AMERICAN POWER CONVERSION CORPORATION - 10-Q Quarterly Report

PART I - CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

In thousands except per share amount

(Unaudited)

ASSETS

	September 26, 2004		December 31, 2003
Current assets:
Cash and cash equivalents	$	166,070	$	252,114
Short term investments (Note 4)	500,405		496,209
Accounts receivable, less allowance for doubtful accounts of $17,435 in 2004 and $18,987 in 2003	308,245		264,718
Inventories:
Raw materials	220,009		185,431
Work-in-process and finished goods	244,766		216,791
Total inventories	464,775		402,222

Prepaid expenses and other current assets	37,752		25,296
Deferred income taxes	59,612		57,638

Total current assets	1,536,859		1,498,197

Property, plant and equipment:
Land, buildings and improvements	69,666		71,206
Machinery and equipment	214,709		207,506
Office equipment, furniture and fixtures	91,200		85,474
Purchased software	40,495		35,074
	416,070		399,260
Less accumulated depreciation and amortization	258,072		235,309
Net property, plant and equipment	157,998		163,951

Long term investments (Note 4)	10,477		58,525
Goodwill (Note 5)	7,179		6,679
Other intangibles, net (Note 5)	42,575		50,292
Deferred income taxes	29,311		25,994
Other assets	2,384		2,328

Total assets	$	1,786,783	$	1,805,966

See accompanying notes to consolidated condensed financial statements.

AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS (CONTINUED)

In thousands except per share amount

(Unaudited)

LIABILITIES AND SHAREHOLDERS’ EQUITY

	September 26, 2004			December 31, 2003
Current liabilities:
Accounts payable	$		132,400	$	102,800
Accrued compensation	42,072			39,366
Accrued sales and marketing programs	41,620			29,947
Accrued warranty (Note 6)	12,482			11,709
Other accrued expenses	35,302			34,146
Deferred revenue	30,762			24,330
Income taxes payable	26,451			38,428

Total current liabilities	321,089			280,726

Deferred tax liability	13,556			14,357

Total liabilities	334,645			295,083

Shareholders’ equity (Notes 7, 8, 9 and 10):
Common stock, $0.01 par value; authorized 450,000 shares in 2004 and 2003; issued 191,261 shares in 2004 and 199,982 shares in 2003	1,913			2,000
Additional paid-in capital	43,102			182,566
Retained earnings	1,404,031			1,326,733
Treasury stock, 250 shares, at cost, in 2003 (Note 8)	—			(1,551			)
Accumulated other comprehensive income	3,092			1,135

Total shareholders’ equity	1,452,138			1,510,883

Total liabilities and shareholders’ equity	$	1,786,783		$		1,805,966

See accompanying notes to consolidated condensed financial statements.

AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

In thousands except earnings per share

(Unaudited)

	Nine months ended				Three months ended
	September 26, 2004		September 28, 2003		September 26, 2004			September 28, 2003

Net sales (Note 11)	$	1,189,085	$	1,034,172	$	441,671		$	393,701

Cost of goods sold	713,785		599,362		264,985			220,817

Gross profit	475,300		434,810		176,686			172,884

Operating expenses:
Marketing, selling, general and administrative	276,455		228,893		95,623			79,969
Research and development	61,611		48,584		21,762			17,777

Total operating expenses	338,066		277,477		117,385			97,746

Operating income	137,234		157,333		59,301			75,138

Other income, net	6,463		7,380		2,475			2,195

Earnings before income taxes	143,697		164,713		61,776			77,333

Income taxes	15,090		45,790		(5,390		)	21,498

Net income	$	128,607	$	118,923	$	67,166		$	55,835

Basic earnings per share	$	0.65	$	0.60	$	0.34		$	0.28

Basic weighted average shares outstanding	198,649		196,900		195,925			197,638

Diluted earnings per share	$	0.63	$	0.59	$	0.34		$	0.28

Diluted weighted average shares outstanding	203,472		200,434		199,208			201,649

See accompanying notes to consolidated condensed financial statements.

AMERICAN POWER CONVERSION CORPORATION AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

In thousands

(Unaudited)

	Nine months ended						Three months ended
	September 26, 2004			September 28, 2003			September 26, 2004			September 28, 2003
*Cash flows from operating activities*
Net income	$	128,607		$	118,923		$	67,166		$	55,835
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment	27,349			26,635			9,055			9,040
Amortization of other intangibles	8,713			8,934			2,916			2,981
Provision for doubtful accounts	(1,090		)	3,920			(1,231		)	2,756
Provision for inventories	17,476			3,100			13,000			1,200
Deferred income taxes	(6,092		)	3,733			4,040			(1,024		)
Other non-cash items, net	2,733			796			918			(346		)
Changes in operating assets and liabilities:
Accounts receivable	(42,437		)	(32,340		)	(35,694		)	(46,196		)
Inventories	(80,029		)	(77,644		)	(21,718		)	(9,657		)
Prepaid expenses and other current assets	(12,456		)	5,670			(8,047		)	4,661
Other assets	(1,552		)	(837		)	(1,355		)	(193		)
Accounts payable	29,600			19,249			6,782			19,396
Accrued expenses	22,740			(11,471		)	17,913			828
Income taxes payable	(9,178		)	87			(17,249		)	14,069
Net cash provided by operating activities	84,384			68,755			36,496			53,350

*Cash flows from investing activities*
Purchases of held-to-maturity securities	(1,859,573		)	(2,271,487		)	(527,269		)	(873,548		)
Maturities of held-to-maturity securities	1,903,425			2,189,494			614,342			822,103
Purchases of available-for-sale securities	—			(598		)	—			(146		)
Maturities of available-for-sale securities	—			13,131			—			13,131
Capital expenditures	(22,959		)	(14,286		)	(10,492		)	(5,251		)
Proceeds from sale of property, plant and equipment	787			—			787			—
Net cash provided by (used in) investing activities	21,680			(83,746		)	77,368			(43,711		)

*Cash flows from financing activities*
Purchases of common stock	(150,000		)	—			(150,000		)	—
Proceeds from issuances of common stock	9,201			23,984			2,345			12,890
Dividends paid on common stock	(51,309		)	(15,826		)	(19,291		)	(15,826		)
Net cash (used in) provided by financing activities	(192,108		)	8,158			(166,946		)	(2,936		)

Net change in cash and cash equivalents	(86,044		)	(6,833		)	(53,082		)	6,703
Cash and cash equivalents at beginning of period	252,114			209,322			219,152			195,786
Cash and cash equivalents at end of period	$	166,070		$	202,489		$	166,070		$	202,489

*Supplemental cash flow disclosures*
Cash paid during the period for:
Income taxes (net of refunds)	$	27,980		$	41,563		$	11,202		$	9,521

See accompanying notes to consolidated condensed financial statements.

In connection with APC’s decision to consolidate its Philippines-based manufacturing operations, APC closed manufacturing facilities located in the Philippines province of Laguna, in Maryland, and also in the U.K. APC marketed its Philippines property with an intent to sell these assets in 2003. However, APC was unable to complete this sale as a result of an unfavorable real estate market. In accordance with the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in the second quarter of 2003 the Philippines building and equipment previously classified as assets held-for-sale were reclassified to held-for-use property, plant, and equipment at their fair values, which aggregated $3.0 million, and depreciation re-commenced. APC sold a building in Maryland to a third party in October 2002. Also, in connection with the closure of a leased facility in the U.K., APC recognized a lease liability during the first quarter of 2002; this lease will expire in 2005.

