 195,778 shares in 2005	1,927		1,958
Additional paid-in capital	71,493		131,862
Retained earnings	1,499,060		1,504,093
Accumulated other comprehensive income	2,004		1,836

Total shareholders’ equity	1,574,484		1,639,749

Total liabilities and shareholders’ equity	$	2,010,076	$	2,075,462

See accompanying notes to consolidated condensed financial statements.

AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
In thousands
(Unaudited)

	Three months ended
	March 26, 2006		March 27, 2005

Net sales (Note 10)	$	478,793	$	408,003

Cost of goods sold	321,005		243,552

Gross profit	157,788		164,451

Operating expenses:
Marketing, selling, general and administrative	121,984		100,579
Research and development	22,535		20,239
Total operating expenses	144,519		120,818

Operating income	13,269		43,633

Other income, net	5,434		3,794

Earnings before income taxes	18,703		47,427

Income taxes	4,208		11,382

Net income	$	14,495	$	36,045

Basic earnings per share	$	0.07	$	0.19

Basic weighted average shares outstanding	194,662		192,422

Diluted earnings per share	$	0.07	$	0.18

Diluted weighted average shares outstanding	197,305		198,258

See accompanying notes to consolidated condensed financial statements.

AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
In thousands
(Unaudited)

	Three months ended
	March 26, 2006			March 27, 2005
*Cash flows from operating activities*
Net income	$	14,495		$	36,045
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization of property, plant and equipment	10,641			8,654
Amortization of other intangibles	3,305			2,948
Provision for doubtful accounts	526			535
Provision for inventories	4,779			760
Share-based compensation expense	4,111			3,067
Deferred income taxes	(15,562		)	(3,405		)
Other non-cash items, net	168			(404		)
Changes in operating assets and liabilities:
Accounts receivable	7,615			(698		)
Inventories	(52,519		)	(17,625		)
Prepaid expenses and other current assets	(1,281		)	(4,506		)
Other assets	(1,960		)	(1,915		)
Accounts payable	(2,790		)	(5,123		)
Accrued expenses	1,568			(5,661		)
Income taxes payable	4,632			21,870
Net cash (used in) provided by operating activities	(22,272		)	34,542

*Cash flows from investing activities*
Purchases of held-to-maturity securities	—			(358,614		)
Maturities of held-to-maturity securities	—			344,549
Purchases of available-for-sale securities	(1,300,103		)	(439,450		)
Sales of available-for-sale securities	1,385,685			463,799
Capital expenditures, net of capital grants	(16,891		)	(4,987		)
Net cash provided by investing activities	68,691			5,297

*Cash flows from financing activities*
Purchases of common stock	(70,277		)	—
Proceeds from issuances of common stock	4,813			8,732
Tax effect of stock options	953			—
Dividends paid on common stock	(19,528		)	(19,255		)
Net cash used in financing activities	(84,039		)	(10,523		)

Net change in cash and cash equivalents	(37,620		)	29,316
Cash and cash equivalents at beginning of period	262,414			72,721
Cash and cash equivalents at end of period	$	224,794		$	102,037

*Supplemental cash flow disclosures*
Cash paid during the period for:
Income taxes (net of refunds)	$	14,164		$	(6,282	)

See accompanying notes to consolidated condensed financial statements.

AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1. Management Representation

The accompanying unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements included in the American Power Conversion Corporation (APC) Annual Report on Form 10-K for the year ended December 31, 2005. In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the consolidated financial position and the consolidated results of operations and cash flows for the interim periods. The results of operations for the interim periods are not necessarily indicative of results to be expected for the full year.

2. Principles of Consolidation

The accompanying consolidated condensed financial statements include the financial statements of American Power Conversion Corporation and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

3. Investments

APC classifies as short term its investments with original maturities greater than three months and less than or equal to one year, and as long term its investments with remaining maturities greater than one year. APC has no investments with maturity dates greater than one year except for auction rate securities and variable rate demand obligations. Held-to-maturity securities are carried at amortized cost. Available-for-sale securities are recorded at fair value with net unrealized gains and losses reported, net of income taxes, in other comprehensive income. Management determines the appropriate classification of securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Securities are classified as held-to-maturity when APC has the positive intent and ability to hold such securities to maturity. APC invests its excess cash principally in auction rate securities and variable rate demand obligations which have long-term underlying maturities, however the market is highly liquid and the interest rates reset frequently.

At March 26, 2006 and December 31, 2005, APC’s held-to-maturity investments included $5.0 million and $5.0 million, respectively, with contractual maturities of one year or less. At March 26, 2006 and December 31, 2005, APC had no held-to-maturity investments with contractual maturities longer than one year. At March 26, 2006 and December 31, 2005, APC’s available-for-sale auction rate debt securities (ARS’s) included $298.4 million and $364.5 million, respectively, with contractual maturities between approximately 1 to 42 years. In addition, at March 26, 2006, APC’s available-for-sale ARS’s included $11.1 million that had underlying equity investments. At March 26, 2006 and December 31, 2005, APC’s available-for-sale variable rate demand obligations (VRDN’s) included $111.1 million and $136.7 million, respectively, with contractual maturities between 13 and 33 years. Both the ARS’s and VRDN’s resemble short-term instruments because they contain features (i.e., interest rate reset and put options, respectively) that allow for the sale of the instrument on a predetermined schedule ranging from 7 to 49 days depending on the type of instrument and its particular features.

Proceeds from the sales of investment securities available-for-sale were $1.386 billion and $463.8 million in the first quarters of 2006 and 2005, respectively.

	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
	(In thousands)
At March 26, 2006

Available-for-sale
Auction rate securities	$	309,500	$	—	$	—		$	309,500
Variable rate demand obligations	111,074		—		—			111,074
Equity investments	488		99		—			587
	421,062		99		—			421,161
Held-to-maturity
U.S. government agency securities	5,000		—		—			5,000
	5,000		—		—			5,000
	$	426,062	$	99	$	—		$	426,161
At December 31, 2005

Available-for-sale
Auction rate securities	$	369,481	$	—	$	—		$	369,481
Variable rate demand obligations	136,700		—		—			136,700
Equity investments	481		81		—			562
	506,662		81		—			506,743
Held-to-maturity
U.S. government agency securities	5,000		—		(28		)	4,972
	5,000		—		(28		)	4,972
	$	511,662	$	81	$	(28	)	$	511,715

4. Goodwill and Other Intangible Assets

At each of March 26, 2006 and December 31, 2005, goodwill of $15.9 million and $15.8 million, respectively, was associated with the Small Systems segment. At March 26, 2006, goodwill of $2.1 million was associated with the Large Systems segment and originated during the first quarter of 2006 from a payment of escrowed purchase price consideration. Amortized intangible assets were as follows:

March 26, 2006

December 31, 2005

Amortized
Intangible
Assets

Weighted
Average
Amortization
Period

Gross
Carrying
Amount

Accumulated
Amortization

Gross
Carrying
Amount

Accumulated
Amortization

($ in thousands)

Technology

8 years

87,319

58,731

87,319

55,958

Customer lists

9 years

11,100

8,001

11,100

7,610

Tradenames

9 years

3,957

2,834

3,957

2,693

Total amortized intangible assets

8 years

102,376

69,566

102,376

66,261

Aggregate amortization expense related to APC’s other intangible assets for each of the first quarters of 2006 and 2005 was $3.3 million and $2.9 million, respectively. Estimated aggregated amortization for each of the next five succeeding fiscal years is $13.2 million for 2006, $11.1 million for 2007, $6.6 million for 2008, $2.6 million for 2009, and $1.2 million for 2010. There are no expected residual values related to these intangible assets.

5. Warranty Liability

	Product Warranty Liability at Beginning of Quarter		Accruals for Product Warranties Issued During the Quarter		Adjustments to Accruals for Preexisting Warranties		Warranty Payments			Product Warranty Liability at End of Quarter
	(In thousands)
First Quarter 2006	$	13,272	$	7,315	$	—	$	(7,358	)	$	13,229

First Quarter 2005	$	13,092	$	5,334	$	—	$	(6,414	)	$	12,012

6. Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and dilutive potential common shares outstanding during the period. Under the treasury stock method, the unexercised options are assumed to be exercised and the unvested restricted stock units are assumed to be vested at the beginning of the period or at issuance, if later. The assumed proceeds are then used to purchase common shares at the average market price during the period. Potential common shares for which inclusion would have the effect of increasing diluted earnings per share (i.e., antidilutive) are excluded from the computation.

