UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $0.01 par value Pacific Exchange, Inc.
Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [ X ] NO [ ]
The aggregate market value of the outstanding common stock, other than shares
held by persons who may be deemed affiliates of the Registrant, as of the last
business day of the Registrant's most recently completed second fiscal quarter
was approximately $2,107,700,000. The number of shares outstanding of the
Registrant's common stock, $0.01 par value, on March 10, 2003 was 196,460,000.
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement in connection with the
2003 Annual Meeting of the Shareholders are incorporated by reference in Part
III hereof.
1
Part I
Item 1. Description of Business
American Power Conversion Corporation
American Power Conversion Corporation, APC, designs, develops, manufactures, and
markets power protection and management solutions for computer, communications,
and electronic applications worldwide. Our products include:
- uninterruptible power supply products, commonly known as UPSs;
- DC-power systems;
- electrical surge protection devices, also known as surge suppressors;
- power conditioning products;
- precision cooling equipment;
- power management software and accessories;
- racks and enclosures;
- services; and
- various desktop and notebook personal computer (PC) accessories.
These products are primarily used with sensitive electronic devices which rely
on electric utility power including, but not limited to, home electronics, PCs,
high-performance computer workstations, servers, networking equipment,
communications equipment, Internetworking equipment, data centers, mainframe
computers, and facilities.
Our UPS products regulate the flow of utility power to ensure safe and clean
power to the protected equipment and provide seamless back-up power in the event
of the loss of utility power. The back-up power lasts for a period of time
sufficient to enable the user to continue computer operations, conduct an
orderly shutdown of the protected equipment, preserve data, work through short
power outages or, in some cases, continue operating for several hours or longer.
Our DC-power systems are highly configurable designs that continuously monitor
and isolate end-user equipment from utility voltage fluctuations, frequency
variations, and electrical noise. In the event of a power failure, the DC
products seamlessly provide back-up power for critical communications networks,
allowing users emergency access to these networks for a period of many hours.
Our surge protection devices and power conditioning products provide protection
from electrical power surges and noise in the flow of utility power. APC's
precision cooling equipment regulates temperature and humidity. Our software
and power management accessories enhance monitoring, management, and performance
of our products, our racks and enclosures provide a high availability
environment for integrating and housing information technology equipment, our
service offerings assist the end-user with installation, configuration, and
maintenance of our products, and our desktop and notebook PC accessories provide
a range of power and availability options.
Segments
APC operates primarily within one industry consisting of three reportable
operating segments by which we manage our 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. Our three segments are: Small Systems,
Large Systems, and Other. Each of these segments address global markets.
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 Smart-UPSr, Matrix-UPSr, Symmetrar Power Arrayr, and Back-UPSr family of
UPSs. Also included are the SurgeArrestr surge suppressors as well as cabling
and connectivity products. Additional accessories and software products are
offered to enhance the management of these networks. Products include
PowerChuter software, MasterSwitchT power distribution units, and NetShelterr
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.
2
The Large Systems segment produces products that provide power and availability
for data centers, facilities, and communications equipment for both commercial
and industrial applications. Product offerings include Silconr UPSs,
NetworkAIRr precision cooling equipment, DC-power systems, and major components
of InfraStruXureT systems. Products are sold to commercial users primarily
through an indirect selling model consisting of value added resellers and
strategic partnerships.
In the fourth quarter of 2001, APC acquired select inventory and related
technology associated with outside plant, networking power product lines from
ARRIS Group, Inc. for $10.3 million paid in cash. The product lines were
acquired from ARRIS' EnergyLinkT family of power supplies, enclosures and
equipment for network broadband power, including the TSPT (Total System Power)
line. The product lines are designed for outdoor use, commonly installed on
utility poles or adjacent to fiber nodes, and provide back-up power for
broadband cable applications. The combination of the Arris product line and
APC's PowerShieldr products provide a comprehensive broadband power product
line. Beginning in 2002, both offerings are included in the Large Systems
segment. Prior to 2002, APC's PowerShield products were classified in the Small
Systems segment. In 2002, the PowerShield products were reclassified to the
Large Systems segment along with the other broadband solutions from the ARRIS
acquisition which share similar product applications and economic
characteristics more closely matching the Large Systems segment.
The Other segment principally consists of desktop and notebook computer
accessories, replacement batteries and Web-based services.
Information on reportable operating segment net sales, profit from operations,
and depreciation for each of the last three years is located in Note 15 of Notes
to Consolidated Financial Statements in Item 8 of this Report.
APC was incorporated under the laws of the Commonwealth of Massachusetts on
March 11, 1981. Executive offices are located at 132 Fairgrounds Road, West
Kingston, RI 02892, our telephone number is (401) 789-5735 and our Internet Web
site is www.apc.com.
APC is required to file annual, quarterly and current reports, proxy statements
and other information with the U.S. Securities and Exchange Commission (SEC).
Investors may read and copy any document that APC files, including this Annual
Report on Form 10-K, at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. Investors may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition,
the SEC maintains an Internet Web site at http://www.sec.gov that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC, from which investors can
electronically access APC's SEC filings.
APC makes available free of charge on or through its Internet Web site
(www.apc.com), its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after it electronically files such
material with, or furnishes the material to, the SEC. The information on APC's
Internet Web site is not, and shall not be deemed to be, a part of this Report
or incorporated into any other filings APC makes with the SEC.
3
Market Overview
The growth of the power protection industry has been fueled by the demand to
have information systems accessible as much as 24 hours a day as well as the
proliferation of microprocessor-based equipment and related systems in the
corporate marketplace and in the small office/home office environment. Despite
recent softness in IT markets and lower general IT spending and growth in core
technology applications, PCs and servers have become an integral part of the
overall business strategy of many organizations as well as in many technical,
scientific, and manufacturing settings. Businesses continue to store,
manipulate, and transfer data via local area and wide area networks as well as
via corporate intranets and the Internet. Additionally, while the installation
of large data centers and investment in networking and communications equipment
have also experienced a spending decline, the past several years have been
marked with a general rise in these installations to support Internet-based
market and corporate IT needs.
We believe that the increased awareness of the costs and lost productivity
associated with poor power quality has increased demand for power protection
products. Complete failures, surges, or sags in the electrical power supplied
by a utility can cause computers and electronic systems to malfunction,
resulting in costly downtime, damaged or lost data files, and damaged hardware.
A UPS protects against these power disturbances by providing continuous power
automatically and virtually instantaneously after the electric power supply is
interrupted. UPSs also provide line filtering and protection against surges or
sags while the electric utility is available. The products also enhance
productivity through the continued availability of networks, sensitive
electronics, and even facilities during power outages. In international
regions, power quality often results in varied levels of distortions and, as a
result, these areas provide us with additional opportunities for our products.
In the first quarter of 2002, APC introduced PowerStruXureT, a patent-pending,
systematic approach to building data center physical infrastructure. This
entirely new approach to data center support simplifies the design, building and
management of data center infrastructure with an innovative, fully engineered
and tested system. The three initial core solutions that comprise PowerStruXure
are a modular, scalable, N+1 redundant UPS; zoned, intelligent power
distribution; and a next generation rack enclosure. In early 2003, we expanded
on the PowerStruXure architecture with the introduction of InfraStruXure.
InfraStruXure combines cooling into the rack-optimized architecture APC
pioneered with PowerStruXure.
In addition to PowerStruXure, in 2002 we introduced new products across many of
our major product offerings. New features and technologies were added to our
UPSs for both corporate and home users; power management software was rolled-out
for new operating systems and management platforms; and we added new products
for notebook and desktop PCs. Despite this ongoing innovation, our business
continued to be impacted by the difficult macro-economic environment and a
slowdown in our core end markets, including PCs, servers, data centers, and
networking and communications infrastructure.
Products
APC's strategy is to design and manufacture products that incorporate high-
performance and quality at competitive prices. Our products are designed to fit
seamlessly into the computer, networking, and communications environments of
businesses, homes, small offices/home offices and outdoor installations. These
products are engineered and extensively tested for compatibility with leading
information and communications technology hardware and software.
UPS
We currently manufacture a broad range of standard domestic and international
UPS products. Our UPSs are designed for multiple applications with the
principal differences among the products being the amount of power which can be
supplied during an outage, the length of time for which battery power can be
supplied, the level of intelligent network interfacing capability, and the
number of brownout and over-voltage correction features. UPSs range from 200
volt-amps, suitable for a PC, to 1.6 megawatt, or MW, suitable for data centers,
mainframe computers, industrial applications or facilities. List prices to end-
users range from approximately $40 to approximately $250,000.
4
Surge Suppressors
We also offer a line of surge protection products to protect against power and
dataline spikes and surges. The principal differences among the surge
suppressor models are the level of protection available, feature sets of the
products, and the applications for which they are designed. List prices to end-
users range from approximately $10 to approximately $3,500.
DC-power
Our DC-power systems include rectifiers; highly configurable DC power plant
design, installation consulting, and service; and power distribution equipment
for a variety of communications networks, including cable, wireless, fiber
optic, and public switched telephone network applications. The products can
serve as both the primary power supply and back-up power for communications
equipment. List prices to end-users range from approximately $500 to over
$100,000.
Power Management Software
APC also offers a family of power management software solutions. The primary
software offering is available under the PowerChute name and provides unattended
system shutdown, UPS power management, and diagnostic features. PowerChute is
available free of charge for many major operating systems with the purchase of
select UPS units. List prices to end-users for other PowerChute products start
at approximately $70. APC also offers software packages for advanced
monitoring, configuring, and managing of power resources. Select versions are
available free of charge, while list prices to end-users for these software
packages range from approximately $169 to approximately $10,000.
Power Management Accessories
We also offer a range of power management hardware accessories. These solutions
include add-on hardware to manage and monitor attached UPS and networking
equipment; cables and connectivity equipment; a free-standing rack enclosure
product, NetShelter; and a variety of rack accessories to better utilize
precious space in a computer room. List prices to end-users for accessory
products range from approximately $70 to approximately $2,200.
Precision Cooling
Additionally, APC offers a line of precision cooling products that regulate
temperature and humidity. Products include portable, floor and ceiling-mounted
precision cooling systems as well as management systems used in a variety of
applications including server rooms, data centers, and communication stations.
List prices range from approximately $700 to approximately $45,000
Service Programs
Warranties
APC provides service programs and warranties to our customers for a wide range
of our products. Typical programs include both in-warranty and out-of-warranty
repair or replacement as well as on-site services, installation consulting
services, remote monitoring services, PowerAuditr services, power availability
consulting, and network integration services. Depending on the product, we
principally offer standard warranties ranging from one to five years, for which
extended warranty periods can generally be purchased, as well as programs to
upgrade older and competitive units to new or refurbished condition.
Equipment Protection Policy
APC offers an Equipment Protection Policy in the U.S., Canada, Europe, and
Australia. Depending on the model and country, the policy provides up to
$150,000, 50,000 pounds sterling, or 100,000 euros for repair or replacement of
customers' hardware should a surge or lightning strike pass through an APC unit.
Certain restrictions may apply. Customers can also register the ProtectNetr
line of dataline surge suppressors for a "Double-Up" Supplemental Equipment
Protection Policy, under which the total recoverable limit under the Equipment
Protection Policy may be doubled (U.S. and Canada only).
5
Except in relation to the product recall discussed below, APC has generally
experienced satisfactory field operating results, and warranty and Equipment
Protection Policy costs incurred to date have not had a significant impact on
our consolidated results of operations.
In early 2003, we announced a product recall of Back-UPS CS 350 and 500 models,
due to potential safety issues. APC has received eight reports worldwide of
units overheating, resulting in the melting of the unit's outer casing, six of
which occurred in the United States. Three of the reported incidents resulted
in minor property damage; no injuries have been reported. The total number of
affected devices being recalled worldwide is approximately 2.1 million with
approximately 900,000 devices recalled in the United States. The recall is
limited to two specific models in APC's Back-UPS CS product line, the Back-UPS
CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models. The
affected units were manufactured between November 2000 and December 2002 and
were sold primarily through computer and electrical distribution, catalog and
retail outlets worldwide.
Distribution Channels
APC markets its products to businesses, small offices/home offices, and home
users around the world through a variety of distribution channels. These
channels include:
- information technology (IT) distributors and dealers;
- value added resellers;
- mass merchandisers;
- catalog merchandisers;
- E-commerce vendors;
- direct to customer including consumer, government, and business
enterprise; and
- strategic partnerships.
We also sell directly to some large value added resellers, which typically
integrate our products into specialized computer systems and then market turnkey
systems to selected vertical markets. Additionally, certain select products are
sold directly to manufacturers for incorporation into products manufactured or
packaged by them.
Two computer distributor customers, Tech Data Product Management and Ingram
Micro, accounted for approximately 14.4% and 13.2%, respectively, of net sales
in 2002, 13.3% and 15.5%, respectively, of net sales in 2001, and 11.4% and
14.9%, respectively, of net sales in 2000. The majority of our sales to Tech
Data Product Management and Ingram Micro are included in the Small Systems
segment.
Sales and Marketing
APC's sales and marketing organizations are primarily responsible for four
activities: sales, marketing, customer service, and technical support. Our
sales force is responsible for relationships with our distribution channels and
end-users as well as developing new distribution channels, particularly in
geographic and product application areas into which we are expanding. We have
charged our sales force with providing customers comprehensive products and
services to meet their power availability and management needs.
Our marketing activities include market research, product planning, trade shows,
sales and pricing strategies, and product sales literature. We utilize direct
marketing efforts domestically and internationally, including direct mailings
and print, online/Internet, radio, and television advertising, as well as
exhibiting at computer trade shows. Customer service is responsible for
technical marketing inquiries and customer support. APC has developed a number
of programs and techniques to support the distribution channels. These include,
but are not limited to, toll-free phone assistance, online product and technical
information, formal product demonstrations, and reseller trainings.
6
Supply Chain Management - Manufacturing, Quality, Raw Materials, and
Distribution
Manufacturing
APC's manufacturing operations are located in the United States, Brazil, China,
India, Ireland, the Philippines, and Switzerland. In 2002, we continued to
streamline capacity and facilities. This included the consolidation of our
Philippines-based manufacturing operations to facilities within the province of
Cavite. As of December 31, 2002, employee terminations related to the closure
of facilities were substantially completed. For more information about our
manufacturing downsizing actions, refer to Note 3 of Notes to Consolidated
Financial Statements in Item 8 of this Report.
We believe that our long-term success depends on, among other things, the
ability to control our costs. We utilize lean "cell" based manufacturing
processes, automated manufacturing techniques, and extensive quality control in
order to minimize costs and maximize product reliability. In addition, the
design of products and the commonality of parts allow for efficient circuit
board component mounting or insertion, wave soldering, and in-process testing.
Quality control procedures are performed at the component, sub-assembly, and
finished product levels. We are committed to an ongoing effort to enhance the
overall productivity of our manufacturing facilities.
Quality
APC has been ISO 14001 and ISO 9001 certified by the International Organization
for Standardization. Our systems have been audited to the stringent ISO 14001
and ISO 9001 levels at our manufacturing facilities in the United States, China,
India, Ireland, and the Philippines as well as at our Design Center in Denmark.
The International Organization for Standardization has also certified our
Research and Development Center in Massachusetts to the ISO 9001 level.
Raw Materials
We generally purchase devices and components from more than one source where
alternative sources are available; however, we do use sole source suppliers for
certain components and certain finished products. We believe that alternative
components for these sole source items could be incorporated into our products,
if necessary. While we have been able to obtain adequate supplies of components
from sole source suppliers, the future unavailability of components from these
suppliers could disrupt production and delivery of products until an alternative
source is identified.
Distribution
APC continues to invest in a worldwide distribution network that delivers our
products and services to our customers. We own or lease distribution centers
and engage third party logistics service providers in numerous countries across
the globe. All distribution centers are connected to our customer service
operations via APC's Enterprise Resource Planning system, which enables orders
received from any point in the network to be fulfilled from any distribution
center throughout the world. APC employs several enhanced fulfillment
capabilities in support of our overall E-commerce initiatives, including the use
of Electronic Data Interchange transactions between APC and our distributors for
receipt of orders, acknowledgement of orders, and confirmation of shipments.
Additionally, we utilize a suite of Web tools that allows consumers and
resellers to view product information, gain access to pricing information, and
place their orders via the Web.
7
Product Development
APC's research and development, or R&D, staff includes engineers and support
persons who develop new products and provide engineering support for existing
products. Our R&D efforts are also aimed at reducing cost and total cycle time
and improving product and component quality. Most of these employees are
located in the United States with additional resources located in Denmark,
Ireland, and Taiwan. Employees devoted to the improvement and development of
software products are located in the United States, Ireland, and at APC's
subsidiary, Systems Enhancement Corporation. We believe that the technical
expertise of our R&D staff is very important to our growth as technological
change is rapid in our markets.
In 2002, we introduced PowerStruXure, a patent-pending, systematic approach to
building data center physical infrastructure. This entirely new approach to
data center support simplifies the design, building and management of data
center infrastructure with an innovative, fully engineered and tested system.
Our Back-UPS and Smart-UPS lines were also enhanced with new models that
highlight longer run time, smaller footprints and lower price points. New
hardware and software management tools were also announced and we added new
products for notebook and desktop PCs. In early 2003, we expanded on the
PowerStruXure architecture with the introduction of InfraStruXure.
InfraStruXure combines cooling into the rack-optimized architecture APC
pioneered with PowerStruXure.
New introductions in 2001 also enhanced our UPS line-up with new models in our
Back-UPS, Smart-UPS and Symmetra families. We revamped our PowerChute software
family introducing three new versions tailored for home, business and enterprise
customers. New management and accessory products were also introduced,
including new NetShelter server enclosures plus monitoring and management tools.
Via acquisition, we added new battery management technology for our three-phase
UPS systems as well as outside plant, networking power solutions to our
broadband power line-up.
Through acquisitions in 2000, APC added DC-power solutions for communications
applications, cabling and connectivity products for desktop and networking
environments, and precision cooling equipment for data center and communications
gear. For more information about these acquisitions, refer to the Acquisitions
section included in Management's Discussion and Analysis of Financial Condition
and Results of Operations in Item 7 of this Report. New UPS solutions
introduced during the year from existing product lines included new Back-UPS
Officer models, new Smart-UPS models, new Symmetra Rack-mount Power Arrays, and
new high end Silcon models in North America. We introduced solutions for
notebook PC users, including TravelPowerT laptop power adapters and notebook
replacement battery cartridges. Additional power management, monitoring and
services were also introduced during the year.
R&D expenditures were $60.1 million or 4.6% of net sales in 2002, $54.6 million
or 3.9% of net sales in 2001, and $46.9 million or 3.2% of net sales in 2000.
