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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 SEPTEMBER 30, 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 Exchange 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 November 8, 2004
----- --------------------------------
Common Stock, par value $.005 41,549,618 shares
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations - (unaudited)
Three Months and Nine Months Ended September 30, 2004 and 2003 3
Condensed Consolidated Balance Sheets -
September 30, 2004 (unaudited) and December 31, 2003 4
Condensed Consolidated Statements of Cash Flows - (unaudited)
Nine Months Ended September 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 29
Signatures 30
Exhibit Index 31
2
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share data)
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales:
Products $ 1,038,893 $ 898,814 $ 2,976,999 $ 2,642,930
Services 120,381 110,144 343,350 318,802
----------- ----------- ----------- -----------
Net sales 1,159,274 1,008,958 3,320,349 2,961,732
Cost of goods sold:
Products (837,870) (728,709) (2,418,456) (2,127,672)
Services (100,590) (89,187) (284,348) (256,534)
----------- ----------- ----------- -----------
Cost of goods sold (938,460) (817,896) (2,702,804) (2,384,206)
----------- ----------- ----------- -----------
Gross profit 220,814 191,062 617,545 577,526
Selling, general, and administrative expenses (171,720) (163,032) (514,548) (468,860)
Restructuring and other charges, net -- (12,140) -- (61,294)
----------- ----------- ----------- -----------
Income from operations 49,094 15,890 102,997 47,372
Interest expense, net (10,947) (12,331) (31,880) (36,462)
Equity in earnings of affiliates 2,826 2,160 7,545 5,725
----------- ----------- ----------- -----------
Income before income taxes and
cumulative effect of a change
in accounting principle 40,973 5,719 78,662 16,635
(Provision) benefit for income taxes (9,628) 4,264 (12,468) (1,082)
----------- ----------- ----------- -----------
Income before cumulative effect of
a change in accounting principle 31,345 9,983 66,194 15,553
Cumulative effect of a change in accounting
principle, net of tax of $10,686 -- (15,413) -- (15,413)
----------- ----------- ----------- -----------
Net income (loss) $ 31,345 $ (5,430) $ 66,194 $ 140
=========== =========== =========== ===========
Basic earnings (loss) per share:
Income before cumulative effect of a
change in accounting principle $ 0.76 $ 0.25 $ 1.62 $ 0.39
Cumulative effect of a change in
accounting principle -- (0.39) -- (0.39)
----------- ----------- ----------- -----------
Net income (loss) $ 0.76 $ (0.14) $ 1.62 $ --
=========== =========== =========== ===========
Diluted earnings (loss) per share:
Income before cumulative effect of
a change in accounting principle $ 0.75 $ 0.25 $ 1.59 $ 0.39
Cumulative effect of a change in
accounting principle -- (0.38) -- (0.39)
----------- ----------- ----------- -----------
Net income (loss) $ 0.75 $ (0.13) $ 1.59 $ --
=========== =========== =========== ===========
Cash dividends per share $ 0.20 $ 0.15 $ 0.60 $ 0.45
=========== =========== =========== ===========
Weighted average common shares and
common equivalents outstanding:
Basic 41,198 39,653 40,965 39,556
Diluted 41,680 40,304 41,594 39,908
See accompanying notes to condensed consolidated financial statements.
3
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
SEPT. 30, 2004 DECEMBER 31,
(UNAUDITED) 2003
--------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 33,771 $ 49,650
Receivables, net 747,474 638,510
Inventories:
Raw material 162,089 138,108
Work in progress 178,200 147,094
Finished goods 303,481 227,512
--------------- ---------------
Total inventories 643,770 512,714
Prepayments and other current assets 121,872 129,921
--------------- ---------------
Total current assets 1,546,887 1,330,795
Deferred income taxes 105,759 107,566
Investments in affiliates 34,905 28,200
Property, plant and equipment, net 539,015 541,118
Goodwill 527,480 529,182
Intangibles, net 35,662 36,744
Deferred charges and other assets 104,995 99,530
--------------- ---------------
Total assets $ 2,894,703 $ 2,673,135
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 30,818 $ 30,755
Accounts payable and accrued expenses 1,010,996 899,093
Income taxes 26,143 38,453
--------------- ---------------
Total current liabilities 1,067,957 968,301
Long-term warranties 55,725 46,888
Long-term debt 643,931 582,027
Postretirement and postemployment benefits 242,234 249,912
Other long-term liabilities 50,028 49,607
--------------- ---------------
Total liabilities 2,059,875 1,896,735
Stockholders' equity 834,828 776,400
--------------- ---------------
Total liabilities and stockholders' equity $ 2,894,703 $ 2,673,135
=============== ===============
See accompanying notes to condensed consolidated financial statements.