	Three months ended
	March 26, 2006	March 27, 2005
	(In thousands)
Basic weighted average shares outstanding	194,662	192,422
Net effect of dilutive potential common shares outstanding based on the treasury stock method using the average market price	2,643	5,836
Diluted weighted average shares outstanding	197,305	198,258
Antidilutive potential common shares excluded from the computation above	2,490	2,607

7. Shareholders’ Equity

Common Stock and Paid-in Capital. In February 2006, APC’s Board of Directors approved a stock repurchase program which authorizes up to $200 million to repurchase outstanding shares of APC’s common stock. The purchases would be made on the open market based on market and business factors. The duration of the repurchase program is two years but may be suspended or discontinued at any time without prior notice. APC commenced the repurchase of its common stock in February 2006. The decrease in common stock and paid-in capital during the first quarter of 2006 reflected APC’s first quarter repurchase on the open market of approximately 3.4 million shares of its common stock, at an average price of $20.39 per share, totaling $70 million; such shares have been deemed authorized but not issued. This decrease was partially offset by stock issuances relating to stock-based employee benefit programs, as well as to the financial statement recognition of the tax benefit afforded to the company as a result of the disposition of option shares by APC employees. Accounting rules require this corporate tax benefit to be recorded as an increase in paid-in capital.

Dividends. Dividends of $0.10 per share were declared and paid in each of the first quarters of 2006 and 2005. It is the intention of the Board of Directors to pay a comparable quarterly dividend on a going forward basis contingent upon continued capital availability and a determination that cash dividends continue to be in the best interests of APC and its shareholders.

8. Comprehensive Income

The components of comprehensive income, net of tax, were as follows:

	Three months ended
	March 26, 2006		March 27, 2005
	(In thousands)

Net income	$	14,495	$	36,045
Other comprehensive income (loss), net of tax:
Change in foreign currency translation adjustment	150		(404		)
Net unrealized gain on investments, net of income taxes	18		—
Other comprehensive income (loss)	168		(404		)
Comprehensive income	$	14,663	$	35,641

9. Share-Based Payments

Effective January 1, 2006, APC adopted the fair value recognition provisions Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, using the modified-prospective transition method. Under this transition method, compensation cost recognized in the first quarter of fiscal 2006 includes compensation cost for all share-based payments granted through January 1, 2006, but for which the requisite service period had not been completed as of January 1, 2006, based on the grant date fair values estimated in accordance with the original provisions of SFAS 123. Compensation cost for all share-based payments granted subsequent to January 1, 2006 will be based on grant date fair values estimated in accordance with the provisions of SFAS 123R. There were no grants during the quarter ended March 26, 2006. Results for prior periods have not been restated.

As a result of the adoption of SFAS 123R, APC’s income before income taxes and net income for the first quarter ended March 26, 2006 are $1.0 million and $0.8 million lower, respectively, than if APC had continued to account for share-based compensation under APB Opinion No. 25. APC recognized a total of $4.1 million of share-based compensation cost for the first quarter ended March 26, 2006. APC did not record a cumulative effect of change in accounting principle related to forfeitures of stock-based awards since such forfeitures were not material. As of March 26, 2006, there was $15.4 million of total unrecognized compensation cost related to outstanding share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 1.6 years. APC utilizes a FASB Interpretation No. 28 attribution model for the timing of the recognition of compensation expense.

Prior to the adoption of SFAS 123R, APC presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in APC’s Consolidated Condensed Statements of Cash Flows. SFAS 123R requires the cash flows resulting from tax deductions in excess of the compensation cost recognized for those stock options (excess tax benefits) to be classified as financing cash flows.

The following table illustrates the effect on net income and earnings per share as if APC had applied the fair value recognition provisions of SFAS 123 for the first quarter ended March 27, 2005:

		Three months ended
		March 27, 2005
		(In thousands except per share amounts)
Net income	As reported	$	36,045
Add: Compensation expense recognized during the period, net of related tax effects		2,377
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	Pro forma	(3,780		)
Net income	Pro forma	$	34,642
Basic earnings per share	As reported	$	0.19
	Pro forma	$	0.18

Diluted earnings per share	As reported	$	0.18
	Pro forma	$	0.18

For all of APC’s stock-based compensation plans, the fair value of each grant was estimated at the date of grant using the Black-Scholes option pricing model. Black-Scholes utilizes assumptions related to volatility, the risk-free interest rate, dividend yield, and employee exercise behavior. Expected volatilities utilized in the model are based on the historical volatility of APC’s stock price. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The model incorporates exercise and post-vesting forfeiture assumptions based on an analysis of historical data. The expected life of fiscal 2006 grants will be derived from historical information and other factors. No stock options were issued during the first quarters ended March 26, 2006 and March 27, 2005.

At March 26, 2006, APC had one active stock-based compensation plan, the 2004 Long-Term Incentive Plan (2004 LTI Plan), and an employee stock purchase plan (ESPP), which are described more fully below. At March 26, 2006, there were 10.1 million shares available for future grants under the 2004 LTI Plan. During the first quarter of 2006, there were no shares granted under the LTI Plan or under the ESPP. APC has a policy of issuing new shares to satisfy stock option exercises.

On June 10, 2004, APC’s shareholders approved APC’s LTI Plan, which replaced APC’s 1997 Stock Option Plan (1997 Plan). The 2004 LTI Plan will enable APC to utilize shares previously not distributed under the 1997 Plan. No further grants will be made from the 1997 Plan. Awards under the 2004 LTI Plan may be in the form of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, performance restricted stock, performance restricted stock units, or any other equity-based interests as the Compensation Committee of APC’s Board of Directors shall determine. The number of shares of common stock that may be delivered in satisfaction of awards granted under the 2004 LTI Plan shall be equal to (a) the number of shares of common stock that remain available for grant under the 1997 Plan as of June 10, 2004, plus (b) any shares of common stock underlying outstanding awards under the 1997 Plan that after June 10, 2004 expire or terminate without being exercised or that would otherwise again become available for issuance under the 1997 Plan, and in no event shall exceed an aggregate of 15 million shares.

On April 21, 1997, APC’s shareholders approved the 1997 Stock Option Plan and on June 19, 1987 approved the 1987 Stock Option Plan (collectively the 1997 and 1987 Plans). The 1997 and 1987 Plans authorized the grant of options for up to 12.0 million shares and 21.6 million shares, respectively, of common stock. On June 11, 2002 and May 7, 1999, APC’s shareholders authorized an additional 9.5 million shares and 12.0 million shares, respectively, under the 1997 Stock Option Plan, resulting in an aggregate of 33.5 million shares available for grant under the 1997 Stock Option Plan.

Options granted under APC’s stock-based compensation plans are either (a) options intended to constitute incentive stock options (ISOs) under the Internal Revenue Code of 1986 (the Code) or (b) non-qualified options. Incentive stock options may be granted under the Plans to employees or officers of APC. Non-qualified options may be granted to consultants, directors (whether or not they are employees), employees or officers of APC.

ISOs granted under APC’s stock-based compensation plans may not be granted at a price less than the fair market value of the common stock on the date of grant (or 110% of fair market value in the case of employees or officers holding 10% or more of the voting stock of APC). The aggregate fair market value of shares, for which ISOs granted to any employee are exercisable for the first time by such employee during any calendar year (under all stock option plans of APC and any related corporation), may not exceed $100,000. Non-qualified options granted under the Plan may not be granted at a price less than the lesser of (a) the book value per share of common stock as of the end of the fiscal year of APC immediately preceding the date of such grant, or (b) 50% of the fair market value of the common stock on the date of grant.

Options granted under the 1997 and 1987 Plans before December 1, 1995 vested 25% at the end of the first year and 12.5% at the end of each six month period thereafter. Options granted after December 1, 1995 and before February 14, 1997 vested 20% at the end of the second year and 20% at the end of each year thereafter. Options granted after February 14, 1997 vest 25% at the end of the first year and 12.5% at the end of each six month period thereafter. Options granted under the 2004 LTI Plan, generally vest 25% at the end of each year.