Intellectual Property
We protect certain proprietary rights in our products as well as certain
proprietary technology developments by seeking patent protection. We believe
that the loss of any such rights concerning these developments would not have a
material adverse effect on our business. We also license from others certain
worldwide patent rights relating to UPS technology. With respect to protection
of those areas of our technology for which patent protection has not been
sought, we rely on the complexity of our technology, trade secrecy law, and
employee confidentiality agreements.
APC has numerous trademarks registered in the United States and in many foreign
countries. We also have trademark applications pending domestically and
internationally. The trademark "APC" is of principal importance to us. In
addition, a number of other trademarks owned by us have significant importance.
8
Competition
We believe that we are one of less than ten global companies providing a full
range of UPS products and services worldwide. Many of our competitors offer
competitive products in both the Small and Large systems space, while some focus
on only one segment. Our principal competitors in the Small Systems space
include:
- Liebert Corporation, a unit of Emerson Electric Co.;
- Powerware Corporation, a member of the Invensys Energy Management
Division of Invensys plc;
- MGE UPS Systems, a privately-held French company;
- Trippe Manufacturing Company, a privately-held U.S. company;
- Phoenixtec Power Company Ltd., a publicly-held Taiwanese company; and
- Belkin Components, a privately-held U.S. company.
Principal competitors in the Large Systems segment include:
- Liebert Corporation;
- Powerware Corporation;
- MGE UPS Systems; and
- Chloride Power, a subsidiary of Chloride Group PLC.
We also compete with a number of other U.S. and non-U.S. based companies that
offer power protection, DC-power, and other products similar to ours in both
segments. Some competitors have greater financial and other resources than APC.
We compete in the sale of our products on the basis of several factors,
including product performance and quality, marketing, access to distribution
channels, customer service, product design, and price.
International Operations
APC has established an extensive international presence consisting of
manufacturing, service, engineering, sales, marketing and administrative
operations. With a full line of internationally positioned products available,
we continue to introduce products and staff personnel to serve geographical
markets of interest. Our manufacturing operations outside of the United States
are located in Brazil, China, India, Ireland, the Philippines, and Switzerland.
A significant portion of products in our Small Systems and Large Systems
reportable operating segments are built internationally, particularly in the
Philippines. We believe that the production of these products could be
redeployed to other regions if necessitated.
Our primary sales offices outside of the United States are located in Europe and
the Far East. These offices, together with offices in other locations
worldwide, provide sales and technical support to our customers across the
globe. APC also owns or leases distribution centers in numerous countries
worldwide, and engages third party logistics service providers in Europe, the
Far East, Canada, South Africa, and Uruguay for distribution into our
international markets.
Financial Information About Foreign and Domestic Operations
The information required under this section is included in Note 15 of Notes to
Consolidated Financial Statements in Item 8 of this Report and is incorporated
herein by reference.
Employees
As of December 31, 2002, APC had approximately 5,424 full-time employees
worldwide. APC also engages other personnel on a part-time basis.
9
APC's Executive Officers
APC's executive officers are elected annually and hold office until the next
Annual Meeting of the Board of Directors and until their successors are duly
elected and qualified. As of March 10, 2003, APC's executive officers were:
Name Age Positions
Rodger B. Dowdell, Jr. 53 Chairman of the Board of Directors,
President, and Chief Executive Officer
Neil E. Rasmussen 48 Senior Vice President, Chief Technical
Officer and Director
Edward W. Machala 48 Senior Vice President, Operations, and
Chief Operations Officer
Donald M. Muir 46 Senior Vice President, Finance and
Administration, Treasurer and Chief
Financial Officer
Emanuel E. Landsman 66 Vice President and Director
Aaron L. Davis 36 Vice President, Marketing and
Communications
Peter A. Rumsey 34 Vice President, Global Sales
Rodger B. Dowdell, Jr. has been President and a Director of APC since August
1985 and Chairman of APC's Board of Directors since June 1988. From January to
August 1985, Mr. Dowdell worked for APC as a consultant, developing a marketing
and production strategy for UPS products. From 1978 to December of 1984 he was
President of Independent Energy, Inc., a manufacturer of electronic temperature
controls.
Neil E. Rasmussen became Senior Vice President in June 2001 and previously was
Vice President since our inception. In 1997, he was appointed Chief Technical
Officer of APC and has been a Director of APC since our inception. From 1979 to
1981, Mr. Rasmussen worked in the Energy Systems Engineering Group at
Massachusetts Institute of Technology's Lincoln Laboratory.
Edward W. Machala was named Senior Vice President, Operations, and Chief
Operations Officer in June 2001. Mr. Machala joined APC in January 1989 as Vice
President, Operations. From January 1985 to January 1989, Mr. Machala was
Director of Manufacturing and Engineering Technology for GTECH, a manufacturer
of electronic lottery and gaming terminals, where he was responsible for
manufacturing and engineering functions.
Donald M. Muir became Senior Vice President, Finance & Administration and
Treasurer in June 2001. Mr. Muir joined APC in July 1995 as Chief Financial
Officer and served as Vice President, Finance and Administration, from May 1998
to June 2001. From July 1993 to July 1995, Mr. Muir was the Treasurer of
Stratus Computer, Inc. where he was responsible for managing investor relations,
treasury services, corporate taxation, and risk management. Prior to his
appointment as Treasurer at Stratus Computer, Inc., Mr. Muir held the position
of Director of Finance and Administration from January 1991 to July 1993 and
Controller, Worldwide Sales and Service from December 1988 to January 1991.
Emanuel E. Landsman has been Vice President and a Director of APC since our
inception and served as Clerk from our inception until June 2001. From 1966 to
1981, Dr. Landsman worked at Massachusetts Institute of Technology's Lincoln
Laboratory, where he was in the Space Communications Group from 1966 to 1977 and
the Energy Systems Engineering Group from 1977 to 1981.
Aaron L. Davis was named Vice President, Marketing and Communications in June
2001. Mr. Davis served as Vice President, Small Systems Group from May 1999 to
June 2001, Vice President, Marketing and Communications from June 1997 to May
1999, and Vice President of Marketing Communications from January 1995 to June
1997. Mr. Davis joined APC as Director of Marketing Communications in May 1989.
Mr. Dowdell is the uncle of Mr. Davis.
Peter A. Rumsey was named Vice President, Global Sales at APC in June 2001. Mr.
Rumsey served as APC's Vice President, Enterprise Solutions Group from May 1999
to June 2001. Mr. Rumsey joined APC in 1990 as an OEM Account Manager and has
served in a variety of sales management roles including Technical Sales Manager,
Director of Strategic Partners, Country Manager for Japan, Managing Director of
Asia Pacific, and General Manager of Asia Pacific. From 1991 to 1993, Mr.
Rumsey served in the U.S. Air Force.
10
Item 2. Properties
APC's principal properties are located in the United States, Brazil, China,
Denmark, England, India, Ireland, the Philippines, and Switzerland. In
addition, we own or lease sales offices and other space at various locations
throughout the United States and outside the United States. APC also owns or
leases such machinery and equipment as are necessary in our operations. In
general, our properties are in good condition, are considered to be adequate for
the uses to which they are being put, and are substantially in regular use.
Location of Sales,
Principal Marketing &
Properties Administration Manufacturing R&D Warehouse Total Segment
In square feet
Owned
United States
Rhode Island 167,850 98,930 -- 4,980 271,760 Shared
Massachusetts -- -- 23,000 -- 23,000 Shared
Europe
Ireland 67,190 210,100 5,280 108,140 390,710 Shared
Denmark 24,000 28,000 58,650 -- 110,650 Large Systems
Far East
Philippines 21,520 178,760 -- 48,700 248,980 Shared
Leased
United States
Rhode Island 41,210 182,830 9,540 304,940 538,520 Shared
Massachusetts -- -- 77,300 -- 77,300 Shared
Missouri 24,460 4,000 22,000 -- 50,460 Shared
Maryland 14,400 -- -- 21,600 36,000 Small Systems
Texas 3,640 1,530 21,130 2,640 28,940 Large Systems
Europe
England 17,690 55,630 7,290 9,130 89,740 Large Systems
Switzerland 14,510 20,690 540 8,610 44,350 Large Systems
Ireland -- -- -- 31,850 31,850 Shared
Far East
India 26,755 75,895 5,010 6,210 113,870 Small Systems
China 25,065 38,945 -- 29,990 94,000 Shared
South America
Brazil 34,750 82,930 -- 46,620 164,300 Small Systems
11
Item 3. Legal Proceedings
APC is involved in various claims and legal actions arising in the ordinary
course of business. We do not believe that the ultimate disposition of these
matters will have a material adverse effect on APC's consolidated financial
position or results of operations or liquidity.
In addition, on January 10, 2003, Powerware Corporation filed in the United
States District Court for the Eastern District of North Carolina a lawsuit
alleging infringement of three United States patents. We have not yet been
served with the complaint. Powerware Corporation is seeking unspecified damages
and injunctive relief.
Item 4. Submission of Matters to a Vote of Security-Holders
We did not submit any matters to a vote of our security-holders during the three
months ended December 31, 2002.
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
APC's Common Stock is traded over-the-counter on The Nasdaq Stock Market under
the symbol APCC and on the Pacific Exchange, Inc. under the symbol ACC. The
following table sets forth the range of high and low bid quotations on The
Nasdaq Stock Market per share of Common Stock for the years 2002 and 2001.
These quotations reflect inter-dealer prices, without retail mark up, mark down,
or commission and may not necessarily represent actual transactions.
2002 2001
High Low High Low
First Quarter $16.24 $12.29 $18.50 $10.25
Second Quarter 14.74 12.07 19.39 11.06
Third Quarter 13.43 9.75 15.30 10.26
Fourth Quarter 16.60 9.06 15.80 11.21
On March 10, 2003, the closing sale price for APC's common stock was $14.37 per
share. As of March 10, 2003, there were approximately 1,990 holders of record
of APC's common stock. No cash dividends have been paid and it is possible that
none will be declared in the foreseeable future. We currently intend to retain
any earnings to finance the growth and development of our business. Any future
dividends will be at the discretion of the Board of Directors and will depend
upon, among other things, the financial condition, capital requirements,
earnings, and liquidity of APC.
The information required under this section related to APC's stock-based
compensation plans is included in Note 13 of Notes to Consolidated Financial
Statements in Item 8 of this Report and is incorporated herein by reference.
12
Item 6. Selected Financial Data
All amounts are in dollars except for outstanding shares. Dollars are in
thousands except for basic and diluted earnings per share. Shares are in
thousands. APC did not declare any cash dividends for the five year period
presented. Earnings per share and share data reflect a two for one stock split
effected in 1999.
APC adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, on January 1, 2002. In connection with its adoption of
Statement 142, APC recorded a non-cash charge equal to the goodwill balance
associated with its Large Systems segment of approximately $50 million
(approximately $35 million on an after-tax basis). This charge was recognized
as the cumulative effect of a change in accounting principle net of income
taxes, included in APC's results as of January 1, 2002, and had no effect on
APC's liquidity.
In consideration of guidance issued by the Financial Accounting Standards
Board's Emerging Issues Task Force in Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products,
Issue No. 00-14, Accounting for Certain Sales Incentives, and Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products), certain customer promotional payments,
rebates and other discounts formerly classified as operating expenses have been
retroactively re-classified as a reduction of revenue. These changes reduced
net sales and also reduced marketing, selling, general and administrative
expenses by $23.1 million, $28.5 million, $13.2 million, $13.2 million, and
$10.0 million in 2002, 2001, 2000, 1999 and 1998, respectively. This accounting
change had no impact on reported profit from operations, net income or earnings
per share for any of the periods presented.
The results of operations of companies acquired in 2000 and 1998 are included
from their respective dates of acquisition. For more information about these
acquisitions, refer to the Acquisitions section included in Management's
Discussion and Analysis of Financial Condition and Results of Operations in Item
7 of this Report.
13
Item 6. Selected Financial Data (cont.)
2002 2001 2000 1999 1998
Net sales $1,300,025 $1,404,784 $1,470,344 $1,331,708 $1,120,972
Cost of goods sold 816,318 920,895 867,680 747,389 645,378
Gross profit 483,707 483,889 602,664 584,319 475,594
Operating expenses 332,760 339,036 393,191 305,094 271,125
Operating income 150,947 144,853 209,473 279,225 204,469
Other income, net 10,889 13,700 23,838 13,292 11,687
Earnings before income
taxes, cumulative
effect of accounting
change, and minority
interest 161,836 158,553 233,311 292,517 216,156
Income taxes 45,314 45,188 67,660 86,293 68,231
Earnings before
cumulative effect
of accounting change
and minority interest 116,522 113,365 165,651 206,224 147,925
Cumulative effect of
accounting change,
net of income taxes
of $15,459 34,500 -- -- -- --
Minority interest, net -- -- -- -- 349
Net income $82,022 $113,365 $165,651 $206,224 $147,576
Basic earnings per share:
Basic earnings per
share before
cumulative effect
of accounting change $0.59 $0.58 $0.85 $1.07 $0.77
Cumulative effect of
accounting change,
net of tax 0.17 -- -- -- --
Basic earnings
per share $0.42 $0.58 $0.85 $1.07 $0.77
Basic weighted
average shares
outstanding 195,927 195,171 194,235 192,201 191,006
Diluted earnings per share:
Diluted earnings per
share before
cumulative effect
of accounting change $0.59 $0.58 $0.83 $1.05 $0.76
Cumulative effect of
accounting change,
net of tax 0.17 -- -- -- --
Diluted earnings
per share $0.42 $0.58 $0.83 $1.05 $0.76
Diluted weighted
average shares
outstanding 196,993 196,793 200,156 196,088 193,576
Cash, cash equivalents,
and short and long
term investments $696,601 $393,078 $308,025 $456,325 $219,908
Working capital $998,887 $884,421 $744,813 $706,038 $493,779
Total assets $1,604,580 $1,420,772 $1,317,105 $1,106,938 $871,983
Short term debt -- -- -- -- $12,540
Long term debt -- -- -- -- --
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Implementation of Recent Accounting Pronouncements
Classification of Certain Customer Promotional Payments, Rebates, and Other
Discounts
In consideration of guidance issued by the Financial Accounting Standards
Board's Emerging Issues Task Force in Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products,
Issue No. 00-14, Accounting for Certain Sales Incentives, and Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products), certain customer promotional payments,
rebates and other discounts formerly classified as operating expenses have been
retroactively re-classified as a reduction of revenue. These changes reduced
net sales and also reduced marketing, selling, general and administrative
expenses by $23.1 million, $28.5 million, and $13.2 million in 2002, 2001 and
2000, respectively. This accounting change had no impact on reported profit
from operations, net income or earnings per share for any of the periods
presented.
Goodwill and Other Intangibles
On January 1, 2002, we adopted Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets. With the adoption of Statement 142,
we implemented the necessary reclassifications in order to conform to the new
criteria in Statement of Financial Accounting Standards No. 141, Business
Combinations, for recognition of intangible assets apart from goodwill.
Statement 142 requires that companies no longer amortize goodwill and other
intangible assets with indefinite lives, but instead test goodwill impairment at
least annually or more frequently if impairment indicators arise. Statement 142
also requires completion of a two-step transitional goodwill impairment test.
In connection with completion of the first step of our transitional analysis, we
identified two reporting units with goodwill, Large Systems and Small Systems;
these reporting units are also reportable segments. We then determined the
carrying value of each reporting unit by assigning the assets and liabilities,
including existing goodwill and other intangible assets, to these reporting
units as of the date of adoption. Completion of the first step of our analysis
indicated impairment in the carrying amount of our goodwill. Our goodwill was
primarily associated with our Large Systems segment which consists primarily of
uninterruptible power supply (UPS), DC-power systems, and precision cooling
products for data centers, facilities, and communication applications.
Conditions contributing to the goodwill impairment included the ongoing softness
in IT and communications market segments coupled with lower corporate investment
for these types of applications.
In connection with completion of the second step of our transitional analysis,
we compared the carrying amount of reporting unit goodwill with the implied fair
value of reporting unit goodwill, both of which were measured as of the date of
adoption. The implied fair value of goodwill was determined by allocating the
fair value of the reporting unit to all of the assets (recognized and
unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation, in accordance with the provisions of Statement 141.
The residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. Based on this second step, we recorded a non-cash
charge equal to the goodwill balance associated with our Large Systems segment
of approximately $50 million (approximately $35 million on an after-tax basis).
This charge was recognized as the cumulative effect of a change in accounting
principle net of income taxes, included in APC's results as of January 1, 2002,
and had no effect on our liquidity. Our remaining goodwill is associated with
our Small Systems segment. We evaluate each of our reporting units with
goodwill during the fourth quarter of each fiscal year or more frequently if
impairment indicators arise.
15
Statement 142 also provides for other intangible assets with definite useful
lives to be amortized over their respective estimated useful lives to their
estimated residual values and to be reviewed for impairment in accordance with
the provisions of Statement of Financial Accounting Standards No. 144,
Impairment on Disposal of Long-Lived Assets. Our other intangible assets
consist principally of technology and licensed patent rights relating to
uninterruptible power supply technology. With the adoption of Statement 142, we
reduced the estimated useful lives of our other intangible assets with definite
useful lives from a weighted average life of approximately 15 years to a
weighted average life of approximately 6 years. There are no expected residual
values related to these intangible assets.
Long-lived Assets
On January 1, 2002, we adopted Statement 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Statement 144 retains the requirements of
Statement 121 to recognize an impairment loss only if the carrying amount of a
long-lived asset is not recoverable from its undiscounted cash flows, and to
measure an impairment loss as the difference between the carrying amount and
fair value of the asset. An impairment loss is recognized only if the carrying
amount of a long-lived asset is not recoverable and exceeds its fair value. The
carrying amount of a long-lived asset is deemed not recoverable if it exceeds
the sum of the undiscounted cash flows expected to result from the use and
eventual disposition of the asset. That assessment is based on the carrying
amount of the asset at the date it is tested for recoverability. We evaluate
our long-lived assets if impairment indicators arise.
Statement 144 also sets forth criteria to determine when a long-lived asset is
to be deemed held for sale. Such criteria specify that the asset must be
available for immediate sale in its present condition subject only to terms that
are usual and customary for sales of such assets. In addition, the sale of the
asset must be probable, and its transfer expected to qualify for recognition as
a completed sale, generally within one year.
In 2002, we announced our decision to consolidate our Philippines-based
manufacturing operations resulting in the closing of APC's manufacturing
facility in the province of Laguna. In connection with this action as well as
the closure of manufacturing facilities in the U.S. and U.K., we recorded $7.1
million of asset impairment charges related to buildings and equipment of which
$6.6 million and $0.5 million were classified in cost of goods sold and
operating expenses, respectively. These impairment charges have not been
allocated to our operating segments, but rather have been classified as indirect
operating expenses for segment reporting consistent with our classification for
our internal financial reporting. At December 31, 2002, a building and
equipment held-for-sale with an aggregate value of $3.0 million are stated at
the lower of their fair values less estimated selling costs or carrying amounts,
and depreciation is no longer recognized. We expect to complete our sale of
these assets, located in the Philippines, in 2003.