4
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
NINE MONTHS ENDED SEPT. 30,
2004 2003
--------- ---------
Cash flows from operating activities:
Net income $ 66,194 $ 140
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Cumulative effect of a change in accounting principle -- 15,413
Depreciation and amortization of property, plant and equipment 52,919 50,718
Amortization of deferred charges and intangibles 2,630 2,828
Provision for doubtful receivables 6,934 10,295
Effect of non-cash charges -- 47,171
Deferred income taxes (4,337) 5,900
Loss on sale of fixed assets 1,163 1,703
Other (1,478) (3,032)
Change in assets and liabilities net of effects from
acquisitions and divestitures:
Receivables, net (117,524) 10,759
Inventories (133,010) (37,101)
Prepayments and other current assets 13,437 (42,370)
Accounts payable and accrued expenses 115,148 53,866
Income taxes (12,399) 420
Other long-term assets and liabilities 1,958 3,752
--------- ---------
Net cash (used) provided by operating activities (8,365) 120,462
--------- ---------
Cash flows from investing activities:
Purchases of other companies, net of cash acquired (728) (3,343)
Capital expenditures (56,860) (53,961)
Proceeds from sale of fixed assets 1,189 3,030
--------- ---------
Net cash used by investing activities (56,399) (54,274)
--------- ---------
Cash flows from financing activities:
Net payments of short-term debt (141) (3,312)
Net proceeds from credit agreement -- 70,000
Payment of senior notes -- (100,000)
Net proceeds on other long-term debt 58,838 23,961
Net reduction in sale of receivables -- (5,000)
Payment of sale-leaseback obligation -- (82,397)
Common stock issued 15,280 3,033
Treasury stock purchases (74) (7)
Dividends paid (24,808) (17,899)
--------- ---------
Net cash provided (used) by financing activities 49,095 (111,621)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (210) (534)
--------- ---------
Net decrease in cash and cash equivalents (15,879) (45,967)
Cash and cash equivalents at beginning of period 49,650 92,940
--------- ---------
Cash and cash equivalents at end of period $ 33,771 $ 46,973
========= =========
See accompanying notes to condensed consolidated financial statements.
5
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements (unaudited)
(1) FINANCIAL STATEMENTS
The condensed consolidated 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 the information presented is not
misleading and the disclosures are adequate. In our opinion, our condensed
consolidated financial statements contain all adjustments necessary to
present fairly our financial position as of September 30, 2004 and
December 31, 2003, our results of operations for the three and nine months
ended September 30, 2004 and 2003, and our cash flows for the nine months
ended September 30, 2004 and 2003. The results of operations for interim
periods are not necessarily indicative of the results expected for the
full year.
Certain reclassifications have been made to the 2003 condensed
consolidated financial statements to conform to the 2004 presentation.
During the three months ended September 30, 2004, we retroactively adopted
a new accounting standard related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. As a result, our condensed
consolidated statement of operations for the nine months ended September
30, 2004 includes the impact of adoption as of January 1, 2004, which was
immaterial. See note 7 for additional information.
