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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
COMMISSION FILE NUMBER 1-10863
YORK INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3473472
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
631 SOUTH RICHLAND AVENUE, YORK, PA 17403
(717) 771-7890
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 6, 2004
----- --------------------------
Common Stock, par value $.005 41,330,025 shares
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - (unaudited)
Three Months Ended March 31, 2004 and 2003 3
Consolidated Condensed Balance Sheets -
March 31, 2004 (unaudited) and December 31, 2003 4
Consolidated Condensed Statements of Cash Flows - (unaudited)
Three Months Ended March 31, 2004 and 2003 5
Supplemental Notes to Consolidated Condensed
Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
2
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Statements of Operations (unaudited)
(in thousands, except per share data)
THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ---------
Net sales:
Products $ 833,718 $ 769,042
Services 105,649 99,315
--------- ---------
Net sales 939,367 868,357
Cost of goods sold:
Products (678,584) (627,205)
Services (89,727) (81,052)
--------- ---------
Cost of goods sold (768,311) (708,257)
--------- ---------
Gross profit 171,056 160,100
Selling, general, and administrative expenses (166,181) (149,032)
Restructuring and other charges, net -- (16,094)
--------- ---------
Income (loss) from operations 4,875 (5,026)
Interest expense, net (10,861) (12,016)
Equity in earnings of affiliates 492 1,088
--------- ---------
Loss before income taxes (5,494) (15,954)
Benefit from income taxes 1,291 2,318
--------- ---------
Net loss $ (4,203) $ (13,636)
========= =========
Basic and diluted net loss per share $ (0.10) $ (0.34)
========= =========
Cash dividends per share $ 0.20 $ 0.15
========= =========
Basic and diluted weighted average common shares
and common equivalents outstanding 40,607 39,623
See accompanying supplemental notes to consolidated condensed financial
statements.
3
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(in thousands)
MARCH 31, 2004 DECEMBER 31,
(UNAUDITED) 2003
-------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 52,931 $ 49,650
Receivables, net 614,894 638,510
Inventories:
Raw material 140,680 138,108
Work in progress 159,217 147,094
Finished goods 258,482 227,512
-------------- ------------
Total inventories 558,379 512,714
Prepayments and other current assets 133,959 129,921
-------------- ------------
Total current assets 1,360,163 1,330,795
Deferred income taxes 101,058 107,566
Investments in affiliates 28,335 28,200
Property, plant and equipment, net 535,625 541,118
Goodwill 526,278 529,182
Intangibles, net 35,587 36,744
Deferred charges and other assets 101,963 99,530
-------------- ------------
Total assets $ 2,689,009 $ 2,673,135
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 15,070 $ 30,755
Accounts payable and accrued expenses 891,976 899,093
Income taxes 27,639 38,453
-------------- ------------
Total current liabilities 934,685 968,301
Long-term warranties 48,288 46,888
Long-term debt 646,147 582,027
Postretirement and postemployment benefits 243,045 249,912
Other long-term liabilities 49,854 49,607
-------------- ------------
Total liabilities 1,922,019 1,896,735
Stockholders' equity 766,990 776,400
-------------- ------------
Total liabilities and stockholders' equity $ 2,689,009 $ 2,673,135
============== ============
See accompanying supplemental notes to consolidated condensed financial
statements.
4
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (unaudited)
(in thousands)
THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ---------
Cash flows from operating activities:
Net loss $ (4,203) $ (13,636)
Adjustments to reconcile net loss to net
cash (used) provided by operating activities:
Depreciation and amortization of property, plant and
equipment 17,435 16,326
Amortization of deferred charges and intangibles 790 882
Provision for doubtful receivables 3,673 2,859
Effect of non-cash charges -- 15,234
Deferred income taxes 2,145 6,829
Loss on sale of fixed assets 420 262
Other 1,866 (869)
Change in assets and liabilities net of effects from
acquisitions and divestitures:
Receivables, net 20,997 18,951
Inventories (48,163) (31,764)
Prepayments and other current assets (1,053) (18,180)
Accounts payable and accrued expenses (1,058) 16,069
Income taxes (10,715) (5,461)
Other long-term assets and liabilities (444) 2,250
--------- ---------
Net cash (used) provided by operating activities (18,310) 9,752
--------- ---------
Cash flows from investing activities:
Purchases of other companies, net of cash acquired (728) (325)
Capital expenditures (17,780) (15,191)
Proceeds from sale of fixed assets 865 95
--------- ---------
Net cash used by investing activities (17,643) (15,421)
--------- ---------
Cash flows from financing activities:
Net (payments of) proceeds from short-term debt (12,714) 990
Proceeds from credit agreement -- 95,000
Payment of senior notes -- (100,000)
Net proceeds from other long-term debt 59,470 3,394
Reduction in sale of receivables (5,000) (31,000)
Common stock issued 5,843 94
Treasury stock purchases -- (5)
Dividends paid (8,206) (5,948)
--------- ---------
Net cash provided (used) by financing activities 39,393 (37,475)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (159) (91)
--------- ---------
Net increase (decrease) in cash and cash equivalents 3,281 (43,235)
Cash and cash equivalents at beginning of period 49,650 92,940
--------- ---------
Cash and cash equivalents at end of period $ 52,931 $ 49,705
========= =========
See accompanying supplemental notes to consolidated condensed financial
statements.
5
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Supplemental Notes To Consolidated Condensed Financial Statements (unaudited)
(1) FINANCIAL STATEMENTS
The consolidated condensed financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission, and certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. We believe that the information presented is not
misleading and the disclosures are adequate. In our opinion, the
consolidated condensed financial statements contain all adjustments
necessary to present fairly our financial position as of March 31, 2004
and December 31, 2003 and results of operations and cash flows for the
three months ended March 31, 2004 and 2003. Our results of operations for
interim periods are not necessarily indicative of results expected for the
full year.
Certain reclassifications have been made to the 2003 consolidated
condensed financial statements to conform to the 2004 presentation.
(2) STOCK-BASED COMPENSATION
We apply the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for our stock-based
compensation plans. Accordingly, no compensation expense has been
recognized for our stock-based compensation plans other than for
restricted stock and performance-based awards. Had compensation expense
for all stock and employee stock purchase plans been determined based upon
the fair value at the grant date for awards under these plans consistent
with the methodology prescribed under Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as
amended, our net loss and loss per share would have been adjusted to the
pro forma amounts as follows (in thousands, except per share data):
THREE MONTHS ENDED MARCH 31,
2004 2003
-------- --------
Net loss - as reported $ (4,203) $(13,636)
Add: Stock-based employee compensation expense included in reported
net loss, net of related tax effects 306 22
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (1,100) (2,190)
-------- --------
Pro forma net loss $ (4,997) $(15,804)
======== ========
Basic and diluted loss per share:
As reported $ (0.10) $ (0.34)
Pro forma (0.12) (0.40)
Since the determination of fair value of all stock options granted
includes variable factors, including volatility, and additional stock
option grants are expected to be made each year, the above pro forma
disclosures are not representative of pro forma effects on reported net
income and earnings per share for future years.
