UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 401-789-5735
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS 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 [ ]
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON
STOCK, $.01 PAR VALUE, ON MAY 10, 1996 WAS 93,706,938 SHARES.
1
FORM 10-Q
MARCH 31, 1996
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
INDEX
PAGE
NO.
PART I - FINANCIAL INFORMATION:
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS:
CONSOLIDATED CONDENSED BALANCE
SHEETS -MARCH 31, 1996
(UNAUDITED) AND DECEMBER 31, 1995 3,4
UNAUDITED CONSOLIDATED
CONDENSED STATEMENTS OF INCOME
- THREE MONTHS ENDED MARCH 31,
1996 AND 1995 5
UNAUDITED CONSOLIDATED
CONDENSED STATEMENTS OF CASH
FLOWS - THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 6
NOTES TO CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8 - 12
PART II - OTHER INFORMATION:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
2
FORM 10-Q
MARCH 31, 1996
PART I - CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
ITEM 1 - FINANCIAL STATEMENTS
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
1996 1995
(UNAUDITED)
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 67,070,535 $ 39,039,735
ACCOUNTS RECEIVABLE, LESS
ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $8,395,000 IN 1996
AND $6,920,000 IN 1995 73,674,047 71,199,105
INVENTORIES:
RAW MATERIALS 61,605,801 62,495,212
WORK-IN-PROCESS AND
FINISHED GOODS 75,237,351 85,045,841
TOTAL INVENTORIES 136,843,152 147,541,053
PREPAID EXPENSES AND OTHER
CURRENT ASSETS 11,320,895 9,277,986
DEFERRED INCOME TAXES 11,498,000 11,323,000
TOTAL CURRENT ASSETS 300,406,629 278,380,879
PROPERTY, PLANT AND EQUIPMENT:
LAND, BUILDING AND IMPROVEMENTS 16,344,418 15,973,746
MACHINERY AND EQUIPMENT 52,743,983 51,353,043
PURCHASED SOFTWARE 4,124,810 4,160,439
OFFICE EQUIPMENT AND FURNITURE 19,754,861 17,860,365
92,968,072 89,347,593
LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION 24,874,737 22,144,085
NET PROPERTY, PLANT AND EQUIPMENT 68,093,335 67,203,508
OTHER ASSETS 1,170,899 1,003,452
TOTAL ASSETS $369,670,863 $346,587,839
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
3
FORM 10-Q
MARCH 31, 1996
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
1996 1995
(UNAUDITED)
CURRENT LIABILITIES:
ACCOUNTS PAYABLE $ 22,143,660 $ 26,406,283
ACCRUED EXPENSES 8,490,240 5,790,421
ACCRUED COMPENSATION 7,270,167 6,472,255
ACCRUED SALES AND MARKETING PROGRAMS 8,153,828 6,780,595
ACCRUED PENSION CONTRIBUTIONS 2,171,109 4,677,639
INCOME TAXES PAYABLE 7,004,635 1,795,751
TOTAL CURRENT LIABILITIES 55,233,639 51,922,944
DEFERRED INCOME TAX LIABILITY 5,143,000 4,899,000
TOTAL LIABILITIES 60,376,639 56,821,944
SHAREHOLDERS' EQUITY:
COMMON STOCK, $.01 PAR VALUE;
AUTHORIZED 200,000,000 SHARES;
ISSUED AND OUTSTANDING
93,689,791 SHARES IN 1996,
93,270,933 SHARES IN 1995 936,898 932,709
ADDITIONAL PAID-IN CAPITAL 41,434,442 37,122,872
RETAINED EARNINGS 266,922,884 251,710,314
TOTAL SHAREHOLDERS' EQUITY 309,294,224 289,765,895
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $369,670,863 $346,587,839
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
4
FORM 10-Q
MARCH 31, 1996
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1996 1995
Net Sales $141,625,835 $109,203,576
Cost of goods sold 83,440,749 56,612,773
Gross Profit 58,185,086 52,590,803
Operating expenses:
Research and Development 3,719,472 2,749,179
Selling, General and
Administrative 32,297,828 23,023,425
Total Operating Expenses 36,017,300 25,772,604
Operating Income 22,167,786 26,818,199
Other income:
Interest Income 704,079 635,887
Other income 3,705 18,727
Earnings before income taxes 22,875,570 27,472,813
Income Taxes 7,663,000 9,203,000
Net Income $15,212,570 $18,269,813
Earnings per Share $0.16 $0.20
Weighted average shares
outstanding 93,750,447 93,336,733
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
5
FORM 10-Q
MARCH 31, 1996
American Power Conversion Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
MARCH 31, MARCH 31,
1996 1996
Cash flows from operating
activiities:
Net income $15,212,570 $18,269,813
Adjustments to reconcile
net income to net
cash provided by
operating activities:
Depreciation and amortization 2,730,566 2,077,810
Provision for deferred taxes 69,000 (931,000)
Provision for doubtful accounts 1,475,000 515,000
Increase in accounts receivable (3,949,942) (2,386,266)
(Increase) decrease in
inventories 10,697,901 (41,179,127
Increase in prepaid expenses
and other current assets (2,042,909) (1,746,380)
Decrease in recoverable
income taxes - 1,801,217
Increase in other assets (167,447) -
Increase (decrease) in
accounts payable (4,262,623) 21,575,545