(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 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 income (loss) and earnings (loss) per share would have been adjusted
to the pro forma amounts as follows (in thousands, except per share data):
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income (loss) - as reported $ 31,345 $ (5,430) $ 66,194 $ 140
Add: Stock-based employee compensation
expense included in reported net
income (loss), net of related tax effects 580 166 1,457 445
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (1,757) (892) (4,490) (4,058)
---------- ---------- ---------- ----------
Pro forma net income (loss) $ 30,168 $ (6,156) $ 63,161 $ (3,473)
========== ========== ========== ==========
Earnings (loss) per share:
Basic - as reported $ 0.76 $ (0.14) $ 1.62 $ --
Basic - pro forma 0.73 (0.16) 1.54 (0.09)
Diluted - as reported 0.75 (0.13) 1.59 --
Diluted - pro forma 0.73 (0.15) 1.52 (0.09)
6
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 periods.
(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 May 2004, we amended the facility increasing the availability
from $150 million to $200 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 $150 million of an
undivided interest in trade receivables as of September 30, 2004 and
December 31, 2003. The proceeds from the sale were reflected as a
reduction of net receivables reflected in our condensed consolidated
balance sheets as of September 30, 2004 and December 31, 2003. The
discount rate on trade receivables sold was 1.84% and 1.12% as of
September 30, 2004 and December 31, 2003, respectively. The program fee on
trade receivables sold was 0.4% and 0.5% as of September 30, 2004 and
December 31, 2003, respectively.
(4) GOODWILL
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2004, by segment, are as follows (in thousands):
NET FOREIGN
BALANCE AS OF GOODWILL CURRENCY BALANCE AS OF
DEC. 31, 2003 ACQUIRED FLUCTUATION SEPT. 30, 2004
------------- -------- ----------- --------------
Global Applied:
Americas $ 92,949 $ -- $ 20 $ 92,969
Europe, Middle East and Africa 130,166 429 (2,007) 128,588
Asia 109,314 -- (144) 109,170
------------- -------- ----------- -------------
332,429 429 (2,131) 330,727
Unitary Products Group 140,440 -- -- 140,440
Bristol Compressors 56,313 -- -- 56,313
------------- -------- ----------- -------------
$ 529,182 $ 429 $ (2,131) $ 527,480
============= ======== =========== =============
(5) INTANGIBLES, NET
The following table summarizes the major intangible asset classes subject
to amortization included in our condensed consolidated balance sheets as
of September 30, 2004 and December 31, 2003 (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
September 30, 2004
Trade names and trademarks $41,087 $ 7,253 $33,834
Other 3,158 1,330 1,828
------- ------- -------
$44,245 $ 8,583 $35,662
======= ======= =======
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
======= ======= =======
7
Amortization expense for trade names and trademarks and other intangible
assets for the three and nine months ended September 30, 2004 was $0.4
million and $1.2 million, respectively. For the three and nine months
ended September 30, 2003, amortization expense for trade names and
trademarks and other intangible assets was $0.3 million and $1.3 million,
respectively.
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 (October 1 - December 31) $ 377
2005 1,668
2006 1,698
2007 1,598
2008 1,598
Thereafter 28,723
--------------
$ 35,662
==============
(6) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of (in thousands):
SEPT. 30, DEC. 31,
2004 2003
--------- ---------
Notes payable and current portion of long-term debt:
Bank loans (primarily foreign currency) $ 27,643 $ 27,784
Current portion of long-term debt 3,175 2,971
--------- ---------
Total $ 30,818 $ 30,755
========= =========
Long-term debt:
Domestic bank lines at an average rate of 2.1%
in 2004 and 1.58% in 2003 $ 87,354 $ 25,000
Danish retail notes, 2% interest, due October
2004 41,220 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 (including foreign bank loans) at an
average rate of 5.95% in 2004 and 6.3% in 2003 18,532 18,154
--------- ---------
Total 647,106 584,998
Less current portion (3,175) (2,971)
--------- ---------
Noncurrent portion $ 643,931 $ 582,027
========= =========
The domestic bank lines and the Danish retail notes are classified as
long-term, as they are supported by our Five Year Credit Agreement, which
matures on May 29, 2006.
In October 2004, our Danish retail notes matured and were redeemed with
borrowings from our domestic bank lines.