(3) RECEIVABLES, NET
Pursuant to the terms of an annually renewable revolving facility, we sell
certain of our trade receivables to a wholly-owned, consolidated
subsidiary, York Receivables Funding LLC (YRFLLC). In turn, YRFLLC sells,
on a revolving basis, an undivided ownership interest in the purchased
trade receivables to bank-administered asset-backed commercial paper
vehicles. In April 2003, we amended the facility, reducing it from $175
million to $150 million.
6
We continue to service sold trade receivables. No servicing asset or
liability has been recognized as our cost to service sold trade
receivables approximates the servicing income.
In accordance with the facility, YRFLLC has sold $145 million and $150
million of an undivided interest in trade receivables as of March 31, 2004
and December 31, 2003, respectively. The proceeds from the sale were
reflected as a reduction of net receivables in our consolidated condensed
balance sheets as of March 31, 2004 and December 31, 2003. The discount
rate on trade receivables sold was 1.04% and 1.12% as of March 31, 2004
and December 31, 2003, respectively.
(4) GOODWILL
The changes in the carrying amount of goodwill for the three months ended
March 31, 2004 by segment are as follows (in thousands):
NET FOREIGN
BALANCE AS OF GOODWILL CURRENCY BALANCE AS OF
DEC. 31, 2003 ACQUIRED FLUCTUATION MARCH 31, 2004
------------- -------- ----------- --------------
Global Applied:
Americas $ 92,949 $ -- $ (32) $ 92,917
Europe, Middle East and Africa 130,166 403 (3,348) 127,221
Asia 109,314 -- 73 109,387
------------- -------- ----------- --------------
332,429 403 (3,307) 329,525
Unitary Products Group 140,440 -- -- 140,440
Bristol Compressors 56,313 -- -- 56,313
------------- -------- ----------- --------------
$ 529,182 $ 403 $ (3,307) $ 526,278
============= ======== =========== ==============
(5) INTANGIBLES, NET
The following table summarizes the major intangible asset classes subject
to amortization included in our consolidated condensed balance sheets as
of March 31, 2004 and December 31, 2003 (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING
March 31, 2004 AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
Trade names and trademarks $ 40,965 $ 6,908 $ 34,057
Other 2,567 1,037 1,530
-------------- ------------ ------------
$ 43,532 $ 7,945 $ 35,587
============== ============ ============
December 31, 2003
Trade names and trademarks $ 42,028 $ 6,723 $ 35,305
Other 2,536 1,097 1,439
-------------- ------------ ------------
$ 44,564 $ 7,820 $ 36,744
============== ============ ============
Amortization expense for trade names and trademarks and other intangible
assets for the three months ended March 31, 2004 and 2003 was $0.4 million
and $0.5 million, respectively.
7
The following table estimates the amount of amortization expense for trade
names and trademarks and other intangible assets for the remainder of 2004
and each of the fiscal years indicated (in thousands):
2004 (April 1 - December 31) $ 1,156
2005 1,583
2006 1,583
2007 1,483
2008 1,483
Thereafter 28,299
------------
$ 35,587
============
(6) NOTES PAYABLE AND LONG-TERM DEBT
As of March 31, 2004 and December 31, 2003, our indebtedness consisted of
senior notes and various other bank and term loans. In March 2003 and
2004, we amended our Five Year Credit Agreement and renewed our 364-Day
Credit Agreement, respectively. We have a $400 million Five Year Credit
Agreement, which expires on May 29, 2006, and a $200 million 364-Day
Credit Agreement, which expires on March 11, 2005 (collectively, the
Agreements). No amounts were outstanding under the Agreements as of March
31, 2004 and December 31, 2003.
The $400 million Five Year Credit Agreement provides for borrowings at the
London InterBank Offering Rate (LIBOR) plus 1.175% and the $200 million
364-Day Credit Agreement provides for borrowings at LIBOR plus 0.85%. We
pay annual fees of 0.2% on the $400 million facility and 0.15% on the $200
million facility. The Agreements allow for borrowings at specified bid
rates. As of March 31, 2004 and December 31, 2003, the three-month LIBOR
rate was 1.1% and 1.14%, respectively. The Agreements contain financial
covenants requiring us to maintain certain financial ratios and standard
provisions limiting leverage and liens. We were in compliance with these
financial covenants as of March 31, 2004 and December 31, 2003.
We have domestic bank lines that provide for total borrowings of up to
$150 million and $135 million as of March 31, 2004 and December 31, 2003,
respectively. As of March 31, 2004 and December 31, 2003, $91.5 million
and $25 million, respectively, were outstanding under the domestic bank
lines.
In October and December 2003, we issued Danish denominated retail notes of
DKK 200 million and DKK 50 million, respectively. These notes are due in
October 2004 and have a coupon rate of 2%. Both the domestic bank lines
and the Danish retail notes are classified as long-term as they are
supported by our $400 million Five Year Credit Agreement.
Our non-U.S. subsidiaries maintain bank credit facilities in various
currencies that provide for total borrowings of $390.8 million and $355.2
million as of March 31, 2004 and December 31, 2003, respectively. As of
March 31, 2004 and December 31, 2003, $11.7 million and $27.8 million,
respectively, were outstanding under the non-U.S. facilities, with
remaining availability of $264.1 million and $246.3 million, respectively,
after bank guarantees and letters of credit usage.
8
Notes payable and long-term debt consist of (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Notes payable and current portion of long-term debt:
Bank loans (primarily foreign currency) $ 11,730 $ 27,784
Current portion of long-term debt 3,340 2,971
--------- ------------
Total $ 15,070 $ 30,755
========= ============
Long-term debt:
Domestic bank lines at an average rate of 1.78% in 2004
and 1.58% in 2003 $ 91,500 $ 25,000
Danish retail notes, 2% interest, due October 2004 40,675 41,844
Senior notes, 6.625% interest, due August 2006 200,000 200,000
Senior notes, 6.7% interest, due June 2008 200,000 200,000
Senior notes, 5.8% interest, due November 2012 100,000 100,000
Other (primarily foreign bank loans) at an
average rate of 6.17% in 2004 and 6.3% in 2003 17,312 18,154
--------- ------------
Total 649,487 584,998
Less current portion (3,340) (2,971)
--------- ------------
Noncurrent portion $ 646,147 $ 582,027
========= ============
(7) POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
PENSION PLANS
Effective January 1, 2004, we replaced our defined benefit pension plans
for U.S. salaried non-bargaining and certain U.S. salaried bargaining
employees with a new defined contribution plan.