Increase (decrease) in
accrued expenses 2,364,434 (1,327,319)
Increase in income taxes
payable 5,208,884 6,010,708
Net cash provided by
operating activities 27,335,434 2,680,001
Cash flows from investing
activities:
Capital expenditures, net
of capital grants (3,620,393) (7,615,744)
Proceeds from sale of
capital equipment - 130,310
Sales and maturities of
short-term investments,
net of gains and losses - 194,831
Purchases of short-term
investments - (802,800)
Net cash used in investing
activities (3,620,393) (8,093,403)
Cash flows from financing
activities:
Issuances of common stock 4,315,759 485,665
Net cash provided by
financing activities 4,315,759 485,665
Net increase (decrease) in
cash and cash equivalents 28,030,800 (4,927,737)
Cash and cash equivalents
at beginning of period 39,039,735 29,072,717
Cash and cash equivalents
at end of period $67,070,535 $24,144,980
The Company paid $2,385,100 and $2,322,100 for income taxes for
the three month periods ended March 31, 1996 and 1995,
respectively. During the first quarter of 1995, changes in
unrealized holding losses on short-term investments resulted in
increases to shareholders' equity and to short-term investments
of $295,000.
SEE ACCOMPANYING NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS
6
FORM 10-Q
MARCH 31, 1996
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) MANAGEMENT REPRESENTATION: In the opinion of management,
the accompanying unaudited interim financial statements contain
all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position and the
results of operations for the interim periods. The results of
operations for the interim period are not necessarily indicative
of results to be expected for the full year.
(2) PRINCIPLES OF CONSOLIDATION: The consolidated
financial statements include the financial statements of American
Power Conversion Corporation and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
(3) PER SHARE DATA: Earnings per common share are based on the
weighted average number of shares of common stock and dilutive
common stock options and warrants outstanding during each period.
Under the treasury stock method, the unexercised options were
assumed to be exercised at the beginning of the period or at
issuance, if later. The assumed proceeds were then used to
purchase common stock at the average market price during the
period. Common stock equivalents whose inclusion would have the
effect of increasing earnings per share (i.e antidilutive) are
excluded from the computation. Primary and fully diluted
earnings per share are equivalent for all periods presented.
(4) SHAREHOLDERS' EQUITY: Changes in paid-in capital for the
periods presented represent the issuances of common stock
resulting from the exercise of employee stock options, as well as
the Company's contributions to the Employee Stock Ownership Plan.
7
FORM 10-Q
MARCH 31, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Revenues
Net sales of $141,625,835 for the first quarter of 1996 increased
29.7% compared to $109,203,576 for the same period in 1995. The
increase is attributable to continued strong worldwide demand for
the Company's products across fast-growing core markets,
including computer networking, internetworking equipment and
point-of-sale devices, as well as what the Company believes is an
increasing awareness by computer users of the consequences of
data loss and hardware damage which can be caused by power
problems. The Company continues to experience increased sales
growth in emerging international markets as international sales
(including Canada) comprised 44% of net sales in the first
quarter of 1996 compared to 41% in the first quarter of 1995.
Cost of Goods Sold
Cost of goods sold was $83,440,749 or 58.9% of net sales in the
first quarter of 1996 compared to $56,612,773 or 51.8% in the
first quarter of 1995. The gross margin erosion from 1995 to
1996 was primarily attributable to several factors, including but
not limited to: a shift in product sales mix from the high-end
Smart-UPS(R) products to the lower margin Smart-UPS v/s products;
increased reserves for excess inventories in light of the on-
going product transition occurring within the Smart-UPS product
family; reduced average selling prices resulting from sales
discounting, particularly relating to the Smart-UPS product
transition; and increased indirect manufacturing costs associated
with additional indirect manufacturing personnel and other costs
incurred to support manufacturing infrastructure expansion and a
transition toward focused factories.
Operating Expenses
Operating expenses include Selling, General and Administrative
and Research and Development expenses.
