QUARTERLY REPORT ON FORM 10-Q
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
_________________________
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 29, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________to_____________
Commission File Number: 1-12432
AMERICAN POWER CONVERSION CORPORATION
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-2722013
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
132 FAIRGROUNDS ROAD, WEST KINGSTON, RHODE ISLAND 02892
401-789-5735
(Address and telephone number of principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports to be
filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES [ X ] NO [ ]
Registrant's Common Stock outstanding, $.01 par value, at May 11, 1998 -
95,381,000 shares
1
FORM 10-Q
March 29, 1998
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
INDEX
Page No.
Part I - Financial Information:
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets -
March 29, 1998 (Unaudited) and December 31, 1997 3 - 4
Consolidated Condensed Statements of Income -
Three Months Ended
March 29, 1998 and March 30, 1997 (Unaudited) 5
Consolidated Condensed Statements of Cash Flows -
Three Months Ended
March 29, 1998 and March 30, 1997 (Unaudited) 6
Notes to Consolidated Condensed Financial Statements
(Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 11
Part II - Other Information:
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
FORM 10-Q
March 29, 1998
PART I - CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
ITEM 1 - FINANCIAL STATEMENTS
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
ASSETS
March 29, December 31,
1998 1997
(Unaudited)
Current assets:
Cash and cash equivalents $287,886 $270,134
Accounts receivable,
less allowance for doubtful accounts of
$13,157 in 1998 and $12,230 in 1997 150,270 131,115
Inventories:
Raw materials 73,997 61,430
Work-in-process and finished goods 56,897 42,741
Total inventories 130,894 104,171
Prepaid expenses and other current assets 15,371 13,305
Deferred income taxes 26,177 21,571
Total current assets 610,598 540,296
Property, plant, and equipment:
Land, buildings and improvements 32,807 31,143
Machinery and equipment 85,999 80,091
Office equipment, furniture, and fixtures 33,199 31,431
Purchased software 9,960 9,584
161,965 152,249
Less accumulated depreciation and amortization 58,979 52,631
Net property, plant, and equipment 102,986 99,618
Other assets 1,297 1,376
Total assets $714,881 $641,290
See accompanying notes to consolidated condensed financial statements.
3
FORM 10-Q
March 29, 1998
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 29, December 31,
1998 1997
(Unaudited)
Current liabilities:
Accounts payable $66,741 $37,068
Accrued expenses 14,899 16,334
Accrued compensation 17,065 16,476
Accrued sales and marketing programs 15,738 15,965
Accrued retirement contributions 8,679 7,446
Income taxes payable 36,812 20,241
Total current liabilities 159,934 113,530
Deferred tax liability 5,721 6,006
Total liabilities 165,655 119,536
Shareholders' equity:
Common stock, $.01 par value;
authorized 200,000 shares; issued 95,459
shares in 1998 and 95,383 shares in 1997 955 954
Additional paid-in capital 56,371 55,626
Retained earnings 493,451 466,725
Treasury stock, 125 shares, at cost (1,551) (1,551)
Total shareholders' equity 549,226 521,754
Total liabilities and shareholders' equity $714,881 $641,290
See accompanying notes to consolidated condensed financial statements.
4
FORM 10-Q
March 29, 1998
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands except earnings per share)
Three months ended
March 29, March 30,
1998 1997
(Unaudited)
Net sales $218,867 $171,989
Cost of goods sold 120,855 95,801
Gross profit 98,012 76,188
Operating expenses:
Marketing, selling, general and administrative 55,367 40,987
Research and development 7,724 4,205
Total operating expenses 63,091 45,192
Operating income 34,921 30,996
Other income (expenses), net 3,534 (375)
Earnings before income taxes 38,455 30,621
Income taxes 11,729 9,646
Net income $26,726 $20,975
Basic earnings per share $ .28 $ .22
Basic weighted average shares outstanding 95,304 94,542
Diluted earnings per share $ .28 $ .22
Diluted weighted average shares outstanding 96,568 95,551
See accompanying notes to consolidated condensed financial statements.
5
FORM 10-Q
March 29, 1998
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended
March 29, March 30,
1998 1997
(Unaudited)
Cash flows from operating activities
Net income $26,726 $20,975
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 6,396 3,902
Provision for doubtful accounts 1,248 973
Deferred income taxes (4,891) (3,321)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (20,403) 1,399
Increase in inventories (26,723) (28,812)
(Increase) decrease in prepaid expenses
and other current assets (2,066) 1,964
Decrease in other assets 31 369
Increase in accounts payable 29,673 13,751
Increase (decrease) in accrued expenses 160 (4,345)
Increase (decrease) in income taxes payable 16,571 (247)
Net cash provided by operating activities 26,722 6,608
Cash flows from investing activities
Capital expenditures, net of capital grants (9,716) (12,792)
Cash acquired in acquisition - 101
Net cash used in investing activities (9,716) (12,691)
Cash flows from financing activities
Proceeds from issuances of common stock 746 3,946
Net cash provided by financing activities 746 3,946
Net increase (decrease) in cash and cash equivalents 17,752 (2,137)
Cash and cash equivalents at beginning of period 270,134 153,234
Cash and cash equivalents at end of period $287,886 $151,097
Supplemental cash flow disclosures
Cash paid during the period for income taxes
(net of refunds) $ - $13,142
See accompanying notes to consolidated condensed financial statements.