A summary of the related 2002 restructuring liabilities during the first, second, and third quarters of 2004 and 2003 is outlined below. APC expects all such restructuring liabilities at September 26, 2004 to be fully paid in cash by the end of 2005.

2002 Restructuring Plans

	Restructuring Liabilities at Beginning of Quarter		Total Charges		Non-cash Charges		Cash Payments			Restructuring Liabilities at End of Quarter
					(In thousands)

Third Quarter 2004
Employee terminations	$	25	$	—	$	—	$	—		$	25
Termination of U.K. lease	320		—		—		(91		)	229
	$	345	$	—	$	—	$	(91	)	$	254
Second Quarter 2004
Employee terminations	$	25	$	—	$	—	$	—		$	25
Termination of U.K. lease	320		—		—		—			320
	$	345	$	—	$	—	$	—		$	345
First Quarter 2004
Employee terminations	$	25	$	—	$	—	$	—		$	25
Termination of U.K. lease	414		—		—		(94		)	320
	$	439	$	—	$	—	$	(94	)	$	345

Third Quarter 2003
Employee terminations	$	25	$	—	$	—	$	—		$	25
Termination of U.K. lease	558		—		—		(77		)	481
	$	583	$	—	$	—	$	(77	)	$	506
Second Quarter 2003
Employee terminations	$	25	$	—	$	—	$	—		$	25
Termination of U.K. lease	617		—		—		(59		)	558
	$	642	$	—	$	—	$	(59	)	$	583
First Quarter 2003
Employee terminations	$	25	$	—	$	—	$	—		$	25
Termination of U.K. lease	775		—		—		(158		)	617
	$	800	$	—	$	—	$	(158	)	$	642

4. 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. Held-to-maturity securities are carried at amortized cost. Available-for-sale securities are recorded at fair value with net unrealized gains and losses reported, net of income taxes, in other comprehensive income. Management determines the appropriate classification of securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Securities are classified as held-to-maturity when APC has the positive intent and ability to hold such securities to maturity. There were no sales of investment securities in the third quarters and first nine months of 2004 and 2003.

	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
	(In thousands)
At September 26, 2004

Held-to-maturity
Certificates of deposit	$	162,843	$	—	$	—		$	162,843
Corporate bonds	247,898		28		(1		)	247,925
Municipal bonds and notes	64,701		—		—			64,701
U.S. government agency securities	35,000		—		(94		)	34,906
	510,442		28		(95		)	510,375
Available-for-sale
Equity investments	440		—		—			440

	$	510,882	$	28	$	(95	)	$	510,815
At December 31, 2003

Held-to-maturity
Certificates of deposit	$	209,814	$	—	$	—		$	209,814
Corporate bonds	236,873		237		—			237,110
Municipal bonds and notes	66,607		67		—			66,674
U.S. government agency securities	41,000		5		(16		)	40,989
	554,294		309		(16		)	554,587
Available-for-sale
Equity investments	440		—		—			440

	$	554,734	$	309	$	(16	)	$	555,027

5. Goodwill and Other Intangible Assets

At each of September 26, 2004 and December 31, 2003, goodwill of $7.2 million and $6.7 million, respectively, was associated with the Small Systems segment. Amortized intangible assets were as follows:

Weighted

September 26, 2004

December 31, 2003

Amortized
Intangible
Assets

Average
Amortization
Period

Gross
Carrying
Amount

Accumulated
Amortization

Gross
Carrying
Amount

Accumulated
Amortization

($ in thousands)

Technology

6 years

81,040

42,581

80,043

35,239

Customer lists

5 years

8,900

5,873

8,900

4,864

Tradenames

5 years

3,157

2,068

3,157

1,705

Total amortized intangible assets

6 years

93,097

50,522

92,100

41,808

Aggregate amortization expense related to APC’s other intangible assets for the third quarters of 2004 and 2003 was $2.9 million and $3.0 million, respectively, and for the first nine months of 2004 and 2003 was $8.7 million and $8.9 million, respectively. Estimated aggregated amortization for each of the next five succeeding fiscal years is $11.7 million for 2004, $11.8 million for 2005, $11.8 million for 2006, $9.6 million for 2007, and $5.2 million for 2008. There are no expected residual values related to these intangible assets.

6. Warranty Liability and Product Recall

	Product Warranty Liability at Beginning of Quarter		Accruals for Product Warranties Issued During the Quarter		Adjustments to Accruals for Preexisting Warranties			Warranty Payments			Product Warranty Liability at End of Quarter
					(In thousands)
Third Quarter 2004	$	11,934	$	5,418	$	—		$	(4,870	)	$	12,482
Second Quarter 2004	$	12,001	$	5,001	$	—		$	(5,068	)	$	11,934
First Quarter 2004	$	11,709	$	6,291	$	—		$	(5,999	)	$	12,001

Third Quarter 2003	$	17,577	$	7,342	$	(5,500	)	$	(7,854	)	$	11,565
Second Quarter 2003	$	20,746	$	5,629	$	—		$	(8,798	)	$	17,577
First Quarter 2003	$	27,183	$	6,965	$	—		$	(13,402	)	$	20,746

In early 2003, APC announced a product recall of Back-UPS® CS 350 and 500 models, due to potential safety issues. Prior to announcing the recall, APC 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 were reported. The total number of affected devices 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. In the fourth quarter of 2002, APC accrued a current liability and recognized additional warranty expense, classified in cost of goods sold, of $19.6 million. Based upon repair cost and return rate experience to-date as well as then-current estimates of remaining costs to be incurred, APC projected that aggregate costs for the recall would be less than originally estimated. To reflect this change, cost of goods sold was reduced by $5.5 million in the third quarter of 2003.

As of September 26, 2004, APC had incurred approximately 83% of currently estimated total recall costs. Our estimation of remaining recall costs of $2.4 million, comprised of $0.9 million for the U.S. and $1.5 million for international geographies, continues to be subject to actual return rates and per unit repair costs (which can vary by country) as well as estimates for other recall-related costs expected to be incurred. We expect that future amounts will not differ materially from our current estimates.

7. 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.

	Nine months ended		Three months ended
	September 26, 2004	September 28, 2003	September 26, 2004	September 28, 2003
	(In thousands)
Basic weighted average shares outstanding	198,649	196,900	195,925	197,638
Net effect of dilutive potential common shares outstanding based on the treasury stock method using the average market price	4,823	3,534	3,283	4,011
Diluted weighted average shares outstanding	203,472	200,434	199,208	201,649
Antidilutive potential common shares excluded from the computation above	2,706	3,921	2,996	3,249

8. Shareholders’ Equity

The decrease in paid-in capital during 2004 reflected APC’s third quarter repurchase on the open market of approximately 9.3 million shares of its common stock, at an average price of $16.09 per share totaling $150 million, completing a program approved by APC’s Board of Directors in June 2004. No further repurchases will be made under this program. Such shares have been deemed authorized but not issued. In addition, in March 2004, APC returned its 250,000 treasury shares to an authorized but not issued status. The total decrease in paid-in capital during 2004 was partially offset by the exercise of employee stock options as well as the tax benefit arising from the disposition of option shares by APC employees.