8
The following table summarizes the terms of our lines of credit (in
thousands):
LIMIT AVAILABILITY (a)
SEPT. 30, DEC. 31, SEPT. 30, DEC. 31, BORROWING ANNUAL
2004 2003 2004 2003 EXPIRES RATE (b) FEE
--------- -------- --------- -------- -------------- --------- ------
Five Year
Credit LIBOR +
Agreement $400,000 $400,000 $400,000 $400,000 May 29, 2006 1.175% 0.2%
364-Day
Credit LIBOR +
Agreement (c) 200,000 200,000 200,000 200,000 March 11, 2005 0.85% 0.15%
Domestic
bank lines 150,000 135,000 62,646 110,000 Uncommitted Various --
Non-U.S
bank credit
facilities 391,326 355,246 246,826 246,298 Uncommitted Various --
(a) Availability is reduced for outstanding borrowings and bank
guarantee and letters of credit usage.
(b) The one-month LIBOR (London Interbank Offering Rate) rate was 1.84%
and 1.12% as of September 30, 2004 and December 31, 2003,
respectively.
(c) We renewed our 364-Day Credit Agreement in March 2004.
(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. As a result, we recorded a
non-cash curtailment loss of $12.4 million in the three months ended
September 30, 2003.
Net periodic benefit cost under our defined benefit pension plans includes
the following components (in thousands):
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Components of net periodic benefit cost:
Service cost $ 3,053 $ 5,273 $ 9,196 $ 15,819
Interest cost 8,234 8,287 24,657 24,859
Expected return on plan assets, income (10,160) (9,238) (30,484) (27,715)
Amortization of prior service cost 563 854 1,685 2,559
Amortization of net (gain) loss 677 466 2,009 1,398
Curtailments -- 12,414 -- 12,414
Settlement and other -- 80 1,049 369
------------- ------------- ------------- -------------
Net periodic benefit cost $ 2,367 $ 18,136 $ 8,112 $ 29,703
============= ============= ============= =============
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 September 30, 2004, $11.9 million of
contributions have been made. We currently anticipate contributing an
additional $2.2 million to fund our plans in 2004 for a total of $14.1
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 $2.1 million and $7.3 million
related to the plan in the three and nine months ended September 30, 2004,
respectively.
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 $0.7 million
and $2.4 million in the three and nine months ended September 30, 2004,
respectively, and $0.3 million and $1.0 million in the three and nine
months ended September 30, 2003, respectively. We recorded expense of
approximately $1.0 million and $3.1 million related to the plans in the
three and nine months ended September 30, 2004, respectively, and $0.4
million and $1.3 million related to the plans in the three and nine months
ended September 30, 2003, respectively.
POSTRETIREMENT HEALTH AND LIFE INSURANCE PLANS
Net periodic benefit cost includes the following components (in
thousands):
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Components of net periodic benefit cost:
Service cost $ 337 $ 516 $ 1,012 $ 1,548
Interest cost 1,861 2,391 5,588 7,173
Amortization of prior service cost (1,365) (700) (4,095) (2,100)
Amortization of net loss 780 927 2,338 2,782
------------ ------------ ------------ ------------
Net periodic benefit cost $ 1,613 $ 3,134 $ 4,843 $ 9,403
============ ============ ============ ============
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
September 30, 2004, $5.7 million of contributions have been made. We
currently anticipate contributing an additional $1.8 million to fund our
plans in 2004 for a total of $7.5 million.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (Act) became law. The Act provides for
prescription drug benefits to retirees and federal subsidies to sponsors
of certain retiree health-care plans. In May 2004, the Financial
Accounting Standards Board (FASB) issued Staff Position No. FAS 106-2,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" (FSP 106-2),
effective for the first interim or annual period beginning after June 15,
2004. We have determined that one of our postretirement benefit plans
providing prescription drug benefits are actuarially equivalent to
Medicare Part D and have elected to recognize the effects of the Act by
implementing the provisions of FSP 106-2 retroactively as of January 1,
2004. We have reduced our accumulated postretirement benefit obligation
(APBO) for the effect of the subsidy related to benefits attributed to
past service by $7.8 million. This is reflected as a decrease in
unrecognized net actuarial losses and will be amortized over current and
future periods. In addition, the subsidy will reduce interest costs on the
APBO. The total effect of the subsidy on the measurement of net periodic
benefit cost for 2004 is expected to be $1.3 million, consisting of lower
amortization of actuarial losses of $0.8 million and lower interest costs
of $0.5 million. As the effect of the subsidy will be recognized evenly
throughout the fiscal year, net periodic benefit cost decreased by $0.3
million and $1.0 million in the three and nine months ended September 30,
2004, respectively.