On April 21, 1997, APC’s shareholders approved the 1997 Non-employee Director Stock Option Plan and on May 20, 1993 approved the 1993 Non-employee Director Stock Option Plan (collectively the Director Plans). The 1997 and 1993 Director Plans authorized the grant of options for up to 400,000 shares and 80,000 shares of common stock, respectively. In the first quarters of 2006 and 2005, all non-employee directors were entitled to participate in the 1997 Non-Employee Director Stock Option Plan, with each receiving no option grants during those quarters.

Options granted under the 1997 Director Plan, and the options granted on August 9, 2001 under the 1997 Stock Option Plan, vest 25% at the end of the second year and 9.375% at the end of each six month period thereafter. Options granted under the 1993 Director Plan vested 25% at the end of the first year and 25% annually thereafter.

Options granted under all stock-based compensation plans after January 1, 1993 expire not more than ten years from the date of grant (five years in the case of ISOs granted to ten percent shareholders). The outstanding options at March 26, 2006 expire at various dates through 2015. Options granted terminate within a specified period of time following termination of an optionee’s employment or position as a director or consultant with APC.

A summary of the status of stock options outstanding under APC’s stock-based compensation plan as of March 26, 2006, and changes during the first quarter ending on that date is presented below:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
	(In thousands except years and per share amounts)
Outstanding at January 1, 2006	11,757		$	15.69
Exercised	(360	)	$	13.09		$	1.8
Terminated	(76	)	$	18.04
Outstanding at March 26, 2006	11,321		$	15.75	4.5 years	$	74.4
Exercisable at March 26, 2006	9,615		$	15.62	4.0 years	$	60.2

Stock Purchase Plan. On April 21, 1997, APC’s shareholders approved an Employee Stock Purchase Plan (the Plan) to provide substantially all employees an opportunity to purchase shares of its common stock through payroll deductions, in an aggregate amount up to 10% of eligible compensation. Semiannually, participant account balances are used to purchase shares of stock at the lesser of 85% of the fair market value of shares on the grant date or the exercise date. The aggregate number of shares purchased by an employee may not exceed 3,000 shares annually (subject to limitations imposed by the Internal Revenue Code). The employee stock purchase plan expires on February 11, 2007. A total of 2.0 million shares are available for purchase under the Plan. No shares were issued under the Plan during the first quarters of 2006 and 2005.

Restricted Stock Units. Also under the aforementioned 2004 LTI Plan, APC’s Compensation and Stock Option Committee of the Board of Directors approved the award of restricted stock units (RSU’s). A summary of the status of RSU’s as of March 26, 2006 and changes during the first quarter then ended is presented below:

	Number of RSU’s		Weighted Average Grant-Date Fair Value
	(Shares in thousands)
Non-vested at January 1, 2006	1,137		$	19.82
Terminated	(54	)	$	22.35
Non-vested at March 26, 2006	1,083		$	19.69

Under the 2004 LTI Plan, if APC awards a dividend on its common stock prior to the vesting date of an RSU, the holder of the restricted stock unit would be entitled to receive on the vesting date a dividend equivalent payment. Dividend equivalents are recognized as compensation expense when the dividend is declared. The RSU awards will vest, and the underlying common stock will concurrently issue, ratably over four years, whereby the units granted will vest 25% on June 30 in the year following the date approved, and 25% on June 30 of each year thereafter.

10. Operating Segment Information

Basis for presentation. APC operates primarily within one industry consisting of three reportable operating segments by which it manages its business and from which various offerings are commonly combined to develop a total solution for the customer. These efforts primarily incorporate the design, manufacture, and marketing of power protection equipment and related software and accessories for computer, communications, and related equipment. APC’s three segments are: Small Systems, Large Systems, and “Other.” Each of these segments address global markets.

Small Systems. The Small Systems segment develops power devices and accessories for servers and networking equipment commonly used in local area and wide area networks and for personal computers and sensitive electronics. Major product offerings include the Back-UPS®, Smart-UPS®, and Symmetra® Power Array® single-phase family of uninterruptible power supplies (UPSs). Also included are SurgeArrest® surge suppressors as well as cabling and connectivity products. Additional accessories and software products are offered to enhance the management of these networks, including APC’s PowerChute® software and NetShelter® server enclosures. Products are sold to home and commercial users primarily through an indirect selling model consisting of computer distributors and dealers, value-added resellers, mass merchandisers, catalog merchandisers, E-commerce vendors, and strategic partnerships.

Large Systems. The Large Systems segment provides systems, products and services that primarily provide back-up power, power distribution and cooling for data centers, facilities, and communications equipment for both commercial and industrial applications. Product offerings include major components of InfraStruXure® systems, Silcon® UPSs, NetworkAIR® precision cooling equipment, DC and broadband power systems, and services. Products are sold to commercial users through both a direct and indirect selling model consisting of value-added resellers and strategic partnerships. Additionally, APC utilizes manufacturer representatives to identify and secure projects.

“Other” Segment. The “Other” segment principally consists of desktop and notebook computer accessories and replacement batteries. The distribution model of products in the “Other” segment is consistent with that of the Small Systems segment.

APC measures the profitability of its segments based on gross margin. Segment gross margins exclude certain expenses which are managed outside the reportable segments. Costs excluded from segment profit are operating expenses, primarily consisting of R&D, selling and corporate expenses, and income taxes. Expenditures for additions to long-lived assets are not tracked or reported by the operating segments, although depreciation expense is allocated to and reported by the operating segments.

Summary operating segment information is as follows:

	Three months ended
	March 26, 2006		March 27, 2005		Increase (Decrease)
	($ in thousands)
Segment net sales
Small Systems	$	350,893	$	307,461	14.1	%
Large Systems	107,106		80,673		32.8	%
Other	17,501		17,333		1.0	%
Total segment net sales	475,500		405,467		17.3	%
Shipping and handling revenues	3,293		2,536		29.9	%
Total net sales	$	478,793	$	408,003	17.4	%

Segment profits
Small Systems	$	144,786	$	146,507	(1.2	%)
Large Systems	17,339		17,447		(0.6	%)
Other	9,456		10,266		(7.9	%)
Total segment profits	171,581		174,220		(1.5	%)
Shipping and handling net costs	13,793		9,769		41.2	%
Other indirect operating expenses	144,519		120,818		19.6	%
Other income, net	5,434		3,794		43.2	%
Earnings before income taxes	$	18,703	$	47,427	(60.6	%)

11. Litigation

APC is involved in various claims and legal actions arising in the ordinary course of business. While management currently believes that resolving all pending legal matters, individually or in aggregate, will not have a material adverse impact on APC’s financial position, litigation and claims are subject to inherent uncertainties, including the risk of an unfavorable outcome, and management’s view of these matters may change in the future. An unfavorable outcome could include monetary damages or, in cases where injunctive relief is sought, an injunction prohibiting certain activities. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on APC’s financial position, cash flows and results of operations for the period in which the effect becomes reasonably estimable.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with a discussion of our business outlook for 2006. We also provide a discussion of our Results of Operations for the first quarter of 2006 compared to the first quarter of 2005. This discussion includes an overview of our operating results and the directions in which our markets, segments, and geographies are moving. We then provide a Liquidity and Financial Resources discussion of the significant changes in our balance sheet during the first quarter of 2006, and cash flows for the first quarter of 2006 compared to the first quarter of 2005, as well as our contractual obligations and foreign currency activity. This is followed by a discussion of the Critical Accounting Policies that we believe are important to our business operations and understanding of our results of operations. We conclude with information about factors that may affect our future results.

This MD&A should be read in conjunction with the other sections of this report, including “Item 1. Financial Statements” and also our Annual Report on Form 10-K for the year ended December 31, 2005, including “Item 1. Business;” “Item 6. Selected Financial Data;” “Item 8. Financial Statements and Supplementary Data;” and “Item 9A. Controls and Procedures.”

In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Form 10-Q.

BUSINESS OUTLOOK

We are generally pleased with APC’s top line performance during our first quarter of 2006, but have identified opportunities for improvement. For the eleventh consecutive quarter APC’s year-over-year revenue growth was in double-digits. We are confident that the strong year-over-year revenue growth can be attributed to what we believe is an improved macro-economic environment for IT spending and is the result of our continued investments in research and development, sales and marketing activities and the growing adoption of APC’s network-critical physical infrastructure, or NCPI, architecture. The investments we have continued to make to educate the market and drive adoption of the technology, we believe, are meeting our strategic objectives as customers are embracing the modular, standardized approach APC has pioneered in network-critical physical infrastructure.