In June 2003, APC’s Board of Directors approved the initiation of a quarterly cash dividend of $0.08 per share of common stock. Dividends of $0.08 per share were declared and paid in each subsequent quarter including in April 2004, payable on June 16, 2004 to shareholders of record as of May 26, 2004. In June 2004, APC’s Board of Directors approved a 25% increase in its quarterly cash dividend raising the payout to $0.10 per share, as well as approved APC’s first quarterly dividend at this new rate, payable on September 16, 2004 to shareholders of record as of August 26, 2004. It is the intention of the Board of Directors to pay a comparable quarterly dividend on a going forward basis contingent upon continued capital availability and a determination that cash dividends continue to be in the best interests of APC and its shareholders.

9. Comprehensive Income

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

	Nine months ended				Three months ended
	September 26, 2004		September 28, 2003		September 26, 2004		September 28, 2003
	(In thousands)
Net income	$	128,607	$	118,923	$	67,166	$	55,835
Other comprehensive income (loss), net of tax:
Change in foreign currency translation adjustment	1,957		742		142		(526		)
Net unrealized gain on investments, net of income taxes	—		54		—		180
Other comprehensive income (loss)	1,957		796		142		(346		)
Comprehensive income	$	130,564	$	119,719	$	67,308	$	55,489

10. Stock-Based Compensation

On June 10, 2004, APC’s shareholders approved APC’s 2004 Long-Term Incentive Plan (LTI Plan), which replaces the 1997 Stock Option Plan. At September 26, 2004, APC had two stock-based compensation plans, the aforementioned 2004 LTI Plan and the 1997 Non-employee Director Stock Option Plan, and an employee stock purchase plan, described more fully in Note 11 of Notes to Consolidated Financial Statements in Item 8 of APC’s Form 10-K for the year ended December 31, 2003. 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 Accounting Principles Board 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:

		Nine months ended						Three months ended
		September 26, 2004			September 28, 2003			September 26, 2004			September 28, 2003
		(In thousands except per share amounts)
Net income	As reported	$	128,607		$	118,923		$	67,166		$	55,835
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	Pro forma	(8,319		)	(16,511		)	(3,368		)	(5,612		)
Net income	Pro forma	$	120,288		$	102,412		$	63,798		$	50,223

Basic earnings per share	As reported	$	0.65		$	0.60		$	0.34		$	0.28
	Pro forma	$	0.61		$	0.52		$	0.33		$	0.25

Diluted earnings per share	As reported	$	0.63		$	0.59		$	0.34		$	0.28
	Pro forma	$	0.59		$	0.51		$	0.32		$	0.25

On October 25, 2004, APC’s Board of Directors approved the award of 927,500 restricted stock units (RSU) under the 2004 LTI Plan. Under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, stock-based employee compensation cost will be reflected in net income for such units beginning in the fourth quarter of 2004. The RSU Awards will vest, and the underlying common stock will concurrently issue, ratably over four years, whereby one-fourth of the shares will vest on each of June 30, 2005, June 30, 2006, June 30, 2007, and June 30, 2008.

11. Operating Segment Information

Basis for presentation

APC operates primarily within one industry consisting of three reportable operating segments by which it manages its business and from which various offerings are commonly combined to develop a total solution for the customer. These efforts primarily incorporate the design, manufacture, and marketing of power protection equipment and related software and accessories for computer, communications, and related equipment. APC’s three segments are: Small Systems, Large Systems, and Other. Each of these segments address global markets. The Small Systems segment develops power solutions for servers and networking equipment commonly used in local area and wide area networks and for personal computers and sensitive electronics; additional accessories and software products are offered to enhance the management of these networks. The Large Systems segment produces large system products and services that provide power and availability solutions for data centers, facilities and communications equipment. The Other segment principally consists of mobile accessories and replacement batteries.

APC measures the profitability of its segments based on gross margin. Segment gross margins exclude certain expenses which are managed outside the reportable segments. Costs excluded from segment profit are operating expenses, primarily consisting of research and development, selling and corporate expenses, and income taxes. In addition, APC’s third quarter 2004 excess inventory provision and third quarter 2003 update to its 2002 product recall provision were not allocated to APC’s operating segments, but rather were classified as indirect operating expenses for segment reporting consistent with APC’s classification for its 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.

During the fourth quarter of 2003, gross margin was determined to be the most reliable and meaningful measure of segment profitability for the purpose of executive management’s allocating resources to and assessing the performance of APC’s operating segments for 2003 and future periods. Prior period amounts have been restated on this basis in accordance with the requirements of Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

Summary operating segment information is as follows:

	Nine months ended					Three months ended
	September 26, 2004		September 28, 2003			September 26, 2004		September 28, 2003
	(In thousands)
Segment net sales
Small Systems	$	919,830	$	813,323		$	343,593	$	313,277
Large Systems	214,458		163,390			78,226		59,800
Other	46,726		51,461			16,820		18,264
Total segment net sales	1,181,014		1,028,174			438,639		391,341
Shipping and handling revenues	8,071		5,998			3,032		2,360
Total net sales	$	1,189,085	$	1,034,172		$	441,671	$	393,701

Segment profits
Small Systems	$	443,841	$	387,033		$	168,551	$	149,382
Large Systems	37,935		33,073			17,425		14,686
Other	29,816		29,491			11,142		10,694
Total segment profits	511,592		449,597			197,118		174,762
Shipping and handling net costs	24,792		20,287			8,932		7,378
Provision for excess inventory	11,500		—			11,500		—
Update to provision for product recall	—		(5,500		)	—		(5,500		)
Other indirect operating expenses	338,066		277,477			117,385		97,746
Other income, net	6,463		7,380			2,475		2,195
Earnings before income taxes	$	143,697	$	164,713		$	61,776	$	77,333

ITEM 2.

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

We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) with a discussion of our business outlook for the remainder of this fiscal year. We also provide a discussion of our Results of Operations for the third quarter and first nine months of 2004 compared to the third quarter and first nine months of 2003. This discussion includes an overview of our operating results and the directions in which we believe our markets, segments, and geographies are moving. We then provide a Liquidity and Financial Resources discussion of the significant changes in our balance sheet during the first nine months of 2004, and cash flows for the third quarter and first nine months of 2004 compared to the third quarter and first nine months of 2003, as well as our contractual obligations and foreign currency activity. This is followed by a discussion of the Critical Accounting Policies that we believe are important to our business operations and understanding of our results of operations. We conclude with information about factors that may affect our future results.

This MD&A should be read in conjunction with the other sections of this report, including “Item 1. Financial Statements” and also our Annual Report on Form 10-K for the year ended December 31, 2003, including “Item 1. Business;” “Item 6. Selected Financial Data;” and “Item 8. Financial Statements and Supplementary Data.”