10
(8) GUARANTEES AND WARRANTIES
We issue various types of guarantees in the normal course of business. As
of September 30, 2004, we have the following guarantees outstanding (in
thousands):
Standby letters of credit and surety bonds $ 106,500
Performance guarantees 154,247
Commercial letters of credit 4,595
Guarantee of affiliate debt 30,000
Changes in our warranty liabilities for the three and nine months ended
September 30, 2004 are as follows (in thousands):
BALANCE PAYMENTS ACCRUALS FOR BALANCE
AS OF MADE UNDER WARRANTIES AS OF
JUNE 30, 2004 WARRANTIES ISSUED SEPT. 30, 2004
- ------------- ---------- ------------ --------------
$124,100 $(19,892) $19,640 $123,848
BALANCE PAYMENTS ACCRUALS FOR ACCRUALS FOR BALANCE
AS OF MADE UNDER WARRANTIES PREEXISTING AS OF
DEC. 31, 2003 WARRANTIES ISSUED WARRANTIES SEPT. 30, 2004
- ------------- ---------- ------------ ------------ --------------
$ 101,675 $ (55,064) $ 57,237 $ 20,000 $ 123,848
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 in the above table.
During the second quarter of 2004, we finalized field and factory testing
to investigate failures found in heat exchangers of certain sealed
combustion gas furnaces used in the manufactured housing industry. We
found that installation and application factors combined with component
part variation can result in excessive heat exchanger temperatures, which
may contribute to failures in certain furnace models manufactured in the
years 1995 to 2000. We no longer produce these furnace models. As a
result, we recorded a $20 million warranty charge for the Unitary Products
Group furnace inspection and remediation program during the second quarter
of 2004. The $20 million warranty charge represents our best estimate of
inspection and repair costs within a reasonable estimated range of $13
million and $30 million. Repair cost estimates are mainly comprised of the
expected cost of repair kits or new heat exchangers and installation
labor. Our estimates are based upon the projected number of furnace units
to be serviced (find rate), current repair costs, and the estimated number
of furnace units requiring repair. Differences between estimated and
actual find rate, costs to manufacture and install repair kits or heat
exchangers, and number of furnace units that require repair could have a
significant impact on our consolidated results of operations. We began to
manufacture replacement parts and repair furnaces in the third quarter of
2004 and expect to complete the program by the end of 2006. Repair
activity in the third quarter was minimal.
(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
11
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 losses included in cost of goods sold due to the
discontinuance of ineffective currency and commodity cash flow hedges for
the three and nine months ended September 30, 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 September 30, 2004, we forecasted that $0.5 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, non-derivative 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 September 30, 2004, we have
designated $41.2 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 forward contracts to effectively fix a portion of our
commodity costs. These contracts require each settlement between our
counterparty and us to coincide with cash market purchases of the actual
commodity.
As of September 30, 2004, we forecasted that $13.7 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.
In May 2004, we entered into a $100 million notional amount interest rate
swap contract with a final maturity at November 2012.
As of September 30, 2004, we had interest rate swap contracts to pay
variable interest, based on the six-month LIBOR rate, and receive a
blended fixed rate of interest of 6.213% on a notional amount of $200
million ($100 million related to senior notes due August 2006 and $100
million related to senior notes due November 2012). As of September 30,
2004, the fair value of these swap contracts was an unrealized gain of
$10.6 million. We have designated our outstanding interest rate swap
contracts as fair value hedges of underlying fixed rate debt obligations.
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 obligations. 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 net interest expense
component of the condensed consolidated 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.
