QUARTERLY REPORT ON FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
_________________________
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2001
or
[ ] 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 (I.R.S. employer
incorporation or organization) 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 [ ]
Registrant's Common Stock outstanding, $.01 par value, at November 8, 2001 -
195,531,000 shares
1
FORM 10-Q
September 30, 2001
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information:
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets -
September 30, 2001 (Unaudited) and December 31, 2000 3 - 4
Consolidated Condensed Statements of Income -
Three Months and Nine Months Ended
September 30, 2001 and October 1, 2000 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows -
Three Months and Nine Months Ended
September 30, 2001 and October 1, 2000 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements
(Unaudited) 7 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9 - 14
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
Part II - Other Information:
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
2
FORM 10-Q
September 30, 2001
PART I - CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
ITEM 1 - FINANCIAL STATEMENTS
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
ASSETS
September 30, December 31,
2001 2000
(Unaudited)
Current assets:
Cash and cash equivalents $ 279,568 $ 283,025
Short term investments 47,978 25,000
Accounts receivable,
less allowance for doubtful accounts of
$22,991 in 2001 and $20,085 in 2000 293,440 298,041
Inventories:
Raw materials 182,603 120,685
Work-in-process and finished goods 181,856 168,347
Total inventories 364,459 289,032
Prepaid expenses and other current assets 20,382 23,488
Deferred income taxes 42,226 42,024
Total current assets 1,048,053 960,610
Property, plant, and equipment:
Land, buildings and improvements 73,734 72,136
Machinery and equipment 198,217 178,558
Office equipment, furniture, and fixtures 77,114 68,765
Purchased software 31,277 25,633
380,342 345,092
Less accumulated depreciation
and amortization 161,199 133,335
Net property, plant, and equipment 219,143 211,757
Goodwill and other intangibles, net 113,207 122,716
Other assets 20,353 22,022
Total assets $1,400,756 $1,317,105
See accompanying notes to consolidated condensed financial statements.
3
FORM 10-Q
September 30, 2001
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
2001 2000
(Unaudited)
Current liabilities:
Accounts payable $ 96,485 $ 105,031
Accrued expenses 36,074 37,946
Accrued compensation 25,331 21,708
Accrued sales and marketing programs 23,621 15,210
Deferred revenue 15,819 11,847
Income taxes payable 2,469 14,377
Total current liabilities 199,799 206,119
Deferred income taxes 14,131 13,805
Total liabilities 213,930 219,924
Shareholders' equity:
Common stock, $.01 par value;
authorized 450,000 shares; issued 195,658
shares in 2001 and 195,071 shares in 2000 1,957 1,951
Additional paid-in capital 121,488 115,381
Retained earnings 1,070,464 986,176
Treasury stock, 250 shares, at cost (1,551) (1,551)
Accumulated other comprehensive loss (5,532) (4,776)
Total shareholders' equity 1,186,826 1,097,181
Total liabilities and shareholders' equity $1,400,756 $1,317,105
See accompanying notes to consolidated condensed financial statements.
4
FORM 10-Q
September 30, 2001
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except earnings per share)
Nine months ended Three months ended
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
(Unaudited)
Net sales $1,085,175 $1,076,266 $ 360,943 $ 397,034
Cost of goods sold 700,211 609,854 244,025 232,995
Gross profit 384,964 466,412 116,918 164,039
Operating expenses:
Marketing, selling, general
and administrative 238,758 225,239 75,315 77,191
Special charges - 47,900 - 17,500
Research and development 39,497 32,728 13,014 11,800
Total operating expenses 278,255 305,867 88,329 106,491
Operating income 106,709 160,545 28,589 57,548
Other income, net 11,177 18,650 2,593 5,846
Earnings before income
taxes 117,886 179,195 31,182 63,394
Income taxes 33,598 51,967 8,887 18,385
Net income $ 84,288 $ 127,228 $ 22,295 $ 45,009
Basic earnings per share $ .43 $ .66 $ .11 $ .23
Basic weighted average
shares outstanding 195,154 194,059 195,377 194,600
Diluted earnings per share $ .43 $ .64 $ .11 $ .22
Diluted weighted average
shares outstanding 196,769 200,274 196,522 200,112
See accompanying notes to consolidated condensed financial statements.