16
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
The following table sets forth key data, expressed as a percentage of net sales,
for the years ended December 31, 2002, 2001 and 2000.
2002 2001 2000
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 62.8 65.6 59.0
Gross profit 37.2 34.4 41.0
Marketing, selling, general
& administrative expenses 21.0 20.2 20.3
Special charges -- -- 3.3
Research & development 4.6 3.9 3.2
Operating income 11.6 10.3 14.2
Other income, net 0.8 1.0 1.7
Earnings before income taxes
and cumulative effect
of accounting change 12.4 11.3 15.9
Earnings before cumulative
effect of accounting change 9.0 8.1 11.3
Net income 6.3 8.1 11.3
Revenues
Net sales in fiscal year 2002 decreased by 7.5% to $1,300.0 million from
$1,404.8 million in fiscal year 2001 which was 4.5% lower than $1,470.3 million
in fiscal year 2000. Net sales in each year included sales attributable to 2000
acquisitions; also refer to Acquisitions below. Our fiscal year 2002 net
revenue continued to be impacted by softness in IT and communications market
segments. Our Small Systems business, which provides power protection,
uninterruptible power supply (UPS), and management products for the PC, server,
and local area networking markets, was negatively impacted in fiscal years 2002,
2001 and 2000 by industry softness in the IT markets, weakening global
economies, and maturing markets. The rate of growth in the Large Systems
segment, consisting primarily of UPS, DC-power systems, and precision cooling
products for data centers, facilities, and communication applications, was
negatively impacted in fiscal years 2002 and 2001 by the significant reduction
in corporate investment for these types of applications, particularly in the
second half of 2001 and again in 2002. This negative impact was partially
offset for fiscal year 2001 by the inclusion of incremental revenue activity
attributable to the 2000 acquisitions of Advance Power and NetworkAir, formerly
Airflow Company, which were acquired in the second and fourth quarters of 2000,
respectively.
Despite decreased net sales in 2002 and 2001, sales of new products contributed
to overall net sales in 2002 and 2001. Sales of products introduced during
2002, 2001 and 2000 represented approximately 9%, 18%, and 12%, respectively, of
net sales in those years.
On a geographic basis, the Americas (North and Latin America) represented 54.6%,
57.2%, and 57.2% of total net sales for fiscal years 2002, 2001 and 2000,
respectively. The Americas decreased 11.6% in 2002 from 2001, and decreased
4.4% in 2001 from 2000. Europe, the Middle East and Africa (EMEA) represented
28.7%, 26.4%, and 26.8% of total net sales for fiscal years 2002, 2001 and 2000,
respectively. EMEA increased 0.6% in 2002 from 2001, and decreased 6.1% in 2001
from 2000. Finally, Asia was 16.7%, 16.4%, and 16.0% of total net sales for
fiscal years 2002, 2001 and 2000, respectively. Asia decreased 6.0% in 2002
from 2001, and decreased 1.9% in 2001 from 2000. In fiscal year 2002, on a
constant currency basis, EMEA decreased 3.0% and Asia decreased 4.7% from 2001.
In fiscal year 2001, on a constant currency basis, EMEA decreased 4.9% and Asia
increased 4.4% from 2000.
17
Total sales to unaffiliated customers outside the U.S., primarily in Europe, the
Far East, South America, and Canada, in fiscal year 2002 were $674.7 million or
51.9% of net sales compared to $673.2 million or 47.9% of net sales in fiscal
year 2001 and $696.2 million or 46.9% of net sales in fiscal year 2000. Also
refer to Note 15 of Notes to Consolidated Financial Statements in Item 8 of this
Report.
Cost of Goods Sold
Cost of goods sold was $816.3 million or 62.8% of net sales in fiscal year 2002
compared to $920.9 million or 65.6% of net sales in fiscal year 2001 and $867.7
million or 59.0% of net sales in fiscal year 2000. Gross margins for fiscal
year 2002 were 37.2% of net sales, approximately 280 basis points higher than in
fiscal year 2001; for fiscal year 2001, gross margins were 34.4% of net sales,
approximately 660 basis points lower than in fiscal year 2000. The 2002 gross
margin improvement was associated with gross margin improvements in both the
Small and Large System segments. The 2002 gross margin improvement in the Small
Systems segment over 2001 was primarily attributable to and driven by product
cost reduction efforts. These cost reductions were achieved through a
combination of product transitions to low cost manufacturing locations and
material cost reductions from APC's supplier base. Also contributing to the
overall improvement was favorable product mix in the underlying product lines to
higher margin products. The 2002 gross margin improvement in the Large Systems
segment over 2001 was primarily the result of a continual lowering of product
costs achieved through factory consolidations and capacity rationalization
efforts that were begun in late 2001. In addition, to a lesser extent, the 2002
improvement over 2001 was assisted by the favorable pricing impact of a
weakening U.S. dollar, particularly in Europe. The 2001 gross margin erosion
was associated with product mix shifts to lower margin products, principally the
continued growth of our lower gross margin Large System segment in 2001, the
effect of pro-active Small Systems consumer product price cuts in 2001 and 2000,
and manufacturing inefficiencies from continued global capacity expansion prior
to our capacity rationalization efforts which commenced during the second half
of 2001.
Fiscal year 2002 gross margins included the effects of a fourth quarter charge
for estimated costs associated with the product recall of Back-UPS CS 350 and
500 models of approximately $19.6 million; a fourth quarter charge for
impairment of assets held for sale of approximately $3.2 million; and first
quarter charges for restructuring costs of approximately $4.8 million. These
charges have not been allocated to our operating segments, but rather have been
classified as indirect operating expenses for segment reporting consistent with
our classification for our internal financial reporting. These charges were the
result of events or assessments that occurred during the respective quarters of
2002. Our 2002 restructuring costs and asset impairment charges were associated
with our decision to consolidate our Philippines-based manufacturing operations,
resulting in the closing of APC's manufacturing facility in the province of
Laguna, as well as the closure of manufacturing facilities in the U.S. and U.K.
Our 2002 restructuring actions were announced and substantially completed during
2002. We anticipate the final settlements of our 2002 restructuring actions to
be completed by no later than the end of 2003. Due to the timing of the
facilities closures and contractual or regulatory obligations to certain
workers, the financial benefits of these actions did not commence until the
second quarter of 2002 with most of the full benefit being realized by the close
of the fiscal year. Also refer to Notes 3, 9 and 11 of Notes to Consolidated
Financial Statements in Item 8 of this Report.
Additionally, fiscal year 2001 gross margins included the effects of third
quarter charges for excess inventory of $12.4 million and restructuring costs of
$4.1 million. These charges have not been allocated to our operating segments,
but rather have been classified as indirect operating expenses for segment
reporting consistent with our classification for our internal financial
reporting. These charges were the result of events or assessments that occurred
during the third quarter of 2001. The charge for excess inventory related to
specifically identified finished goods and raw materials inventories. The
inventories subject to the write-off were categorized as follows: $1.5 million
of residual, unusable quantities located at facilities impacted by 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. There were no additional inventory charges,
other than APC's standard provisioning, during the fourth quarter of 2001 or
during fiscal year 2002. As of December 31, 2002, approximately $8.7 million of
inventories included in the third quarter 2001 charge were physically disposed.
Disposition of the remaining inventories has continued into 2003; we anticipate
that all excess inventory will be physically disposed by no later than the end
of 2003. Our 2001 restructuring costs were associated with manufacturing
downsizing actions in Denmark and the U.K. and included the effects of employee
terminations, facilities closures, and the related impairment of tangible and
intangible assets. Our 2001 restructuring actions were announced and
substantially completed in the third quarter of 2001, and the final settlements
of such 2001 restructuring actions were completed during 2002. Due to the
timing of the facilities closures and contractual or regulatory obligations to
certain workers, the financial benefits of these actions did not commence until
the fourth quarter of 2001 and continued to phase in gradually during 2002.
Also refer to Note 3 of Notes to Consolidated Financial Statements in Item 8 of
this Report.
18
Total inventory reserves at December 31, 2002 were $37.2 million compared to
$32.9 million at December 31, 2001. This increase was due primarily to routine
provisioning that was necessary as a result of applying APC's inventory reserve
methodology throughout the year. 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 15 of Notes to Consolidated Financial
Statements in Item 8 of this Report for important information regarding APC's
reportable segments)
Net sales for products in the Small Systems segment, which provides power
protection, UPS, and management products for the PC, server, and local area
networking markets, decreased in fiscal year 2002 by 8.1% from 2001, and
decreased in fiscal year 2001 by 8.3% from 2000. The overall decreases in 2002
and 2001 were impacted by industry softness in the IT markets, weakening global
economies, and maturing markets. Profits as a percentage of net sales for the
Small Systems segment improved in 2002 over the prior year levels primarily
reflecting product cost reduction efforts. These cost reductions were achieved
through a combination of product transitions to low cost manufacturing locations
and material cost reductions from APC's supplier base. Also contributing to the
overall improvement was favorable product mix in the underlying product lines to
higher margin products. Profits as a percentage of net sales for the Small
Systems segment declined in 2001 from comparable levels in 2000 as a result of
pro-active price reductions in 2001 combined with a mix shift within the segment
toward lower margin products.
Net sales for products in the Large Systems segment, consisting primarily of
UPS, DC-power systems, and precision cooling products for data centers,
facilities, and communication applications, decreased 13.6% in fiscal year 2002
compared to 2001, and increased 9.4% in fiscal year 2001 over 2000. The decline
in 2002 and rate of growth during 2001 were negatively impacted by the
significant reduction in corporate investment for these types of applications,
particularly in 2002 and the second half of 2001. Losses for the Large Systems
segment declined in 2002 reflecting a continual lowering of product costs
achieved through factory consolidations and capacity rationalization efforts
that were begun in late 2001. This segment reported losses in 2001 compared to
profits in 2000 due to cost inefficiencies resulting from global capacity
expansion, coupled with declining sales volumes, particularly in the second half
of 2001. Also contributing to 2001 losses were the continued investment in
product and business development initiatives for this business segment in 2001,
as well as the restructuring costs discussed above associated with manufacturing
downsizing actions in Denmark and the U.K. which included the effects of
employee terminations, facilities closures, and the related impairment of
tangible and intangible assets.
In the fourth quarter of 2001, we acquired select inventory and related
technology associated with outside plant, networking power product lines from
ARRIS Group, Inc. for $10.3 million paid in cash. The product lines were
acquired from ARRIS' EnergyLink family of power supplies, enclosures and
equipment for network broadband power, including the TSP (Total System Power)
line. The product lines are designed for outdoor use, commonly installed on
utility poles or adjacent to fiber nodes, and provide back-up power for
broadband cable applications. The combination of the Arris product line and
APC's PowerShield products provide a comprehensive broadband power product line.
Beginning in 2002, both offerings are included in the Large Systems segment.
Prior to 2002, our PowerShield products were classified in the Small Systems
segment. In 2002, the PowerShield products were reclassified to the Large
Systems segment along with the other broadband solutions from the ARRIS
acquisition which share similar product applications and economic
characteristics more closely matching the Large Systems segment.
19
Operating Expenses
Marketing, selling, general, and administrative (SG&A) expenses in fiscal year
2002 were $272.7 million or 21.0% of net sales compared to $284.4 million or
20.2 % of net sales in fiscal year 2001 and $298.4 million or 20.3% of net sales
in fiscal year 2000. The decrease in total spending from 2000 to 2002 reflects
focused efforts to control expenses while improving the productivity and
efficiency of our global resources. Reduced spending in 2002 compared to 2001
resulted primarily from lower advertising, promotional, and other operating
costs of our marketing and selling functions combined with decreased investment
in IT support, partially offset by increased investment in administrative
support. Reduced spending in 2001 compared to 2000 resulted principally from
lower spending on administrative support, partially offset by increased
investment in sales personnel and distribution costs as well as increased
investment in IT support.
During the third and second quarters of 2000, we agreed to license worldwide
patent rights relating to uninterruptible power supply technology for lump-sum
cash payments of $17.0 million and $48.0 million, respectively. These license
fees were paid from operating cash during the third and second quarters of 2000.
APC evaluated the portion of the license fees that represented payment for prior
use of the subject technology and the portion that represented payment for
future use. Considering each of our markets and the historical and projected
revenue realized in markets utilizing the licensed technology, we estimated the
present value of royalty payments, basing this calculation on an appropriate
royalty rate and the technology's contribution to the overall value of affected
products. Separate present values were calculated for both historic and
projected product sales; the historic values were expensed and the projected
values were capitalized. Accordingly, write-offs of the fully paid-up portions
of the patent licenses were recognized in our consolidated statements of income
for the third and second quarters of 2000 as special charges to pre-tax earnings
of $17.5 million and $30.4 million, respectively, including direct expenses of
$1.5 million and $1.9 million, respectively. The remaining balances of $1.0
million and $19.5 million have been classified on the consolidated balance sheet
as long term assets and are being amortized on a straight-line basis over three
years and nine years, respectively, the estimated remaining economic lives of
the patent licenses.
The allowance for bad debts was 7.0% of gross accounts receivable at December
31, 2002 compared to 6.6% at December 31, 2001. Accounts receivable balances
outstanding over 60 days represented 11.7% of total receivables at December 31,
2002 compared to 18.2% at December 31, 2001. This decrease reflects a product
mix shift away from our Large Systems business, which typically carries longer
sales cycles and collection cycles, along with an increased collection effort,
offset in part by a growing portion of our business originating in areas where
longer payment terms are customary, including a growing contribution from
international markets. We continue to experience strong collection performance.
Write-offs of uncollectable accounts represent less than 1% of net sales. While
a majority of international customer balances continue to be covered by
receivables insurance, the amount of covered receivables outside the U.S.
declined in 2002 from comparable levels in 2001.
R&D expenditures were $60.1 million or 4.6% of net sales in fiscal year 2002,
$54.6 million or 3.9% of net sales in fiscal year 2001, and $46.9 million or
3.2% of net sales in fiscal year 2000. The increases 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 costs incremental in 2001 attributable to Advance Power and
NetworkAir, formerly Airflow Company, which were acquired in the second and
fourth quarters of 2000, respectively.
Other Income, Net and Income Taxes
Other income is comprised principally of interest income combined with a $1.3
million gain in fiscal year 2001 on the sale of a building in Billerica,
Massachusetts. Although average cash balances available for investment rose
during fiscal years 2001 and 2002, interest income decreased substantially from
2000 to 2002 due to lower short term interest rates continuing throughout 2001
and 2002.
At December 31, 2002, APC had $696.6 million of total cash and investments, all
of which are stated at fair value. 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 December 31, 2002, 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.
20
Our effective income tax rates were approximately 28.0%, 28.5%, and 29.0% in
2002, 2001 and 2000, respectively. The decrease from 2000 to 2002 is due to the
tax savings from an increasing portion of taxable earnings being 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.
Effects of Inflation
Management believes that inflation has not had a material effect on APC's
operations.
LIQUIDITY AND FINANCIAL RESOURCES
Working capital at December 31, 2002 was $998.9 million compared to $884.4
million at December 31, 2001. APC has been able to increase its working capital
position as the result of continued positive operating results and despite
internally financing the capital investment required to expand its operations.
Our cash, cash equivalents, and short-term investments position increased to
$640.3 million at December 31, 2002 from $393.1 million at December 31, 2001.
Worldwide inventories were $320.0 million at December 31, 2002, down from $350.6
million at December 31, 2001. During 2002, our finished goods planning better
aligned inventory levels with anticipated demand resulting in lower finished
goods inventories, principally UPS and surge products. The decreases in
finished goods inventories were partially offset by increases in on-hand raw
materials to support current and anticipated demand for our three phase systems
including PowerStruXure and other related products. There were no inventory
charges, other than APC's standard provisioning, during fiscal year 2002.
Inventory levels as a percentage of quarterly sales were 89% in the fourth
quarter of 2002, up slightly from 87% in the third quarter of 2002 and down from
104% in the fourth quarter of 2001.
We announced a product recall of Back-UPS CS 350 and 500 models in early 2003
due to potential safety issues. APC has received eight reports worldwide of
units overheating, resulting in the melting of the unit's outer casing, six of
which occurred in the United States. Three of the reported incidents resulted
in minor property damage; no injuries have been reported. The total number of
affected devices being recalled worldwide is approximately 2.1 million with
approximately 900,000 devices recalled in the United States. The recall is
limited to two specific models in APC's Back-UPS CS product line, the Back-UPS
CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models. The
affected units were manufactured between November 2000 and December 2002 and
were sold primarily through computer and electrical distribution, catalog and
retail outlets worldwide. Our methodology for estimating costs associated with
this product recall involved estimating future costs to be incurred to replace
the recalled products based on expected returns and the costs to conduct the
recall, particularly repair and transportation costs. Our repair and
transportation cost estimates include costing for component parts and inside
labor; we also obtained third party cost quotes for outside labor and freight.
The expected percentage of units to be returned out of the total population of
units is an important assumption. Our current assumption is that approximately
40% of domestic units in the hands of end-users and approximately 20% of
international units will be exchanged. To help understand the relative impact
of the return rate assumption, a 10 percentage point increase in the worldwide
return rate would increase the estimated recall costs from $19.6 million to $25
million. We have accrued a current liability and recognized additional warranty
expense which is classified in cost of goods sold. We expect APC's cash outlays
associated with this product recall to be financed from operating cash. Actual
amounts may differ materially from our current estimates.
21
At December 31, 2002 and 2001, we had available for future borrowings $65.0
million 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 $6.0
million ($7.0 million in 2001) under an unsecured line of credit agreement with
a second bank at similar interest rates. No borrowings were outstanding under
these facilities during fiscal years 2002, 2001 and 2000, or at December 31,
2002 and 2001. APC had no significant financial commitments, other than those
required in the normal course of business, during fiscal years 2002, 2001 and
2000, or at December 31, 2002 and 2001.
APC has several non-cancelable operating leases, primarily for warehousing and
office space, expiring at various dates through 2011. These leases contain
renewal options for periods ranging from one to nine years and require APC to
pay its proportionate share of utilities, taxes, and insurance. Future minimum
lease payments under these non-cancelable leases are: 2003 - $6.9 million; 2004
- - $5.6 million; 2005 - $4.0 million; 2006 - $2.3 million; 2007 - $1.9 million;
and $5.9 million thereafter.
During 2002 and 2001, our capital expenditures, net of capital grants, amounted
to approximately $19.6 million and $47.9 million, respectively, consisting
primarily of manufacturing and office equipment, buildings and improvements, and
purchased software applications. Capital spending in 2002 decreased from prior
year levels, reflecting our focused efforts to control and reduce capital
spending and rationalize our overall production capacity which included our
first quarter 2002 decision to consolidate our Philippines based manufacturing
operations in the province of Cavite. Capital spending in 2001 focused on
improving manufacturing capabilities, principally in Brazil and India, as well
as funding IT-related capital equipment and software purchases to support
business process improvement initiatives; capital spending during 2001 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 during fiscal years 2002, 2001 and 2000, or at December 31,
2002 and 2001.