6
FORM 10-Q
March 29, 1998
AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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
periods are not necessarily indicative of results to be expected for the full
year.
2. Principles of Consolidation
The consolidated financial statements include the financial statements of
American Power Conversion Corporation and its wholly-owned subsidiaries. All
intercompany accounts and transactions are eliminated in consolidation.
3. Per Share Data
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. Dilutive potential common shares outstanding at March
29, 1998 and March 30, 1997 were approximately 1.3 million and 1.0 million,
respectively.
Potential common shares for which inclusion would have the effect of increasing
diluted earnings per share (i.e., antidilutive) are excluded from the
computation. Antidilutive potential common shares outstanding at March 29, 1998
and March 30, 1997 were approximately 157,000 and 4,000, respectively.
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.
7
FORM 10-Q
March 29, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Revenues
Net sales were $218.9 million for the first quarter of 1998, an increase of
27.3% compared to $172.0 million for the same period in 1997. The increase was
attributable to continued strong demand for the Company's uninterruptible power
supply (UPS) and surge protection products. International net sales (excluding
Canada) in the first quarter of 1998 were up 29% versus the first quarter of
1997, while North American net sales were up 26%.
Cost of Goods Sold
Cost of goods sold was $120.9 million or 55.2% of net sales in the first quarter
of 1998 compared to $95.8 million or 55.7% in the first quarter of 1997. Gross
margins improved by approximately 50 basis points during the first quarter of
1998 over the comparable period in 1997. The improvement was primarily
attributable to continued improvement in margins on lower cost Back-UPSr
products manufactured in the Philippines and the favorable margin impact of a
higher-end product mix resulting from strong growth in Smart-UPSr sales into the
server segment of the power protection market. Total inventory reserves at
March 29, 1998 were $20.1 million compared to $19.3 million at December 31,
1997. 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.
Operating Expenses
Operating expenses include marketing, selling, general and administrative
(SG&A), and research and development expenses.
SG&A expenses were $55.4 million or 25.3 % of net sales for the first quarter of
1998 compared to $41.0 million or 23.8% of net sales for the first quarter of
1997. The increase over last year was due primarily to increased advertising
and promotional costs, as well as costs associated with increased staffing of
sales and other related positions both domestically and internationally. The
allowance for doubtful accounts at March 29, 1998 was 8.1% of accounts
receivable, compared to 8.5% at December 31, 1997. The Company continues to
experience strong collection performance. Accounts receivable balances
outstanding over 60 days represented 11.9% of total receivables at March 29,
1998, up from 6.6% at December 31, 1997, reflecting a higher level of
international receivables with generally longer payment cycles. 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.
Research and development expenses were $7.7 million or 3.5% of net sales and
$4.2 million or 2.4% of net sales for the first quarters of 1998 and 1997,
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), Net and Income Taxes
Other income during the first quarter of 1998 was comprised principally of
interest income, which increased substantially from the comparable period in
1997 due to higher average cash balances available for investment during 1998.
Interest income during the first quarter of 1997 was more than offset by net
8
foreign currency losses primarily related to foreign currency denominated assets
of international subsidiaries for which the U.S. dollar is the functional
currency.
The Company's effective income tax rates were approximately 30.5% and 31.5% for
the quarters ended March 29, 1998 and March 30, 1997, respectively. The
decrease from last year is due to the expected tax savings from an increasing
portion of taxable earnings being generated from the Company's operations in
Ireland, a jurisdiction which currently has a lower income tax rate for
manufacturing companies than the present U.S. statutory income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 29, 1998 was $450.7 million compared to $426.8 million
at December 31, 1997. 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 required to expand its operations.
The Company's cash position increased to $287.9 million at March 29, 1998 from
$270.1 million at December 31, 1997.
Worldwide inventories were $130.9 million at March 29, 1998 compared to $104.2
million at December 31, 1997. The first quarter 1998 inventory build was
primarily related to anticipation of increased demand patterns during the second
half of the year which result from typical seasonal factors. Inventory levels
as a percentage of quarterly sales were 60% in the first quarter of 1998 up from
41% in the fourth quarter of 1997 compared to 93% in the first quarter of 1997
up from 62% in the fourth quarter of 1996.