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

BUSINESS OUTLOOK

We entered 2004 in as strong a competitive and financial position as ever before, and we are leveraging this strength throughout our business. It is evident that APC solutions are resonating with customers across their networks as we experienced growth in our major business segments. Not only have our core UPS offerings grown, but increasingly APC solutions, specifically our InfraStruXure architecture, are being specified for network-critical physical infrastructure (NCPI) requirements. As customers implement adaptable, on-demand information technology (IT) systems, we believe that APC’s products are supporting NCPI needs more quickly and more cost-effectively than ever before.

As we approach the end of 2004, we currently expect growth in our overall annual revenue driven principally by anticipated continued revenue growth in our Small and Large Systems reportable segments. We expect the rate of growth of our Large Systems products to be greater than the growth expected for Small Systems due to the assumed continued success of our overall strategy and the acceptance of our products in specific market segments.

Overall gross margins for 2004 are currently expected to be impacted by a shift in product mix toward the faster-growing, lower-margin Large Systems products. Gross margins, particularly for Small Systems products, are expected to be impacted by price reductions. Gross margin variability could result from changing revenue levels, which are dependent on unit volumes and prices as well as the mix of products sold, unit costs and yield issues associated with production at our factories, currency trends, changing component and commodity costs, excess manufacturing capacity, excess inventory, inventory obsolescence and variations in inventory valuation.

We have dedicated significant efforts to rationalize our overall manufacturing capacity over the past three years and we will continue to plan for future capacity requirements based on the assumed continued acceptance and demand for our products in the specific market segments they were designed to address. We currently expect that capital spending will be between $25 million and $35 million in 2004, compared to $21.6 million in 2003. We expect that most of the capital spending for 2004 will go toward maintaining, upgrading, and expanding current manufacturing capacity, as well as investing to upgrade current hardware and software office technologies. We are also in the process of building product demonstration sites in selected locations around the world in support of our present strategy.

We are committed to sustaining our R&D efforts to meet the future needs of our customers across all segments and potentially expanding into emerging, high-growth areas. We continue to dedicate resources to support our investment in research and development with a primary focus on driving product innovation through increasing engineering efforts. We believe that continued product innovation through development is necessary for our existing products to remain competitive in our markets, as well as to create opportunities from new product introductions, including our InfraStruXure architecture.

We will remain focused on aggressively driving the growth of our network-critical physical infrastructure solutions such as InfraStruXure, which will require sustaining and increasing our operating expense investments in sales and marketing. A primary focus is increasing the awareness of existing and prospective customers, particularly in relation to our InfraStruXure architecture. Overall we are expanding sales and support teams, developing new channels such as manufacturer representatives and engineering contractors, funding our educational efforts through high-level customer and partner events, as well as increasing sales and marketing support of our core reseller channels.

We currently expect our tax rate to be approximately 15% for 2004. This rate includes the effect of a net tax credit in the third quarter of 2004 of approximately $20.8 million associated with the reversal of income tax provisioning resulting from the favorable outcome of recent tax audits by U.S. federal and state taxing authorities. The estimated effective tax rate is based on current tax law and the current expected income. The tax rate may be affected by the jurisdictions in which profits are determined to be earned and taxed, our ability to successfully implement additional tax savings planning opportunities, the outcome of tax audits, and our ability to realize deferred tax assets. We expect our tax rate for the fourth quarter of 2004 to return to levels similar to the first half of 2004. In October 2004, the American Jobs Creation Act of 2004 was enacted. This Act repealed the tax code’s extraterritorial income (ETI) exclusion in response to the World Trade Organization’s challenge that the ETI exclusion was a prohibited tax subsidy. The repeal will be phased in through 2006. The Act replaced the ETI exclusion with a 9% domestic deduction for domestic production activities effective for APC’s 2005 tax year. The Act also provides for an elective tax-favored repatriation of offshore earnings, provided that the dividends are invested in the United States under a properly approved domestic reinvestment plan. The election to apply an 85% dividends-received deduction against cash dividends made by APC’s offshore subsidiaries can be made in either 2004 or 2005. We are currently reviewing the Act to determine its impact on APC.

We are currently a party to various legal proceedings and claims, including a claim alleging patent infringement. As a result of expected costs related to the defense of such matters, we expect 2004 legal costs to exceed 2003 legal costs. We currently do not believe that the ultimate outcome of these legal proceedings and claims will have a material adverse effect on our financial position or overall trends in results of operations. However, litigation is subject to inherent uncertainties, including the risk of an unfavorable outcome, and management’s view of these matters may change in the future. An unfavorable outcome could include monetary damages or, in cases where injunctive relief is sought, an injunction prohibiting certain activities. If an unfavorable outcome were to occur in any specific period, there exists the possibility of a material adverse impact on the results of operations of that period or future periods. We believe that, given our current liquidity and cash and investment balances, even an adverse judgment would not have a material impact on cash and investments or liquidity. We also expect that our administrative spending for 2004 will increase year-over-year in support of our on-going efforts to comply with the provisions of the Sarbanes-Oxley Act of 2002.

On October 25, 2004, APC’s Board of Directors approved the award of 927,500 restricted stock units under the 2004 LTI Plan. Under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, stock-based employee compensation cost will be reflected in net income for such units beginning in the fourth quarter of 2004.

RESULTS OF OPERATIONS COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 26, 2004 AND SEPTEMBER 28, 2003

Revenues

Net sales were $441.7 million for the third quarter of 2004, an increase of 12.2% compared to $393.7 million for the same period in 2003. Net sales for the first nine months of 2004 were $1.189 billion compared to $1.034 billion in 2003, an increase of 15.0%. These increases were attributable to strength in our major product segments, the Small and Large System segments, as well as growth across our major geographies. Demand for information technology hardware continued to be healthy in the third quarter 2004. Our product segment growth was driven by ongoing advancement of our data center initiatives. Management continues to believe our InfraStruXure™ systems are increasingly being specified for network-critical physical infrastructure (NCPI) requirements. Our core uninterruptible power supply (UPS) offerings also contributed solid growth during the third quarter and first nine months of 2004. For further information about revenues by segment, refer to the Segment Results section below.

Revenues by Geography. The following tables summarize our revenues on a geographic basis for the three and nine month periods ended September 26, 2004 and September 28, 2003.

	Three months ended
	September 26, 2004		% of Total		September 28, 2003		% of Total
	($ in millions)
North and Latin America (the Americas)	$	226.1	51.2	%	$	206.1	52.4	%
Europe, the Middle East, and Africa (EMEA)	137.7		31.2	%	117.1		29.7	%
Asia	77.9		17.6	%	70.5		17.9	%
Total Net Sales	$	441.7	100.0	%	$	393.7	100.0	%

	Nine months ended
	September 26, 2004		% of Total		September 28, 2003		% of Total
	($ in millions)
North and Latin America (the Americas)	$	601.1	50.6	%	$	529.1	51.2	%
Europe, the Middle East, and Africa (EMEA)	367.5		30.9	%	316.9		30.6	%
Asia	220.5		18.5	%	188.2		18.2	%
Total Net Sales	$	1,189.1	100.0	%	$	1,034.2	100.0	%

In the third quarter of 2004, net sales of the Americas increased 9.7% over the third quarter of 2003. In the first nine months of 2004, net sales of the Americas increased 13.6% over the first nine months of 2003. Net sales of EMEA increased 17.6% in the third quarter of 2004 over the third quarter of 2003 and increased 16.0% in the first nine months of 2004 over the first nine months of 2003. Net sales of Asia increased 10.5% in the third quarter of 2004 over the third quarter of 2003, and increased 17.2% in the first nine months of 2004 over the first nine months of 2003.