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 19 of Notes to Consolidated Financial Statements in Item 8 of this
Report.
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.
Acquisitions
In the fourth quarter of 2000, APC acquired privately-held Airflow Company, a
Maryland-based manufacturer of precision cooling equipment primarily used in
data center, Internet, and telecommunications applications, for $22.5 million in
cash plus expenses, of which $4.0 million will be paid in 2003 in the event no
indemnity claims arise. Early in the second quarter of 2000, APC acquired
privately-held Advance Power Ltd., a U.K.-based manufacturer of DC-based power
solutions used in communications and Internet applications, for $75.0 million in
cash plus expenses. Also early in the second quarter of 2000, APC acquired
privately-held ABL Electronics Corporation (ABL), a North American provider of
computer and network cables, switches, and other connectivity products, for $8.0
million paid in a combination of cash and stock, plus expenses.
APC's cash outlays associated with these acquisitions were financed from
operating cash. At December 31, 2001 and 2000, the excess of the purchase price
over the estimated fair value of the tangible net assets acquired was included
in Large Systems goodwill for the Airflow and Advance Power acquisitions and
Small Systems goodwill for the ABL acquisition, and was being amortized on a
straight-line basis over 15 years. In connection with its adoption in 2002 of
Statement 142, APC recorded a non-cash charge equal to the goodwill balance
associated with its Large Systems segment. This charge was recognized as the
cumulative effect of a change in accounting principle net of income taxes,
included in APC's results as of January 1, 2002, and had no effect on APC's
liquidity. Also effective January 1, 2002, in accordance with the provisions of
Statement 142, goodwill associated with APC's Small Systems segment is no longer
being amortized but instead tested for impairment at least annually or more
frequently if impairment indicators arise; also refer to Note 8 of Notes to
Consolidated Financial Statements in Item 8 of this Report. These acquisitions
have been accounted for as purchases and, accordingly, the acquired companies'
results of operations are included in APC's consolidated financial statements
from the respective dates of acquisition.
22
In the fourth quarter of 2001, we acquired select inventory and related
technology associated with outside plant, networking power product lines from
ARRIS Group, Inc. for $10.3 million paid in cash. The product lines were
acquired from ARRIS' EnergyLink family of power supplies, enclosures and
equipment for network broadband power, including the TSP (Total System Power)
line. Our cash outlays associated with this purchase were financed from
operating cash.
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 2002, 2001 and 2000.
At December 31, 2002, APC's unhedged foreign currency accounts receivable, by
currency, were as follows:
In thousands Foreign U.S.
Currency Dollars
European Euros 40,429 $42,382
Japanese Yen 2,357,941 $19,896
Swiss Francs 21,507 $15,517
British Pounds 6,251 $10,029
APC also had non-trade receivables denominated in Irish Pounds of approximately
U.S.$0.9 million, liabilities denominated in various European currencies of
approximately U.S.$43.8 million, and liabilities denominated in Japanese Yen of
approximately U.S.$5.8 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 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 this Report.
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.
23
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.
Installation is not applicable for Small Systems and 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 pursuant to the
delivery terms, as we do not perform installation. 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)).
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. Since we do not perform the 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 on-site services, installation consulting
services, remote monitoring services, power audit services, and network
integration 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.
Our arrangements do not generally include acceptance clauses. However, if an
arrangement includes a customer specified acceptance provision, acceptance
generally occurs at our factory prior to delivery. As we introduce new products
in 2003, 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.
In consideration of guidance issued by the Financial Accounting Standards
Board's Emerging Issues Task Force in Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products,
Issue No. 00-14, Accounting for Certain Sales Incentives, and Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products), certain customer promotional payments,
rebates and other discounts formerly classified as operating expenses have been
retroactively re-classified as a reduction of revenue. These changes reduced
net sales and also reduced marketing, selling, general and administrative
expenses by $23.1 million, $28.5 million, and $13.2 million in 2002, 2001 and
2000, respectively. This accounting change had no impact on reported profit
from operations, net income or earnings per share for any of the periods
presented.
24
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. 101. Returns of Large Systems products generally do not occur.
Historically, returns have represented 3% of gross sales and have not differed
significantly from prior estimates.
Similarly, we must make estimates of the uncollectability of our accounts
receivables. 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. While the
amount of covered receivables outside the U.S. declined in 2002 from comparable
levels in 2001, a majority of international customer balances are covered by
receivables insurance.
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.
In early 2003, we announced a product recall of Back-UPS CS 350 and 500 models.
Our methodology for estimating costs associated with this product recall
involved estimating future costs to be incurred to replace the recalled products
based on expected returns and the costs to conduct the recall, particularly
repair and transportation costs. Our repair and transportation cost estimates
include costing for component parts and inside labor. We also obtained third
party cost quotes for outside labor and freight. The expected percentage of
units to be returned out of the total population of units is an important
assumption. Our current assumption is that approximately 40% of domestic units
in the hands of end-users and approximately 20% of international units will be
exchanged. To help understand the relative impact of the return rate
assumption, a 10 percentage point increase in the worldwide return rate would
increase the estimated recall costs from $19.6 million to $25 million. We have
accrued a current liability and recognized additional warranty expense which is
classified in cost of goods sold. Actual amounts may differ materially from our
current estimates.
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
estimatable 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 uncertain and includes the risk of an unexpected, unfavorable result. We may
be materially adversely impacted by any such litigation.
25
Valuation of Long-lived Tangible and Intangible Assets including Goodwill
We assess the impairment of long-lived tangible and intangible assets including
goodwill on an ongoing basis and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Should our assessment
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.
On January 1, 2002, we adopted Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets. With the adoption of Statement 142,
we implemented the necessary reclassifications in order to conform to the new
criteria in Statement of Financial Accounting Standards No. 141, Business
Combinations, for recognition of intangible assets apart from goodwill.
Statement 142 requires that companies no longer amortize goodwill and other
intangible assets with indefinite lives, but instead test goodwill impairment at
least annually or more frequently if impairment indicators arise. Statement 142
also requires completion of a two-step transitional goodwill impairment test.
In connection with completion of the first step of our transitional analysis, we
identified two reporting units with goodwill, Large Systems and Small Systems;
these reporting units are also reportable segments. We then determined the
carrying value of each reporting unit by assigning the assets and liabilities,
including existing goodwill and other intangible assets, to these reporting
units as of the date of adoption. Completion of the first step of our analysis
indicated impairment in the carrying amount of our goodwill. Our goodwill was
primarily associated with our Large Systems segment which consists primarily of
uninterruptible power supply (UPS), DC-power systems, and precision cooling
products for data centers, facilities, and communication applications.
Conditions contributing to the goodwill impairment included the ongoing softness
in IT and communications market segments coupled with lower corporate investment
for these types of applications.
In connection with completion of the second step of our transitional analysis,
we compared the carrying amount of reporting unit goodwill with the implied fair
value of reporting unit goodwill, both of which were measured as of the date of
adoption. The implied fair value of goodwill was determined by allocating the
fair value of the reporting unit to all of the assets (recognized and
unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation, in accordance with the provisions of Statement 141.
The residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. Based on this second step, we recorded a non-cash
charge equal to the goodwill balance associated with our Large Systems segment
of approximately $50 million (approximately $35 million on an after-tax basis).
This charge was recognized as the cumulative effect of a change in accounting
principle net of income taxes, included in APC's results as of January 1, 2002,
and had no effect on our liquidity. Our remaining goodwill is associated with
our Small Systems segment. We evaluate each of our reporting units with
goodwill during the fourth quarter of each fiscal year or more frequently if
impairment indicators arise.
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.
26
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 December 31, 2002 and 2001, we provided
a valuation allowance on certain of our deferred tax assets, primarily
consisting of net operating losses generated in 2002 and 2001 for the start up
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
In November 2002, the Emerging Issues Task Force reached a consensus on Issue
No. 00-21, Revenue Arrangements with Multiple Deliverables. This consensus
addresses several issues including how to determine when a multiple arrangement
exists and the proper accounting treatment. The guidance in this consensus is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. Adoption of the guidance in this consensus is not expected
to have a material impact on our consolidated financial position or results of
operations.
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Guarantees of Indebtedness of Others. Disclosures related to this
interpretation are effective for 2002 and the accounting requirements are
effective January 1, 2003. The implementation of this Interpretation is not
expected to have a material impact on our consolidated financial position or
results of operations.
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. Statement 146 is
required to be applied prospectively to exit or disposal activities initiated
after December 31, 2002; we will adopt this Statement on 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 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 for fiscal years beginning
after June 15, 2002; we will adopt this Statement on 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.
27
FACTORS THAT MAY AFFECT FUTURE RESULTS
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.
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.
Our annual and quarterly results are likely to be volatile.
Our annual and quarterly operating results may fluctuate as a result of a number
of factors, including:
- costs incurred for the recent product recall are greater than or less
than currently anticipated;
- ramp up, expansion and rationalization of global manufacturing capacity;
- our ability to effectively align operating expenses and production
capacity with the current demand environment;
- volatility in general world economic conditions, and, in particular, the
possibility that the PC and related markets decline more dramatically
than currently anticipated;
- the 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;
- risks of nonpayment of accounts receivable;
- timing of orders from, and shipments to, customers;
- timing of new product introductions and the market acceptance of those
products;
- changes in manufacturing costs;
- factors associated with international operations;
- natural disasters; and
- labor disputes, acts of terrorism, war and political instability.
We currently compete with several firms providing power protection and related
products and services and expect competition to increase in the future, which
could affect our revenue and profitability.
We believe that we are one of less than ten global companies providing a full
range of UPS products and services worldwide. The UPS, power protection and
related industries, however, are highly competitive on both a worldwide basis
and a regional geographic basis. We compete, and will continue to compete, with
several U.S. and foreign firms, both on a worldwide basis and in various
geographical regions, and within individual product and application niches. We
expect competition to increase in the future from existing competitors and a
number of companies that may enter our existing or future markets. Increased
competition could adversely affect our revenue and profitability through price
reductions and loss of market share. The principal competitive factors in our
products include:
- product performance and quality;
- marketing and access to distribution channels;
- customer services; and
- product design and price.
Some of our current and potential competitors may have substantially greater
financial, technical, sales and marketing resources than we have. We may not be
able to continue to compete successfully with our existing competitors or with
new competitors.
28
Technological innovation, or failure to alter our products to meet the demands
of technological innovation, could seriously harm our business.
The market for our products is characterized by rapidly changing technology,
evolving industry standards and frequent new product introductions. Current
competitors or new market entrants may develop new products with features that
could adversely affect the competitive position of our products. We may not be
successful in selecting, developing, manufacturing and marketing new products or
enhancing our existing products or in responding effectively to technological
changes, new standards or product announcements by competitors. The timely
availability of new products and enhancements, and their acceptance by customers
are important to our future success. Delays in such availability or a lack of
market acceptance could have an adverse effect on our business. Additionally,
there may be technological innovation that eliminates or reduces the need for
our products.
Defects in our products could seriously harm our business.
Our products may have defects despite testing internally or by current or
potential customers. These defects could result in product returns or recalls
and loss or delay in market acceptance, which could have a material adverse
effect upon our business, operating results, or financial condition.
In early 2003, APC announced a product recall of Back-UPS CS 350 and 500 models,
due to potential safety issues. APC has received eight reports worldwide of
units overheating, resulting in the melting of the unit's outer casing, six of
which occurred in the United States. Three of the reported incidents resulted
in minor property damage; no injuries have been reported. The total number of
affected devices being recalled worldwide is approximately 2.1 million with
approximately 900,000 devices recalled in the United States. The recall is
limited to two specific models in APC's Back-UPS CS product line, the Back-UPS
CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models. The
affected units were manufactured between November 2000 and December 2002 and
were sold primarily through computer and electrical distribution, catalog and
retail outlets worldwide. We have accrued a current liability and recognized
additional warranty expense, classified in cost of goods sold, of $19.6 million.
Actual amounts may differ materially from our current estimates.
Loss of any of our key personnel could seriously harm our business.
Our success depends to a significant degree upon the continuing contributions of
key management, sales, marketing, research and development and manufacturing
personnel, many of whom we would have difficulty replacing. We believe that our
future success will depend in large part upon our ability to attract and retain
highly-skilled hardware and software engineers, and management, sales, and
marketing personnel. Competition for such personnel is intense, and we may not
be successful in attracting and retaining such personnel. Failure to attract
and retain key personnel could have a material adverse effect on our business,
operating results, or financial condition.
Because we depend on foreign operations and revenues, we are exposed to currency
fluctuations, import barriers and other risks related to conducting foreign
operations.
We manufacture and market our products worldwide through several foreign
subsidiaries, distributors, and resellers. Our worldwide operations are subject
to the risks normally associated with foreign operations including, but not
limited to:
- customer and vendor financial instability;
- volatility in general world economic conditions;
- the disruption of markets;
- changes in export or import laws;
- restrictions on currency exchanges;
- potentially negative tax consequences;
- longer payment terms;
- acts of war, terrorism, and political instability
- natural disasters; and
- the modification or introduction of government policies with potentially
adverse effects.
International sales, which are both direct and indirect sales to customers
outside the U.S., accounted for approximately 51.9%, 47.9%, and 46.9% of our net
sales in 2002, 2001 and 2000, respectively. We anticipate that international
sales will continue to account for a significant portion of our revenue. We
invoice our customers in various currencies. To date, we do not use any rate
protection agreements or derivative agreements to hedge any foreign exchange
exposure. Accordingly, we may be exposed to exchange losses based upon currency
exchange rate fluctuations, which losses could have a materially adverse effect
on our operating results.
29
A significant portion of products in our Small Systems and Large Systems
reportable operating segments are manufactured in foreign locations,
particularly developing countries such as Brazil, China, India, and the
Philippines, which subject APC to a number of economic and other risks. The
Small Systems have particular exposure to the Philippines, a country which is
experiencing political and financial instability. Disruption of manufacturing
efforts in these international facilities could materially adversely impact our
ability to fulfill customer orders and potentially result in the loss of
business.
Because our business relies upon a variety of computer systems to operate
effectively, the failure or disruption of, or latent defects in these systems
could have a material adverse effect on our business.
APC is a highly automated company whose efficient and effective operation relies
on a variety of information systems, including e-mail, enterprise resource
planning, electronic data interchange, customer resource management and e-
commerce systems. Disruption in the operation of these systems, or difficulties
in maintaining or upgrading these systems, could have an adverse effect on our
business. In January 2001, we upgraded our enterprise resource planning system.
Difficulties that we have encountered, or may encounter, in connection with our
implementation and use of our computer systems, including human error or our
reliance on, or a failure or disruption of, or latent defects in such systems,
could adversely affect our order management and fulfillment, financial reporting
and supply chain management processes, and any such difficulties could have a
material adverse effect on our business.
Our reliance on sole source suppliers may result in product delays or price
increases.
We currently obtain certain components of our products and certain finished
products from sole sources. In the future, our suppliers may not be able to
meet our demand for components and products in a timely and cost-effective
manner. Our inability to secure and qualify alternative sources of supply in a
timely manner may disrupt our ability to fulfill customer orders. We generally
purchase these sole source components and products using purchase orders and
have no guaranteed supply arrangements with the suppliers. In addition, the
availability of many of these components and products is dependent in part on
our ability to provide the suppliers with accurate forecasts of our future
requirements. However, our operating results and customer relationships could
be materially adversely affected by either an increase in prices for, or an
interruption or reduction in supply of, any key components and products.
We have a limited ability to protect our intellectual property rights; others
could infringe on or misappropriate our propriety rights and information.
Our success will depend, to a large extent, on our ability to protect our
proprietary technology. We rely on a combination of contractual rights, trade
secrets, patents, and copyrights to protect our proprietary rights. Although we
own certain patents, and we have applied, and in the future we may apply, for
patents, our intellectual property protection may not be sufficient to prevent
competitors from developing similar technology. Moreover, in the absence of
patent protection, our business may be adversely affected by competitors which
independently develop functionally equivalent technology.
Our products may infringe on the intellectual property rights of others.
We attempt to ensure that our products and processes do not infringe upon third
party patents and other proprietary rights, but from time to time third parties
have alleged, and in the future may allege, such infringement. If third parties
allege or determine infringement, we may not prevail in such a challenge.
Furthermore, if infringement is determined, we may not be able to obtain the
necessary licenses on acceptable terms, if at all.
If we are unable to identify and successfully integrate acquisitions, our
ability to expand and our financial results could suffer.
We have limited experience in integrating acquired companies or technologies
into our operations. We may from time to time pursue the acquisition of other
companies, assets, products or technologies. We may not be able to integrate
successfully products, technologies, distribution channels, key personnel and
businesses of acquired companies into our business or product offerings. In
addition, the integration of acquired companies may adversely affect our
business, operating results, or financial condition. Further, these acquired
companies, assets, products or technologies may not contribute significantly to
our sales or earnings, and the sales and earnings from acquired businesses may
be adversely affected by the integration process or other factors. If we are
not successful in the integration of such acquired businesses, our financial
results could be adversely impacted. In addition, we may not be able to
identify and consummate suitable acquisition transactions in the future.
30
Our stock price could be volatile, which could cause you to lose part or all of
your investment.
The market price of our common stock has been, and may continue to be, extremely
volatile. The trading price of our common stock could be subject to wide
fluctuations in response to:
- quarter-to-quarter variations in operating results;
- changes in earnings estimates by analysts;
- announcements of technological innovations or new products developed by
us or our competitors; and
- labor disputes, acts of war, terrorism and political instability and
other events or factors.
In addition, the stock market has from time to time experienced extreme price
and volume fluctuations which have particularly affected the market price for
many high technology companies and which often have been unrelated to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of our common stock.
Our tax rate depends on earnings derived from certain foreign manufacturing
operations.
Our tax rate is heavily dependent upon the proportion of earnings that we derive
from our Ireland and Philippines manufacturing operations and our ability to
reinvest those earnings permanently outside the United States. If the earnings
of these operations as a percentage of our total earnings were to decline
significantly from anticipated levels, or should our ability to reinvest these
earnings be reduced, our effective tax rate would exceed the currently estimated
rate for 2003. In addition, should our intercompany transfer pricing with
respect to our Ireland or Philippines manufacturing operations require
significant adjustment due to audits or regulatory changes, our overall
effective tax rate could increase.
We are, and may become, involved in litigation, which could materially harm our
business.
We are, and may in the future become, involved in litigation involving our
business, products or operations. The litigation process is uncertain and
includes the risk of an unexpected, unfavorable result. We may be materially
adversely impacted by any such litigation.