As strong as our revenue results were in the first quarter, we are disappointed in our operating performance. Developing and managing the internal capabilities necessary to meet the supply and order fulfillment requirements of two distinct business models, that is, a transaction-oriented products business and a customer-focused systems solutions business, is a complicated and difficult task. To support these two businesses, we are working to lower manufacturing costs and improve product delivery to our global customer base. This includes transitioning more Large Systems manufacturing overseas and populating global distribution centers with a broader portfolio of products and this has generated incremental costs and product availability disruptions. During the first quarter we made strides to improve our order fulfillment process and reduce our reliance on expedited shipping methods, particularly related to air freight. We even saw our gross margin stabilize and increase slightly from the fourth quarter despite the typical seasonal sequential decline in revenue and volume. However, our freight and logistics costs remain at levels higher than they were prior to the recent transitions of Large Systems product manufacturing overseas and we have more work to do to reach optimal levels of efficiency in the process.

In building this new business we endeavored to increase service levels to our customers by establishing more distribution centers throughout North America, particularly over the past year. It has now become clear to us that, although we have been successful in some incremental improvement in service levels, the costs to accomplish this improvement were much greater than anticipated. As a result, we are now taking corrective actions to reduce these logistics and warehousing expenses.

As we look forward to the remainder of 2006, we will be implementing plans to continue transforming APC into a lean, ambidextrous, customer-centric enterprise. To accomplish this, we will need to: (1) optimize operational efficiency, (2) deploy and improve distribution capabilities in all regions globally, (3) accelerate the responsiveness of the supply chain to minimize availability issues for the more complex solutions, and (4) improve demand to supply signaling capabilities to support both business models. Some of these initiatives, during implementation, may result in our incurring incremental costs prior to achieving the desired outcomes. Additionally, these initiatives will take time, some more than others, to implement, but we are committed to making significant, meaningful, and timely progress.

We believe that we are very well positioned competitively, financially and strategically. We will continue to be focused on empowering IT professionals with the knowledge, tools and solutions they need to effectively design, build and manage network-critical physical infrastructure. Our objective is for APC to become a trusted, global partner for the long term, committed to solving our customers’ network-critical physical infrastructure problems of today and helping them anticipate their challenges of tomorrow, thereby allowing our customers to focus on their core competencies. We believe that we can accomplish this by dramatically reducing our customers’ level of complexity and their total cost of ownership involved in designing, building, and managing the network-critical physical infrastructure that is at the very core of maintaining business continuity, application availability, and network reliability.

Additionally, we continue to plan for revenue growth in all three of our reportable segments: Small Systems, Large Systems and “Other.” As in recent quarters, we expect the rate of revenue growth of our Large Systems segment to be greater than the growth expected for Small Systems due to the assumed continued success of our overall strategy and the acceptance of our products in specific market segments.

Overall gross margins for 2006 are currently expected to continue to be impacted by increased operational costs and a shift in product mix toward the faster-growing, lower-margin Large Systems products. Gross margins, particularly for Small Systems products, are expected to continue to be impacted by our response to competitive price reductions. While we expect to continue to strive for favorable component pricing arrangements with our material suppliers, the recent trends of commodity prices, particularly for steel, copper and lead, are expected to put upward pressure on our product materials costs, but we also expect partial offset from material cost reductions, particularly for Large Systems products, typically seen after transitioning to low-cost factories. Increased operational costs, including freight and warehousing, are associated with the management of our supply chain. These costs are tied to fulfilling customer orders and reducing overall long-term costs through the stocking of global third-party distribution centers, expediting of product to meet customer demand, and the transition cost of shifting production to lower cost manufacturing locations. We expect this could continue in the near term, however ultimately it is expected these transitions will allow for lower manufacturing costs. In the short-term, each transition is the equivalent of a new product introduction to a facility and comes with a learning curve and initial supply chain inefficiencies. Operational cost improvement initiatives, including redesign of our supply chain processes and elimination of redundant manufacturing costs, are expected to cause incremental costs in the short-term, but ultimately result in long-term gross margin improvement. Gross margin variability could continue to result from changing revenue levels, which are dependent on unit volumes, prices and currency trends as well as the mix of products sold, unit costs and yield issues associated with production at our factories, transfers of production to our low cost facilities, excess manufacturing capacity, costs to comply with new and existing environmental regulations (including, but not limited to, the European Union’s directive on waste electrical and electronic equipment (WEEE) and directives relating to restriction of hazardous substances (RoHS)), excess inventory, supply chain inefficiencies, inventory obsolescence (including potential exposure from WEEE and RoHS compliance) and variations in inventory valuation.

We have dedicated efforts to optimize our overall manufacturing capacity and locations over recent years and we will continue to plan for future capacity requirements based on the assumed continued acceptance and demand for our products in the specific market segments they were designed to address. We currently expect that capital spending will be between $80 million and $100 million in 2006, compared to $49 million in 2005. We expect that most of our incremental capital spending for 2006 will go toward acquiring and expanding a building for a customer Technology Learning Center, to be based in St. Louis, Missouri, and maintaining, upgrading, and expanding our current manufacturing capacity, as well as investments to upgrade current hardware and software office technologies.

We are committed to sustaining our R&D efforts to meet the future needs of our customers across all segments and potentially expanding into emerging, high-growth areas. We continue to advance our NCPI systems in addition to ensuring our end-to-end offering is the best in the industry. We will remain focused on aggressively driving the growth of our network-critical physical infrastructure solutions, which will require sustaining and increasing our operating expense investments in sales and marketing, as well as making incremental investments in global customer education initiatives.

Our investment posture remains intact and we are firmly committed to supporting the level of sales and marketing spending necessary to educate customers and channel partners on the inherent performance and total cost of ownership benefits of a modular, standardized solution such as InfraStruXure.

In February 2006, APC’s Board of Directors approved a stock repurchase program which authorizes up to $200 million to repurchase outstanding shares of APC’s common stock. The purchases would be made on the open market based on market and business factors. APC commenced the repurchase of its common stock in February 2006 and, as of the end of the first quarter, had repurchased approximately 3.4 million shares on the open market at an average price of approximately $20.39 per share, totaling $70 million. The duration of the repurchase program is two years but may be suspended or discontinued at any time without prior notice.

We currently expect our tax rate to be approximately 21 - 23% for the full year 2006. The estimated effective tax rate is based on current tax law and the current expected income. The tax rate may be affected by the jurisdictions in which profits are determined to be earned and taxed, our ability to successfully implement additional tax savings planning opportunities and our ability to realize deferred tax assets.

We are currently a party to various legal proceedings and claims. We currently do not believe that the ultimate outcome of current legal proceedings and claims will have a material adverse effect on our financial position or overall trends in results of operations. However, litigation is subject to inherent uncertainties, including the risk of an unfavorable outcome, and management’s view of these matters may change in the future. An unfavorable outcome could include monetary damages or, in cases where injunctive relief is sought, an injunction prohibiting certain activities. If an unfavorable outcome were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period or future periods. We believe that, given our current liquidity and cash and investment balances, even an adverse judgment in current legal proceedings and claims would not have a material impact on cash and investments or liquidity.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 26, 2006 AND MARCH 27, 2005

Revenues

Net sales in the first quarter of 2006 were $478.8 million, an increase of 17.4% compared to $408.0 million for the comparable period in 2005, attributable to strength across all of our product segments and all of our major geographies. We are confident that the strong year-over-year growth can be attributed to what we believe is an improved macro-economic environment for IT spending and is the result of our continued investments in sales and marketing activities and the growing adoption of APC’s network-critical physical infrastructure, or NCPI, architecture.

Each of our operating segments contributed to the strong top line performance. The Large Systems segment, which is a focus of our data center initiatives and incorporates 3-phase UPS products, cooling, services and other related products, again posted the strongest gains for APC. We continued to make investments in supporting our efforts in these network-critical physical infrastructure markets and our top line advances highlight the resulting strong performance. Led by solid growth in our Smart-UPS family, the Small Systems segment also continues to produce strong results that reflect APC’s position as a preferred partner in the mid-market and consumer power protection markets. For further information about revenues by segment, refer to the Segment Results section below.