Net periodic benefit cost includes the following components (in
thousands):
THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ----------
Components of net periodic benefit cost:
Service cost $ 3,226 $ 5,805
Interest cost 8,452 9,154
Expected return on plan assets, income (10,262) (10,279)
Amortization of prior service cost 572 969
Amortization of net loss 668 475
Settlement 1,049 --
--------- ----------
Net periodic benefit cost $ 3,705 $ 6,124
========= ==========
We previously disclosed in our consolidated financial statements for the
year ended December 31, 2003 that we expected to contribute $14.3 million
to our pension plans in 2004. As of March 31, 2004, $7.5 million of
contributions have been made. We currently anticipate contributing an
additional $6.4 million to fund our plans in 2004 for a total of $13.9
million.
9
DEFINED CONTRIBUTION PLANS
Effective January 1, 2004, certain U.S. employees participate in our new
defined contribution plan. We contribute a cash amount to the plan on an
annual basis, based on employees' eligible earnings, vesting service, and
age. We recorded expense of approximately $2.8 million related to the plan
in the three months ended March 31, 2004.
Certain employees participate in various other investment plans. Under the
plans, the employees may voluntarily contribute a percentage of their
compensation. We contribute a cash amount based on the participants'
contributions. Our contributions to plans were approximately $0.8 million
and $0.3 million in the three months ended March 31, 2004 and 2003,
respectively. We recorded expense of approximately $1.0 million and $0.4
million related to the plans in the three months ended March 31, 2004 and
2003, respectively.
POSTRETIREMENT HEALTH AND LIFE INSURANCE PLANS
Net periodic benefit cost includes the following components (in
thousands):
THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ----------
Components of net periodic benefit cost:
Service cost $ 354 $ 414
Interest cost 2,061 1,919
Amortization of prior service cost (1,360) (562)
Amortization of net loss 1,100 745
--------- ----------
Net periodic benefit cost $ 2,155 $ 2,516
========= ==========
We previously disclosed in our consolidated financial statements for the
year ended December 31, 2003 that we expected to contribute $7.4 million
to our postretirement health and life insurance plans in 2004. As of March
31, 2004, $2.3 million of contributions have been made. We currently
anticipate contributing an additional $5.4 million to fund our plans in
2004 for a total of $7.7 million.
(8) GUARANTEES
We issue various types of guarantees in the normal course of business. As
of March 31, 2004, we have the following guarantees outstanding (in
thousands):
Standby letters of credit and surety bonds $ 108,380
Performance guarantees 171,976
Commercial letters of credit 8,043
Guarantee of affiliate debt 30,000
Changes in our warranty liabilities for the three months ended March 31,
2004 are as follows (in thousands):
BALANCE PAYMENTS ACCRUALS FOR BALANCE
AS OF MADE UNDER WARRANTIES AS OF
DEC. 31, 2003 WARRANTIES ISSUED MARCH 31, 2004
- ------------- ---------- ------------ --------------
$ 101,675 $ 17,592 $ 18,600 $ 102,683
Warranties include standard warranties and extended warranty contracts
sold to customers to increase the warranty period beyond the standard
period. Extended warranty contracts sold are reflected as accruals for
warranties issued and amortized revenue is reflected as payments made
under warranties.
10
(9) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to market risk associated with changes in interest rates,
foreign currency exchange rates, and certain commodity prices. To enhance
our ability to manage these market risks, we enter into derivative
instruments for periods consistent with the related underlying hedged
exposures. The changes in fair value of these hedging instruments are
offset in part or in whole by corresponding changes in fair value or cash
flows of the underlying hedged exposures. We mitigate the risk that the
counter-party to these derivative instruments will fail to perform by only
entering into derivative instruments with major financial institutions. We
do not typically hedge our market risk exposures beyond three years and do
not hold or issue derivative instruments for trading purposes.
Recognized gains or loses in cost of goods sold due to the discontinuance
of ineffective currency and commodity cash flow hedges for the three
months ended March 31, 2004 and 2003 were immaterial.
Currency Rate Hedging
We manufacture and sell our products in a number of countries throughout
the world, and therefore, are exposed to movements in various currencies
against the U.S. dollar and against the currencies in which we
manufacture. Through our currency hedging activities, we seek to minimize
the risk that cash flows resulting from the sale of products, manufactured
in a currency different from the currency used by the selling subsidiary,
will be affected by changes in foreign currency exchange rates. Foreign
currency derivative instruments (forward contracts) are matched to the
underlying foreign currency exposures and are executed to minimize foreign
exchange transaction costs.
As of March 31, 2004, we forecasted that $0.4 million of net losses in
accumulated other comprehensive losses will be reclassified into earnings
within the next twelve months.
Hedges of Net Investment
We issued Danish denominated, retail notes as a hedge to protect the value
of a portion of our net investment in a Danish subsidiary. Hedges of a net
investment are accounted for under SFAS No. 52, "Foreign Currency
Translation." Under SFAS No. 52, the gains or losses on a
foreign-denominated, nonderivative financial instrument designated as a
hedge of a net investment are recorded in foreign currency translation
adjustments within accumulated other comprehensive losses. The gains and
losses are accounted for in a similar manner as the foreign denominated
net assets, offsetting a portion of the change in net assets due to
foreign currency fluctuations. As of March 31, 2004, we have designated
$40.7 million in Danish retail notes as a hedge of a net investment.
Commodity Price Hedging
We purchase raw material commodities and are at risk for fluctuations in
the market price of those commodities. In connection with the purchase of
major commodities, principally copper for manufacturing requirements, we
enter into commodity swap contracts to effectively fix our cost of the
commodity. These contracts require each settlement between us and our
counterparty to coincide with cash market purchases of the actual
commodity.
As of March 31, 2004, we forecasted that $15.5 million of net gains in
accumulated other comprehensive losses will be reclassified into earnings
within the next twelve months.
Interest Rate Hedging
We manage our interest rate risk by entering into both fixed and variable
rate debt. In addition, we enter into interest rate swap contracts in
order to achieve a balanced mix of fixed and variable rate indebtedness.