Item 7A. 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 7 of this Report and is incorporated herein by
reference.
APC, in the normal course of business, is 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 7 of this Report and is incorporated herein by reference.
31
Item 8. Financial Statements and Supplementary Data
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
In thousands except per share amount
ASSETS
2002 2001
Current assets:
Cash and cash equivalents $209,322 $288,210
Short term investments (Note 5) 430,986 104,868
Accounts receivable, less allowance for
doubtful accounts of $17,855 in 2002
and $18,712 in 2001 (Note 6) 237,079 263,595
Inventories (Note 7) 319,971 350,636
Prepaid expenses and other current
assets 24,545 15,935
Assets held-for-sale (Notes 3 and 9) 3,033 -
Deferred income taxes (Note 12) 51,606 44,255
Total current assets 1,276,542 1,067,499
Property, plant, and equipment:
Land, buildings, and improvements 64,190 71,166
Machinery and equipment 195,076 200,000
Office equipment, furniture, and
fixtures 78,388 72,510
Purchased software 32,513 30,463
370,167 374,139
Less accumulated depreciation
and amortization 195,239 164,154
Net property, plant, and equipment 174,928 209,985
Long term investments (Note 5) 56,293 -
Goodwill (Note 8) 6,679 56,388
Other intangibles, net (Notes 4 and 8) 61,257 73,100
Deferred income taxes (Note 12) 26,354 10,924
Other assets 2,527 2,876
Total assets $1,604,580 $1,420,772
See accompanying notes to consolidated financial statements.
32
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
In thousands except per share amount
LIABILITIES AND SHAREHOLDERS' EQUITY
2002 2001
Current liabilities:
Accounts payable $99,983 $75,569
Accrued compensation 33,029 21,640
Accrued warranty (Note 11) 27,183 6,846
Accrued sales and marketing programs 22,405 23,011
Other accrued expenses 30,301 21,430
Deferred revenue 19,135 14,451
Income taxes payable 45,404 20,131
Total current liabilities 277,440 183,078
Deferred tax liability (Note 12) 15,088 16,306
Total liabilities 292,528 199,384
Shareholders' equity (Notes 13 and 14):
Common stock, $0.01 par value;
authorized 450,000 shares in 2002
and 2001; issued 196,496 in 2002
and 196,025 in 2001 1,965 1,960
Additional paid-in capital 131,827 126,365
Retained earnings 1,181,563 1,099,541
Treasury stock, 250 shares, at cost (1,551) (1,551)
Accumulated other comprehensive loss (1,752) (4,927)
Total shareholders' equity 1,312,052 1,221,388
COMMITMENTS AND CONTINGENCIES
(Notes 11, 16, 18 and 19)
Total liabilities and
shareholders' equity $1,604,580 $1,420,772
See accompanying notes to consolidated financial statements.
33
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002, 2001 and 2000
In thousands except per share amounts
2002 2001 2000
Net sales (Note 15) $1,300,025 $1,404,784 $1,470,344
Cost of goods sold 816,318 920,895 867,680
Gross profit 483,707 483,889 602,664
Operating expenses:
Marketing, selling,
general, and administrative 272,702 284,390 298,393
Special charges (Note 4) -- -- 47,900
Research and development 60,058 54,646 46,898
Total operating expenses 332,760 339,036 393,191
Operating income 150,947 144,853 209,473
Other income, net 10,889 13,700 23,838
Earnings before income taxes
and cumulative effect of
accounting change 161,836 158,553 233,311
Income taxes (Note 12) 45,314 45,188 67,660
Earnings before cumulative
effect of accounting change 116,522 113,365 165,651
Cumulative effect of
accounting change, net of
income taxes of $15,459 34,500 -- --
Net income $82,022 $113,365 $165,651
Basic earnings per share:
Basic earnings per share
before cumulative effect
of accounting change $0.59 $0.58 $0.85
Cumulative effect of
accounting change,
net of tax 0.17 -- --
Basic earnings
per share $0.42 $0.58 $0.85
Basic weighted average
shares outstanding 195,927 195,171 194,235
Diluted earnings per share:
Diluted earnings per share
before cumulative effect
of accounting change $0.59 $0.58 $0.83
Cumulative effect of
accounting change,
net of tax 0.17 -- --
Diluted earnings
per share $0.42 $0.58 $0.83
Diluted weighted average
shares outstanding 196,993 196,793 200,156
See accompanying notes to consolidated financial statements.
34
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
In thousands
Accumulated
$0.01 Par, Additional Treasury Stock, Other
Common Stock Paid-in Retained at Cost Comprehensive
Shares Amount Capital Earnings Shares Amount Income Total
Balances at
December 31, 1999 193,339 $1,933 $82,989 $820,525 (250) $(1,551) $(1,806) $902,090
Net income 165,651 165,651
Foreign currency
translation
adjustment (2,970) (2,970)
Comprehensive
income 162,681
Exercises of
stock options 1,488 15 18,652 18,667
Tax benefit from
exercises of
stock options 7,981 7,981
Shares issued to
Employee Stock
Purchase Plan 131 1 1,761 1,762
Shares issued to
acquire ABL
Electronics 113 2 3,998 4,000
Balances at
December 31, 2000 195,071 1,951 115,381 986,176 (250) (1,551) (4,776) 1,097,181
Net income 113,365 113,365
Foreign currency
translation
adjustment (51) (51)
Net unrealized loss
on investments (100) (100)
Comprehensive
income 113,214
Exercises of
stock options 754 7 7,633 7,640
Tax benefit from
exercises of
stock options 1,131 1,131
Shares issued to
Employee Stock
Purchase Plan 200 2 2,220 2,222
Balances at
December 31, 2001 196,025 1,960 126,365 1,099,541 (250) (1,551) (4,927) 1,221,388
Net income 82,022 82,022
Foreign currency
translation
adjustment 3,300 3,300
Net unrealized loss
on investments (125) (125)
Comprehensive
income 85,197
Exercises of
stock options 305 3 3,167 3,170
Tax benefit from
exercises of
stock options 490 490
Shares issued to
Employee Stock
Purchase Plan 166 2 1,805 1,807
Balances at
December 31, 2002 196,496 $1,965 $131,827 $1,181,563 (250) $(1,551) $(1,752) $1,312,052
See accompanying notes to consolidated financial statements.
35
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
In thousands 2002 2001 2000
Cash flows from
operating activities:
Net income $82,022 $113,365 $165,651
Adjustments to reconcile
net income to net cash
provided by operating
activities
Depreciation and
amortization of property,
plant, and equipment 39,665 44,377 32,357
Gain on sale of property,
plant, and equipment (347) (1,728) --
Amortization of goodwill
and other intangibles 11,857 11,559 8,586
Provision for doubtful
accounts 3,890 4,775 2,028
Provision for inventories 10,780 18,015 4,632
Deferred income taxes (23,999) (10,654) (7,212)
Cumulative effect of
accounting change 49,959 -- --
Restructuring charges 3,877 5,089 --
Impairment of assets
held-for-sale 3,203 -- --
Special charges -- -- 47,900
Other non-cash items, net 3,175 (151) (2,970)
Changes in operating
assets and liabilities,
excluding effects of
acquisitions:
Accounts receivable 22,626 29,671 (59,638)
Inventories 19,885 (79,619) (95,885)
Prepaid expenses and
other current assets (8,610) 7,553 (4,559)
Other assets 85 (3,018) (69,262)
Accounts payable 24,414 (29,462) 8,898
Accrued compensation 11,389 (68) (4,610)
Accrued warranty 20,337 1,252 1,433
Accrued sales and
marketing programs (606) 7,801 (1,902)
Other accrued expenses 8,871 (10,922) (3,190)
Deferred revenue 4,684 2,604 3,108
Income taxes payable 25,763 6,885 (8,336)
Net cash provided by
operating activities 312,920 117,324 17,029
Cash flows from
investing activities:
Purchases of held-to-
maturity securities (1,517,274) (79,776) (75,000)
Maturities of held-to-
maturity securities 1,140,670 25,000 50,000
Purchases of available-
for-sale securities (25,807) (25,092) --
Sales of available-for-
sale securities 20,000 -- --
Capital expenditures,
net of capital grants (19,555) (47,859) (73,716)
Proceeds from disposals
of property, plant,
and equipment 1,624 -- --
Proceeds from sale of
property, plant, and
equipment 3,557 5,726 --
Acquisitions, net of cash
acquired -- -- (100,315)
Net cash used in investing
activities (396,785) (122,001) (199,031)
Cash flows from
financing activities:
Repayment of short term debt -- -- (11,727)
Proceeds from issuances
of common stock 4,977 9,862 20,429
Net cash provided by
financing activities 4,977 9,862 8,702
Net change in cash and
cash equivalents (78,888) 5,185 (173,300)
Cash and cash equivalents
at beginning of year 288,210 283,025 456,325
Cash and cash equivalents
at end of year $209,322 $288,210 $283,025
Supplemental cash flow
disclosures
Cash paid during
the year for:
Income taxes
(net of tax refunds) $23,753 $45,982 $80,240
Details of acquisitions:
Fair value of assets $ -- $ -- $138,242
Liabilities and minority
interest -- -- (36,614)
Cash paid -- -- 101,628
Cash acquired -- -- (1,313)
Acquisitions $ -- $ -- $100,315
NON-CASH TRANSACTIONS: In 2002, 2001 and 2000, the tax effect of the exercise
of stock options resulted in increases to additional paid-in capital and
reductions to income taxes payable of $490, $1,131, and $7,981, respectively.
In 2002 and 2001, APC recorded restructuring charges and impairment of assets
held-for-sale that included non-cash components of $7,080 and $5,089,
respectively (Notes 3 and 9). In 2000, 113,273 shares were issued related to
the acquisition of ABL Electronics Corporation resulting in an increase to
additional paid-capital of $3,998.
See accompanying notes to consolidated financial statements.
36
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2002, 2001 and 2000
1. Summary of Significant Accounting Policies
Nature of Business
American Power Conversion Corporation and its subsidiaries (APC) designs,
develops, manufactures, and markets power protection and management solutions
for computer, communications and electronic applications worldwide. APC's
products include uninterruptible power supply products (UPSs), DC-power systems,
electrical surge protection devices, power conditioning products, precision
cooling equipment, and associated software, services, and accessories. These
products are used with sensitive electronic devices which rely on electric
utility power including, but not limited to, home electronics, personal
computers (PCs), high-performance workstations, servers, networking equipment,
communications equipment, Internetworking equipment, data centers, mainframe
computers, and facilities. APC's principal markets are in North America,
Europe, and the Far East.
Principles of Consolidation
The consolidated financial statements include the accounts of American Power
Conversion Corporation and all of its majority-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Implementation of Recent Accounting Pronouncements
Classification of Certain Customer Promotional Payments, Rebates, and Other
Discounts
In consideration of guidance issued by the Financial Accounting Standards
Board's Emerging Issues Task Force in Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products,
Issue No. 00-14, Accounting for Certain Sales Incentives, and Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products), certain customer promotional payments,
rebates and other discounts formerly classified as operating expenses have been
retroactively re-classified as a reduction of revenue. These changes reduced
net sales and also reduced marketing, selling, general and administrative
expenses by $23.1 million, $28.5 million, and $13.2 million in 2002, 2001 and
2000, respectively. This accounting change had no impact on reported profit
from operations, net income or earnings per share for any of the periods
presented.
Goodwill and Other Intangibles
On January 1, 2002, APC adopted Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets. With the adoption of Statement 142,
APC implemented the necessary reclassifications in order to conform to the new
criteria in Statement of Financial Accounting Standards No. 141, Business
Combinations, for recognition of intangible assets apart from goodwill.
Statement 142 requires that companies no longer amortize goodwill and other
intangible assets with indefinite lives, but instead test goodwill impairment at
least annually or more frequently if impairment indicators arise. Statement 142
also requires completion of a two-step transitional goodwill impairment test.
In connection with completion of the first step of its transitional analysis,
APC identified two reporting units with goodwill, Large Systems and Small
Systems; these reporting units are also reportable segments. APC then
determined the carrying value of each reporting unit by assigning the assets and
liabilities, including existing goodwill and other intangible assets, to these
reporting units as of the date of adoption. Completion of the first step of
APC's analysis indicated impairment in the carrying amount of its goodwill.
APC's goodwill was primarily associated with its Large Systems segment which
consists primarily of uninterruptible power supply (UPS), DC-power systems, and
precision cooling products for data centers, facilities, and communication
applications. Conditions contributing to the goodwill impairment included the
ongoing softness in IT and communications market segments coupled with lower
corporate investment for these types of applications.
37
In connection with completion of the second step of its transitional analysis,
APC compared the carrying amount of reporting unit goodwill with the implied
fair value of reporting unit goodwill, both of which were measured as of the
date of adoption. The implied fair value of goodwill was determined by
allocating the fair value of the reporting unit to all of the assets (recognized
and unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation, in accordance with the provisions of Statement 141.
The residual fair value after this allocation is the implied fair value of the
reporting unit goodwill. Based on this second step, APC recorded a non-cash
charge equal to the goodwill balance associated with APC's Large Systems segment
of approximately $50 million (approximately $35 million on an after-tax basis).
This charge was recognized as the cumulative effect of a change in accounting
principle net of income taxes, included in APC's results as of January 1, 2002,
and had no effect on APC's liquidity. APC's remaining goodwill is associated
with its Small Systems segment. APC evaluates each of its reporting units with
goodwill during the fourth quarter of each fiscal year or more frequently if
impairment indicators arise.
Statement 142 also provides for other intangible assets with definite useful
lives to be amortized over their respective estimated useful lives to their
estimated residual values and to be reviewed for impairment in accordance with
the provisions of Statement of Financial Accounting Standards No. 144,
Impairment on Disposal of Long-Lived Assets. APC's other intangible assets
consist principally of technology and licensed patent rights relating to
uninterruptible power supply technology. With the adoption of Statement 142,
APC reduced the estimated useful lives of its other intangible assets with
definite useful lives from a weighted average life of approximately 15 years to
a weighted average life of approximately 6 years. There are no expected
residual values related to these intangible assets.
Long-lived Assets
On January 1, 2002, APC adopted Statement 144, Impairment on Disposal of Long-
Lived Assets. Statement 144 sets forth criteria to determine when a long-lived
asset is held for sale. Such criteria specify that the asset must be available
for immediate sale in its present condition subject only to terms that are usual
and customary for sales of such assets. In addition, the sale of the asset must
be probable, and its transfer expected to qualify for recognition as a completed
sale, generally within one year. Statement 144 requires recognition of an
impairment loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows. An impairment loss is measured as
the difference between the carrying amount and fair value of the asset. APC
evaluates its long-lived assets if impairment indicators arise.
Revenue Recognition
Revenue from sales of APC's products, including UPS products, DC-power systems,
electrical surge protection devices, power conditioning products, precision
cooling equipment, and associated accessories, is recognized when title has
passed at the time of delivery of product as stipulated by the delivery terms
for the sales transactions. In addition, prior to revenue recognition, APC
requires persuasive evidence of the arrangement, that the price is fixed or
determinable, and that collectibility is reasonably assured. APC offers
additional services to customers depending on the type of product the customer
has purchased, including on-site services, installation consulting services,
remote monitoring services, power audit services, and network integration
services. Revenue is recognized at the time services are provided or is
deferred and recognized ratably over the service period where applicable,
typically one to five years. APC's arrangements do not generally include
acceptance clauses. However, if an arrangement includes a customer specified
acceptance provision, acceptance generally occurs at APC's factory prior to
delivery. Provisions for potential liabilities resulting from sales returns and
allowances, warranties, and uncollectible accounts are made 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. 101.
Cash and Cash Equivalents
Cash and cash equivalents consist of funds on deposit, money market savings
accounts, and short-term commercial paper with original maturities of three
months or less.
38
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 and less than or
equal to two years. APC has no investments with maturity dates greater than two
years. Available-for-sale securities are recorded at fair value with net
unrealized gains and losses reported, net of income taxes, in other
comprehensive income. Held-to-maturity securities are carried at amortized
cost. 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.
Inventories
Inventories are stated at the lower of cost or market; cost being determined
using the first-in, first-out (FIFO) method.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives indicated below.
Leasehold improvements are amortized over the shorter of the lease term or
estimated useful life of the asset.
Land improvements 15 years
Buildings and improvements 40 years
Machinery and equipment 5 - 10 years
Office equipment, furniture,
and fixtures 3 - 10 years
Purchased software 3 years
Grant Monies
Grant monies are provided to certain of APC's subsidiaries located in Ireland to
reimburse qualifying capital expenditures and for hiring and maintaining certain
employment levels within Ireland. Grant monies received for costs incurred for
property, plant and equipment are recorded as a reduction to the basis of the
corresponding depreciable assets. Grant monies received for employee levels are
recorded as a reduction of payroll expense in the period in which the employee
levels required by the grant are reached. Grant monies are received subject to
"clawback" provisions that would obligate APC to repay the grant monies received
should its employment levels fall below established levels. At the end of each
fiscal quarter, APC evaluates current conditions relating to the status of on-
going operations and related employment levels in Ireland to assess the
possibility that grant monies will need to be repaid and, if deemed necessary,
to accrue a repayment liability. Since the inception of its grant agreements in
1994, APC has not assessed the need to accrue a repayment liability and, based
upon a current evaluation of its significant investment in Ireland and on-going
operational requirements, APC believes the possibility that the clawback
provisions will become effective is remote.
Goodwill and Other Intangibles
Goodwill represents the excess of cost over the fair value of the net tangible
assets and identifiable intangible assets of businesses acquired. Prior to
January 1, 2002, APC's goodwill was being amortized on a straight-line basis
over 15 years. On January 1, 2002, APC adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. With the
adoption of Statement 142, APC implemented the necessary reclassifications in
order to conform to the new criteria in Statement of Financial Accounting
Standards No. 141, Business Combinations, for recognition of intangible assets
apart from goodwill. Statement 142 requires that companies no longer amortize
goodwill and other intangible assets with indefinite lives, but instead test
goodwill impairment at least annually or more frequently if impairment
indicators arise. In connection with its adoption of Statement 142, APC
recorded a non-cash charge equal to the goodwill balance associated with its
Large Systems segment of approximately $50 million (approximately $35 million on
an after-tax basis). This charge was recognized as the cumulative effect of a
change in accounting principle net of income taxes, included in APC's results as
of January 1, 2002, and had no effect on APC's liquidity. APC's remaining
goodwill was associated with its Small Systems segment. APC evaluates each of
its reporting units with goodwill during the fourth quarter of each fiscal year
or more frequently if impairment indicators arise.