Revenues by Geography. We experienced growth in all regions during the quarter. In addition to a strong performance in the U.S., our emerging geographies, including Russia, Brazil, and India, were healthy contributors to our top line growth.

The following table summarizes our revenues on a geographic basis for the first quarters ended March 26, 2006 and March 27, 2005.

	Three months ended
	March 26, 2006		% of Total	March 27, 2005		% of Total
	($ in millions)
North and Latin America (the Americas)	$	247.3	51.7%	$	204.2	50.0%
Europe, the Middle East, and Africa (EMEA)	137.0		28.6%	116.7		28.6%
Asia	94.5		19.7%	87.1		21.4%
Total Net Sales	$	478.8	100.0%	$	408.0	100.0%

In the first quarter of 2006, net sales of the Americas increased 21.1% over the first quarter of 2005. EMEA increased 17.4% in the first quarter of 2006 over the first quarter of 2005 and Asia increased 8.5% in the first quarter of 2006 over the first quarter of 2005.

In the first quarter of 2006, on a constant currency basis, EMEA increased 22.9% and Asia increased 13.9% over the first quarter of 2005. In the first quarter of 2006, on a constant currency basis, EMEA’s revenues would have been higher by $6.3 million, principally due to weakening of the Euro and British pound, and Asia’s revenues would have been higher by $4.7 million, principally due to weakening of the Japanese yen and Australian dollar. In the first quarter of 2005, on a constant currency basis, EMEA’s revenues would have been lower by $3.2 million, principally due to strengthening of the Euro and British pound, and Asia’s revenues would have been lower by $1.0 million, principally due to strengthening of the Japanese yen and Australian dollar. In total, the impact of currency exchange rate changes worldwide reduced our net sales in the first quarter of 2006 by $10.0 million, and increased our net sales in the first quarter of 2005 by $4.5 million. We believe constant currency information is useful for an understanding of our operating results. Revenues on a constant currency basis differ from revenues presented in accordance with accounting principles generally accepted in the United States.

Cost of Goods Sold

Cost of goods sold was $321.0 million or 67.0% of net sales in the first quarter of 2006 compared to $243.6 million or 59.7% of net sales in the first quarter of 2005. Gross margins for the first quarter of 2006 were 33.0% of net sales, approximately 730 basis points lower than in the first quarter of 2005. Nearly three percentage points of the year-over-year decline were associated with price actions and the negative impact of currency fluctuations.

Additionally, approximately four percentage points of the decline were attributable to higher operational costs, primarily freight and logistics costs, resulting from production shifts to lower-cost locations and distribution center transitions and, to a lesser degree, manufacturing cost inefficiencies caused by redundant capacity. Although we reduced our reliance on expedited shipment methods during the quarter, particularly air freight, overall freight and logistics costs remain higher than prior year levels. Going forward, we will be taking additional steps to further improve our processes and efficiencies. Commodity prices also pressured gross margins in the quarter. The top three commodities impacting our cost of goods sold are lead, copper and steel. In the first quarter of 2006, steel pricing growth trends have begun to moderate both year-over-year and sequentially, but both lead and copper are up approximately 50% year-over-year, and could continue to impact component costs during 2006.

For further information about gross margins by segment, refer to the Segment Results section below.

Inventory Reserves. Total inventory reserves at March 26, 2006 were $54.6 million compared to $48.6 million at December 31, 2005. The increase in total inventory reserves reflected routine provisioning that was necessary as a result of applying APC’s inventory reserve methodology throughout the quarter, offset by the physical disposition of inventories covered by APC’s inventory reserves. APC’s reserve estimate methodology involves quantifying the total inventory position having potential loss exposure. Loss exposure generally results from several business factors, including product or component discontinuance, unplanned changes in demand, product design changes, and factory transitions. Quantifying such loss exposure is the result of combining the cost of inventories specifically identified as having little or no opportunity for sale or use (thus available for physical disposition) plus the cost of inventories having a high risk of no future sale or use based upon an analysis of on-hand quantities compared to historical and anticipated future sale or use. APC maintains an on-going business process for the physical disposition of inventories previously identified. Inventory write-offs occur at the time of physical disposition. Inventories, once reserved, are not written back up as such reserve adjustments are considered to be a permanent decrease to the cost basis of the excess or obsolete inventory.

Segment Results (Also refer to Note 10 of Notes to Consolidated Financial Statements in Item 1 of this report for important information regarding APC’s reportable segments)

	Three months ended
	March 26, 2006		March 27, 2005		Increase (Decrease)
	($ in millions)
Segment net sales
Small Systems	$	350.9	$	307.5	14.1	%
Large Systems	107.1		80.7		32.8	%
Other	17.5		17.3		1.0	%
Total segment net sales	475.5		405.5		17.3	%
Shipping and handling revenues	3.3		2.5		29.9	%
Total net sales	$	478.8	$	408.0	17.4	%
Segment profits
Small Systems	$	144.8	$	146.5	(1.2	%)
Large Systems	17.3		17.4		(0.6	%)
Other	9.5		10.3		(7.9	%)
Total segment profits	171.6		174.2		(1.5	%)
Shipping and handling net costs	13.8		9.8		41.2	%
Other indirect operating expenses	144.5		120.8		19.6	%
Other income, net	5.4		3.8		43.2	%
Earnings before income taxes	$	18.7	$	47.4	(60.6	%)

Small Systems. Net sales for products in the Small Systems segment, which provides power protection, UPS and management products for the PC, server and networking markets, increased in the first quarter of 2006 by 14.1% over the comparable period in 2005. The primary drivers of quarterly growth in this segment came from across the Smart-UPS family highlighted by growth in the Smart-UPS RT online UPS, as well as InfraStruXure-related solutions, including racks and power distribution units.

First quarter 2006 gross margins for the Small Systems segment of 41.3% declined 640 basis points from the comparable period in 2005. In addition to the aforementioned higher freight and logistics costs, price discounting, commodity price increases, and currency were factors in the year-over-year decline.

Large Systems. Net sales for products in the Large Systems segment, consisting primarily of 3-phase UPS, services, precision cooling and ancillary products for data centers, facilities and communication applications, increased 32.8% in the first quarter of 2006 over the comparable period in 2005. Growth in InfraStruXure-related solutions, including Symmetra 3-phase, the UPS component of our InfraStruXure solution, continue to support this segment’s strong top line performance. Approximately 30% of the Large Systems revenue in the quarter came from InfraStruXure sales. This segment also benefited from healthy revenue contributions from broadband products driven by fiber to the home programs with service providers and our Smart-UPS VT 3-phase UPS which replaces lower kVA legacy Silcon products.

First quarter 2006 gross margins for the Large Systems segment of 16.2% decreased 540 basis points over the comparable period in 2005. While the aforementioned higher freight and logistics costs contributed to the downward pressure on margins in this segment, product mix, particularly related to the growth of lower margin offerings in our broadband family, and unfavorable manufacturing absorption also impacted the year-over-year margin comparison, as did negative foreign currency trends. Continuing material cost savings partially offset these unfavorable factors.

“Other” Segment. Net sales for products in the “Other” segment, consisting principally of mobile accessories and replacement batteries, increased 1.0% in the first quarter of 2006 over the comparable period in 2005 mainly attributable to organic growth of existing products across the segment.

First quarter 2006 gross margins for the “Other” segment of 54.0% decreased 520 basis points from the comparable prior year level, pricing, material costs, and to a lesser extent, currency trends, negatively impacted this segment’s gross margins.

Operating Expenses

Marketing, Selling, General, and Administrative (SG&A) Expenses. SG&A expenses in the first quarter of 2006 were $122.0 million or 25.5% of net sales compared to $100.6 million or 24.7% of net sales in the first quarter of 2005. We continue to support our data center initiatives, with a primary focus on increasing the awareness of our existing and prospective customers, particularly in relation to our InfraStruXure architecture. Our investment priorities remain intact and are concentrated on driving InfraStruXure and data center-related initiatives, including sales and service staffing, education, and sales generation. The investments we are making in these areas are essential to branding the data center, and establishing APC as a leader in the network-critical physical infrastructure market. We also recorded nearly $3 million in incremental costs year-over-year associated with the newly acquired Netbotz business, including amortization of intangibles. Additionally, pursuant to our adoption of SFAS 123R, we recorded approximately $1 million in incremental stock-based compensation during the quarter, for a total equity compensation expense of $4 million, when combined with costs associated with restricted stock units; the majority of these costs were classified in operating expenses.