Selling, General and Administrative expenses increased to
$32,297,828 or 22.8% of net sales for the three month period
ended March 31, 1996 compared to $23,023,425 or 21.1% of net
sales for the same period one year ago. The increase was due
primarily to costs associated with increased advertising and
promotional efforts, as well as costs associated with increased
staffing of sales and other related positions both domestically
and internationally. The allowance for bad debts increased from
8.9% of accounts receivable at December 31, 1995 to 10.2% at
8
March 31, 1996 as a result of additional bad debt provisioning
charged to operating expenses. The Company has experienced and
continues to experience very strong collection performance from
its accounts receivable with balances outstanding over 60 days
representing 6.4% and 5.8% of total receivables at March 31, 1996
and December 31, 1995, respectively. Write-offs of uncollectible
accounts have historically represented less than 1% of total
receivable balances. A majority of international customer
balances are covered by receivables insurance. The increase in
bad debt reserves was primarily attributable to increased
international sales, particularly in regions not covered by the
Company's receivables insurance, as well as a discretionary
increase in the Company's bad debt provision during the first
quarter of 1996 to cover potential exposure in identified
customer accounts.
Research and Development expenses were $3,719,472 or 2.6% of net
sales and $2,749,179 or 2.5% of net sales for the first quarter
of 1996 and 1995, respectively. The increased research and
development spending primarily reflects increased numbers of
software and hardware engineers and costs associated with new
product development and engineering support.
Other Income (Expenses) and Income Taxes
Interest income increased by 10.7% from $635,887 to $704,079 for
the three months ended March 31, 1996 and 1995, respectively.
The increase is primarliy attributable to higher average cash
balances available for investment during the first quarter of
1996 compared to the same period one year ago.
The Company's effective tax rate was approximately 33.5% for
both the periods ended March 31, 1996 and 1995.
9
FORM 10-Q
MARCH 31, 1996
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1996 was $245,172,990 compared to
$226,457,935 at December 31, 1995. The Company has been able to
increase its working capital position as the result of continued
strong operating results and despite internally financing the
capital investment of the expansion of its operations. The
Company's cash position rose approximately $28.1 million, or 72%,
to $67.1 million during the first quarter of 1996.
Worldwide inventories were $136,843,152 at March 31, 1996
compared to $147,541,053 at December 31, 1995. Inventory levels
have decreased as a result of the Company's concerted efforts to
reduce inventory levels as a percentage of sales. Inventory
levels as a percentage of quarterly sales have declined from 104%
in the fourth quarter of 1995 to 97% in the first quarter of
1996. The total inventory reserves at March 31, 1996 were $8.8
million compared to $6.5 million at December 31, 1995. The
increased inventory reserves have been provided primarily to
cover the potential loss exposure that may result from excess
inventories as the demand for second generation products
diminishes. Second generation Smart-UPS represented
approximately 7% of total inventories at March 31, 1996. The
Company's reserve estimate methodology involves quantifying the
total inventory position having potential loss exposure, reduced
by an amount reasonably forecasted to be sold, and adjusting its
interim reserve provisioning to cover the net loss exposure.
During the first quarter of 1996, the Company announced that the
Board of Directors had authorized the repurchase of up to $15
million worth of the Company's outstanding Common Stock. These
purchases of stock will be made from time to time on the open
market as market conditions warrant. The objective of the
repurchase program is to offset potential dilution of earnings
per share which may result from employee stock programs.
Capital investment for the first quarter of 1996 consisted
primarily of manufacturing and office equipment. The nature and
level of capital spending was made to improve manufacturing
capabilities and to support the increased selling, marketing and
administrative efforts necessitated by the Company's significant
growth. Net capital expenditures were financed from available
operating cash. The Company had no material capital commitments
at March 31, 1996.
The Company's Ireland facility is providing manufacturing and
technical support in order to better service the Company's
markets in Europe, the Middle East, Africa and Russia. In
February 1994, the Company executed an agreement with the
Industrial Development Authority of Ireland ("IDA") under which
the Company will receive grant monies equal to 40% of the costs
incurred for machinery, equipment and building improvements for
the Galway facility. The maximum amount attainable under the
agreement is approximately $13.1 million. The grant monies would
be repayable, in whole or in part, should (1) the Company fail to
meet certain employment goals established under the agreement
which are to be achieved over a five year implementation period
and/or (2) the Company discontinues operations in Ireland prior
to the termination of the agreement. The agreement terminates
eight years from the date of the last claim made by the Company
for grant monies. The total cumulative amount of capital grant
10
claims submitted through March 31, 1996 was approximately $9.1
million. The total cumulative amount of capital grants received
through March 31, 1996 amounted to approximately $5.4 million.
Under a separate agreement with the IDA, the Company will also
receive up to $3,000 per new employee hired for the direct
reimbursement of training costs. The total cumulative amount of
training grant claims submitted through March 31, 1996 was
approximately $1.9 million. The total cumulative amount of
training grants received through March 31, 1996 amounted to
approximately $400,000.
The Company continues to investigate potential sites for
manufacturing expansion in international locations. The Company
is establishing a manufacturing operation in the Philippines.