39
Statement 142 also provides for other intangible assets with definite useful
lives to be amortized over their respective estimated useful lives to their
estimated residual values and to be reviewed for impairment in accordance with
the provisions of Statement of Financial Accounting Standards No. 144,
Impairment on Disposal of Long-Lived Assets. APC's other intangible assets
consist principally of technology and licensed patent rights relating to
uninterruptible power supply technology. With the adoption of Statement 142,
APC reduced the estimated useful lives of its other intangible assets with
definite useful lives from a weighted average life of approximately 15 years to
a weighted average life of approximately 6 years. There are no expected
residual values related to these intangible assets.
Long-lived Assets
APC accounts for long-lived assets, excluding goodwill, in accordance with the
provisions of Statement 144, Impairment on Disposal of Long-Lived Assets.
Statement 144 sets forth criteria to determine when a long-lived asset is held
for sale. Such criteria specify that the asset must be available for immediate
sale in its present condition subject only to terms that are usual and customary
for sales of such assets. In addition, the sale of the asset must be probable,
and its transfer expected to qualify for recognition as a completed sale,
generally within one year. Statement 144 requires recognition of an impairment
loss only if the carrying amount of a long-lived asset is not recoverable from
its undiscounted cash flows. An impairment loss is measured as the difference
between the carrying amount and fair value of the asset. APC evaluates its long-
lived assets if impairment indicators arise.
Research and Development
Expenditures for research and development (R&D) are expensed in the period
incurred.
Warranties
APC offers limited warranties ranging from one to five years varying by product.
The provision for potential liability resulting from warranty claims is made 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. 101. Customers can extend the basic warranty period of
select products, at an additional charge, for a period of one or three
additional years. Recognition of revenue associated with extended warranty
programs commences on the date the extended warranty becomes effective and is
recognized ratably over the extended warranty period. In addition, APC offers
an Equipment Protection Policy in the U.S., Canada, and Europe. Depending on
the model and country, the policy provides up to $150,000, 50,000 pounds
sterling, or 100,000 euros for repair or replacement of customers' hardware
should a surge or lightning strike pass through an APC unit. Other restrictions
also apply. Customers can also register the ProtectNet line of data line surge
suppressors for a "Double-Up" Supplemental Equipment Protection Policy, under
which the total recoverable limit under the Equipment Protection Policy may be
doubled (U.S. and Canada only). Most surge suppressor products come with a
lifetime product warranty. Except in relation to the product recall discussed
below, APC has generally experienced satisfactory field operating results, and
warranty and Equipment Protection Policy costs incurred to date have not had a
significant impact on APC's results of operations.
In early 2003, APC announced a product recall of Back-UPS CS 350 and 500 models.
APC's methodology for estimating costs associated with this product recall
involved estimating future costs to be incurred to replace the recalled products
based on expected returns and the costs to conduct the recall, particularly
repair and transportation costs; also refer to Note 11.
40
Income Taxes
Income taxes are accounted for under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Deferred income taxes have not been provided for the undistributed earnings of
APC's foreign subsidiaries which aggregated approximately $419 million at
December 31, 2002. APC plans to reinvest all such earnings for future
expansion. If such earnings were distributed, taxes would increase by
approximately $107 million. Additionally, APC has tax holidays in China, India,
and the Philippines, which reduce or eliminate the income taxes paid in those
countries. These holidays begin to expire in the third quarter of 2003. Based
on the currently enacted regular corporate income tax rates in these countries,
the benefit to APC of these tax holidays was approximately $7.5 million, or
$0.04 per diluted share, for the year ended December 31, 2002; $8.0 million, or
$0.04 per diluted share, for the year ended December 31, 2001; and $6.8 million,
or $0.03 per diluted share, for the year ended December 31, 2000.
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 2002 2001 2000
Basic weighted average
shares outstanding 195,927 195,171 194,235
Net effect of dilutive
potential common shares
outstanding based on the
treasury stock method using
the average market price 1,066 1,622 5,921
Diluted weighted average
shares outstanding 196,993 196,793 200,156
Antidilutive potential
common shares excluded
from the computation above 8,882 9,566 280
41
Stock-Based Compensation
At December 31, 2002, APC had four stock option plans and an employee stock
purchase plan, which are described more fully in Note 13. As permitted by
Statement of Financial Accounting Standards No. 123 as amended by No. 148,
Accounting for Stock-Based Compensation, APC accounts for those plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if APC had applied the fair value recognition
provisions of Statement 123 to stock-based employee compensation:
In thousands except per share amounts 2002 2001 2000
Net income As reported $82,022 $113,365 $165,651
Deduct:
Total stock-based
employee compensation
expense determined
under fair value
based method for
all awards, net of
related tax effects Pro forma 25,108 47,737 32,536
Net income Pro forma $56,914 $65,628 $133,115
Basic earnings per share As reported $0.42 $0.58 $0.85
Pro forma $0.29 $0.34 $0.69
Diluted earnings per share As reported $0.42 $0.58 $0.83
Pro forma $0.29 $0.33 $0.65
The pro forma effect on net income for 2002, 2001 and 2000 is not representative
of the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to stock option grants
made prior to 1995. The weighted average fair value of stock options granted
during 2002, 2001 and 2000 was $7.07, $10.32, and $11.43, respectively. APC
estimates the fair value of each option as of the date of grant using the Black-
Scholes pricing model with the following weighted average assumptions used for
grants in 2002, 2001 and 2000:
2002 2001 2000
Expected volatility 74% 83% 70%
Dividend yield -- -- --
Risk-free interest rate 3.2% 4.7% 5.9%
Expected life 6 years 6 years 6 years
APC accounts for its non-employee stock-based compensation awards in which goods
or services are the consideration received for the equity instruments issued
based on the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable. Compensation
cost recognized for non-employees under these plans in the accompanying
consolidated financial statements is not material.
42
Advertising Costs
Advertising costs are expensed as incurred and reported in marketing, selling,
general, and administrative expenses in the accompanying consolidated statements
of income. Such costs of advertising, advertising production, trade shows, and
other activities are designed to enhance demand for APC's products. Advertising
costs were $40.8 million in 2002, $46.5 million in 2001, and $72.3 million in
2000. There are no capitalized advertising costs in the accompanying
consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
2. Acquisitions
In the fourth quarter of 2000, APC acquired privately-held Airflow Company, a
Maryland-based manufacturer of precision cooling equipment primarily used in
data center, Internet, and telecommunications applications, for $22.5 million in
cash plus expenses, of which $4.0 million will be paid in 2003 in the event no
indemnity claims arise. Early in the second quarter of 2000, APC acquired
privately-held Advance Power Ltd., a U.K.-based manufacturer of DC-based power
solutions used in communications and Internet applications, for $75.0 million in
cash plus expenses. Also early in the second quarter of 2000, APC acquired
privately-held ABL Electronics Corporation (ABL), a North American provider of
computer and network cables, switches, and other connectivity products, for $8.0
million paid in a combination of cash and stock, plus expenses.
APC's cash outlays associated with these acquisitions were financed from
operating cash. At December 31, 2001 and 2000, the excess of the purchase price
over the estimated fair value of the tangible net assets acquired was included
in Large Systems goodwill for the Airflow and Advance Power acquisitions and
Small Systems goodwill for the ABL acquisition, and was being amortized on a
straight-line basis over 15 years. In connection with its adoption in 2002 of
Statement 142, APC recorded a non-cash charge equal to the goodwill balance
associated with its Large Systems segment. This charge was recognized as the
cumulative effect of a change in accounting principle net of income taxes,
included in APC's results as of January 1, 2002, and had no effect on APC's
liquidity. Also effective January 1, 2002, in accordance with the provisions of
Statement 142, goodwill associated with APC's Small Systems segment is no longer
being amortized but instead tested for impairment at least annually or more
frequently if impairment indicators arise; also refer to Note 8. These
acquisitions have been accounted for as purchases and, accordingly, the acquired
companies' results of operations are included in APC's consolidated financial
statements from the respective dates of acquisition.
Pro forma results from operations have not been provided as the acquisitions are
not considered material individually and in the aggregate.
43
3. Restructuring
During the first quarter of 2002, APC announced global headcount reductions of
approximately 17%. These actions impacted personnel worldwide throughout a
broad range of functions within the organization, principally in the U.S., U.K.,
Ireland, and the Philippines. The majority of these terminations were the
result of APC's decision to consolidate its Philippines-based manufacturing
operations resulting in the closing of APC's manufacturing facility in the
province of Laguna. APC expects to fully implement these restructuring actions
during 2003.
In 2002, APC recorded $7.2 million of related restructuring costs of which $4.7
million and $2.5 million were classified in cost of goods sold and operating
expenses, respectively. These costs included the effects of approximately 941
employee terminations, principally in the manufacturing area, facilities
closures and the related impairment of tangible assets. These costs have not
been allocated to APC's operating segments, but rather have been classified as
indirect operating expenses for segment reporting consistent with APC's
classification for its internal financial reporting; also refer to Note 15.
A summary of the related 2002 restructuring liabilities during 2002 is outlined
below. APC expects all such restructuring liabilities at December 31, 2002 to
be fully paid in cash by the end of 2003.
2002 Restructuring Plans
In thousands Restructuring Restructuring
Liabilities at Liabilities at
January 1, Total Non-cash Cash December 31,
2002 Charges Charges Payments 2002
Employee
terminations $ -- $2,550 $ -- $(2,525) $25
Facilities
closures -- 4,652 (3,877) -- 775
$ -- $7,202 $(3,877) $(2,525) $800
In the second half of 2001, APC recorded $8.6 million of restructuring costs of
which $4.1 million and $4.5 million were classified in cost of goods sold and
operating expenses, respectively. These costs were associated with
manufacturing downsizing actions primarily in Denmark and the U.K. and included
the effects of approximately 450 employee terminations, principally in the
manufacturing area, facilities closures and the related impairment of tangible
and intangible assets. These costs have not been allocated to APC's operating
segments, but rather have been classified as indirect operating expenses for
segment reporting consistent with APC's classification for its internal
financial reporting; also refer to Note 15.
44
A summary of the related 2001 restructuring liabilities during 2002 is outlined
below. All such restructuring liabilities were fully paid in cash at December
31, 2002.
2001 Restructuring Plans
In thousands Restructuring Restructuring
Liabilities at Liabilities at
January 1, Total Non-cash Cash December 31,
2002 Charges Charges Reversals Payments 2002
Employee
terminations $452 $ -- $ -- $ -- $(452) $ --
$452 $ -- $ -- $ -- $(452) $ --
In thousands Restructuring Restructuring
Liabilities at Liabilities at
January 1, Total Non-cash Cash December 31,
2001 Charges Charges Reversals Payments 2001
Employee
terminations $ -- $3,517 $ -- $ -- $(3,065) $452
Facilities
closures -- 2,141 (1,256) (885) -- --
Impairment of
intangible -- 3,833 (3,833) -- -- --
assets
$ -- $9,491 $(5,089) $(885) $(3,065) $452
The reversal occurring in the fourth quarter of 2001 relating to facilities
closures represents the reversal of a cancelled lease liability recognized
during the third quarter of 2001 in connection with the closure of a leased
facility in the United Kingdom. During the fourth quarter of 2001, APC reversed
its decision to vacate the leased facility.
4. Special Charges
During the third and second quarters of 2000, APC agreed to license worldwide
patent rights relating to uninterruptible power supply technology for lump-sum
cash payments of $17.0 million and $48.0 million, respectively. These license
fees were paid from operating cash during the third and second quarters of 2000,
respectively. APC evaluated the portion of the license fees that represented
payment for prior use of the subject technology and the portion that represented
payment for future use. Considering each of its markets and the historical and
projected revenue realized in markets utilizing the licensed technology, APC
estimated the present value of royalty payments, basing this calculation on an
appropriate royalty rate and the technology's contribution to the overall value
of affected products. Separate present values were calculated for both historic
and projected product sales; the historic values were expensed and the projected
values were capitalized. Accordingly, write-offs of the fully paid-up portions
of the patent licenses were recognized in APC's consolidated statements of
income for the third and second quarters of 2000 as special charges to pre-tax
earnings of $17.5 million and $30.4 million, respectively, including direct
expenses of $1.5 million and $1.9 million, respectively. The remaining balances
of $1.0 million and $19.5 million have been classified on the consolidated
balance sheet as long term assets and are being amortized on a straight-line
basis over three years and nine years, respectively, the estimated remaining
economic lives of the patent licenses.
45
5. Investments
In thousands Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
At December 31, 2002
Available-for-sale:
Bond funds $31,233 $114 $(449) $30,898
Equity investments 398 -- -- 398
31,631 114 (449) 31,296
Held-to-maturity:
Certificates of deposit 134,602 -- -- 134,602
Corporate bonds 153,501 78 -- 153,579
Municipal bonds and notes 120,845 -- (6) 120,839
U.S. government
agency securities 47,035 203 (20) 47,218
455,983 281 (26) 456,238
$487,614 $395 $(475) $487,534
At December 31, 2001
Available-for-sale:
Bond funds $25,192 $ -- $(100) $25,092
Held-to-maturity:
Certificates of deposit 12,257 -- -- 12,257
Corporate bonds 32,583 -- (209) 32,374
Municipal bonds and notes 30,083 142 (60) 30,165
U.S. government
agency securities 4,853 134 -- 4,987
79,776 276 (269) 79,783
$104,968 $276 $(369) $104,875
Proceeds from the sales of investment securities available-for-sale were $20
million in 2002; gross realized losses were approximately $224,000 in 2002.
There were no sales of investment securities in 2001 or 2000.
46
6. Accounts Receivable
Accounts receivable are generally not concentrated in any geographic region or
industry. Collateral is usually not required except for certain international
transactions for which APC requires letters of credit to secure payment. APC
estimates an allowance for doubtful accounts based on the credit worthiness of
its customers as well as general economic conditions. Consequently, an adverse
change in those factors could affect APC's estimate of its bad debts.
7. Inventories
In thousands December 31, December 31,
2002 2001
Raw materials $175,079 $158,140
Work in process 7,740 9,238
Finished goods 137,152 183,258
Total inventories $319,971 $350,636
8. Goodwill and Other Intangible Assets
At December 31, 2002, goodwill of $6.7 million is associated with the Small
Systems segment.
Amortized intangible assets are as follows:
In thousands December 31, 2002
Weighted
Amortized Average Gross
Intangible Amortization Carrying Accumulated
Assets Period Amount Amortization
Technology 6 years $80,642 $26,702
Customer lists 5 years 8,900 3,519
Tradenames 5 years 3,157 1,221
Total amortized
intangible assets 6 years $92,699 $31,442
Aggregate amortization expense related to APC's other intangible assets for 2002
was $11.9 million. Estimated aggregated amortization for each of the next five
succeeding fiscal years is $11.9 million for 2003, $11.4 million for 2004, $11.4
million for 2005, $11.4 million for 2006, and $9.3 million for 2007. There are
no expected residual values related to these intangible assets.
47
The following summary reconciles reported net income to adjusted net income as
if APC had adopted Statement 142 on January 1, 2000, excluding the amortization
of goodwill and reflecting the adjusted useful lives of other intangible assets.
Had APC adopted Statement 142 effective January 1, 2000, there would have been
no impact on 2001 and 2000 diluted earnings per share of $0.58 or $0.83.
In thousands 2002 2001 2000
Reported net income $82,022 $113,365 $165,651
Add back: Goodwill amortization -- 2,853 2,036
Adjust: Technology amortization -- (2,105) (2,012)
Adjust: Customer lists amortization -- (538) (379)
Adjust: Tradenames amortization -- (196) (195)
Adjusted net income $82,022 $113,379 $165,101
9. Long-lived Assets
In 2002, APC announced its decision to consolidate its Philippines-based
manufacturing operations resulting in the closing of APC's manufacturing
facility in the province of Laguna. In connection with this action as well as
the closure of manufacturing facilities in the U.S. and U.K., APC recorded $7.1
million of asset impairment charges related to buildings and equipment of which
$6.6 million and $0.5 million were classified in cost of goods sold and
operating expenses, respectively. These impairment charges have not been
allocated to APC's operating segments, but rather have been classified as
indirect operating expenses for segment reporting consistent with APC's
classification for its internal financial reporting. At December 31, 2002, a
building and equipment held-for-sale with an aggregate value of $3.0 million are
stated at the lower of their fair values less estimated selling costs or
carrying amounts, and depreciation is no longer recognized. APC expects to
complete its sale of these assets, located in the Philippines, in 2003.
10. Revolving Credit Agreements and Short Term Debt
At December 31, 2002 and 2001, APC had available for future borrowings $65.0
million 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 $6.0
million ($7.0 million in 2001) under an unsecured line of credit agreement with
a second bank at similar interest rates. No borrowings were outstanding under
these facilities during fiscal years 2002, 2001 and 2000, or at December 31,
2002 and 2001.
11. Warranty Liability and Product Recall
In Product Accruals for Adjustments Product
thousands Warranty Product to Accruals Warranty
Liability at Warranties for Liability at
Beginning Issued During Preexisting Warranty End of
of Year the Year Warranties Payments Year
2002 $6,846 $41,798 $(167) $(21,294) $27,183
2001 5,594 26,053 (446) (24,355) 6,846
2000 4,161 26,345 -- (24,912) 5,594
48
In early 2003, APC announced a product recall of Back-UPS CS 350 and 500 models,
due to potential safety issues. APC has received eight reports worldwide of
units overheating, resulting in the melting of the unit's outer casing, six of
which occurred in the United States. Three of the reported incidents resulted
in minor property damage; no injuries have been reported. The total number of
affected devices being recalled worldwide is approximately 2.1 million with
approximately 900,000 devices recalled in the United States. The recall is
limited to two specific models in APC's Back-UPS CS product line, the Back-UPS
CS 350 and the Back-UPS CS 500, in both 120-volt and 230-volt models. The
affected units were manufactured between November 2000 and December 2002 and
were sold primarily through computer and electrical distribution, catalog and
retail outlets worldwide. We have accrued a current liability and recognized
additional warranty expense, classified in cost of goods sold, of $19.6 million.
Actual amounts may differ materially from our current estimates.