The allowance for bad debts was 4.0% of gross accounts receivable at March 26, 2006, substantially unchanged from 3.8% at December 31, 2005. Accounts receivable balances outstanding over 60 days represented 13.7% of total receivables at March 26, 2006 compared to 12.7% at December 31, 2005. A majority of U.S. and international customer balances continue to be covered by receivables insurance. We continue to experience strong collection performance. Write-offs of uncollectable accounts represent less than 1% of net sales for both periods.

Research and Development (R&D). R&D expenditures were $22.5 million or 4.7% of net sales in the first quarter of 2006 and $20.2 million or 5.0% of net sales in the first quarter of 2005. We are committed to sustaining our R&D efforts to meet the future needs of our customers across all segments and potentially expanding into emerging, high-growth areas. We continue to advance our NCPI systems in addition to ensuring our end-to-end offering is the best in the industry. We believe that continued product innovation through development is necessary for our existing products to remain competitive in our markets, as well as creating opportunities from new product introductions. The increases in total R&D spending primarily reflect increased numbers of software and hardware engineers and costs associated with new product development and engineering support.

Other Income, Net and Income Taxes

Other Income, Net. Other income is comprised principally of interest income which increased during the first quarter of 2006 due principally to higher average cash balances available for investment as well as rising interest rates compared to first quarter of 2005.

At March 26, 2006, APC had $651.0 million of total cash and investments, down from $774.2 million at December 31, 2005. We manage APC’s cash and investment balances to preserve principal and liquidity while maximizing our return on the total investment portfolio. We diversify our investment portfolio by investing in multiple types of investment-grade securities with multiple investment brokers. Based on APC’s investment portfolio and interest rates, at March 26, 2006, a 100 basis point increase or decrease in interest rates would have resulted in an increase or decrease of approximately $7 million in our annual interest income.

Income Taxes. Our effective income tax rates for the first quarters of 2006 and 2005 were approximately 22.5% and 24.0%, respectively. The decrease in the first quarter of 2006 compared to the first quarter of 2005 is due to the tax savings from an increasing portion of taxable earnings anticipated to be generated from APC’s operations in jurisdictions currently having lower income tax rates than the present U.S. statutory income tax rate. This shift resulted partially from our product transitions to lower cost, lower tax, manufacturing locations. APC has tax holidays in China and India which reduce or eliminate the income taxes paid in those countries. Although this could have the effect of increasing APC’s foreign taxes, we expect APC’s effective income tax rate to remain considerably lower than the U.S. statutory federal corporate tax rate of 35%.

LIQUIDITY AND FINANCIAL RESOURCES

Working Capital

Working capital at March 26, 2006 was $1.307 billion compared to $1.389 billion at December 31, 2005. Our total cash, cash equivalents, and short-term investments decreased to $650.4 million at March 26, 2006 from $773.6 million at December 31, 2005. In February 2006, APC’s Board of Directors approved a stock repurchase program which authorizes up to $200 million to repurchase outstanding shares of APC’s common stock. The purchases would be made on the open market based on market and business factors. The duration of the repurchase program is two years but may be suspended or discontinued at any time without prior notice. APC commenced the repurchase of its common stock in February 2006. The first quarter 2006 decrease in our cash, cash equivalents, and short-term investments position reflected APC’s first quarter repurchase on the open market of approximately 3.4 million shares of its common stock, at an average price of $20.39 per share, totaling $70 million. In addition, APC’s continued positive operating results allowed us to pay a quarterly dividend and continue to internally finance the capital investment, R&D, sales and marketing spending required to expand our operations.

Cash Flows

The table below summarizes our cash flows for the first quarters ended March 26, 2006 and March 27, 2005.

	Three months ended
	March 26, 2006			March 27, 2005
	(In millions)

Net cash (used in) provided by operating activities	$	(22.3	)	$	34.5
Net cash provided by investing activities	68.7			5.3
Net cash used in financing activities	(84.0		)	(10.5		)
Net change in cash and cash equivalents	(37.6		)	29.3

Cash and cash equivalents at beginning of period	262.4			72.7
Cash and cash equivalents at end of period	$	224.8		$	102.0

Cash Flows from Operating Activities. During the first quarter of 2006, our operating cash flows funded increased inventory as discussed below. Our cash flows from operations for the first quarter of 2005 reflected higher profit levels, partially offset by increased inventory.

Cash Flows from Investing Activities. Our investing activities cash flows were used mainly for the purchase of available-for-sale securities and for capital spending, principally manufacturing and office equipment, purchased software applications, and building improvements. Our investment approach and the composition of our investment portfolio remained relatively constant overall with no investments having maturity dates greater than one year, except for our auction rate securities and variable rate demand obligations. Capital spending in the first quarters of 2006 and 2005 focused on funding additional equipment needs and improving existing factories, principally in the U.S., India, and the Philippines, as well as continuing investment in information technologies.

Cash Flows from Financing Activities. Our cash flows from financing activities included the afore-mentioned first quarter 2006 repurchase of approximately 3.4 million of our common shares on the open market at an average price of approximately $20.39 per share, totaling $70 million, as well as payment of common stock dividends of approximately $19.5 million and $19.3 million during the first quarters of 2006 and 2005, respectively. These outflows were partially offset by proceeds from issuances of common stock relating to employee stock plans during each of the periods presented.

Inventories

Worldwide inventories were $589.6 million at March 26, 2006, up from $541.8 million at December 31, 2005. Our inventory typically increases in the first quarter due to seasonally lower revenue in the first quarter. Also, higher levels of on-hand finished goods were required to ensure product availability as we navigate our aforementioned supply chain issues, and to meet increasing current and anticipated demand, particularly InfraStruXure demand, as well as to manage the requirements associated with continuing transfers of production of a wide range of Small and Large Systems products to and among our low cost manufacturing regions. In addition, we increased our inventory levels strategically to support in-region lead time initiatives, as well as to support continuing new product introductions. Inventory levels as a percentage of quarterly sales were 123% in the first quarter of 2006, up from 94% in the fourth quarter of 2005 and 118% in the first quarter of 2005. The first quarter increase over the comparable quarter last year was due in part to the typical first quarter 2006 inventory build combined with the typical seasonal decline in net sales from the fourth quarter to the sequential first quarter of the following year. There were no inventory charges, other than APC’s standard provisioning, during the first quarters of 2006 and 2005.

Contractual Obligations

The following table summarizes our significant contractual obligations at March 26, 2006, and the effect such obligations are expected to have on our liquidity and cash flows in future periods. This table excludes amounts already recorded on our balance sheet as current liabilities at March 26, 2006.

			Payments Due By Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In millions)
Operating Lease Obligations	$	29.8	$	7.1	$	13.6	$	6.4	$	2.7

APC’s non-cancelable operating leases, primarily for warehousing and office space, expire at various dates through 2019. These leases contain renewal options for periods ranging from one to 14 years and require APC to pay its proportionate share of utilities, taxes, and insurance. APC is not able to determine the aggregate amount of purchase orders that represent contractual obligations for the purchase of goods and services, as such purchase orders may represent authorizations to purchase rather than binding agreements. For the purposes of this disclosure, contractual obligations for the purchase of goods and services are defined as agreements that are enforceable and legally binding on APC and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; the approximate timing of the transaction, and contain no provisions allowing for cancellation without significant penalty. Our purchase orders for raw materials or purchased finished products are based on our current manufacturing needs and/or demand forecasts and are fulfilled by our vendors within short time horizons. We do not have significant agreements for the purchase of raw materials or finished products specifying minimum quantities or set prices that exceed our expected requirements for three months.

Capital Expenditures and Capital Commitments

During the first quarters of 2006 and 2005, our capital expenditures, net of capital grants, amounted to approximately $16.9 million and $5.0 million, respectively, consisting primarily of manufacturing and office equipment, purchased software applications, and building improvements. Capital spending in the first quarters of 2006 and 2005 focused on funding additional equipment needs and improving existing factories, principally in the U.S., India, and the Philippines, as well as continuing investment in information technologies. Substantially all of APC’s net capital expenditures were financed from available operating cash.

We had no material capital commitments during the first quarters of 2006 and 2005, or at March 26, 2006 and December 31, 2005.