In the third quarter of 2004, on a constant currency basis, EMEA’s net sales increased 12.0% and Asia’s net sales increased 7.6% over the third quarter of 2003. In the first nine months of 2004, on a constant currency basis, EMEA’s net sales increased 9.6% and Asia’s net sales increased 11.4% over the first nine months of 2003. Total third quarter and first nine months 2004 net sales grew 10.0% and 11.9%, respectively, on a constant currency basis over the comparable prior year periods. EMEA’s revenues would have been lower, on a constant currency basis, by $6.6 million in the third quarter of 2004 and by $20.3 million in the first nine months of 2004, principally due to strengthening of the Euro and British pound. Asia’s revenues would have been lower, on a constant currency basis, by $2.0 million in the third quarter of 2004 and by $10.9 million in the first nine months of 2004, principally due to strengthening of the Japanese yen and Australian dollar. In total, the impact of currency exchange rate changes worldwide added $8.6 million and $31.7 million to net sales in the third quarter and first nine months of 2004, respectively. We believe constant currency information is useful for an understanding of our operating results. Revenues on a constant currency basis differ from revenues presented in accordance with accounting principles generally accepted in the United States.

Cost of Goods Sold

Cost of goods sold was $265.0 million or 60.0% of net sales in the third quarter of 2004 compared to $220.8 million or 56.1% of net sales in the third quarter of 2003. Cost of goods sold was $713.8 million or 60.0% of net sales in the first nine months of 2004 compared to $599.4 million or 58.0% of net sales in the first nine months of 2003. Gross margins for the third quarter of 2004 were 40.0% of net sales, approximately 390 basis points lower than in the third quarter of 2003. Gross margins for the first nine months of 2004 were 40.0% of net sales, approximately 200 basis points lower than in the first nine months of 2003. Gross margins in the third quarter and first nine months of 2004 were negatively impacted by pricing actions and, to a lesser extent, product mix shifts, notably within our Small Systems segment toward lower-margin products combined with strong sales growth in our lower-margin Large Systems segment. The downward pressure of these factors was substantially offset by cost reductions, particularly in the Small Systems segment, from declining material costs and select product transitions to low cost manufacturing locations, but not to the extent of prior periods, as well as the favorable pricing impact of a weakening U.S. dollar, particularly in Europe. For further information about gross margins by segment, refer to the Segment Results section below.

Provision for excess inventory. Additionally, third quarter 2004 gross margins included the effects of a $11.5 million incremental charge for excess inventory related to specifically-identified finished goods and raw materials inventories deemed obsolete as the result of recently commenced efforts to reduce the number of unique product offerings in several of our product lines, as well as the result of new product introductions. There were no additional inventory charges, other than APC’s standard provisioning, during the third quarters and first nine months of 2004 and 2003.

Product Recall. In early 2003, we announced a product recall of Back-UPS CS 350 and 500 models, due to potential safety issues. Prior to announcing the recall, APC 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 were reported. The total number of affected devices 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. In the fourth quarter of 2002, APC accrued a current liability and recognized additional warranty expense, classified in cost of goods sold, of $19.6 million. Based upon repair cost and return rate experience to-date as well as then-current estimates of remaining costs to be incurred, APC projected that aggregate costs for the recall would be less than originally estimated. To reflect this change, cost of goods sold was reduced by $5.5 million in the third quarter of 2003. As of September 26, 2004, APC had incurred approximately 83% of currently estimated total recall costs. Our estimation of remaining recall costs of $2.4 million, comprised of $0.9 million for the U.S. and $1.5 million for international geographies, continues to be subject to actual return rates and per unit repair costs (which can vary by country) as well as estimates for other recall-related costs expected to be incurred. We expect that future amounts will not differ materially from our current estimates.

Inventory Reserves. Total inventory reserves at September 26, 2004 were $50.6 million compared to $38.8 million at December 31, 2003. This increase was due primarily to the aforementioned charge for excess inventory as well as 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 11 of Notes to Consolidated Financial Statements in Item 1 of this report for important information regarding APC’s reportable segments)

	Nine months ended					Three months ended
	September 26, 2004		September 28, 2003			September 26, 2004		September 28, 2003
	(In thousands)
Segment net sales
Small Systems	$	919,830	$	813,323		$	343,593	$	313,277
Large Systems	214,458		163,390			78,226		59,800
Other	46,726		51,461			16,820		18,264
Total segment net sales	1,181,014		1,028,174			438,639		391,341
Shipping and handling revenues	8,071		5,998			3,032		2,360
Total net sales	$	1,189,085	$	1,034,172		$	441,671	$	393,701

Segment profits
Small Systems	$	443,841	$	387,033		$	168,551	$	149,382
Large Systems	37,935		33,073			17,425		14,686
Other	29,816		29,491			11,142		10,694
Total segment profits	511,592		449,597			197,118		174,762
Shipping and handling net costs	24,792		20,287			8,932		7,378
Provision for excess inventory	11,500		—			11,500		—
Update to provision for product recall	—		(5,500		)	—		(5,500		)
Other indirect operating expenses	338,066		277,477			117,385		97,746
Other income, net	6,463		7,380			2,475		2,195
Earnings before income taxes	$	143,697	$	164,713		$	61,776	$	77,333

Small Systems. 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, increased in the third quarter of 2004 by 9.7% over the third quarter of 2003, and increased in the first nine months of 2004 by 13.1% over the first nine months of 2003. Solid performance in this segment was driven by strong Smart-UPS® sales. This segment also benefited from strength in NCPI and InfraStruXure related products.

Gross margins for the Small Systems segment increased in the third quarter and first nine months of 2004 from the comparable periods in 2003. The factors favorably influencing the gross margins of this segment included product cost reductions and favorable currency trends. Our Small Systems cost reductions were achieved through a combination of product transitions to low cost manufacturing locations and material cost reductions from our supplier base. Our product cost reductions were driven principally by material cost improvements and favorably impacted gross margins in the Small Systems segment by approximately 280 basis points in the third quarter of 2004 and 340 basis points in the first nine months of 2004. Partially offsetting the favorable product cost and currency trends were the impact of pricing actions and product mix shifts within the segment.

Large Systems. Net sales for products in the Large Systems segment, consisting primarily of three-phase UPS, services, precision cooling products and ancillary products for data centers, facilities, and communication applications, increased in the third quarter of 2004 by 30.8% over the third quarter of 2003, and increased in the first nine months of 2004 by 31.3% over the first nine months of 2003. With approximately 72% of InfraStruXure revenue included in the Large Systems segment, InfraStruXure sales were a major contributor to the year-over-year growth of this segment. On a product level, Symmetra three-phase, the primary power component of an InfraStruXure system, our industrial products, and services were leading growth drivers.

Gross margins for the Large Systems segment decreased in the third quarter and first nine months of 2004 from the comparable prior year levels. This decline was the result of increased costs within our service business, particularly in the U.S. and Europe, as well as increasing material costs on select product lines, including cooling and Silcon products. These increases were partially offset by volume-driven cost improvements on Symmetra 3-phase products. Symmetra’s increasing share of Large Systems revenue further enhanced the favorable impact of these cost improvements.