5
FORM 10-Q
September 30, 2001
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months ended Three months ended
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
(Unaudited)
Cash flows from operating
activities
Net income $ 84,288 $127,228 $ 22,295 $ 45,009
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization of
property, plant, and equipment 31,759 22,692 12,417 7,848
Deferred income taxes 124 6,008 38 660
Other non-cash items, net 10,958 3,456 4,121 742
Changes in operating assets and
liabilities excluding effects
of acquisitions:
Accounts receivable 236 (49,273) 4,534 (28,250)
Inventories (75,427) (64,215) (871) (32,780)
Prepaid expenses and
other current assets 3,106 (7,413) 3,047 (2,720)
Other assets 2,492 (19,749) 2,664 (477)
Accounts payable (8,546) 34,641 (11,276) 15,820
Accrued expenses 14,134 (8,734) 7,631 (102)
Income taxes payable (11,908) (20,087) (11,182) (9,479)
Net cash provided by (used in
operating activities 51,216 24,554 33,418 (3,729)
Cash flows from investing
activities
Purchases of held-to-maturity
securities (47,978) (75,000) (34,125) -
Maturities of held-to-
maturity securities 25,000 50,000 - 50,000
Capital expenditures, net of
capital grants (40,552) (56,014) (12,084) (16,287)
Proceeds from sale of
property, plant, and equipment 2,744 - - -
Acquisitions - (78,922) - -
Net cash (used in) provided by
investing activities (60,786) (159,936) (46,209) 33,713
Cash flows from financing
activities
Proceeds from issuances of
common stock 6,113 18,811 611 2,105
Net cash provided by
financing activities 6,113 18,811 611 2,105
Net change in cash and
cash equivalents (3,457) (116,571) (12,180) 32,089
Cash and cash equivalents
at beginning of period 283,025 456,325 291,748 307,665
Cash and cash equivalents
at end of period $279,568 $339,754 $279,568 $339,754
Supplemental cash flow
disclosures
Cash paid during the period for
income taxes (net of refunds) $ 67,058 $ 63,902 $ 43,073 $ 25,614
See accompanying notes to consolidated condensed financial statements
6
.
FORM 10-Q
September 30, 2001
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
American Power Conversion Corporation's, APC's, Annual Report on Form 10-K for
the year ended December 31, 2000. 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 consolidated financial statements include the financial statements of
American Power Conversion Corporation and its direct and indirect wholly-owned
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation.
3. 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 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.
In thousands Nine months ended Three months ended
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
Basic weighted average
shares outstanding 195,154 194,059 195,377 194,600
Net effect of dilutive
potential common shares
outstanding based on the
treasury stock method using
the average market price 1,615 6,215 1,145 5,512
Diluted weighted average
shares outstanding 196,769 200,274 196,522 200,112
Antidilutive potential
common shares excluded
from the computation above 9,611 - 9,600 281
7
4. Shareholders' Equity
Changes in common stock and paid-in capital for the periods presented represent
the issuances of common stock resulting from the exercise of employee stock
options.
5. Comprehensive Income
The components of comprehensive income, net of tax, are as follows:
In thousands Nine months ended Three months ended
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
Net income $84,288 $127,228 $22,295 $45,009
Other comprehensive loss,
net of tax:
Change in foreign currency
translation adjustment (756) (3,219) (375) (2,451)
Other comprehensive loss (756) (3,219) (375) (2,451)
Comprehensive income $83,532 $124,009 $21,920 $42,558
6. Short Term Investments
At September 30, 2001, short term investments consisted of investment grade
corporate and municipal bonds with original maturities greater than three months
and less than or equal to one year at the date of acquisition. Such securities
were classified as held-to-maturity and carried at amortized cost. Management
determines the appropriate classification of debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity when APC has the positive intent
and ability to hold such securities to maturity.
7. 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. The Small Systems segment develops power solutions for servers and
networking equipment commonly used in local area and wide area networks and for
personal computers and sensitive electronics; the Large Systems segment produces
large system power and availability solutions for data centers, facilities, and
communications equipment; and the Other segment provides Web-based
informational, product, and selling services as well as replacement batteries
for APC's UPS products and notebook computers.
APC measures the profitability of its segments based on direct contribution
margin. Direct contribution margin includes R&D, marketing, and administrative
expenses directly attributable to the segments and excludes certain expenses
which are managed outside the reportable segments. Costs excluded from segment
profit are indirect operating expenses, primarily consisting of 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.