APC has agreements with the Industrial Development Authority of Ireland, otherwise known as the IDA. Under these agreements, we receive grant monies for costs incurred for machinery, equipment, and building improvements for our Galway and Castlebar facilities. These grants are equal to 40% and 60%, respectively, of such costs up to a maximum of $13.1 million for Galway and $1.3 million for Castlebar. Such grant monies are subject to APC meeting certain employment goals and maintaining operations in Ireland until termination of the respective agreements. Under separate agreements with the IDA, we receive direct reimbursement of training costs at our Galway and Castlebar facilities for up to $3,000 and $12,500, respectively, per new employee hired. Also refer to Note 15 of Notes to Consolidated Financial Statements in Item 8 of American Power Conversion Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005.

APC also has an agreement with the IDA for a research and development grant towards the costs of a project for the development of software products. The availability of the grant is contingent on meeting certain milestones in the progress of the project as well as meeting certain employment goals on the project within the Galway facility. The amount of grant assistance available on satisfaction of all conditions is 28% of the eligible expenditure to a maximum of €714,588. At March 26, 2006, no grant claims had been claimed or received.

Borrowing Facilities and Financial Commitments

APC had no borrowing facilities or significant financial commitments, other than those required in the normal course of business, during the first quarters of 2006 and 2005, or at March 26, 2006 and December 31, 2005.

Off-Balance-Sheet Arrangements

APC had no significant off-balance sheet arrangements during the first quarters of 2006 and 2005, or at March 26, 2006 and December 31, 2005.

Stock Repurchase Program

Quarterly Cash Dividends

Dividends of $0.10 per share were declared and paid in each of the first quarters of 2006 and 2005. It is the intention of the Board of Directors to pay a comparable quarterly dividend on a going forward basis contingent upon continued capital availability and a determination that cash dividends continue to be in the best interests of APC and its shareholders.

APC has historically generated annual cash flows from operating activities as a result of strong operating results and, at times, improvement in working capital. We believe that current internal cash flows together with available cash, available credit facilities or, if needed, the proceeds from the sale of additional equity, will be sufficient to support anticipated capital spending, dividend payments, and other working capital requirements for the foreseeable future.

Foreign Currency Activity

We invoice our customers in various currencies. Realized and unrealized transaction gains or losses are included in the results of operations and are measured based upon the effect of changes in exchange rates on the actual or expected amount of functional currency cash flows. Transaction gains and losses were not material to the results of operations in the first quarters of 2006 and 2005.

The table below summarizes information on balances that are sensitive to foreign currency exchange rates and presents such amounts in U.S. dollar equivalents.

	March 26, 2006				December 31, 2005
	Accounts Receivable		Liabilities		Accounts Receivable		Liabilities
	(In millions)
U.S. dollar functional currency	$	85.3	$	86.2	$	98.6	$	93.8
Swiss franc functional currency	$	15.1	$	6.7	$	14.4	$	5.8

APC also had non-trade receivables denominated in Euros of approximately U.S.$0.9 million and U.S.$1.4 million at March 26, 2006 and December 31, 2005, respectively.

We continually review our foreign exchange exposure and consider various risk management techniques, including the netting of foreign currency receipts and disbursements, rate protection agreements with customers/vendors and derivatives arrangements, including foreign exchange contracts. We presently do not utilize rate protection agreements or derivative arrangements.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The U.S. Securities and Exchange Commission has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and which require our most difficult, complex or subjective judgments or estimates. Based on this definition, we have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies. For a detailed discussion on the application of these and other accounting policies, also refer to Note 1 of Notes to Consolidated Financial Statements in Item 8 of American Power Conversion Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005.

On an on-going basis, we evaluate the judgments and estimates underlying all of our accounting policies, including those related to revenue recognition, product returns, bad debts, inventories, impairment of long-lived assets, deferred tax valuation allowances, restructuring reserves and contingencies, and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Materially different results in the amount and timing of our actual results for any period could occur if we made different judgments or utilized different estimates. Actual results may differ from those estimates.

Our critical accounting policies are as follows:

Revenue Recognition. We follow very specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter. In general, revenue is recognized when title has passed at the time of delivery of product for all of our operating segments as stipulated by the delivery terms for the sales transactions. In addition, prior to revenue recognition, we require persuasive evidence of the arrangement, that the price is fixed or determinable, and that collectibility is reasonably assured. This requires us to assess at the point of delivery whether these criteria have been met. When management determines that such criteria have been met, revenue is recognized. Installation is not applicable for a majority of Small Systems and all “Other” segment products based on the nature of the products sold. Generally, revenue associated with Large Systems sales is also recognized at the time of delivery and/or installation pursuant to the delivery and/or installation terms. Delivery terms vary, but often include origin-based terms (e.g., FOB Shipping Point and Ex-works) and destination-based terms (e.g., DDU/DDP (delivered duty unpaid/delivered duty paid)). We record estimated reductions to revenue for customer programs and incentive offerings, including special pricing agreements, price protection, co-operative advertising and other volume based discounts at the time of sale.

Our arrangements do not generally include acceptance clauses. However, if an arrangement includes a customer specified acceptance provision, acceptance can occur at our factory prior to delivery or at the customers’ site. Revenue recognition will occur upon management’s determination of acceptance by the customer consistent with the agreed-upon delivery terms for the sale. As we continue to introduce new products and enter into new product and service arrangements with customers, we anticipate that installation and customer acceptance provisions may become more common, and therefore increasingly significant for determining delivery and performance and consequently our entitlement to recognize revenue.

Certain Large Systems product lines and, at times, one product line included in the Small Systems segment, require electrical hardwire installation or duct installation which is performed by the customer or their contracted licensed contractor/electrician. Where we do not perform such installation, revenue recognition at the time of delivery is proper as customer acceptance of the unit is not required. Also, payment by the customer is not contingent upon installation of the product.

We offer additional services to customers depending on the type of product the customer has purchased, including product-based and professional services. Revenue is recognized at the time services are provided or is deferred and recognized over the service period (where applicable). The fair value of these services are based upon the rates that we charge customers in separately negotiated transactions and such services are not essential to the functionality of the delivered product.

For all sales, except those completed over the Internet, we use a binding purchase order as evidence of an arrangement. For sales over the Internet, we use a credit card authorization as evidence of an arrangement. Sales through certain customers are evidenced by a master agreement governing the relationship together with binding purchase orders on a transaction by transaction basis.

Estimating Valuation Allowances and Accrued Liabilities — Allowances for Sales Returns, Doubtful Accounts, Inventory Obsolescence and Product Recall, and Assessment of the Probability of the Outcome of our Current Litigation. Significant management judgments that affect the application of our revenue policy also include estimates of potential future product returns related to current period product revenue. We analyze historical returns, current economic trends, and channel inventories when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.

We provide limited rights of return to distributors and retailers for our Small Systems product lines. We provide appropriate reserves for returns at the time that related revenue is recognized, based on historical patterns of returns and contractual provisions in accordance with the provisions of Statement of Financial Accounting Standards No. 48, Revenue Recognition When Right of Return Exists, and U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 104. Returns of Large Systems products generally do not occur. Historically, returns have represented approximately 3% of gross sales and have not differed significantly from prior estimates.

Similarly, we must make estimates of the uncollectability of our accounts receivable. Management specifically analyzes accounts receivable balances in view of customer credit-worthiness, customer concentrations, historical bad debts, current economic trends, and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. A majority of U.S. and international customer balances continue to be covered by receivables insurance. Historically, write-offs of uncollectable accounts have represented less than 1% of net sales.

Our inventory reserve estimate methodology involves quantifying the total inventory position having potential loss exposure. Loss exposure generally results from several business factors, including product or component discontinuance, unplanned changes in demand, product design changes, and factory transitions. Quantifying such loss exposure is the result of combining the cost of inventories specifically identified as having little or no opportunity for sale or use (thus available for physical disposition) plus the cost of inventories having a high risk of no future sale or use based upon an analysis of on-hand quantities compared to historical and anticipated future sale or use. We maintain an on-going business process for the physical disposition of inventories previously identified. Inventory write-offs occur at the time of physical disposition. Inventories, once reserved, are not written back up as such reserve adjustments are considered to be a permanent decrease to the cost basis of the excess or obsolete inventory. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

We are, and may in the future become, involved in litigation involving our business, products or operations. For pending claims for which there is an estimable range of loss greater than zero, we record the best estimate of liability within the range. If no point within the range is considered the best estimate, we record the minimum estimated liability. Because of uncertainties related to the identifiable range of loss on any pending claims, we may be unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. As additional information becomes available, we assess the potential liability related to our pending claims and revise our estimates. Such revisions in our estimates of the potential liability could materially impact our results of operation and financial position. The litigation process is inherently uncertain and includes the risk of an unexpected, unfavorable result. We may be materially adversely impacted by any such litigation.