As of March 31, 2004, we had interest rate swap contracts to pay variable
interest, based on the six-month LIBOR rate, and receive a fixed rate of
interest of 6.625% on a notional amount of $100 million. As of March 31,
2004, the fair value of these swap contracts was an unrealized gain of
$8.3 million. We have designated our outstanding interest rate swap
contracts as fair value hedges of an underlying fixed rate debt
obligation. The fair value of these contracts is recorded in other
long-term assets or liabilities with a corresponding increase or decrease
in the fixed rate debt obligation. The change in fair values of both the
fair value hedge instruments and the underlying debt obligations are
recorded as equal and offsetting unrealized gains and losses in the
interest expense component of the consolidated condensed statements of
operations. All existing fair value hedges are determined to be 100%
effective under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended. As a result, there is no impact on
current earnings resulting from hedge ineffectiveness.
11
(10) COMPREHENSIVE LOSS
Comprehensive loss is determined as follows (in thousands):
THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ----------
Net loss $ (4,203) $ (13,636)
Other comprehensive (loss) income:
Foreign currency translation adjustment (9,200) 7,731
Cash flow hedges:
Reclassification adjustment, net of tax 1,290 (611)
Net derivative income, net of tax 3,695 848
Available for sale securities 37 --
--------- ----------
Comprehensive loss $ (8,381) $ (5,668)
========= ==========
(11) STOCKHOLDERS' EQUITY
The following table summarizes our stockholders' equity as of March 31,
2004 and December 31, 2003 (in thousands, except per share data):
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Common stock $.005 par value; 200,000 shares authorized;
issued 46,249 shares at
March 31, 2004
and 46,248 shares at December 31, 2003 $ 231 $ 231
Additional paid-in capital 732,566 732,339
Retained earnings 286,786 299,195
Accumulated other comprehensive losses (55,775) (51,597)
Treasury stock, at cost; 5,245 shares at March 31, 2004
and 5,420 shares at December 31, 2003 (194,352) (200,856)
Unearned compensation (2,466) (2,912)
--------- ------------
Total stockholders' equity $ 766,990 $ 776,400
========= ============
(12) LOSS PER SHARE
Net loss as set forth in the consolidated condensed statements of
operations is used in the computation of basic and diluted loss per share.
Our basic and diluted loss per share is based upon the weighted average
common shares outstanding during the period. The computation of diluted
loss per share excludes non-vested restricted shares and stock options of
5.6 million and 6 million for the three months ended March 31, 2004 and
2003, respectively, as their effect would have been anti-dilutive.
(13) SEGMENT INFORMATION
Our global business operates in the heating, ventilating, air
conditioning, and refrigeration (HVAC&R) industry. Our organization
consists of Global Applied, Unitary Products Group, and Bristol
Compressors. The Global Applied business is comprised of three geographic
regions: Americas; Europe, Middle East and Africa (EMEA); and Asia. Global
Applied's three geographic regions, Unitary Products Group, and Bristol
Compressors represent our reportable segments.
Global Applied designs, produces, markets, and sells HVAC&R equipment and
solutions and provides maintenance and service of equipment manufactured
by us and by others. Types of equipment include air-cooled and
water-cooled
12
chillers, central air handling units, variable air volume units, screw and
reciprocating compressors, condensers, evaporators, heat exchangers,
ductless minisplits, process refrigeration systems, hygienic air
distribution systems, gas compression systems, and control equipment to
monitor and control the entire system. Heating and air conditioning
solutions are provided for buildings ranging from small office buildings
and fast food restaurants to large commercial and industrial complexes.
Refrigeration systems are provided for industrial applications in the
food, beverage, chemical and petroleum industries. Cooling and
refrigeration systems are also supplied for use on naval, commercial and
passenger vessels.
Unitary Products Group (UPG) produces heating and air conditioning
solutions for buildings ranging from private homes and apartments to small
commercial buildings. UPG products include ducted central air conditioning
and heating systems (air conditioners, heat pumps, and furnaces), and
light commercial heating and cooling equipment.
Bristol Compressors (Bristol) manufactures reciprocating and scroll
compressors for our use and for sale to original equipment manufacturers
and wholesale distributors. Bristol purchases an essential component from
one vendor. Due to consolidation in the vendor's industry, there are
limited alternate sources of supply. We believe an alternate source of
supply is attainable in the event the current vendor is unable to supply
the component. However, a change in vendors would cause a delay in
manufacturing and loss of sales, which would adversely impact the results
of operations of Bristol and our consolidated results of operations.
General corporate expenses and charges and other expenses are not
allocated to the individual segments for management reporting purposes.
General corporate expenses include certain incentive compensation,
pension, medical and insurance costs; corporate administrative costs;
development costs for information technology applications and
infrastructure; and other corporate costs. Charges and other expenses in
2003 include restructuring and other charges. Non-allocated assets
primarily consist of prepaid pension benefit cost, net deferred tax
assets, LIFO inventory reserves, and other corporate assets. For
management reporting purposes, intersegment sales are recorded on a
cost-plus or market price basis. Business segment management performance
is based on earnings before interest and taxes, net capital employed, and
earnings per share.
13
The table below represents our operating results and assets by segment (in
thousands):
THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ----------
Net sales:
Global Applied:
Americas $ 332,799 $ 297,413
EMEA 298,421 262,052
Asia 102,784 90,119
Intragroup sales (44,991) (40,366)
--------- ----------
689,013 609,218
Unitary Products Group 180,391 163,542
Bristol Compressors 113,478 137,562
Eliminations(1) (43,515) (41,965)
--------- ----------
$ 939,367 $ 868,357
========= ==========
(1)Eliminations include the following
intersegment sales:
Global Applied $ 731 $ 586
Unitary Products Group 13,734 12,689
Bristol Compressors 29,050 28,690
--------- ----------
Eliminations $ 43,515 $ 41,965
========= ==========
Income (loss) from operations:
Global Applied:
Americas $ 1,686 $ (2,756)
EMEA (9) 589
Asia 9,574 9,693
--------- ----------
11,251 7,526
Unitary Products Group 12,026 8,220
Bristol Compressors 4,078 11,329
General corporate expenses, eliminations, and
other non-allocated items (22,480) (14,115)
Charges and other expenses -- (17,986)
--------- ----------
4,875 (5,026)
--------- ----------
Interest expense, net (10,861) (12,016)
--------- ----------
Equity in earnings (loss) of affiliates:
Global Applied:
EMEA 384 415
Asia 116 196
--------- ----------
500 611
Bristol Compressors (8) 477
--------- ----------
492 1,088
--------- ----------
Loss before income taxes (5,494) (15,954)
Benefit from income taxes 1,291 2,318
--------- ----------
Net loss $ (4,203) $ (13,636)
========= ==========
14
MARCH 31, 2004 DEC. 31, 2003
-------------- -------------
Total assets:
Global Applied:
Americas $ 732,909 $ 711,103
EMEA 888,780 937,981
Asia 396,218 389,456
Eliminations and other non-allocated
assets (94,604) (111,789)
-------------- -------------
1,923,303 1,926,751
Unitary Products Group 426,241 384,355
Bristol Compressors 289,558 242,375
Eliminations and other non-allocated assets 49,907 119,654
-------------- -------------
$ 2,689,009 $ 2,673,135
============== =============
(14) CHARGES TO OPERATIONS
In 2003, we initiated actions to further reduce our overall cost structure
and support the implementation of our new geographic organization. In
addition to cost reductions associated with the consolidation of our
former Engineered Systems Group and York Refrigeration Group segments,
additional actions included the further reduction of manufacturing
capacity, the elimination of certain product lines, and the exiting of
several small, non-core businesses. All actions were substantially
completed by December 31, 2003.