“Other” Segment. Net sales for products in the Other segment, consisting principally of mobile accessories and replacement batteries, decreased in the third quarter of 2004 by 7.9% from the third quarter of 2003, and decreased in the first nine months of 2004 by 9.2% from the first nine months of 2003. The year-over-year decreases were attributable to softness in mobile accessories, partially offset by growth in replacement batteries.

Gross margins for the Other segment improved in the third quarter and first nine months of 2004 from the comparable prior year levels. Strength in replacement battery sales and product cost reductions drove the year-over-year improvements. These cost reductions favorably impacted gross margins in the Other segment by approximately 240 basis points in the third quarter of 2004 and 390 basis points in the first nine months of 2004.

Operating Expenses

Marketing, Selling, General, and Administrative (SG&A) Expenses. SG&A expenses in the third quarter of 2004 were $95.6 million or 21.7% of net sales compared to $80.0 million or 20.3% of net sales in the third quarter of 2003. SG&A expenses in the first nine months of 2004 were $276.5 million or 23.2% of net sales compared to $228.9 million or 22.1% of net sales in the first nine months of 2003. We continue to support our data center initiatives, with a primary focus on increasing the awareness of our existing and prospective customers, particularly in relation to our InfraStruXure architecture. The increases in total spending in the third quarter and first nine months of 2004 reflected ongoing sales and promotional efforts which involve expanding our sales and support teams, developing new channels such as manufacturer representatives and engineering contractors, and increasing sales and marketing support of our core reseller channels, as well as funding our educational efforts through high-level customer and partner events. Also contributing to the increases in total spending were higher professional service costs in the third quarter and first nine months of 2004 in support of ongoing litigation and Sarbanes-Oxley compliance.

The allowance for bad debts was 5.4% of gross accounts receivable at September 26, 2004 compared to 6.7% at December 31, 2003. Accounts receivable balances outstanding over 60 days represented 13.2% of total receivables at September 26, 2004 compared to 13.5% at December 31, 2003. We continue to experience strong collection performance. Write-offs of uncollectable accounts represent less than 1% of net sales. Commencing in August 2004, we expanded APC’s receivables insurance coverage to include U.S.-based sales. As a result of this increased coverage, in the third quarter of 2004 we were able to reduce our allowance for doubtful accounts by approximately $1.5 million. A majority of international customer balances continue to be covered by receivables insurance.

Research and Development (R&D). R&D expenditures were $21.8 million or 4.9% of net sales in the third quarter of 2004, up from $17.8 million or 4.5% of net sales in the third quarter of 2003. R&D expenditures were $61.6 million or 5.2% of net sales in the first nine months of 2004, up from $48.6 million or 4.7% of net sales in the first nine months of 2003. We continue to commit resources to support our investment in research and development with a primary focus on driving product innovation through increasing engineering efforts. We believe that continued product innovation through development is necessary for our existing products to remain competitive in our markets, as well as creating opportunities from new product introductions. The increases in total R&D spending primarily reflect increased numbers of software and hardware engineers and costs associated with new product development and engineering support.

Other Income, Net and Income Taxes

Other Income, Net. Other income is comprised principally of interest income. Although global interest income for the first nine months of 2004 was lower than the comparable period last year, such income increased in the third quarter of 2004 over the third quarter of 2003 as a result of increasing interest rates and investments in foreign-sourced commercial paper. On a year-to-date basis, the decrease reflected our strategic purchase of additional tax-exempt securities as well as an overall decline in the bond market.

At September 26, 2004, APC had $677.0 million of total cash and investments, down from $806.8 million at December 31, 2003, all of which are stated at fair value. This decrease reflected APC’s third quarter repurchase on the open market of approximately 9.3 million shares of its common stock, at an average price of $16.09 per share totaling $150 million, completing a program approved by APC’s Board of Directors in June 2004. 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 September, 2004, a 100 basis point increase or decrease in interest rates would have resulted in an increase or decrease of approximately $7 million in our annual interest income.

Income Taxes. Our effective income tax rate was approximately -8.7% and 27.8% for the third quarters and 10.5% and 27.8% for the first nine months ended September 26, 2004 and September 28, 2003, respectively. The decrease in 2004 from 2003 was principally attributable to a net tax credit of approximately $20.8 million associated with the reversal of income tax provisioning resulting from the favorable outcome of recent tax audits by U.S. federal and state taxing authorities. In connection with the completion of the examination of its 2000-2002 U.S. federal tax returns, APC adjusted certain income tax related reserves established in prior years due to the expiration of the statute of limitations primarily related to transfer pricing reserves established for the Philippine operations, offset by the additional tax due agreed to as a result of the examination, as well as an upward revision of reserves for years remaining open under the statute of limitations. This revision relates primarily to transfer pricing matters concerning our manufacturing subsidiaries in India and China and our sales subsidiaries in Europe. In addition, APC recorded an additional tax credit to the third quarter tax rate with respect to the reversal of a tax reserve established for potential state taxes. APC prevailed on a 1996-1997 state tax appeal concerning a sales apportionment matter and this, along with the expiration of the statue of limitations for all years through 2000, resulted in this tax credit.

The decrease in our effective tax rate in 2004 from 2003 also reflected tax savings from an increasing portion of taxable earnings anticipated to be generated from APC’s operations in jurisdictions currently having lower income tax rates than the present U.S. statutory income tax rate. This shift resulted partially from our product transitions to lower cost, lower tax, manufacturing locations. APC has tax holidays in China, India, and the Philippines, which reduce or eliminate the income taxes paid in those countries. A substantial portion of APC’s tax holiday in the Philippines expired in the third quarter of 2003. Although this will have the effect of increasing APC’s foreign taxes, APC’s effective income tax rate will remain considerably lower than the U.S. statutory federal corporate tax rate of 35%.

In October 2004, the American Jobs Creation Act of 2004 was enacted. This Act repealed the tax code’s extraterritorial income (ETI) exclusion in response to the World Trade Organization’s challenge that the ETI exclusion was a prohibited tax subsidy. The repeal will be phased in through 2006. The Act replaced the ETI exclusion with a 9% domestic deduction for domestic production activities effective for APC’s 2005 tax year. The Act also provides for an elective tax-favored repatriation of offshore earnings, provided that the dividends are invested in the United States under a properly approved domestic reinvestment plan. The election to apply an 85% dividends-received deduction against cash dividends made by APC’s offshore subsidiaries can be made in either 2004 or 2005. We are currently reviewing the Act to determine its impact on APC.

LIQUIDITY AND FINANCIAL RESOURCES

Working Capital. Working capital at September 26, 2004 was $1.216 billion, substantially unchanged from $1.217 billion at December 31, 2003. APC’s continued positive operating results have allowed us to repurchase on the open market approximately 9.3 million shares of our common stock, at an average price of $16.09 per share totaling $150 million, in the third quarter of 2004, as well as pay a quarterly dividend and continue to internally finance the capital investment, R&D, sales and marketing spending required to expand our operations.

Cash Flows. The following table summarizes our cash flows for the three and nine month periods ended September 26, 2004 and September 28, 2003.