At March 29, 1998, the Company had $50 million available for future borrowings
under an unsecured line of credit agreement at a floating interest rate equal to
the bank's cost of funds rate plus .625% and an additional $15 million under an
unsecured line of credit agreement with a second bank at a similar interest
rate. No borrowings were outstanding under these facilities at March 29, 1998.
Additionally, the Company had no significant financial commitments, other than
those required in the normal course of business, at March 29, 1998.
Capital investment for the first quarter of 1998 consisted primarily of
manufacturing and office equipment, and buildings and improvements. The nature
and level of capital spending was made to improve manufacturing capabilities and
to support the increased marketing, selling, and administrative efforts
necessitated by the Company's growth. Net capital expenditures were financed
from available operating cash. The Company had no material capital commitments,
other than those required in the normal course of business, at March 29, 1998.
The Company has agreements with the Industrial Development Authority of Ireland
("IDA") under which the Company receives grant monies for costs incurred for
machinery, equipment, and building improvements for its Galway and Castlebar
facilities equal to 40% and 60%, respectively, of such costs up to a maximum of
$13.1 million and $1.3 million, respectively. Such grant monies are subject to
the Company 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 March 29, 1998
for the Galway facility were approximately $9.4 million and $8.3 million,
respectively. The total cumulative amount of capital grant claims submitted
through March 29, 1998 for the Castlebar facility was $1.1 million; no capital
grant claims had been received for the Castlebar facility. Under separate
agreements with the IDA, the Company 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 March 29, 1998 for the Galway
facility were approximately $1.7 million and $1.2 million, respectively. The
total cumulative amount of training grant claims submitted through March 29,
1998 for the Castlebar facility was approximately $0.3 million; no training
grant claims had been received for the Castlebar facility.
During the first quarter of 1998, the Company began establishing a manufacturing
operation in China. The Company is leasing a 50,000 square foot facility in
Suzhou and expects to begin manufacturing selected products at this facility
during the second half of 1998. Capital expenditures for the China expansion
will be financed from operating cash. The Company continues to evaluate
international manufacturing expansion including additional locations in the Far
East and South America.
9
Management believes 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.
Acquisition
On April 27, 1998, the Company entered into a definitive agreement with the
principal management shareholders of Silcon A/S to acquire all of the stock of
Silcon, a Denmark-based manufacturer of three-phase UPSs up to 480 kVA, for DKK
480 million or approximately US$70 million, in cash, as of April 27, 1998 based
on the then current exchange rate. The acquisition will be financed from
operating cash and is targeted for completion in the second quarter of 1998,
subject to certain conditions including the successful completion of a tender
offer for the remaining shares, receipt of applicable European regulatory
authority and third-party approvals, and the conclusion of a satisfactory due
diligence review by the Company. The Company expects a one-time charge against
after-tax earnings of between $0.15 and $0.30 per share in the quarter in which
the transaction closes for the write-off of purchased research and development
expenses.
Foreign Currency Activity
Financial statements for the Company's international subsidiaries for which the
U.S. dollar is the functional currency are remeasured into U.S. dollars using
current rates of exchange for monetary assets and liabilities and historical
rates of exchange for nonmonetary assets. Gains and losses from remeasurement
are included in other income (expenses), net.
The Company invoices its customers in Japan, Great Britain, Germany, and France,
in their respective local currencies. At March 29, 1998 the Company's unhedged
foreign currency accounts receivable, by currency, were as follows:
(In thousands) Foreign Currency U.S. Dollars
Japanese Yen 1,496,950 11,515
British Pounds 3,978 6,696
German Marks 10,705 5,882
French Francs 24,800 4,066
Total gross accounts receivable at March 29, 1998 was approximately $163.4
million. The Company had non-trade receivables of 2.1 million Irish Pounds
(approximately US$3.0 million), as well as Irish Pound denominated liabilities
of 14.6 million (approximately US$20.3 million). The Company also had
liabilities denominated in various European currencies of US$2.6 million, as
well as Yen denominated liabilities of approximately US$1.5 million.
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 arrangements, including foreign exchange contracts. The Company
presently does not utilize rate protection agreements or derivatives
arrangements.
Legal Proceedings
On February 26, 1998, the Company announced that it had reached agreements-in-
principle to settle five purported class action lawsuits that were filed in the
United States District Court for the District of Rhode Island in August 1995
(the "Federal Class Action") and a derivative action lawsuit that was filed in
the Massachusetts Superior Court for Suffolk County in February 1996 (the "State
Derivative Action"). Although the Company believes that the allegations in both
the Federal Class Action and the State Derivative Action are without merit and
has defended the lawsuits vigorously, it concluded that settlement of the
lawsuits on the terms of the settlement agreements was in the Company's best
interests. The entire settlement amount is being borne by the liability
insurance carrier which insures the Company, its directors, and its officers.