12. Income Taxes
Total federal, state, and foreign income tax expense (benefit) from continuing
operations for the years ended December 31, 2002, 2001, and 2000 consists of the
following:
In thousands Current Deferred Total
2002
Federal $33,502 $(5,657) $27,845
State 7,287 (1,063) 6,224
Foreign 12,978 (1,733) 11,245
$53,767 $(8,453) $45,314
2001
Federal $33,887 $(7,584) $26,303
State 7,653 (1,425) 6,228
Foreign 14,302 (1,645) 12,657
$55,842 $(10,654) $45,188
2000
Federal $53,319 $(3,850) $49,469
State 8,073 (794) 7,279
Foreign 12,559 (1,647) 10,912
$73,951 $(6,291) $67,660
Income tax expense attributable to continuing operations amounted to $45.3
million in 2002, $45.2 million in 2001, and $67.7 million in 2000, (effective
rates of 28.0%, 28.5%, and 29.0%, respectively). The actual expense for 2002,
2001 and 2000 differs from the "expected" tax expense (computed by applying the
statutory U.S. federal corporate tax rate of 35% to earnings before income
taxes) as follows:
In thousands 2002 2001 2000
Computed "expected"
tax expense $56,643 $55,494 $81,659
State income taxes,
net of federal
income tax benefit 4,046 4,048 4,731
Foreign earnings
taxed at rates
lower than U.S.
statutory rate
(principally
Ireland and the
Philippines) (13,641) (10,920) (16,616)
Extraterritorial
income exclusion/
foreign sales
corporation (1,610) (1,352) (1,754)
Other (124) (2,082) (360)
$45,314 $45,188 $67,660
49
The domestic and foreign components of earnings before income taxes were $89.3
million and $72.5 million, respectively, for 2002; $79.6 million and $79.0
million, respectively, for 2001; and $145.3 million and $88.0 million,
respectively, for 2000. Total income tax expense for the years ended December
31, 2002, 2001 and 2000 was allocated as follows:
In thousands 2002 2001 2000
Income from continuing
operations $45,314 $45,188 $67,660
Shareholders' equity, for
compensation expense for
tax purposes in excess of
amounts recognized for
financial statement purposes (490) (1,131) (7,981)
Shareholders' equity, for
unrealized loss in
investments (85) -- --
Cumulative effect of
accounting change (15,459) -- --
$29,280 $44,057 $59,679
At December 31, 2002 and 2001, deferred income tax assets and liabilities result
from temporary differences in the recognition of income and expense for tax and
financial reporting purposes. The sources and tax effects of these temporary
differences are presented below:
In thousands 2002 2001
Deferred tax assets:
Intangible assets $27,792 $12,006
Inventory obsolescence reserve 11,137 4,956
Allowances for sales and
marketing programs 8,474 9,019
Reserve for warranty and product
recall costs 7,930 2,262
Intercompany inventory profits 6,903 6,140
Accrual for compensation and
compensated absences 6,816 3,877
Deferred revenue 5,199 4,345
Additional costs inventoried
for tax purposes 1,715 6,681
Allowance for doubtful accounts 990 4,521
Other 3,438 3,031
Total gross deferred tax assets 80,394 56,838
Less valuation allowance (2,434) (1,659)
Net deferred tax assets 77,960 55,179
Deferred tax liabilities:
Excess of tax over financial
statement depreciation 11,933 12,215
Other 3,155 4,091
Total deferred tax liabilities 15,088 16,306
Net deferred income taxes $62,872 $38,873
In assessing the realizability of deferred tax assets, APC considers whether it
is more likely than not that some portion or all of the deferred tax assets will
not be realized. At December 31, 2002 and 2001, APC provided a valuation
allowance on certain of its deferred tax assets, primarily consisting of net
operating losses generated in 2002 and 2001 for the start up of Brazilian
operations, because of uncertainty regarding their realizability.
50
13. Stock Plans
Stock-based Compensation Plans
At December 31, 2002, APC had four stock option plans and an employee stock
purchase plan, which are described below.
Stock Option Plans
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 Plans). The
1997 and 1987 Stock Option 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 the 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 the 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 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.
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 2002, four non-employee directors were
entitled to participate in the 1997 Non-Employee Director Stock Option Plan with
each receiving a grant of options as of February 12, 2002 for 20,000 shares at
an exercise price of $13.01. Two of those non-employee directors were elected
at the June 2001 Annual Meeting of Shareholders and were each granted on August
9, 2001 under the 1997 Stock Option Plan options to purchase 13,643 shares at an
exercise price of $13.57. In addition, two non-employee directors were
previously entitled to participate in the 1997 Non-Employee Director Stock
Option Plan with each receiving a grant of options as of February 12, 2001 for
20,000 shares at an exercise price of $13.25 and February 12, 2000 for 20,000
shares at an exercise price of $29.84 (i.e., the market price on the dates of
grant).
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 option plans before January 1, 1993 expired not
more than five years from the date of grant, if unexercised. Options granted
under all stock option 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 December 31, 2000 expire at
various dates through 2009. 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.
51
A summary of the status of APC's stock option plans as of December 31, 2002,
2001 and 2000, and changes during the years ending on those dates is presented
below:
Shares in thousands 2002 2001 2000
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 17,649 $15.27 19,002 $15.26 12,082 $14.00
Granted 4,603 11.08 574 14.36 9,448 16.41
Exercised (305) 10.09 (754) 10.05 (1,488) 12.63
Terminated (1,763) 17.09 (1,173) 17.20 (1,040) 15.50
Outstanding
at end of year 20,184 14.27 17,649 15.31 19,002 15.26
Exercisable
at end of year 10,834 14.86 8,454 14.55 4,531 13.01
Shares available
at end of year
for future grants 11,084 4,424 3,891
The following table summarizes information about stock options outstanding at
December 31, 2002:
Shares in thousands Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life (years) Price Exercisable Price
$4.56 - $6.82 507 2.7 $4.95 507 $4.95
$8.30 - $11.69 5,895 8.5 10.63 1,374 9.40
$12.43 - $17.71 10,548 6.9 13.95 7,075 14.37
$19.30 - $24.80 3,062 7.2 23.01 1,780 23.00
$29.00 - $31.13 172 7.1 30.63 98 30.72
20,184 7.3 14.27 10,834 14.86
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 6,000 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. During 2002, under the Plan, 86,131 shares were
issued at $10.92 per share and 79,838 shares were issued at $10.85 per share.
During 2001, under the Plan, 102,079 shares were issued at $11.17 per share and
98,851 shares were issued at $10.94 per share. During 2000, under the Plan,
41,671 shares were issued at $18.75 per share and 89,173 shares were issued at
$11.00 per share.
52
14. Retirement Benefits
Employee Stock Ownership Plans
At December 31, 2002, APC had noncontributory Employee Stock Ownership Plans
(ESOP) covering substantially all employees in North America and Ireland.
Contributions to the ESOP are based on a percentage of eligible compensation and
are determined by APC's Board of Directors at its discretion, subject to the
limitations established by U.S. and Ireland tax laws. The ESOP held 7.1 million
shares, 7.7 million shares, and 8.3 million shares of common stock at December
31, 2002, December 31, 2001, and December 31, 2000, respectively. No shares
were contributed to the ESOP in 2002, 2001 or 2000.
Employee Savings Plan
On May 1, 1997, APC established an employee savings plan (the Savings Plan) that
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code of 1986, as amended, covering substantially all North American
employees. The Savings Plan allows eligible employees to contribute up to 15%
of their compensation on a pre-tax basis subject to certain limitations. APC
matches, with its common stock, 100% of the first 3% of employee contributions
plus 50% of the next 3% of employee contributions. Employees are fully vested
in their employer matching contributions. Employees may diversify employer
matching contributions to other investment options available under the Savings
Plan.
APC also contributes to Company sponsored and government sponsored pension and
retirement programs in several foreign locations.
During December 2002, APC's Board of Directors approved the merger of APC's ESOP
into the Savings Plan to be effective at a future date to be determined by
APC's management.
APC's pension and retirement benefit contributions in 2002, 2001 and 2000
amounted to approximately $7.9 million, $9.2 million, and $4.9 million,
respectively.
15. Operating Segment and Geographic Information
Segment accounting policies are the same as policies described in Note 1.
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. Major product offerings include the Smart-
UPS, Matrix-UPS, Symmetra Power Array and Back-UPS family of UPSs. Also
included are the SurgeArrest surge suppressors as well as cabling and
connectivity products. Additional accessories and software products are offered
to enhance the management of these networks. Products include PowerChute
software, MasterSwitch power distribution units 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.
53
The Large Systems segment produces large system solutions that provide power and
availability solutions for data centers, facilities and communications
equipment. Product offerings include Silcon UPSs, NetworkAIR precision cooling
equipment, DC-power systems, and major components of InfraStruXure systems
products are sold to commercial users primarily through an indirect selling
model consisting of value added resellers and strategic partnerships.
In the fourth quarter of 2001, APC acquired select inventory and related
technology associated with outside plant, networking power product lines from
ARRIS Group, Inc. for $10.3 million paid in cash. The product lines were
acquired from ARRIS' EnergyLink family of power supplies, enclosures and
equipment for network broadband power, including the TSP (Total System Power)
line. The product lines are designed for outdoor use, commonly installed on
utility poles or adjacent to fiber nodes, and provide back-up power for
broadband cable applications. The combination of the Arris product line and
APC's PowerShield products provide a comprehensive broadband power product line.
Beginning in 2002, both offerings are included in the Large Systems segment.
Prior to 2002, APC's PowerShield products were classified in the Small Systems
segment. In 2002, the PowerShield products were reclassified to the Large
Systems segment along with the other broadband solutions from the ARRIS
acquisition which share similar product applications and economic
characteristics more closely matching the Large Systems segment.
The Other segment principally consists of notebook computer accessories,
replacement batteries and Web-based services.
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. In addition, our 2002 product recall
provision, 2002 and 2001 restructuring charges, 2002 impairment of assets held-
for-sale, and our 2001 excess inventory provision have not been allocated to our
operating segments, but rather have been classified as indirect operating
expenses for segment reporting consistent with our classification for our
internal financial reporting. 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.
APC closely monitors the credit worthiness of its customers, adjusting credit
policies and limits as deemed necessary. Two computer distributor customers,
Tech Data Product Management and Ingram Micro, accounted for approximately 14.4%
and 13.2%, respectively, of net sales in 2002, 13.3% and 15.5%, respectively, of
net sales in 2001, and 11.4% and 14.9%, respectively, of net sales in 2000. The
majority of APC's sales to Tech Data Product Management and Ingram Micro are
included in the Small Systems segment.
54
Summary operating segment information is as follows:
In thousands 2002 2001 2000
Segment net sales:
Small Systems $1,056,140 $1,149,175 $1,253,365
Large Systems 182,074 210,664 192,505
Other 54,773 38,893 14,441
Total segment net sales 1,292,987 1,398,732 1,460,311
Shipping and handling
revenues 7,038 6,052 10,033
Total net sales $1,300,025 $1,404,784 $1,470,344
Segment profits (losses):
Small Systems $442,195 $459,382 $546,649
Large Systems (16,771) (32,393) 5,143
Other 30,457 22,242 7,590
Total segment profits 455,881 449,231 559,382
Shipping and handling
net costs 21,705 20,777 20,745
Provision for product recall 19,600 -- --
Restructuring charges 7,202 8,606 --
Impairment of assets
held-for-sale 3,203 -- --
Provision for excess
inventory -- 12,370 --
Other indirect operating
expenses 253,224 262,625 329,164
Other income, net 10,889 13,700 23,838
Earnings before income
taxes and cumulative
effect of accounting change $161,836 $158,553 $233,311
Segment depreciation:
Small Systems $17,146 $22,692 $18,517
Large Systems 5,340 8,212 4,885
Other 282 65 77
Total segment depreciation 22,768 30,969 23,479
Corporate 16,897 13,408 8,878
Total depreciation $39,665 $44,377 $32,357
Summary geographic information is as follows:
In thousands 2002 2001 2000
Net sales:
United States $625,447 $731,623 $775,573
North and Latin America
excluding United States 85,158 71,973 65,292
Europe, Middle East, and Africa 372,614 370,483 394,361
Far East 216,906 230,705 235,118
$1,300,125 $1,404,784 $1,470,344
Sales are attributed to geographic regions based on location of customer.
No individual foreign country is material in relation to total net sales.
In thousands 2002 2001 2000
Capital expenditures:
United States $7,395 $15,382 $36,776
Europe 4,119 7,602 13,427
Philippines 1,827 9,237 19,195
Other Far East 4,320 11,671 4,318
Latin America 1,894 3,967 --
$19,555 $47,859 $73,716
Long-lived assets:
United States $176,166 $140,192 $150,929
Europe 84,531 135,363 152,913
Philippines 37,003 51,740 47,798
Other Far East 24,497 21,209 14,533
Latin America 6,056 4,769 --
$328,253 $353,273 $366,173
55
16. Litigation
APC is involved in various claims and legal actions arising in the ordinary
course of business. APC does not believe that the ultimate disposition of these
matters will have a material adverse effect on its consolidated financial
position or results of operations or liquidity.
In addition, on January 10, 2003, Powerware Corporation filed in the United
States District Court for the Eastern District of North Carolina a lawsuit
alleging infringement of three United States patents. We have not yet been
served with the complaint. Powerware Corporation is seeking unspecified damages
and injunctive relief.
17. Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, short term investments, accounts
receivable, short-term debt, accounts payable, and accrued liabilities
approximate their fair values because of the short duration of these
instruments.
18. Commitments
APC has several non-cancelable operating leases, primarily for warehousing and
office space, expiring at various dates through 2011. These leases contain
renewal options for periods ranging from one to nine years and require APC to
pay its proportionate share of utilities, taxes, and insurance. Rent expense
under these leases for 2002, 2001 and 2000 was $8.0 million, $7.7 million, and
$6.7 million, respectively.
Future minimum lease payments under these non-cancelable leases are: 2003 - $6.9
million; 2004 - $5.6 million; 2005 - $4.0 million; 2006 - $2.3 million; 2007 -
$1.9 million; and $5.9 million thereafter.
19. Contingencies
APC has agreements with the Industrial Development Authority of Ireland (IDA)
under which it 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 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. The total cumulative
amounts of capital grant claims submitted and received through December 31, 2002
for the Galway facility were approximately $10.6 million and $10.6 million,
respectively. The total cumulative amount of capital grant claims submitted
through December 31, 2002 for the Castlebar facility was $0.4 million; no
capital grant claims had been received for the Castlebar facility. Under
separate agreements with the IDA, APC receives direct reimbursement of training
costs at its Galway and Castlebar facilities for up to $3,000 and $12,500,
respectively, per new employee hired. The total cumulative amounts of training
grant claims submitted and received through December 31, 2002 for the Galway
facility were approximately $1.2 million and $1.2 million, respectively. The
total cumulative amount of training grant claims submitted and received through
December 31, 2002 for the Castlebar facility were approximately $1.3 million and
$0.8 million, respectively.
In addition, APC executed agreements in 1994 with an unrelated company to
acquire the 280,000 square foot manufacturing and distribution facility
presently occupied for one (1) Irish Pound (equivalent to approximately $1.50).
As additional consideration for the facility, APC assumed a contingent liability
of approximately _4.4 million (US$4.8 million) as part of APC's agreement with
the IDA. The contingent liability is canceled upon successful completion of the
terms of the agreement.
56
20. Quarterly Financial Data (Unaudited)
APC adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, on January 1, 2002. In connection its with adoption of
Statement 142, APC recorded a non-cash charge equal to the goodwill balance
associated with its Large Systems segment of approximately $50 million
(approximately $35 million on an after-tax basis). This charge was recognized
as the cumulative effect of a change in accounting principle net of income
taxes, included in APC's results as of January 1, 2002, and had no effect on
APC's liquidity.
In consideration of guidance issued by the Financial Accounting Standards
Board's Emerging Issues Task Force in Issue No. 00-25, Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products,
Issue No. 00-14, Accounting for Certain Sales Incentives, and Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products), certain customer promotional payments,
rebates and other discounts formerly classified as operating expenses have been
retroactively re-classified as a reduction of revenue. These changes reduced
net sales and also reduced marketing, selling, general and administrative (SG&A)
expenses as shown below, in thousands. This accounting change had no impact on
reported profit from operations, net income or earnings per share for any of the
periods presented.
Increase (decrease) Q1 Q2 Q3 Q4
2002:
Net sales $4,050 $4,245 $8,674 $6,134
SG&A $(4,050) $(4,245) $(8,674) $(6,134)
2001:
Net sales $4,563 $8,556 $5,827 $9,582
SG&A $(4,563) $(8,556) $(5,827) $(9,582)
The following is a summary of quarterly results of operations in thousands
except per share amounts:
Q1 Q2 Q3 Q4
2002
Net sales $296,712 $308,200 $337,143 $357,970
Gross profit $102,301 $117,693 $136,995 $126,718
Earnings before
cumulative effect
of accounting change $16,573 $29,643 $42,015 $28,291
Cumulative effect of
accounting change,
net of income taxes
of $15,459 (Note 8) $34,500 $ -- $ -- $ --
Net income (loss) $(17,927) $29,643 $42,015 $28,291
Basic earnings per share:
Basic earnings
per share before
cumulative effect
of accounting change $0.08 $0.15 $0.21 $0.14
Cumulative effect of
accounting change,
net of tax $(0.17) $ -- $ -- $ --
Basic earnings (loss)
per share $(0.09) $0.15 $0.21 $0.14
Basic weighted average
shares outstanding 195,828 195,918 196,049 196,301
Diluted earnings per share:
Diluted earnings
per share before
cumulative effect
of accounting change $0.08 $0.15 $0.21 $0.14
Cumulative effect of
accounting change,
net of tax $(0.17) $ -- $ -- $ --
Diluted earnings (loss)
per share $(0.09) $0.15 $0.21 $0.14
Diluted weighted average
shares outstanding 197,388 196,917 196,631 197,880
2001
Net sales $355,125 $355,988 $355,116 $338,555
Gross profit $120,426 $134,501 $111,091 $117,871
Net income $27,194 $34,799 $22,295 $29,077
Basic earnings
per share $0.14 $0.18 $0.11 $0.15
Basic weighted average
shares outstanding 195,132 195,176 195,377 195,536
Diluted earnings
per share $0.14 $0.18 $0.11 $0.15
Diluted weighted average
shares outstanding 196,700 197,482 196,522 196,966
57
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
Item 10. Directors of the Registrant
Information with respect to Directors may be found under the caption
"Occupations of Directors" appearing APC's definitive Proxy Statement for the
2003 Annual Meeting of Shareholders. Such information is incorporated herein by
reference.
Our policy governing transactions in our securities by directors, officers and
employees permits our officers, directors and employees to enter into trading
plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as
amended. We have been advised that two members of our Board of Directors, Neil
E. Rassmussen and Emmanuel E. Landsmen, and one executive officer, Donald M.
Muir, have each entered into a trading plan in accordance with Rule 10b5-1. We
anticipate that, as permitted by Rule 10b5-1, some or all of our officers,
directors and employees may establish trading plans in the future. We intend to
disclose the names of executive officers and directors who establish a trading
plan in compliance with Rule 10b5-1 in our future quarterly and annual reports
on Form 10-Q and 10-K filed with the U.S. Securities and Exchange Commission.
However, we undertake no obligation to update or revise the information provided
herein, including for revision or termination of an established trading plan,
other than in such current quarterly and annual reports as required by laws or
regulations.
Item 11. Executive Compensation
The information set forth under the caption "Executive Compensation" appearing
in APC's definitive Proxy Statement for the 2003 Annual Meeting of Shareholders
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Management and Principal Holders of
Voting Securities" appearing in APC's definitive Proxy Statement for the 2003
Annual Meeting of Shareholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Relationships and Related
Transactions" appearing in APC's definitive Proxy Statement for the 2003 Annual
Meeting of Shareholders is incorporated herein by reference.