	Nine months ended						Three months ended
	September 26, 2004			September 28, 2003			September 26, 2004			September 28, 2003
	(In thousands)

Net cash provided by operating activities	$	84,384		$	68,755		$	36,496			$	53,350

Net cash provided by (used in) investing activities	21,680			(83,746		)	77,368				(43,711		)

Net cash (used in) provided by financing activities	(192,108		)	8,158			(166,946		)		(2,936		)

Net change in cash and cash equivalents	(86,044		)	(6,833		)	(53,082		)		6,703
Cash and cash equivalents at beginning of period	252,114			209,322			219,152				195,786
Cash and cash equivalents at end of period	$	166,070		$	202,489		$	166,070			$	202,489

Cash Flows from Operating Activities. Our cash flows from operations for the third quarter and first nine months of 2004 reflected higher profit levels as well as the favorable impact of increasing accounts payable and other liabilities, partially offset by increased inventory and higher accounts receivable balances consistent with our strong sales growth.

Cash Flows from Investing Activities. Our investing activities cash flows were used mainly for the purchase of held-to-maturity securities and for capital spending, principally manufacturing and office equipment, purchased software applications, and building improvements. Cash available from operations resulted in net purchases of investments in the third quarter and first nine months of 2004, including the purchase of additional tax-exempt securities. Our investment approach and the composition of our investment portfolio remained relatively constant overall with no investments having maturity dates greater than two years.

Cash Flows from Financing Activities. Our cash flows from financing activities included the aforementioned $150 million stock repurchase during the third quarter of 2004 as well as the payment of common stock dividends of approximately $19.3 million and $15.8 million during the third quarters of 2004 and 2003, respectively, and approximately $51.3 and $15.8 million during the first nine months of 2004 and 2003, respectively. These outflows were partially offset by proceeds from issuances of common stock relating to employee stock plans during each of the periods presented.

Inventories. Worldwide inventories were $464.8 million at September 26, 2004, up from $402.2 million at December 31, 2003. Higher levels of on-hand raw materials and finished goods were required during the first nine months of 2004 to meet increasing current and anticipated demand, particularly InfraStruXure demand, as well as to manage the supply chain requirements associated with continuing transfers of production of a wide range of Small and Large Systems products to and among our low cost manufacturing regions in 2004. In addition, we increased our inventory levels of price-sensitive materials to hedge against the risk of current and anticipated commodity cost trends, as well as to support continuing new product introductions. Despite increasing inventory levels, inventory as a percentage of quarterly net sales was 105% in the third quarter of 2004, down from 115% in the second quarter of 2004, reflecting our strong third quarter 2004 net sales performance.

Provision for excess inventory. Additionally, APC’s third quarter 2004 results included the effects of a $11.5 million incremental charge for excess inventory related to specifically-identified finished goods and raw materials inventories deemed obsolete as the result of recently commenced efforts to reduce the number of unique product offerings in several of our product lines, as well as the result of new product introductions. There were no additional inventory charges, other than APC’s standard provisioning, during the third quarters and first nine months of 2004 and 2003.

Contractual Obligations. Our future contractual obligations have not changed significantly from the amounts reported in our Annual Report on Form 10-K for the year ended December 31, 2003. Our contractual obligations principally include non-cancelable operating leases, primarily for warehousing and office space, which expire at various dates through 2012. 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. APC is not able to determine the aggregate amount of purchase orders that represent contractual obligations for the purchase of goods and services, as such purchase orders may represent authorizations to purchase rather than binding agreements. For the purposes of this disclosure, contractual obligations for the purchase of goods and services are defined as agreements that are enforceable and legally binding on APC and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; the approximate timing of the transaction, and contain no provisions allowing for cancellation without significant penalty. Our purchase orders for raw materials or purchased finished products are based on our current manufacturing needs and/or demand forecasts and are fulfilled by our vendors within short time horizons. We do not have significant agreements for the purchase of raw materials or finished products specifying minimum quantities or set prices that exceed our expected requirements for three months.

Capital Expenditures and Capital Commitments. During the third quarters of 2004 and 2003, our capital expenditures, net of capital grants, amounted to approximately $10.5 million and $5.3 million, respectively. During the first nine months of 2004 and 2003, our capital expenditures, net of capital grants, amounted to approximately $23.0 million and $14.3 million, respectively. Our capital spending consisted primarily of manufacturing and office equipment, purchased software applications, and building improvements. Capital spending in the third quarter and first nine months of 2004 focused on funding additional equipment needs and improving existing factories, principally in the U.S., India, Ireland, the Philippines, and Denmark, as well as continuing investment in information technologies. Substantially all of APC’s net capital expenditures were financed from available operating cash.

We had no material capital commitments during the third quarters and first nine months of 2004 and 2003, or at September 26, 2004 and December 31, 2003.

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 a separate agreement with the IDA, we receive direct reimbursement of a portion of costs of certain projects at our Galway and Castlebar facilities related to the development of software products. This grant may reimburse up to 28% of actual eligible expenditures subject to a maximum of €714,588.

Borrowing Facilities and Financial Commitments. At September 26, 2004 and December 31, 2003, 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%. No borrowings were outstanding under this facility during the third quarters and first nine months of 2004 and 2003, or at September 26, 2004 and December 31, 2003. APC had no significant financial commitments, other than those required in the normal course of business, during the third quarters and first nine months of 2004 and 2003, or at September 26, 2004 and December 31, 2003.

Off-Balance-Sheet Arrangements. APC had no significant off-balance sheet arrangements during the third quarters and first nine months of 2004 and 2003, or at September 26, 2004 and December 31, 2003.

Quarterly Cash Dividends. In June 2003, APC’s Board of Directors approved the initiation of a quarterly cash dividend of $0.08 per share of common stock. Dividends of $0.08 per share were announced and paid in each subsequent quarter including in April 2004 payable on June 16, 2004 to shareholders of record as of May 26, 2004. In June 2004, APC’s Board of Directors approved a 25% increase in its quarterly cash dividend raising the payout to $0.10 per share, as well as approved APC’s first quarterly dividend at this new rate, payable on September 16, 2004 to shareholders of record as of August 26, 2004. In October 2004, APC’s Board of Directors approved a quarterly dividend payable on December 15, 2004 to shareholders of record as of November 24, 2004. It is the intention of the Board of Directors to pay a comparable quarterly dividend on a going forward basis contingent upon continued capital availability and a determination that cash dividends continue to be in the best interests of APC and its shareholders.

Stock Repurchase Program. During the third quarter of 2004, APC repurchased on the open market approximately 9.3 million shares of its common stock, at an average price of $16.09 per share totaling $150 million, completing a program approved by APC’s Board of Directors in June 2004. No further repurchases will be made under this program. The repurchased shares have been deemed authorized but unissued shares. In March 2004, APC also returned its 250,000 treasury shares to an authorized but not issued status.

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

Foreign Currency Activity. We invoice our customers in various currencies. Realized and unrealized transaction gains or losses are included in the results of operations and are measured based upon the effect of changes in exchange rates on the actual or expected amount of functional currency cash flows. Transaction gains and losses were not material to the results of operations in the third quarters and first nine months of 2004 and 2003.