In the three months ended March 31, 2003, we incurred costs by segment as
follows (in thousands):
Global Applied:
Americas $ 3,571
EMEA 12,345
Asia 2,070
-------------
Total charges to operations, net 17,986
Charges reflected in cost of goods sold 1,892
-------------
Restructuring and other charges, net $ 16,094
=============
Charges included write-downs for the impairment of fixed assets and other
assets relating to facilities to be closed or divested and other impaired
assets. Severance and other accruals included planned reductions in
workforce throughout the Company. Substantially all of the severance
accrual will be utilized in 2004.
Detail of activity relating to the 2003 initiatives in the three months
ended March 31, 2004 is as follows (in thousands):
ACCRUALS
ESTABLISHED UTILIZED
IN THREE IN THREE
MONTHS MONTHS REMAINING
ACCRUALS AT ENDED ENDED ACCRUALS AT
DEC. 31, MARCH 31, MARCH 31, MARCH 31,
2003 2004 2004 2004
----------- ----------- --------- -----------
Severance $ 16,537 $ -- $ 6,613 $ 9,924
Contractual obligations 6,156 -- 374 5,782
Other 1,220 -- 1,002 218
----------- ----------- --------- -----------
$ 23,913 $ -- $ 7,989 $ 15,924
=========== =========== ========= ===========
15
(15) PROPOSED ACCOUNTING STANDARDS
In March 2004, the Financial Accounting Standards Board issued Proposed
Statement of Financial Accounting Standards "Share-Based Payment," an
amendment of FASB Statements No. 123 and 95. This proposed statement
addresses the accounting for share-based compensation in which we exchange
employee services for (a) our equity instruments or (b) liabilities that
are based on the fair value of our equity instruments or that may be
settled by the issuance of our equity instruments. Under the proposed
statement, we will recognize compensation cost for share-based
compensation issued to or purchased by employees under our stock-based
compensation plans using a fair-value-based method effective January 1,
2005. The impact the proposed statement will have on our consolidated
condensed financial statements is not known at this time, however, we
expect the proposed statement to reduce net income and earnings per share
similarly to the amounts disclosed in supplemental note 2 to our
consolidated condensed financial statements and note 1 to our consolidated
financial statements contained in the Annual Financial Statements and
Review of Operations filed as Exhibit 13 to our Form 10-K/A for the year
ended December 31, 2003.
16
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
CONSOLIDATED OPERATIONS
Net sales grew $71 million or 8.2% to $939.4 million in the first quarter of
2004 compared to 2003. Our revenue growth is mainly attributable to the
favorable impact of net strengthening foreign currencies of $41.9 million;
increased equipment volume in Americas, Asia and Unitary Products Group; and
overall growth in Global Applied service business sales (consisting of services,
parts and replacement equipment). Currency, volume and service business
improvements were partially offset by lower equipment volume at Bristol
Compressors. (See further discussion below under Segment Analysis.) For the
three months ended March 31, 2004, net sales in the United States increased 3.6%
to $425.8 million and international net sales increased 12.3% to $513.6 million.
Order backlog as of March 31, 2004 was $1,241.6 million compared to $1,075.7
million as of March 31, 2003 and $1,026.6 million as of December 31, 2003.
Gross profit grew $11 million or 6.8% to $171.1 million (18.2% of net sales) in
the first quarter of 2004 as compared to $160.1 million (18.4% of net sales) in
2003. Overall, gross profit increased due to the net strengthening of foreign
currencies of $7.4 million and higher equipment volume in Americas, Asia and
Unitary Products Group. Gross profit also benefited from our improved cost
structure as a result of the 2003 restructuring initiatives. These improvements
were partially offset by higher raw material (principally steel and copper) and
component costs; reduced equipment volume levels at Bristol Compressors; and
increased service business costs related to infrastructure and labor. While we
hedge a portion of our copper and aluminum purchases and have contracts for
steel purchases, we experienced cost increases for unhedged portions, components
containing these commodities, as well as surcharges on our steel purchases. We
expect raw material and component cost increases to be partially mitigated by
raising our product prices beginning in the second quarter of 2004. In 2003, we
recorded $1.9 million of costs related to our 2003 restructuring initiatives in
cost of goods sold.
Selling, general, and administrative (SG&A) expenses increased $17.1 million or
11.5% to $166.2 million (17.7% of net sales) in the first quarter of 2004 from
$149 million (17.2% of net sales) in 2003. Our SG&A expenses increased by $7.2
million due to net strengthening of foreign currencies. The remaining increase
in SG&A reflects the cost of our initiatives to improve our information
technology capabilities and develop and market new products. We expect to
benefit from these projects in 2005 and beyond.
In 2003, we initiated actions to further reduce our overall cost structure and
support the implementation of our new geographic organization. In addition to
cost reductions associated with the consolidation of our former Engineered
Systems Group and York Refrigeration Group segments, additional actions included
the further reduction of manufacturing capacity, elimination of certain product
lines, and exiting of several small, non-core businesses. In the first quarter
of 2003, we recorded restructuring charges of $18 million related to these
actions, including $1.9 million charged to cost of goods sold. The charges
included $15.2 million in write-downs of various assets and $2.8 million in
accruals for severance and other costs.
Income from operations increased $9.9 million to $4.9 million (0.5% of net
sales) in the first quarter of 2004 compared to a loss of $5 million (-0.6% of
net sales) in 2003. (See further discussion below under Segment Analysis.)
Net interest expense declined $1.2 million to $10.9 million in the first quarter
of 2004 compared to 2003. The decline resulted from lower average debt levels
partially offset by higher interest rates in international markets.
Equity in earnings of affiliates declined $0.6 million to $0.5 million in the
first quarter of 2004 compared to 2003. The reduction was primarily the result
of reduced earnings at Scroll Technologies.