12
(10) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is determined as follows (in thousands):
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income (loss) $ 31,345 $ (5,430) $ 66,194 $ 140
Other comprehensive income (loss):
Foreign currency translation adjustment 8,034 (5,934) (4,567) 51,991
Cash flow hedges:
Reclassification adjustment, net of tax 1,947 (107) 5,384 (1,392)
Net derivative income (loss), net of tax 795 1,352 (3,321) 3,657
Available for sale securities, net of tax 45 118 47 97
------------ ------------ ------------ ------------
Comprehensive income (loss) $ 42,166 $ (10,001) $ 63,737 $ 54,493
============ ============ ============ ============
(11) STOCKHOLDERS' EQUITY
The following table summarizes our stockholders' equity as of September
30, 2004 and December 31, 2003 (in thousands, except per share data):
SEPT. 30, DECEMBER 31,
2004 2003
--------- ------------
Common stock $.005 par value; 200,000 shares authorized; issued 46,463 shares at
September 30, 2004 and 46,248 shares at December 31, 2003 $ 232 $ 231
Additional paid-in capital 739,111 732,339
Retained earnings 340,581 299,195
Accumulated other comprehensive losses (54,054) (51,597)
Treasury stock, at cost; 4,953 shares at September 30, 2004 and 5,420 shares at
December 31, 2003 (183,488) (200,856)
Unearned compensation (7,554) (2,912)
--------- ---------
Total stockholders' equity $ 834,828 $ 776,400
========= =========
13
(12) EARNINGS (LOSS) PER SHARE
Net income (loss) as set forth in our condensed consolidated statements of
operations is used in the computation of basic and diluted earnings (loss)
per share information. Reconciliations of shares used in the computations
of earnings (loss) earnings per share are as follows (in thousands):
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Weighted average common shares
outstanding used in the computation
of basic earnings (loss) per share 41,198 39,653 40,965 39,556
Effect of dilutive securities:
Non-vested restricted shares 151 166 168 166
Stock options 331 485 461 186
------ ------ ------ ------
Weighted average common shares and
equivalents used in the computation
of diluted earnings (loss) per share 41,680 40,304 41,594 39,908
====== ====== ====== ======
Stock options not included in the
earnings (loss) per share computation as
their effect would have been anti-
dilutive 2,440 3,148 1,800 3,975
====== ====== ====== ======
(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 chillers; central air handling units; variable air volume
units; screw, reciprocating and centrifugal 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,
14
medical and insurance costs; corporate administrative costs; development
costs for information technology applications and infrastructure; the $20
million warranty charge discussed in note 8; and other corporate costs.
Charges and other expenses in 2003 include restructuring and other
charges, operating expenses related to cost reduction actions, and a
curtailment loss related to the decision to replace our current defined
benefit pension plans for U.S. salaried non-bargaining employees with a
new defined contribution plan, effective January 1, 2004. 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 compensation
is based on segment earnings before interest and taxes, segment net
capital employed, and consolidated earnings per share.