8
Summary operating segment information is as follows:
In thousands Nine months ended Three months ended
September 30, October 1, September 30, October 1,
2001 2000 2001 2000
Segment net sales
Small Systems $ 889,589 $ 939,350 $304,330 $336,106
Large Systems 163,370 124,385 43,924 52,471
Other 27,948 6,400 11,151 6,400
Total segment net sales 1,080,907 1,070,135 359,405 394,977
Shipping and handling
revenues 4,268 6,131 1,538 2,057
Total net sales $1,085,175 $1,076,266 $360,943 $397,034
Segment profits
Small Systems $ 374,032 $ 421,587 $130,108 $147,615
Large Systems (25,611) 10,540 (15,152) (275)
Other 16,529 4,065 6,162 4,065
Total segment profits 364,950 436,192 121,118 151,405
Shipping and handling
net costs 17,511 11,856 5,676 3,859
Indirect operating 240,730 215,891 86,853 72,498
expenses
Special charges - 47,900 - 17,500
Other income, net 11,177 18,650 2,593 5,846
Earnings before
income taxes $ 117,886 $ 179,195 $ 31,182 $ 63,394
8. Litigation
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations or liquidity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues
Net sales were $360.9 million for the third quarter of 2001, a decrease of 9.1%
compared to $397.0 million for the same period in 2000. Net sales for the first
nine months of 2001 were $1.1 billion, substantially unchanged from $1.1 billion
in 2000. Net sales for the third quarter and first nine months of 2001 included
approximately $4.8 million and $30.0 million, respectively, attributable to
NetworkAir, formerly Airflow Company, which was acquired in the fourth quarter
2000.
APC's 2001 net revenue continues to be impacted by softness in IT and communica-
tions market segments with general IT spending and growth in core technology
applications, such as PCs, down year over year. Our Small Systems business,
which provides power protection, uninterruptible power supply (UPS) and
management products for the PC, server, and local area networking markets,
represented approximately 84.7% and 82.3% of net sales in the third quarter and
first nine months of 2001, respectively. Third quarter 2001 net sales for this
segment were down 9.5% versus the same period last year, while first nine months
of 2001 net sales for this segment were down 5.3% versus the same period last
year. The Large Systems segment, consisting primarily of UPS, DC-power systems,
and precision cooling products for data centers, facilities, and communication
applications, represented approximately 12.2% and 15.1% of net sales in the
third quarter and first nine months of 2001, respectively. Third quarter 2001
net sales for this segment were down 16.3% versus the same period last year,
while the first nine months of 2001 net sales for this segment grew 31.3% versus
the same period last year.
9
On a geographic basis, the Americas (North and Latin America) represented 56.9%
of third quarter 2001 net sales and were down 11.0% year over year. Europe, the
Middle East, and Africa (EMEA) represented 26.1% of the quarter's net sales and
were down 7.5% compared to the same period last year. Asia comprised 16.9% of
the quarter's net sales and was down 5.0% year over year. On a constant
currency basis, EMEA net sales for the third quarter of 2001 fell 7.4% versus
the third quarter of 2000, while Asia net sales for the third quarter of 2001
grew 1.4% versus the same period last year. On a geographic basis, the Americas
represented 60.3% of the first nine months of 2001 net sales and were up 3.2%
year over year. EMEA represented 24.0% of the first nine month's net sales and
were down 3.8% compared to the same period last year. Asia comprised 15.8% of
the first nine month's net sales and were down .6% year over year. On a
constant currency basis, EMEA net sales for the first nine months of 2001 fell
1.2% versus the first nine months of 2000, while Asia net sales for the first
nine months of 2001 grew 6.0% versus the same period last year.
Cost of Goods Sold
Cost of goods sold was $244.0 million or 67.6% of net sales in the third quarter
of 2001 compared to $233.0 million or 58.7% of net sales in the third quarter of
2000. Cost of goods sold was $700.2 million or 64.5% of net sales in the first
nine months of 2001 compared to $609.9 million or 56.7% in the first nine months
of 2000. Third quarter 2001 gross margin was 32.4% of net sales, down from
41.3% in the comparable period in 2000. First nine months 2001 gross margin was
35.5% of net sales, down from 43.3% in the comparable period in 2000.