The income tax benefit of $1.3 million for the first quarter of 2004 and $2.3
million in 2003 relates to both U.S. and non-U.S. operations. The 2004 and 2003
income tax benefits were lower than the U.S. statutory rate of 35% primarily due
to pre-tax earnings and losses in non-U.S. jurisdictions where statutory rates
are less than 35%. The effective tax rate was a benefit of
17
23.5% in the first quarter of 2004 as compared to 14.5% in 2003. The change in
the effective tax rate is attributable to restructuring charges recorded in
2003, for which the tax benefits were recorded at a lower effective tax rate.
Net loss, as a result of the above factors, was $4.2 million (-0.4% of net
sales) in the first quarter of 2004 compared to $13.6 million (-1.6% of net
sales) in 2003.
SEGMENT ANALYSIS
The following table sets forth net sales and income (loss) from operations by
segment (in thousands):
THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ----------
Net sales:
Global Applied:
Americas $ 332,799 $ 297,413
Europe, Middle East and Africa 298,421 262,052
Asia 102,784 90,119
Intragroup sales (44,991) (40,366)
--------- ----------
689,013 609,218
Unitary Products Group 180,391 163,542
Bristol Compressors 113,478 137,562
Eliminations (43,515) (41,965)
--------- ----------
Net sales $ 939,367 $ 868,357
========= ==========
Income (loss) from operations:
Global Applied:
Americas $ 1,686 $ (2,756)
Europe, Middle East and Africa (9) 589
Asia 9,574 9,693
--------- ----------
11,251 7,526
Unitary Products Group 12,026 8,220
Bristol Compressors 4,078 11,329
General corporate expenses, eliminations, and
other non-allocated items (22,480) (14,115)
Charges and other expenses -- (17,986)
--------- ----------
Income (loss) from operations $ 4,875 $ (5,026)
========= ==========
Global Applied
Global Applied net sales grew $79.8 million or 13.1% to $689 million in the
first quarter of 2004 compared to 2003. Net sales benefited $40.9 million or
6.7% from the net strengthening of currencies mainly in Europe, Middle East and
Africa (EMEA). Improved revenue in Americas is attributable to increased
equipment volume and service business growth. Asia equipment revenue continued
to grow principally due to the economic expansion of China. Global Applied
service business revenue increased $28.7 million or 12.7% to $254.3 million in
the first quarter of 2004, of which 6.8% is due to the net strengthening of
foreign currencies. Global Applied service business continued to grow on repair
and replacement opportunities, as we continued to expand our multi-site
commercial service activities, mainly in the Americas.
Global Applied income from operations increased to $11.3 million (1.6% of net
sales) in the first quarter of 2004 from $7.5 million (1.2% of net sales) in
2003. Benefits from improved equipment volume and realized savings from the 2003
restructuring initiatives in the Americas accounted for most of the increase.
Asia remained relatively consistent despite increasing net sales due to
unfavorable global minisplit pricing. EMEA declined due to margin-pricing
pressure in Europe, as some markets remained weak, partially offset by benefits
from the 2003 restructuring initiatives. Overall, Global Applied was negatively
impacted by an increase in raw material costs and continued investments in
service business infrastructure, information technology capabilities, and
product development.
18
Unitary Products Group (UPG)
UPG net sales grew $16.8 million or 10.3% to $180.4 million in the first quarter
of 2004 compared to 2003. Equipment volume increased driven by market share
gains as well as growth in the overall North American unitary air conditioning
and heating market. In the first quarter of 2004, UPG introduced the new, more
efficient "Affinity" line of products. We expect new products and improvements
in construction markets to increase sales for the 2004 year above 2003 levels.
UPG income from operations grew to $12 million (6.7% of net sales) in the first
quarter of 2004 from $8.2 million (5% of net sales) in 2003. Improved results
are mainly attributable to increased equipment volume, production efficiencies,
and a favorable product mix partially offset by higher raw material costs.
Bristol Compressors (Bristol)
Bristol net sales declined $24.1 million or 17.5% to $113.5 million in the first
quarter of 2004 compared to 2003. The decrease primarily relates to lower
shipments to domestic and international unitary customers. Domestic shipments
were negatively impacted by the loss of a customer in the fourth quarter of 2003
partially offset by higher equipment volumes to other domestic customers. During
the first quarter of 2004, Bristol introduced the Benchmark compressor. This
compressor is designed to meet future industry energy standards while reducing
noise levels.
Bristol income from operations decreased to $4.1 million (3.6% of net sales) in
the first quarter of 2004 from $11.3 million (8.2% of net sales) in 2003. The
impact of reduced volume and higher raw material costs negatively impacted
income from operations. The successful introduction and market acceptance of the
Benchmark compressor is expected to improve Bristol's results beyond 2004.
Other
General corporate expenses, eliminations, and other non-allocated items grew
$8.4 million to $22.5 million in the first quarter of 2004 as compared to $14.1
million in 2003. The increase was primarily due to increased costs of $4.5
million related to improving our technology capabilities in both applications
and infrastructure and $3.9 million related to other non-allocated costs. The
year-over-year cost increases are expected to continue for the second quarter
and, to a lesser extent, the remainder of 2004.
Charges and other expenses are as follows (in thousands):
THREE MONTHS
ENDED
MARCH 31, 2003
By segment --------------
Global Applied:
Americas $ 3,571
EMEA 12,345
Asia 2,070
--------------
$ 17,986
==============
By type
Restructuring and other charges, net $ 16,094
Restructuring and other charges reflected in cost of goods sold 1,892
--------------
$ 17,986
==============
No charges and other expenses were recorded in the first quarter of 2004 as the
2003 restructuring initiatives were initiated and substantially completed during
2003.
LIQUIDITY AND CAPITAL RESOURCES
Our significant liquidity and capital funding needs are working capital,
operating expenses, capital expenditures, debt repayments, restructuring costs,
dividends to our shareholders, contractual obligations, and commercial
commitments. Liquidity and capital resource needs are met through cash flows
from operations, borrowings under our credit agreements and
19
bank lines of credit, financing of trade receivables, and credit terms from
suppliers, which approximate receivable terms to our customers. Additional
sources of cash include customer deposits and progress payments.
We believe that we will be able to satisfy our principal and interest payment
obligations and our working capital and capital expenditure requirements from
operating cash flows together with the availability under the uncommitted credit
lines and committed bank lines of credit. Uncommitted credit lines and committed
bank lines of credit support seasonal working capital needs and are available
for general corporate purposes. Since certain of our long-term debt obligations
and our revolving trade receivables purchase facility bear interest at floating
rates, our interest costs are sensitive to changes in prevailing interest rates.