10
The settlements of the Federal Class Action and the State Derivative Action were
both contingent upon certain events, including approval by the respective courts
in which the lawsuits were filed. The settlement of the State Derivative Action
has been finally approved by the Massachusetts Superior Court. The settlement
of the Federal Class Action has been preliminarily approved by the United States
District Court for the District of Rhode Island, and a final approval hearing on
that settlement is scheduled to take place in late May. Although there can be
no assurance that the Federal Class Action settlement will be finally approved,
no objections to that settlement have been filed to date. Should the Federal
Class Action settlement not be finally approved for any reason, the Company
intends to defend the lawsuits vigorously. No provision for any liability that
may result from these actions has been recognized in the Company's consolidated
condensed financial statements included herein.
Recently Issued Accounting Standard
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for reporting
information about operating segments in annual and interim financial statements
issued to shareholders. This Statement also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company will adopt this Statement at December 31, 1998 and is currently
studying its provisions.
Factors That May Affect Future Performance
Statements contained in this document that do not describe historical facts may
constitute forward-looking statements. The Company makes such forward-looking
statements under the provisions of the "safe harbor" section of the Private
Securities Litigation Reform Act of 1995. The forward-looking statements
contained herein are based on current expectations, but are subject to a number
of risks and uncertainties which could cause actual results to differ from those
projected. The factors that could cause actual results to differ materially
include the following: the ability of APC to complete the acquisition of Silcon
in a timely and cost effective manner; APC's ability to successfully integrate
Silcon's operations; a variance between the actual and estimated charge for
purchased research and development related to the acquisition of Silcon; the
timely development and acceptance of new products such as the Symmetra Power
Array; ramp up and expansion of manufacturing capacity; 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; inventory risks due to shifts in
market demand; the effects of any other possible acquisitions; component
constraints and shortages; risk of nonpayment of accounts receivable; the
uncertainty of the litigation process including risk of an unexpected,
unfavorable result of current litigation; factors associated with international
operations; risks associated with the Year 2000 issue; and the risks described
from time to time in the Company's filings with the Securities and Exchange
Commission.
11
FORM 10-Q
March 29, 1998
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 26, 1998, the Company announced that it had reached agreements-in-
principle to settle five purported class action lawsuits that were filed in the
United States District Court for the District of Rhode Island in August 1995
(the "Federal Class Action") and a derivative action lawsuit that was filed in
the Massachusetts Superior Court for Suffolk County in February 1996 (the "State
Derivative Action"). Although the Company believes that the allegations in both
the Federal Class Action and the State Derivative Action are without merit and
has defended the lawsuits vigorously, it concluded that settlement of the
lawsuits on the terms of the settlement agreements was in the Company's best
interests. The entire settlement amount is being borne by the liability
insurance carrier which insures the Company, its directors, and its officers.
The settlements of the Federal Class Action and the State Derivative Action were
both contingent upon certain events, including approval by the respective courts
in which the lawsuits were filed. The settlement of the State Derivative Action
has been finally approved by the Massachusetts Superior Court. The settlement
of the Federal Class Action has been preliminarily approved by the United States
District Court for the District of Rhode Island, and a final approval hearing on
that settlement is scheduled to take place in late May. Although there can be
no assurance that the Federal Class Action settlement will be finally approved,
no objections to that settlement have been filed to date. Should the Federal
Class Action settlement not be finally approved for any reason, the Company
intends to defend the lawsuits vigorously. No provision for any liability that
may result from these actions has been recognized in the Company's consolidated
condensed financial statements included herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
Exhibit No. 11 - Computation of Earnings per Share (Page 14)
Exhibit No. 27 - Financial Data Schedule
(B) Reports on Form 8-K
No reports on Form 8-K were filed by American Power Conversion Corporation
during the quarter ended March 29, 1998.
12
FORM 10-Q
March 29, 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN POWER CONVERSION CORPORATION
Date: May 13, 1998
/s/ Donald M. Muir
Donald M. Muir
Chief Financial Officer
(Principal Accounting And Financial Officer)
13
FORM 10-Q
March 29, 1998
EXHIBIT 11
AMERICAN POWER CONVERSION CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(In thousands except for earnings per share)
Three months ended
March 29, March 30,
1998 1997
(Unaudited)
Basic
Net earnings $26,726 $20,975
Basic weighted average shares outstanding 95,304 94,542
Basic earnings per share $ .28 $ .22
Diluted
Net earnings $26,726 $20,975
Basic weighted average shares outstanding 95,304 94,542
Net effect of dilutive potential common shares
outstanding based on the treasury stock
method using the average market price 1,264 1,009
Diluted weighted average shares outstanding 96,568 95,551
Diluted earnings per share $ .28 $ .22
14