The year over year gross margin erosion reflected lower gross margins in the
Large Systems segment, which experienced declining sales and production volumes
in the third quarter of 2001, coupled with increasing cost inefficiencies due to
manufacturing downsizing actions in Denmark and the U.K. These actions were
announced and substantially completed in the third quarter of 2001. As a result
of these actions, we expect to generate significant employment cost savings.
However, due to the timing of the facilities closures and contractual or
regulatory obligations to certain workers, the financial benefits of these
actions will phase in gradually, commencing in the fourth quarter of 2001. The
lower Large Systems gross margins more than offset a slightly favorable segment
mix shift during the third quarter of 2001 towards the higher margin Small
Systems segment. Third quarter 2001 Small Systems segment gross margins
approximated comparable third quarter 2000 gross margins. Third quarter 2001
gross margins were also adversely impacted by start-up costs for a new factory
in Brazil which is expected to begin manufacturing products by the end of the
year.
Additionally, third quarter 2001 gross margins included the effects of charges
for excess inventory and restructuring costs that totaled $17.1 million,
principally associated with the Large Systems segment. These charges were the
result of events or assessments that occurred during the third quarter of 2001.
The charge for excess inventory relates to specifically identified finished
goods and materials inventories which are expected to be disposed of in late
2001 and early 2002. The restructuring costs are the effects of employee
terminations, facilities closures, and the related impairment of tangible and
intangible assets. Total inventory reserves at September 30, 2001 were $37.5
million compared to $20.5 million at December 31, 2000. This increase was
due primarily to the aforementioned charge for excess inventory. APC's reserve
estimate methodology has involved and will continue to involve quantifying
the total inventory position having potential loss exposure, reduced by an
amount reasonably forecasted to be sold, and adjusting its interim reserve
provisioning to cover the net loss exposure.
Operating Expenses
Operating expenses include marketing, selling, general and administrative
(SG&A), special charges, and research and development (R&D) expenses.
10
SG&A expenses were $75.3 million or 20.9% of net sales for the third quarter of
2001 compared to $77.2 million or 19.4% of net sales for the third quarter of
2000. SG&A expenses were $238.8 million or 22.0% of net sales for the first
nine months of 2001 compared to $225.2 million or 20.9% of net sales for the
first nine months of 2000. Although total spending for the first nine months of
2001 increased year over year, total spending for the third quarter of 2001 was
lower than the same quarter last year due primarily to our focused efforts to
control expenses while improving the productivity and efficiency of our global
resources. The increase in total spending for the first nine months of 2001
over the same period last year was due primarily to costs associated with
increased operating expenses of selling and administrative functions as well as
increased promotional and sales incentives costs, combined with incremental
costs attributable to NetworkAir, formerly Airflow Company, which was acquired
in the fourth quarter 2000.
The allowance for doubtful accounts at September 30, 2001 was 7.3% of accounts
receivable, compared to 6.3% at December 31, 2000. APC continues to experience
strong collection performance. Accounts receivable balances outstanding over 60
days represented 18.6% of total receivables at September 30, 2001, up from 13.4%
at December 31, 2000. This increase reflects in part a growing portion of APC's
business originating in areas where longer payment terms are customary,
including a growing contribution from international markets, as well as the
product mix shift towards Large Systems business, which typically carries longer
sales cycles and collection cycles. In addition, slower payment cycles
reflected recent macro economic trends. Write-offs of uncollectible accounts
have historically represented less than 1% of total net sales. A majority of
international customer balances are covered by receivables insurance.
R&D expenses were $13.0 million or 3.6% of net sales and $11.8 million or 3.0%
of net sales for the third quarters of 2001 and 2000, respectively, and $39.5
million or 3.6% of net sales and $32.7 million or 3.0% of net sales for the
first nine month periods of 2001 and 2000, respectively. The increase in total
R&D spending primarily reflects increased numbers of software and hardware
engineers and other costs associated with new product development and
engineering support, combined with incremental costs attributable to NetworkAir,
formerly Airflow Company, which was acquired in the fourth quarter 2000.