WORKING CAPITAL
Our working capital is mainly comprised of inventories, net receivables, and
accounts payable and accrued expenses. Working capital increased $63 million to
$425.5 million as of March 31, 2004 compared to $362.5 million as of December
31, 2003. The increase resulted from higher inventories and reduced current
liabilities partially offset by a decline in net receivables.
Net Receivables
Net receivables decreased $23.6 million due to improved collection efforts in
all businesses. Overall, days sales outstanding decreased to 48 days in the
first quarter of 2004 from 50 days at December 31, 2003.
Inventories
Inventories increased $45.7 million mainly due to increases in work-in-progress
and finished goods. The increase in our work-in-progress inventory is the result
of increased demand for longer lead time equipment in our Global Applied
business. Our work-in-progress and finished goods increase as we manufacture
inventory during the first half of the year to support demand in the second half
of the year.
Notes Payable and Current Portion of Long-Term Debt
Notes payable and current portion of long-term debt decreased $15.7 million due
to less borrowing under non-U.S. bank credit facilities, mainly in Brazil.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses declined $7.1 million primarily due to
payment of year-end incentive compensation and restructuring accruals and net
weakening of foreign currencies since December 31, 2003. These increases were
partially offset by higher accruals for customer deposits, insurance, and
interest.
Income Taxes
Income taxes decreased $10.8 million primarily due to U.S. tax benefits recorded
in the first quarter of 2004, as well as foreign tax payments.
CASH FLOWS
Operating Activities
We used $18.3 million of cash for operating activities in the first quarter of
2004. Net cash flows of $40.4 million were used by the change in assets and
liabilities net of effects from acquisitions and divestitures, mainly due to the
increase in inventory as discussed above. Remaining cash flows of $22.1 million
were generated from operations.
Investing Activities
Cash used in investing activities of $17.6 million was mainly comprised of
capital expenditures for manufacturing equipment and information technology
systems.
Financing Activities
Cash provided by financing activities of $39.4 million included proceeds of
$41.8 million from net borrowings and $5.8 million from issuance of common stock
partially offset by common stock dividend payments of $8.2 million. Net
borrowings are consistent with the typical seasonality of our businesses to
finance increasing working capital needs during the first half of the year.
Proceeds from issuance of common stock represent cash received from employee
stock purchases and exercise of stock options under our employee stock plans. We
paid a cash dividend of $0.20 per share in the first quarter of 2004
representing a 33% increase compared to 2003.
20
BORROWINGS AND AVAILABILITY
Total indebtedness was $661.2 million as of March 31, 2004, primarily consisting
of $500 million of senior notes, $91.5 million outstanding under domestic bank
lines, and $40.7 million of Danish retail notes. The senior notes mature at
dates ranging from 2006 to 2012 and carry fixed rates ranging from 5.8% to 6.7%.
We have a $400 million Five Year Credit Agreement, which expires on May 29,
2006, and a $200 million 364-Day Credit Agreement, which expires on March 11,
2005 (collectively, the Agreements). As of March 31, 2004 and December 31, 2003,
no amounts were outstanding under our Agreements. We renewed our $200 million
364-Day Credit Agreement in March 2004.
The $400 million Five Year Credit Agreement provides for borrowings at the
London InterBank Offering Rate (LIBOR) plus 1.175%, and the $200 million 364-Day
Credit Agreement provides for borrowings at LIBOR plus 0.85%. We pay annual fees
of 0.2% on the $400 million facility and 0.15% on the $200 million facility. The
Agreements allow for borrowings at specified bid rates. As of March 31, 2004 and
December 31, 2003, the three-month LIBOR rate was 1.1% and 1.14%, respectively.
The Agreements contain financial covenants requiring us to maintain certain
financial ratios and standard provisions limiting leverage and liens. We were in
compliance with these financial covenants as of March 31, 2004 and December 31,
2003.
In October and December 2003, we issued Danish denominated retail notes of DKK
200 million and DKK 50 million, respectively. These notes are due in October
2004 and have a coupon rate of 2%.
We have domestic bank lines that provide for total borrowings of up to $150
million and $135 million as of March 31, 2004 and December 31, 2003,
respectively. The domestic bank lines are uncommitted and may be unavailable for
renewal at maturity. As of March 31, 2004 and December 31, 2003, $91.5 million
and $25 million, respectively, were outstanding under the domestic bank lines.
Our non-U.S. subsidiaries maintain bank credit facilities in various currencies
that provide for total borrowings of $390.8 million and $355.2 million as of
March 31, 2004 and December 31, 2003, respectively. As of March 31, 2004 and
December 31, 2003, $11.7 million and $27.8 million, respectively, were
outstanding under the non-U.S. facilities, with remaining availability of $264.1
million and $246.3 million, respectively, after bank guarantees and letters of
credit usage.
We have access to bank lines of credit and have the ability to borrow under the
Agreements as long as we continue to meet the financial covenants or until
expiration of the Agreements. The primary financial covenants are the earnings
before interest, taxes, depreciation, and amortization (EBITDA) interest
coverage and the debt to capital ratio, as defined under the Agreements. As of
March 31, 2004, our EBITDA interest coverage was 4.7 times, exceeding the
minimum requirement of 3.5 times. As of March 31, 2004, our debt to capital
ratio, as defined in the agreement, was 44%, below the maximum allowed of 50%.
Our ability to issue commercial paper is limited due to our credit ratings.
We also maintain an annually renewable revolving facility under which we sell
certain trade receivables - see "Off-Balance Sheet Arrangements" section below.
OFF-BALANCE SHEET ARRANGEMENTS
Our off-balance sheet arrangements are comprised of a trade receivable revolving
facility and operating leases.
Trade Receivable Revolving Facility
Pursuant to the terms of an annually renewable revolving facility, we sell
certain of our trade receivables to a wholly owned consolidated subsidiary, York
Receivables Funding LLC (YRFLLC). In turn, YRFLLC sells, on a revolving basis,
an undivided ownership interest in the trade receivables to bank-administered
asset-backed commercial paper vehicles. In April 2003, we amended the facility,
reducing it from $175 million to $150 million. The facility is expected to be
renewed in 2004 at a level equal to or greater than $150 million. We continue to
service sold trade receivables. No servicing asset or liability has been
recognized as our cost to service sold trade receivables approximates the
servicing income.