At September 26, 2004, APC’s unhedged foreign currency accounts receivable, by currency, were as follows:

	Foreign Currency	U.S. Dollars
	(In thousands)
European Euros	39,277	$	48,157
Swiss Francs	28,349	$	22,484
Japanese Yen	2,926,085	$	26,464
British Pounds	9,675	$	17,343

APC also had non-trade receivables denominated in European Euros of approximately U.S.$0.9 million, liabilities denominated in various European currencies of approximately U.S.$64.0 million, and liabilities denominated in Japanese Yen of approximately U.S.$13.7 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 American Power Conversion Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.

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

Our critical accounting policies are as follows:

Revenue Recognition

We follow very specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter. In general, revenue is recognized when title has passed at the time of delivery of product for all of our operating segments as stipulated by the delivery terms for the sales transactions. In addition, prior to revenue recognition, we require persuasive evidence of the arrangement, that the price is fixed or determinable, and that collectibility is reasonably assured. 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. 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 (excluding sales orders received via EDI transmission), 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 continue to introduce new products in 2004 and 2005, 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.

Estimating Valuation Allowances and Accrued Liabilities — Allowances for Sales Returns, Doubtful Accounts, Inventory Obsolescence and Product Recall, and Assessment of the Probability of the Outcome of our Current Litigation

Significant management judgments that affect the application of our revenue policy also include estimates of potential future product returns related to current period product revenue. We analyze historical returns, current economic trends, and channel inventories when evaluating the adequacy of the sales returns and other allowances. Significant management judgments and estimates must be made and used in connection with establishing the sales returns and other allowances in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.

We provide limited rights of return to distributors and retailers for our Small Systems product lines. We provide appropriate reserves for returns at the time that related revenue is recognized, based on historical patterns of returns and contractual provisions in accordance with the provisions of Statement of Financial Accounting Standards No. 48, Revenue Recognition When Right of Return Exists, and U.S. Securities and Exchange Commission Staff Accounting Bulletin No. 104. Returns of Large Systems products generally do not occur. Historically, returns have represented 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. Commencing in August 2004, we expanded APC’s receivables insurance coverage to include U.S.-based sales. A majority of international customer balances continue to be covered by receivables insurance. Historically, bad debts have been less than 1% of net sales.

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

In early 2003, we announced a product recall of Back-UPS CS 350 and 500 models, due to potential safety issues. Prior to announcing the recall, APC 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 were reported. The total number of affected devices 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. In the fourth quarter of 2002, APC accrued a current liability and recognized additional warranty expense, classified in cost of goods sold, of $19.6 million. Based upon repair cost and return rate experience to-date as well as then-current estimates of remaining costs to be incurred, APC projected that aggregate costs for the recall would be less than originally estimated. To reflect this change, cost of goods sold was reduced by $5.5 million in the third quarter of 2003. As of September 26, 2004, APC had incurred approximately 83% of currently estimated total recall costs. Our estimation of remaining recall costs of $2.4 million, comprised of $0.9 million for the U.S. and $1.5 million for international geographies, continues to be subject to actual return rates and per unit repair costs (which can vary by country) as well as estimates for other recall-related costs expected to be incurred. Actual return rates may vary significantly among different geographies. The most significant risks associated with our return rate assumptions include varying degrees of product recall regulation by geography as well as varying consumer awareness levels and access to timely recall information. Actual per unit repair cost includes principally transportation costs which will be influenced by the proximity of customer locations to the service center location as well as the priority level of delivery requirements. We expect that actual future amounts will not 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.

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.

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. In October 2004, the American Jobs Creation Act of 2004 was enacted. This Act repealed the tax code’s extraterritorial income (ETI) exclusion in response to the World Trade Organization’s challenge that the ETI exclusion was a prohibited tax subsidy. The repeal will be phased in through 2006. The Act replaced the ETI exclusion with a 9% domestic deduction for domestic production activities effective for APC’s 2005 tax year. The Act also provides for an elective tax-favored repatriation of offshore earnings, provided that the dividends are invested in the United States under a properly approved domestic reinvestment plan. The election to apply an 85% dividends-received deduction against cash dividends made by APC’s offshore subsidiaries can be made in either 2004 or 2005. We are currently reviewing the Act to determine its impact on APC.

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

To the extent we believe that recovery of deferred tax assets is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the consolidated statements of income. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At September 26, 2004 and December 31, 2003, we provided a valuation allowance on certain of our deferred tax assets, primarily consisting of net operating losses generated in 2001 through 2004 for the start up and continuing operations of Brazilian operations, because of uncertainty regarding their realizability. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.

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

The following table summarizes information relating to purchases made by APC of shares of our common stock during the three months ended September 26, 2004.

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
	(in thousands except per share amounts)
June 28, 2004 to July 25, 2004	—	$	—	—	$	150,000
July 26, 2004 to August 22, 2004	6,326	$	15.68	6,326	$	50,678
August 23, 2004 to September 26, 2004	2,987	$	16.95	2.987	$	—
Total	9,313	$	16.09	9,313	$	—

In June, 2004, APC’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to $150 million of APC’s common stock. During the third quarter of 2004, APC repurchased on the open market approximately 9.3 million shares of its common stock, at an average price of $16.09 per share, totaling $150 million. Accordingly, this repurchase plan has been completed and no further repurchases will be made under this program. The repurchased shares have been deemed authorized but unissued shares.

In March 2004, APC returned its 250,000 treasury shares to an authorized but not issued status.

ITEM 6. EXHIBITS

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

Exhibit No. 3.02		By-Laws of APC, as amended and restated, previously filed as an exhibit to APC’s Current Report on Form 8-K, filed on October 29, 2004, and incorporated herein by reference (File No. 1-12432)

Exhibit No. 31.1		Certification of Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

Exhibit No. 31.2		Certification of Donald M. Muir, Chief Financial Officer, pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

Exhibit No. 32.1		Certification of Rodger B. Dowdell, Jr., Chief Executive Officer, pursuant to Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

Exhibit No. 32.2		Certification of Donald M. Muir, Chief Financial Officer, pursuant to Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)

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

Part I - Financial Information:

Item 1.	Consolidated Condensed Financial Statements:
	Consolidated Condensed Balance Sheets - September 26, 2004 and December 31, 2003 (Unaudited)

	Consolidated Condensed Statements of Income - Three Months and Nine Months Ended September 26, 2004 and September 28, 2003 (Unaudited)

	Consolidated Condensed Statements of Cash Flows - Three Months and Nine Months Ended September 26, 2004 and September 28, 2003 (Unaudited)

	Notes to Consolidated Condensed Financial Statements (Unaudited)

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

Part II - Other Information:

Item 1.	Legal Proceedings

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

Item 6.	Exhibits

Signatures

Exhibit Index

		/s/ Donald M. Muir

	Donald M. Muir
	Chief Financial Officer
	(Principal Accounting And Financial Officer)

Exhibit Index

Operating Expenses

RECENTLY ISSUED ACCOUNTING STANDARDS

FACTORS THAT MAY AFFECT FUTURE RESULTS

Exhibit Number		Description

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

3.02		By-Laws of APC, as amended and restated, previously filed as an exhibit to APC’s Current Report on Form 8-K, filed on October 29, 2004, and incorporated herein by reference (File No. 1-12432)

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

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

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

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