Other Income, Net and Income Taxes
Other income is comprised principally of interest income combined with a $1.3
million gain in the first quarter of 2001 on the sale of a building in
Billerica, Massachusetts. Interest income was lower during the third quarter
and first nine months of 2001 due to lower short term interest rates and lower
average cash balances available for investment in 2001 compared to the same
periods last year.
Our effective income tax rates were approximately 28.5% and 29.0% for the
respective quarters and first nine month periods ended September 30, 2001 and
October 1, 2000. The decrease in the effective tax rate from last year is due
to the expected tax savings from an increasing portion of taxable earnings being
generated from APC's operations in jurisdictions currently having a lower income
tax rate than the present U.S. statutory income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 2001 was $848.3 million compared to $754.5
million at December 31, 2000. APC has been able to increase its working capital
position as the result of continued strong operating results and despite
internally financing the working and long term capital investments required to
expand its operations. Our cash, cash equivalents, and short term investments
position was $327.5 million at September 30, 2001, up from $308.0 million at
December 31, 2000.
Worldwide inventories were $364.5 million at September 30, 2001 compared to
$289.0 million at December 31, 2000. Like many other vendors participating in
the communications and Internet infrastructure build-out, APC has been impacted
by the rapid decline in forecasted demands during the fourth quarter of 2000 and
the first nine months of 2001. APC has also experienced shipment cancellations
and rescheduled sales orders from customers in the telecommunications and
service provider industry, while our global capacity expansion and rebalancing
in our Large Systems business drove the need for additional safety stock.
Additionally, APC's third quarter results include the effects of a charge for
excess inventory that totaled $12.4 million relating to specifically identified
finished goods and materials inventories which are expected to be disposed of in
late 2001 and early 2002. The inventories subject to the write-off are
categorized as follows: $1.5 million of residual, unusable quantities located
at facilities impacted by recent downsizing actions; $2.5 million of unusable or
unsaleable quantities related to declining and changing demand requirements; and
$8.4 million of custom finished goods impacted by canceled sales orders,
primarily from customers in the telecom and Internet infrastructure industries.
Inventory levels as a percentage of quarterly sales were 101.0% in the third
quarter of 2001, 99.7% in the second quarter of 2001, and 92.0% in the first
quarter of 2001.
11
At September 30, 2001, we had $65.0 million available for future borrowings
under an unsecured line of credit agreement at a floating interest rate equal to
the bank's cost of funds rate plus 0.625% and an additional $7.0 million under
an unsecured line of credit agreement with a second bank at a similar interest
rate. No borrowings were outstanding under these facilities at September 30,
2001. APC had no significant financial commitments, other than those required
in the normal course of business, at September 30, 2001.
During the first nine months of 2001, our capital expenditures, net of capital
grants, consisted primarily of manufacturing and office equipment, buildings and
improvements, and purchased software applications. The nature and level of
capital spending was made to improve manufacturing capabilities, principally in
Brazil and India, as well as to fund IT-related capital equipment and software
purchases to support business process improvement initiatives. Capital spending
included Large Systems segment global capacity expansion into lower cost
locations closer to local end-user customers and markets. Substantially all of
APC's net capital expenditures were financed from available operating cash. We
had no material capital commitments, other than those required in the normal
course of business, at September 30, 2001.
APC has agreements with the Industrial Development Authority of Ireland under
which APC receives grant monies for costs incurred for machinery, equipment, and
building improvements for its Galway and Castlebar facilities equal to 40% and
60%, respectively, of such costs up to a maximum of $13.1 million and $1.3
million, respectively. Such grant monies are subject to APC meeting certain
employment goals and maintaining operations in Ireland until termination of the
respective agreements.
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
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.
At September 30, 2001, APC's unhedged foreign currency accounts receivable, by
currency, were as follows:
Foreign
In thousands Currency US Dollars
European Euros 45,888 $42,386
Japanese Yen 2,656,581 22,565
British Pounds 11,670 17,221
Swiss Francs 21,965 13,752
APC also had non-trade receivables denominated in Irish Pounds of approximately
US$1.9 million, liabilities denominated in various European currencies of
approximately US$40.0 million, and liabilities denominated in Japanese Yen of
approximately US$7.5 million.
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 derivative
arrangements, including foreign exchange contracts. We presently do not utilize
rate protection agreements or derivative arrangements.