Valuation of Long-lived Tangible and Intangible Assets including Goodwill. We assess the impairment of long-lived tangible and intangible assets on an ongoing basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Should our assessment of long-lived and amortizable intangible assets suggest impairment, we would determine recoverability based on an estimate of future undiscounted cash flows resulting from our use of the asset and its eventual disposition. Factors we consider that could trigger an impairment review include the following:

· significant underperformance relative to expected historical or projected future operating results;

· significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

· significant negative industry or economic trends; and

· significant technological changes, which would render equipment and manufacturing process, obsolete.

We evaluate each of our reporting units with goodwill during the fourth quarter of each fiscal year or more frequently if impairment indicators arise. Impairment losses are determined based upon the excess of carrying amounts over discounted expected future cash flows of the underlying business.

Accounting for Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Expectations about future taxable income incorporate numerous assumptions about actions, elections and strategies to minimize income taxes in future years. Our ability to take such actions, make preferred elections and implement tax-planning strategies may be adversely impacted by enacted changes in tax laws and/or tax rates, as well as successful challenges by tax authorities resulting from differing interpretations of tax laws and regulations.

APC is routinely under audit by federal, foreign, state, or local authorities in the areas of income taxes and the remittance of sales and use taxes. These audits include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal, foreign, state, and local tax laws. In evaluating the exposure associated with various tax filing positions, we often accrue for probable exposures. To the extent APC were to prevail in matters for which accruals have been established or were to be required to pay amounts in excess of reserves, APC’s effective tax rate in a given financial statement period could be materially affected.

To the extent we believe that recovery of deferred tax assets is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statements of income. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At March 26, 2006 and December 31, 2005, we provided a valuation allowance on certain of our deferred tax assets, primarily consisting of net operating losses generated in 2001 through the first quarter of 2006 for the start up and continuing operations of Brazilian operations, because of uncertainty regarding their realizability. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.

RECENTLY ISSUED ACCOUNTING STANDARDS

We have determined that there are no recently issued accounting standards expected to have a material impact on APC’s consolidated financial position or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We, in the normal course of business, are exposed to market risks relating to fluctuations in foreign currency exchange rates. The information required under this section related to such risks is included in the Foreign Currency Activity section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of this report and is incorporated herein by reference.

We, in the normal course of business, are also exposed to market risks relating to fluctuations in interest rates and the resulting rates of return on investments in marketable securities. The information required under this section related to such risks is included in the Other Income, Net section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of this report and is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

(A) Evaluation of disclosure controls and procedures

As of the end of the period covered by this report, management carried out an evaluation, under the supervision and with the participation of APC’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, APC’s disclosure controls and procedures were effective in timely alerting them to material information required to be included in APC’s periodic filings with the U.S. Securities and Exchange Commission.

(B) Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting during APC’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, APC’s internal control over financial reporting.

Limitations Inherent in all Controls. APC’s management, including our Chief Executive Officer and our Chief Financial Officer, recognize that our disclosure controls and our internal controls (discussed above) cannot prevent all error or all attempts at fraud. Any controls system, no matter how well crafted and operated, can only provide reasonable, and not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected.

PART II - - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

APC is involved in claims and legal actions arising in the ordinary course of business. While management currently believes that resolving all pending legal matters, individually or in aggregate, will not have a material adverse impact on APC’s financial position, litigation and other claims are subject to inherent uncertainties, including the risk of an unfavorable outcome, and management’s view of these matters may change in the future. An unfavorable outcome could include monetary damages or, in cases where injunctive relief is sought, an injunction prohibiting certain activities. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on APC’s financial position, cash flows and results of operations for the period in which the effect becomes reasonably estimable.

ITEM 1A. RISK FACTORS

FACTORS THAT MAY AFFECT FUTURE RESULTS

This document contains forward-looking statements that involve risks and uncertainties, particularly in the Business Outlook section of this MD&A. You can identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates,” or “anticipates” or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. Our actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this document.

We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

The factors that could cause actual results to differ materially include the following: APC’s ability to improve the execution of its operations processes and eliminate operational waste and excess expense; depending on market circumstances, APC may not complete its previously approved stock repurchase program; the impact of increasing competition which could adversely affect APC’s revenues and profitability; the impact of foreign currency exchange rate fluctuations; the impact on demand, component availability and pricing, and logistics, and the disruption of manufacturing operations that result from labor disputes, war, acts of terrorism or political instability; ramp up, expansion, transfer and rationalization of global manufacturing capacity; the potential impact of complying with changing environmental regulations; impact on order management and fulfillment, financial reporting and supply chain management processes as a result of APC’s reliance on a variety of computer systems; the discovery of a latent defect in any of APC’s products; APC’s ability to effectively align operating expenses and production capacity with the current demand environment; general worldwide economic conditions, and, in particular, the possibility that the PC and related markets decline; growth rates in the power protection industry and related industries; product mix changes and the potential negative impact on gross margins from such changes; changes in the seasonality of demand patterns; inventory risks due to shifts in market demand; component constraints, shortages, pricing and quality; risk of nonpayment of accounts receivable; the uncertainty of the litigation process including risk of an unexpected, unfavorable result of current or future litigation; and the risks described from time to time in APC’s filings with the Securities and Exchange Commission.

For a discussion of these and other risk factors, please refer to “Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2005.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following table summarizes information relating to purchases made by APC of shares of our common stock during the first quarter ended March 26, 2006.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
	(In thousands except per share amounts)
January 1, 2006 to January 22, 2006	—	$	—	—	$	—
January 23, 2006 to February 19, 2006	970	$	20.20	970	$	180,389
February 20, 2006 to March 26, 2006	2,474	$	20.46	2,474	$	149,335
Total	3,444	$	20.39	3,444	$	129,723

On February 1, 2006, APC’s Board of Directors approved a stock repurchase program which authorizes up to $200 million to repurchase outstanding shares of APC’s common stock. The purchases would be made on the open market based on market and business factors. APC commenced the repurchase of its common stock in February 2006 and, as of the end of the first quarter, had repurchased approximately 3.4 million shares on the open market at an average price of approximately $20.39 per share (compared to a volume weighted average price of $20.40 per share), totaling $70 million. The duration of the repurchase program is two years but may be suspended or discontinued at any time without prior notice.

ITEM 6. EXHIBITS

Exhibit No. 3.01	Articles of Organization of APC, as amended, previously filed as an exhibit to APC’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 1999 and incorporated herein by reference (File No. 1-12432)
Exhibit No. 3.02	By-Laws of APC, as amended and restated, previously filed as an exhibit to APC’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by reference (File No. 1-12432)
Exhibit No. 31.1	Certification of Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
Exhibit No. 31.2	Certification of Richard J. Thompson, Chief Financial Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
Exhibit No. 32.1	Certification of Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
Exhibit No. 32.2	Certification of Richard J. Thompson, Chief Financial Officer, pursuant to Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AMERICAN POWER CONVERSION CORPORATION

Date: May 5, 2006

/s/ Richard J. Thompson

Richard J. Thompson
Chief Financial Officer
(Principal Accounting And Financial Officer)

AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES

EXHIBIT INDEX

Exhibit Number	Description	Page No.

3.01	Articles of Organization of APC, as amended, previously filed as an exhibit to APC’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 27, 1999 and incorporated herein by reference (File No. 1-12432)

3.02	By-Laws of APC, as amended and restated, previously filed as an exhibit to APC’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by reference (File No. 1-12432)

31.1	Certification of Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)	34

31.2	Certification of Richard J. Thompson, Chief Financial Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)	35

32.1	Certification of Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)	36

32.2	Certification of Richard J. Thompson, Chief Financial Officer, pursuant to Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)	37

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

American Power Conversion Inactive 10-Q2006 Q1 Quarterly report

Content analysis

Operating Expenses