Item 14. Controls and Procedures
(A) Evaluation of disclosure controls and procedures
Our chief executive officer and our chief financial officer, after evaluating
the effectiveness of APC's "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date
(the "Evaluation Date") within 90 days before the filing date of this annual
report, have concluded that as of the Evaluation Date, our disclosure controls
and procedures were adequate and designed to ensure that material information
relating to us and our consolidated subsidiaries would be made known to them by
others within those entities.
(B) Changes in internal controls
There were no significant changes in our internal controls or, to our knowledge,
in other factors that could significantly affect our internal controls
subsequent to the Evaluation Date.
58
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of Form 10-K
1. Consolidated Financial Statements
APC's consolidated financial statements have been included in Item 8 of this
report.
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Income for each of the three years ended
December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Shareholders' Equity for each of
the three years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
2. Consolidated Financial Statement Schedules
Schedule Page
Number Description Number
II Valuation and Qualifying Accounts and Reserves 67
Schedules other than those listed above have been omitted since they are either
not required or the information required is included in the consolidated
financial statements or the notes thereto.
KPMG LLP's reports with respect to the above listed consolidated financial
statements and consolidated financial statement schedule are included herein on
pages 61 and 62.
59
3. Exhibit Listing
Exhibit
Number Description
3.01 Articles of Organization of APC, as amended
3.02 By-Laws of the Registrant, as amended and
restated
4.01 Shareholder Rights Agreement, dated as of
September 2, 1999, between APC and BankBoston, N.A.
4.02 Stock Purchase Agreement dated as of April 28,
2000, by and among ABL Acquisition Corporation,
Randall R. Amon, Daniel Bryan, William C.
Litsinger III, Jack L. Ottenheimer and Kevin W.
Campion (4.02)
10.01 1987 Stock Option Plan of APC (X)
10.02 Form of Incentive Stock Option Agreement under
APC's 1987 Stock Option Plan (X)
10.03 Form of the Non-Qualified Stock Option Agreement
under APC's 1987 Stock Option Plan (X)
10.04 APC's Employee Stock Ownership Plan Trust
Agreement dated December 30, 1987 (X)
10.05 APC's Employee Stock Ownership Plan dated
December 30, 1987, as amended and restated (X)
10.06 Employment Agreement dated June 16, 1986 between
APC and Rodger B. Dowdell, Jr. (X)
10.07 Unsecured line of credit agreement dated June 29,
1991 between APC and Rhode Island Hospital Trust
National Bank
10.08 Unsecured line of credit agreement dated December
30, 1991 between APC and Fleet National Bank
10.09 Amendment dated December 30, 1992 to Unsecured
line of credit agreement between APC and Fleet
National Bank
10.10 Grant agreement dated February 16, 1994 between
APC and Industrial Development Authority of Ireland
10.11 Contract for Sale dated January 31, 1994 between
APC and Digital Equipment International
10.12 Management Agreement dated January 31, 1994
between APC and Digital Equipment International
10.13 License Agreement dated January 31, 1994 between
APC (Grantor) and Digital Equipment International
(Licensee)
10.14 Grant of Options Agreement dated January 31, 1994
between APC and Digital Equipment International
10.15 Memorandum Agreement dated January 31, 1994
between APC and Digital Equipment International
10.16 1993 Non-Employee Director Stock Option Plan (X)
10.17 Letter Agreement dated June 22, 1995 to amend
loan agreement dated December 30, 1991 by and
between APC and Fleet National Bank
10.18 Letter Agreement dated October 11, 1995 to amend
loan agreement dated December 30, 1991 by and
between APC and Fleet National Bank
10.19 Purchase and Sale Contract dated April 12, 1995
between APC and Trustees of Normac-Billerica
Associates III u/d/t dated October 11, 1979
10.20 American Power Conversion Corporation B.V. Profit
Sharing Scheme dated September 25, 1996 (X)
10.21 1997 Non-Employee Director Stock Option Plan of APC (X)
10.22 Amended and Restated 1997 Stock Option Plan of APC (X)
10.23 1997 Employee Stock Purchase Plan of APC (X)
10.24 Form of Change-in-Control Severance Agreement
dated as of July 5, 2000 entered into by APC with
each of Rodger B. Dowdell, Jr. and Neil E.
Rasmussen. (X) (10.24)
10.25 Form of Change-in-Control Severance Agreement
dated as of July 5, 2000 entered into by APC with
each of Donald M. Muir, Aaron L. Davis, and Peter
A. Rumsey, and dated as of February 7, 2001
entered into by APC with Edward M. Machala. (X) (10.25)
21 Subsidiaries of APC
23 Consent of KPMG LLP
99.1 Certification of Rodger B. Dowdell, Jr., Chief
Executive Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 *
99.2 Certification of Donald M. Muir, Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 *
(X) Indicates a management contract or any compensatory plan, contract or
arrangement.
* APC has the originally signed certificate and will provide it to the U.S.
Securities and Exchange Commission upon request.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Registrant during the quarter
ended December 31, 2002.
60
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Power Conversion Corporation:
We have audited the accompanying consolidated balance sheets of American Power
Conversion Corporation and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of American Power
Conversion Corporation and subsidiaries as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Providence, Rhode Island
February 4, 2003
61
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
American Power Conversion Corporation:
Under date of February 4, 2003, we reported on the consolidated balance sheets
of American Power Conversion Corporation and subsidiaries as of December 31,
2002 and 2001, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2002, which are contained in the annual report on Form
10-K for the year 2002. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related financial
statement schedule listed in Item 15(a)(2). This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Providence, Rhode Island
February 4, 2003
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 26, 2003
By: /s/ Donald M. Muir
Donald M. Muir,
Senior Vice President, Finance and Administration,
Treasurer, and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on the date indicated.
Date: March 26, 2003
By: /s/ Rodger B. Dowdell, Jr.
Rodger B. Dowdell, Jr.,
Chairman, President,
Chief Executive Officer and Director
(principal executive officer)
Date: March 26, 2003
By: /s/ Donald M. Muir
Donald M. Muir,
Senior Vice President, Finance and Administration,
Treasurer, and Chief Financial Officer
(principal financial and accounting officer)
Date: March 26, 2003
/s/ Neil E. Rasmussen
Neil E. Rasmussen,
Senior Vice President, Chief Technology Officer and Director
Date: March 26, 2003
/s/ Emanuel E. Landsman
Emanuel E. Landsman,
Vice President and Director
Date: March 26, 2003
/s/ Ervin F. Lyon
Ervin F. Lyon,
Director
63
SIGNATURES (Cont.)
Date: March 26, 2003
/s/ James D. Gerson
James D. Gerson,
Director
Date: March 26, 2003
/s/ John G. Kassakian
John G. Kassakian,
Director
Date: March 26, 2003
/s/ John F. Keane, Sr.
John F. Keane, Sr.
Director
64
CERTIFICATION
I, Rodger B. Dowdell, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of American Power Conversion
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Rodger B. Dowdell, Jr.
Rodger B. Dowdell, Jr.
Chairman, President and Chief Executive Officer
65
CERTIFICATION
I, Donald M. Muir, certify that:
1. I have reviewed this annual report on Form 10-K of American Power Conversion
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Donald M. Muir
Donald M. Muir
Senior Vice President, Finance and Administration,
Treasurer and Chief Financial Officer
66
Schedule II
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
For the years ended December 31, 2002, 2001 and 2000
Valuation accounts deducted from assets to which they apply:
In thousands Balance at Charged to Write Offs/ Balance
Beginning Costs and Allowances at End
of Year Expenses Taken of Year
Allowance for Doubtful Accounts Receivable:
2002 $18,712 $3,890 $(4,747) $17,855
2001 20,085 4,775 (6,148) 18,712
2000 19,543 2,028 (1,486) 20,085
Inventory Reserve:
2002 $32,850 $10,780 $(6,466) $37,164
2001 20,481 18,015 (5,646) 32,850
2000 17,080 4,632 (1,231) 20,481
Deferred Tax Asset Valuation Allowance:
2002 $1,659 $775 $ -- $2,434
2001 -- 1,659 -- 1,659
2000 -- -- -- --
67
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
Page
Exhibit Number Description No.
3.01**** Articles of Organization of the Registrant, as
amended (3.01)
3.02********** By-Laws of the Registrant, as amended and
restated (3.02)
4.01*********** Shareholder Rights Agreement, dated as of
September 2, 1999, between APC and
BankBoston, N.A. (4.01)
4.02*********** Stock Purchase Agreement dated as of April 28, 2000,
by and among ABL Acquisition Corporation,
Randall R. Amon, Daniel Bryan,
William C. Litsinger III, Jack L. Ottenheimer and
Kevin W. Campion (4.02)
10.01* 1987 Stock Option Plan of the Registrant (10.01) (X)
10.02* Form of Incentive Stock Option Agreement under
the Registrant's 1987 Stock Option Plan (10.02) (X)
10.03* Form of the Non-Qualified Stock Option
Agreement under the Registrant's 1987 Stock
Option Plan (10.03) (X)
10.04* The Registrant's Employee Stock Ownership Plan
Trust Agreement dated December 30, 1987 (10.04) (X)
10.05** The Registrant's Employee Stock Ownership Plan
dated December 30, 1987, as amended and
restated (10.05) (X)
10.06* Employment Agreement dated June 16, 1986
between APC and Rodger B. Dowdell, Jr. (10.07) (X)
10.07** Unsecured line of credit agreement dated
June 29, 1991 between the Registrant and Rhode
Island Hospital Trust National Bank (10.19)
10.08** Unsecured line of credit agreement dated
December 30, 1991 between the Registrant and
Fleet National Bank (10.20)
10.09*** Amendment dated December 30, 1992 to Unsecured
line of credit agreement between the Registrant
and Fleet National Bank (10.13)
10.10*** Grant agreement dated February 16, 1994 between
the Registrant and Industrial Development
Authority of Ireland (10.14)
10.11*** Contract for Sale dated January 31, 1994
between the Registrant and Digital Equipment
International (10.15)
10.12*** Management Agreement dated January 31, 1994
between the Registrant and Digital Equipment
International (10.17)
10.13*** License Agreement dated January 31, 1994
between the Registrant (Grantor) and Digital
Equipment International (Licensee) (10.18)
10.14*** Grant of Options Agreement dated January 31,
1994 between the Registrant and Digital
Equipment International (10.19)
10.15*** Memorandum Agreement dated January 31, 1994
between the Registrant and Digital Equipment
International (10.20)
10.16*** 1993 Non-Employee Director Stock Option
Plan (10.22) (X)
10.17***** Letter Agreement dated June 22, 1995 to amend
loan agreement dated December 30, 1991 by and
between Registrant and Fleet National
Bank (10.1)
10.18****** Letter Agreement dated October 11, 1995 to
amend loan agreement dated December 30, 1991 by
and between Registrant and Fleet National
Bank (10.1)
10.19******* Purchase and Sale Contract dated April 12, 1995
between the Registrant and Trustees of Normac-
Billerica Associates III u/d/t dated
October 11, 1979 (10.19)
10.20******** American Power Conversion Corporation B.V.
Profit Sharing Scheme dated
September 25, 1996 (10.20) (X)
10.21********* 1997 Non-Employee Director Stock Option Plan of
the Registrant (4.4) (X)
10.22************* Amended and Restated 1997 Stock Option Plan of
the Registrant (X)
10.23********* 1997 Employee Stock Purchase Plan of the
Registrant (4.6) (X)
10.24************ Form of Change-in-Control Severance Agreement
dated as of July 5, 2000 entered into by APC
with each of Rodger B. Dowdell, Jr. and
Neil E. Rasmussen. (X) (10.24)
10.25************ Form of Change-in-Control Severance Agreement
dated as of July 5, 2000 entered into by APC
with each of Donald M. Muir, Aaron L. Davis,
and Peter A. Rumsey, and dated as of
February 7, 2001 entered into by APC with
Edward M. Machala. (X) (10.25)
68
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX (CONT.)
Page
Exhibit Number Description No.
21 Subsidiaries of Registrant 70
23 Consent of KPMG LLP 71
99.1************** Certification of Rodger B. Dowdell, Jr., 72
Chief Executive Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2************** Certification of Donald M. Muir, 73
Chief Financial Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* Previously filed as exhibits to APC's Registration Statement on Form S-18
dated July, 1988 (File No. 33-22707-B).
** Previously filed as an exhibit to APC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 and incorporated herein by reference (File
No. 0-17126). The number given in parenthesis indicates the corresponding
exhibit in such Form 10-K.
*** Previously filed as an exhibit (Exhibit No. 22) to APC's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by
reference (File No. 1-12432). The number given in parenthesis indicates the
corresponding exhibit in such Form 10-K.
**** Previously filed as an exhibit to APC's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 and incorporated herein by reference (File
No. 1-12432). The number given in parenthesis indicates the corresponding
exhibit in such Form 10-K.
***** Previously filed as an exhibit to APC's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1995 and incorporated herein by reference
(File No. 1-12432). The number given in parenthesis indicates the corresponding
exhibit in such Form 10-Q.
****** Previously filed as an exhibit to APC's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 1995 and incorporated herein by
reference (File No. 1-12432). The number given in parenthesis indicates the
corresponding exhibit in such Form 10-Q.
******* Previously filed as an exhibit to APC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 and incorporated herein by reference
(File No. 1-12432). The number given in parenthesis indicates the corresponding
exhibit in such Form 10-K.
******** Previously filed as an exhibit to APC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 and incorporated herein by reference
(File No. 1-12432). The number given in parenthesis indicates the corresponding
exhibit in such Form 10-K.
********* Previously filed as exhibits to APC's Registration Statement on Form
S-8 dated July 31, 1997 (File No. 333-32563). The number given in parenthesis
indicates the corresponding exhibit in such Form S-8.
********** 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). The number given in parenthesis indicates the corresponding
exhibit in such Form 10-K.
*********** Previously filed as an exhibit to APC's Current Report on Form 8-K,
dated as of September 3, 1999, which included as Exhibit A the Form of Rights
Certificate, and as Exhibit B the Summary of Rights to Purchase Common Stock,
and incorporated herein by reference (File No. 1-12432). The number given in
parenthesis indicates the corresponding exhibit in such Form 8-K.
************ Previously filed as an exhibit to APC's Registration Statement on
Form S-3 and incorporated herein by reference (File No. 333-43348).
************ Previously filed as an exhibit to APC's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 2000 and incorporated herein by
reference (File No. 1-12432).
************* Previously filed as an exhibit to APC's Definitive Proxy
Statement on Schedule 14A for the fiscal year ended December 31, 2002 dated
April 29, 2002 and incorporated herein by reference.
************** APC has the originally signed certificate and will provide it to
the U.S. Securities and Exchange Commission upon request.
(X) Indicates a management contract or any compensatory plan, contract or
arrangement.
69
Exhibit 21
AMERICAN POWER CONVERSION CORPORATION
Subsidiaries as of December 31, 2002
Place of
Subsidiary Incorporation
APC America, Inc. Delaware
APC Sales & Service Corp. Delaware
American Power Conversion Holdings Inc. Delaware
Systems Enhancement Corporation Missouri
A.B.L. Electronics Corporation Delaware
APC DC Network Solutions Inc. Ohio
APC Foreign Sales Corporation Barbados, W.I.
American Power Conversion Europe S.A.R.L. France
American Power Conversion Corporation (A.P.C.) B.V. The Netherlands
APC Distribution Limited Ireland
APC (EMEA) Limited Ireland
APC Holdings B.V. The Netherlands
APC Deutschland GmbH Germany
American Power Conversion UK Ltd. United Kingdom
American Power Conversion Sweden AB Sweden
APC Benelux B.V. The Netherlands
APC Australia Pty Limited Australia
American Power Conversion Portugal, Ltda. Portugal
American Power Conversion Spain S.L. Spain
American Power Conversion Italia S.R.L. Italy
American Power Conversion France SARL France
Advance Power Elektronics KFT Hungary
APC Korea Corporation Korea
American Power Conversion Hong Kong Limited Hong Kong
(50%; 50% American Power Conversion
Corporation (A.P.C.) B.V.)
American Power Conversion (Phils.), Inc. Philippines
American Power Conversion Land Holdings Inc. Philippines
(40%; 60% Filipino nationals)
APC (Suzhou) Uninterrupted Power Supply Co., Ltd. China
American Power Conversion Singapore Pte Ltd. Singapore
APC International Trade (Shanghai) Co. Ltd. China
American Power Conversion Poland Sp. z.o.o. Poland
American Power Conversion Denmark ApS Denmark
Gutor Electronic GmbH Switzerland
American Power Conversion Dublin Limited Ireland
Silcon (Quingdao) Power Electronics Co. Ltd. China
American Power Conversion Mexico, S.A. de C.V. Mexico
American Power Conversion Uruguay S.A. Uruguay
APC Japan, Inc. Japan
American Power Conversion (India) Private Limited India
American Power Conversion Brasil Ltda. Brazil
American Power Conversion Holdings (UK) Limited United Kingdom
APC DC Network Solutions UK Limited United Kingdom
70
Exhibit 23
ACCOUNTANTS' CONSENT
The Board of Directors
American Power Conversion Corporation:
We consent to incorporation by reference in the registration statements
(Nos. 33-25873, 33-54416, 333-32563, 333-78595, 333-80541, 333-80569 and
333-91994) on Form S-8 of American Power Conversion Corporation of our reports
dated February 4, 2003, relating to the consolidated balance sheets of American
Power Conversion Corporation and subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of income, changes in shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2002, and the related schedule, which reports appear in the 2002
annual report on Form 10-K of American Power Conversion Corporation.
KPMG LLP
Providence, Rhode Island
March 28, 2003
71
Exhibit 99.1
CERTIFICATION
In connection with the Annual Report of American Power Conversion Corporation
(the "Company") on Form 10-K for the period ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Rodger B. Dowdell, Jr., Chairman, President and Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Rodger B. Dowdell, Jr.
Rodger B. Dowdell, Jr.
Chairman, President and Chief Executive Officer
March 26, 2003
The foregoing certification is being furnished solely pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, chapter
63 of title 18, United States Code) and is not being filed as part of a separate
disclosure document.
72
Exhibit 99.2
CERTIFICATION
In connection with the Annual Report of American Power Conversion Corporation
(the "Company") on Form 10-K for the period ending December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Donald M. Muir, Senior Vice President, Finance and Administration, Treasurer
and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Donald M. Muir
Donald M. Muir
Senior Vice President, Finance and Administration,
Treasurer and Chief Financial Officer
March 26, 2003
The foregoing certification is being furnished solely pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter
63 of title 18, United States Code) and is not being filed as part of a separate
disclosure document.
73