12
Recently Issued Accounting Standards
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
is effective January 1, 2002. The adoption of this Statement is not expected to
have a material impact on our consolidated financial position or results of
operations.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. This Statement is effective January 1, 2003. The
adoption of this Statement is not expected to have a material impact on our
consolidated financial position or results of operations.
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets. Statement 141 requires that the purchase
method of accounting be used for (a) all business combinations initiated after
June 30, 2001 and (b) all purchase method business combinations completed after
June 30, 2001. Statement 141 also specifies the criteria that intangible assets
acquired in a purchase method business combination must meet in order to be
recognized and reported apart from goodwill. Pursuant to the requirements of
Statement 142, goodwill and intangible assets with indefinite useful lives will
no longer be amortized, but instead will be tested for impairment at least
annually. Statement 142 also requires that intangible assets with definite
useful lives be (a) amortized over their respective estimated useful lives to
their estimated residual values and (b) reviewed for impairment in accordance
with Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
APC is required to adopt the provisions of Statement 141 immediately and
Statement 142 effective January 1, 2002. Prior to the adoption of Statement
142, APC's goodwill and intangible assets acquired in business combinations
completed before June 30, 2001 will continue to be amortized. Also, prior to
the adoption of Statement 142, goodwill and intangible assets acquired in
purchase business combinations completed by APC after June 30, 2001 and
determined to have indefinite useful lives will not be amortized but will be
evaluated for impairment in accordance with the appropriate pre-Statement 142
accounting literature.
APC is currently studying the provisions of Statements 141 and 142. At
September 30, 2001, APC has unamortized goodwill and other intangible assets of
approximately $113.2 million which will be subject to the transition provisions
of Statements 141 and 142. APC's amortization expense related to goodwill and
other intangible assets was $2.3 million in each of the first, second, and third
quarters of 2001 and $7.4 million in fiscal year 2000.
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products." This issue addresses the recognition and measurement of costs
incurred by a vendor in connection with a retailer's purchase or promotion of
the vendor's products, including the income statement classification of such
costs not directly addressed in Issue 00-14 (see below). This Issue is
effective January 1, 2002. APC is currently studying the provisions of this
Issue and is also in the process of quantifying the impact of implementing this
new guidance.
In April 2001, the EITF revised the transition requirements of its May 2000
consensus on Issue No. 00-14, "Accounting for Certain Sales Incentives. " This
issue involves the accounting for and reporting of sales subject to rebates and
revenue sharing arrangements as well as coupons and discounts, including the
income statement classification of rebates and other discounts. This issue is
effective January 1, 2002. APC is currently studying the provisions of this
Issue and is also in the process of quantifying the impact of implementing this
new guidance.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. This Statement became effective for APC on January 1, 2001. The
adoption of this Statement did not have any impact on APC's consolidated
financial position or results of operations as we presently do not utilize any
derivative instruments.
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Factors That May Affect Future Performance
This document contains forward-looking statements that involve risks and
uncertainties. 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.
The factors that could cause actual results to differ materially include the
following: The impact on demand, component availability and pricing, and
logistics that result from war, acts of terrorism, or political instability; the
timely development and acceptance of new products; ramp up, expansion and
rationalization of global manufacturing capacity; our ability to effectively
align operating expenses and production capacity with the current demand
environment; impact on order management and fulfillment, financial reporting and
supply chain management processes as a result of our implementation of Oracle
11i commenced in the first quarter 2001; general worldwide economic conditions,
and, in particular, the possibility that the PC and related markets decline more
dramatically than currently anticipated; growth rates in the power protection
industry and related industries, including but not limited to the PC, server,
networking, telecommunications, and enterprise hardware industries; competitive
factors and pricing pressures; 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 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; risk of disruption to Asian
manufacturing operations due to political instability; and the risks described
from time to time in our filings with the Securities and Exchange Commission.
APC cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date they are made. APC disclaims any
obligation to publicly update or revise any such statements to reflect any
change in APC's 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
APC, in the normal course of business, is 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) 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)
(B) Reports on Form 8-K
No reports on Form 8-K were filed by American Power Conversion Corporation
during the quarter ended September 30, 2001.
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FORM 10-Q
September 30, 2001
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: November 14, 2001
/s/ Donald M. Muir
Donald M. Muir
Chief Financial Officer
(Principal Accounting and Financial Officer)
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FORM 10-Q
September 30, 2001
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Page
Number Description 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)
16