Capital expenditures for the Philippines expansion are estimated
to be $5.0 million for 1996 and will be financed from operating
cash and, if needed, short-term borrowings.
Management believes that current internal cash flows together
with available cash and short-term investments, available credit
facilities or, if needed, the proceeds from the sale of
additional equity, would provide sufficient financing support for
capital spending needs and other working capital requirements for
the foreseeable future. At March 31, 1996, the Company had
available for future borrowings $50 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 $15
million under an unsecured line of credit agreement with a second
bank at a floating interest rate equal to the bank's base rate.
No borrowings were outstanding under these facilities at March
31, 1996. Additionally, the Company has no significant financial
commitments outstanding other than those required in the normal
course of business.
Foreign Currency Activity
During the fourth quarter of 1994, the Company began invoicing
its customers in Great Britain, France and Germany in their
respective local 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 during the first quarter of 1996 and 1995.
At March 31, 1996, the Company's unhedged foreign currency
accounts receivable, by currency, were as follows:
British Pounds - 3,232,000 (approx. US$4,933,000)
French Francs - 12,066,000 (approx. US$2,389,000)
German Marks - 4,981,000 (approx. US$3,365,000)
Total gross accounts receivable at March 31, 1996 was
approximately $82,069,000. The Company had non-trade receivables
of 3,090,000 Irish Pounds (approximately US$5,187,000), as well
as Irish Pound denominated liabilities of 4,057,000
(approximately US$6,543,000). The Company also had liabilities
denominated in various European currencies of US$1,047,000.
The Company continually reviews its foreign exchange exposure and
considers various risk management techniques including the
netting of foreign currency receipts and disbursements, rate
protection agreements with customers/vendors and derivatives
11
arrangements, including foreign exchange contracts. The Company
presently does not utilize rate protection agreements or
derivatives arrangements.
The Company's rationale for not hedging its foreign currency risk
exposure through derivatives arrangements is based on the
assessment that the net foreign currency position was not
material to the financial condition or results of operations of
the Company at March 31, 1996 and, to a lesser degree, an
assessment that the risk of loss from exchange rate fluctuations
was not material based upon available forecasts of short-term
exchange rate movements for the currencies noted above.
Legal Proceedings
As initially reported in Report on Form 10-Q for the quarter
ended June 30, 1995, several purported class action lawsuits were
filed in the United States District Court for the District of
Rhode Island in which the Company was named as a defendant, along
with certain of its officers. The lawsuits relate to disclosures
made by the Company in its public filings and press releases and
assert violations of federal securities laws. The plaintiffs
seek unspecified damages, interest, costs and fees. In mid-
February 1996, a derivative lawsuit was filed by two shareholders
on behalf and for the benefit of the Company against certain
present and former officers and/or directors of the Company in
the Superior Court of Suffolk County, Massachusetts. The Company
was also named as a nominal defendant. The derivative action
plaintiffs allege that the individual defendants in that case
traded in the stock of the Company allegedly in breach of their
fiduciary duty to the Company. It is possible that other claims
may be made against the Company in these actions or that related
allegations could be made that could give rise to other
consequences. The Company intends to defend these lawsuits
vigorously and any similar lawsuits that may be filed; however,
the ultimate outcome of these matters cannot yet be determined.
No provision for any liability that may result from the actions
has been recognized in the consolidated condensed financial
statements included in Item 1 of this Report.
Factors That May Affect Future Performance
This document contains forward-looking statements based on
current expectations that involve a number of risks and
uncertainties. The factors that could cause actual results to
differ materially include the following: general economic
conditions and growth rates in the power protection industry and
related industries, including but not limited to the PC, server
and networking industries; competitive factors and pricing
pressures; changes in product mix; changes in the seasonality of
demand patterns; the timely development and acceptance of new
products; inventory risks due to shifts in market demand;
component constraints and shortages; risk of nonpayment of
accounts receivable; ramp-up and expansion of manufacturing
capacity and the risks described from time to time in the
Company's filings with the Securities and Exchange Commission.
12
FORM 10-Q
MARCH 31, 1996
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8 - K
(A) EXHIBITS:
EXHIBIT NO. 11 - COMPUTATION OF EARNINGS PER SHARE (PAGE 15)
EXHIBIT NO. 27 - FINANCIAL DATA SCHEDULE
(B) REPORTS ON FORM 8-K
NO REPORT ON FORM 8-K WAS FILED BY AMERICAN POWER CONVERSION
CORPORATION DURING THE QUARTER ENDED MARCH 31, 1996.
13
FORM 10-Q
MARCH 31, 1996
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT
OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
AMERICAN POWER CONVERSION CORPORATION
/s/ Donald M. Muir
-------------------------------
Date: May 13, 1996
Donald M. Muir
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING AND FINANCIAL OFFICER)
14