In accordance with the facility, YRFLLC has sold $145 million and $150 million
of an undivided interest in trade receivables as of March 31, 2004 and December
31, 2003, respectively, resulting in a reduction of net receivables reflected in
our consolidated condensed balance sheets. The discount rate on trade
receivables sold was 1.04% and 1.12% as of March 31, 2004 and December 31, 2003,
respectively. The program fee on trade receivables sold was 0.5% as of March 31,
2004 and December 31, 2003.
21
Operating Leases
Operating leases provide us with the flexibility to use property, plant and
equipment without assuming ownership and related debt. Operating leases reduce
our risk associated with disposal and residual fair value of property, plant and
equipment at the end of the lease.
OUTLOOK
Overall, we expect improved net sales and net income in fiscal year 2004 as
compared to 2003. We anticipate continued strength in our service businesses'
(services, parts, and replacement equipment) sales within Global Applied; growth
in our UPG equipment business; and increased sales of large commercial equipment
in our Asian business. Further savings from our 2003 cost reduction actions are
expected to be realized throughout 2004. Overall growth and savings are expected
to be partially offset by declines in large commercial equipment in EMEA; a
decline in Bristol sales; increased costs for pension, healthcare, insurance,
copper, steel, and components containing copper and steel; and continued
investments in new products and information technology projects.
PROPOSED ACCOUNTING STANDARDS
In March 2004, the Financial Accounting Standards Board issued Proposed
Statement of Financial Accounting Standards "Share-Based Payment," an amendment
of FASB Statements No. 123 and 95. This proposed statement addresses the
accounting for share-based compensation in which we exchange employee services
for (a) our equity instruments or (b) liabilities that are based on the fair
value of our equity instruments or that may be settled by the issuance of our
equity instruments. Under the proposed statement, we will recognize compensation
cost for share-based compensation issued to or purchased by employees under our
stock-based compensation plans using a fair-value-based method effective January
1, 2005. The impact the proposed statement will have on our consolidated
condensed financial statements is not known at this time, however, we expect the
proposed statement to reduce net income and earnings per share similarly to the
amounts disclosed in supplemental note 2 to our consolidated condensed financial
statements and note 1 to our consolidated financial statements contained in the
Annual Financial Statements and Review of Operations filed as Exhibit 13 to our
Form 10-K/A for the year ended December 31, 2003.
FORWARD-LOOKING INFORMATION - RISK FACTORS
This document contains statements which, to the extent they are not statements
of historical or present fact, constitute "forward-looking statements" under the
securities laws. From time to time, oral or written forward-looking statements
may also be included in other materials released to the public. These
forward-looking statements are intended to provide our current expectations or
plans for future operating and financial performance based on assumptions
currently believed to be valid.
To the extent we have made "forward-looking statements," certain risk factors
could cause actual results to differ materially from those anticipated in such
forward-looking statements including, but not limited to:
- Changes in competition within specific markets or geographies
- Introduction of new competitive products
- Changes in government regulation, including environmental and tax
laws
- Legal actions, including pending and unasserted claims
- Loss of patented technology
- Events that create a negative image for our trademarks
- Work stoppages
- Price and availability of raw materials and components
- Realization of benefits from our cost reduction initiatives
- Changes in individual country economics, including but not limited
to: Argentina; Brazil; China; Mexico; Saudi Arabia; United Arab
Emirates; and Venezuela
22
- Acts of war or terrorism
- Changes in commercial and residential construction markets
- Significant changes in customer orders
- Significant product defects or failures
Unseasonably cool weather in various parts of the world could adversely affect
our UPG and Global Applied air conditioning businesses and, similarly, the
Bristol compressor business. Bristol and UPG are also impacted by the successful
development, introduction, and customer acceptance of new products. The Global
Applied air conditioning business could also be affected by a further slowdown
in the large chiller market and by the acceptance of new product introductions.
Global Applied could be negatively impacted by reductions in commercial
construction. Our ability to effectively implement price increases to offset
higher costs is dependent on market conditions and the competitive environment.
The financial position and financial results of our foreign locations could be
negatively impacted by the translation effect of currency fluctuations and by
political changes including nationalization or expropriation of assets. In
addition, our overall performance could be affected by declining worldwide
economic conditions or slowdowns resulting from world events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information responsive to this item as of December 31, 2003 appears under the
captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations, Market Risk," on pages 14 to 16 of the Annual Financial
Statements and Review of Operations filed as Exhibit 13 to our Form 10-K/A for
the year ended December 31, 2003. There was no material change in such
information as of March 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2004, we carried out an evaluation, under the supervision and
with the participation of company management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective.
There were no changes in our internal control over financial reporting that
occurred during the quarter ended March 31, 2004 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
23
PART II - OTHER INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 4.1 - 364-DAY CREDIT AGREEMENT, dated as of March 12, 2004,
among YORK INTERNATIONAL CORPORATION, as borrower, the initial
lenders named therein, as initial lenders, CITIBANK, N.A., as
administrative agent, JPMORGAN CHASE BANK, as syndication agent,
BANK OF TOKYO-MITSUBISHI TRUST COMPANY, FLEET NATIONAL BANK, NORDEA
BANK FINLAND PLC and BNP PARIBAS, as documentation agents, and
CITIGROUP GLOBAL MARKETS INC. and J.P. MORGAN SECURITIES, INC., as
joint lead arrangers and joint book managers
Exhibit 10.1 - Employment Agreement between York International
Corporation and David Kornblatt, dated March 24, 2004
Exhibit 10.2 - Employment Agreement between York International
Corporation and Iain A. Campbell, dated March 24, 2004
Exhibit 10.3 - Employment Agreement between York International
Corporation and Jeffrey D. Gard, dated March 24, 2004
Exhibit 31.1 - Certification of the Chief Executive Officer of York
International Corporation pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certification of the Chief Financial Officer of York
International Corporation pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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Exhibit 32.1 - Certification of the Chief Executive Officer and
Chief Financial Officer of York International Corporation pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Current report on Form 8-K dated February 13, 2004, containing a
press release, dated February 13, 2004, announcing that C. David
Myers had assumed the position of Chief Executive Officer upon the
retirement of Michael R. Young
Current report on Form 8-K dated February 18, 2004, containing a
press release, dated February 18, 2004, concerning dividend payments
in 2004
Current report on Form 8-K dated February 19, 2004, containing a
press release, dated February 19, 2004, setting forth our fourth
quarter and full year 2003 results (Such press release is not
incorporated by reference herein or deemed "filed" within the
meaning of Section 18 of the Securities Act of 1933.)
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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 unto duly authorized.
YORK INTERNATIONAL CORPORATION
------------------------------
Registrant
Date May 6, 2004 /s/ M. David Kornblatt
----------------------------------------
M. David Kornblatt
Vice President and
Chief Financial Officer
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