15
The table below represents our operating results and assets by segment (in
thousands):
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales:
Global Applied:
Americas $ 379,335 $ 339,041 $ 1,106,558 $ 999,293
EMEA 384,498 321,888 1,067,322 919,642
Asia 176,845 129,927 443,114 352,033
Intragroup sales (63,180) (48,495) (167,641) (143,113)
----------- ----------- ----------- -----------
877,498 742,361 2,449,353 2,127,855
Unitary Products Group 227,878 207,471 666,384 593,962
Bristol Compressors 100,483 99,455 352,926 375,854
Eliminations(1) (46,585) (40,329) (148,314) (135,939)
----------- ----------- ----------- -----------
$ 1,159,274 $ 1,008,958 $ 3,320,349 $ 2,961,732
=========== =========== =========== ===========
(1)Eliminations include
the following
intersegment sales:
Global Applied $ (605) $ (1,113) $ (1,742) $ (2,294)
Unitary Products Group (15,274) (11,867) (47,089) (42,343)
Bristol Compressors (30,706) (27,349) (99,483) (91,302)
----------- ----------- ----------- -----------
Eliminations $ (46,585) $ (40,329) $ (148,314) $ (135,939)
=========== =========== =========== ===========
Income from operations:
Global Applied:
Americas $ 11,457 $ 15,663 $ 36,456 $ 29,722
EMEA 11,888 11,710 26,479 24,750
Asia 21,029 20,381 52,685 52,497
----------- ----------- ----------- -----------
44,374 47,754 115,620 106,969
Unitary Products Group 24,859 18,807 67,076 51,076
Bristol Compressors 187 2,204 8,507 25,463
General corporate
expenses,
eliminations, and
other non-allocated
items (20,326) (23,808) (88,206) (54,053)
Charges and other -- (29,067) -- (82,083)
expenses
----------- ----------- ----------- -----------
49,094 15,890 102,997 47,372
----------- ----------- ----------- -----------
Interest expense, net (10,947) (12,331) (31,880) (36,462)
----------- ----------- ----------- -----------
Equity in earnings of
affiliates:
Global Applied:
EMEA 1,708 453 4,798 1,840
Asia 355 278 808 806
----------- ----------- ----------- -----------
2,063 731 5,606 2,646
Bristol Compressors 763 1,429 1,939 3,079
----------- ----------- ----------- -----------
2,826 2,160 7,545 5,725
----------- ----------- ----------- -----------
Income before income
taxes
and cumulative effect
of a change in
accounting principle 40,973 5,719 78,662 16,635
(Provision) benefit for
income taxes (9,628) 4,264 (12,468) (1,082)
----------- ----------- ----------- -----------
Income before cumulative
effect of a change in
accounting principle $ 31,345 $ 9,983 $ 66,194 $ 15,553
=========== =========== =========== ===========
16
SEPT. 30, 2004 DEC. 31, 2003
-------------- -------------
Total assets:
Global Applied:
Americas $ 778,637 $ 711,103
EMEA 969,063 937,981
Asia 507,143 389,456
Eliminations and other non-allocated
assets (193,791) (111,789)
-------------- --------------
2,061,052 1,926,751
Unitary Products Group 456,084 384,355
Bristol Compressors 253,011 242,375
Eliminations and other non-allocated
assets 124,556 119,654
-------------- --------------
$ 2,894,703 $ 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 and nine months ended September 30, 2003, we incurred costs
by segment as follows (in thousands):
THREE MONTHS NINE MONTHS
2003 INITIATIVES: ENDED SEPT. 30, 2003 ENDED SEPT. 30, 2003
-------------------- --------------------
Global Applied:
Americas $ 5,490 $ 12,205
EMEA 5,639 40,894
Asia 195 2,961
-------- --------
11,324 56,060
Unitary Products Group 1,100 8,600
Bristol Compressors 107 135
Corporate 698 698
-------- --------
13,229 65,493
2000 AND 2001 INITIATIVES:
Global Applied:
EMEA (39) (39)
Asia (418) (418)
-------- --------
(457) (457)
-------- --------
Total charges to operations, net 12,772 65,036
Charges reflected in cost of goods sold (632) (3,742)
-------- --------
Restructuring and other charges, net $ 12,140 $ 61,294
======== ========
Charges included write-downs for the impairment of assets relating to
businesses or facilities to be closed or divested, severance and other
accruals relating to planned reductions in workforce throughout the
Company, and estimated costs related to the elimination of certain product
lines.
17
Detail of activity relating to the 2003 initiatives in the nine months
ended September 30, 2004 is as follows (in thousands):
ACCRUALS
ESTABLISHED UTILIZED
IN NINE IN NINE
MONTHS MONTHS REMAINING
ACCRUALS AT ENDED ENDED ACCRUALS AT
DEC. 31, SEPT. 30, SEPT. 30, SEPT. 30,
2003 2004 2004 2004
----------- --------- ----------- -----------
Severance $ 16,537 $ -- $ 10,696 $ 5,841
Contractual obligations 6,156 -- 2,666 3,490
Other 1,220 -- 1,138 82
----------- ----------- ----------- -----------
$ 23,913 $ -- $ 14,500 $ 9,413
=========== =========== =========== ===========
Substantially all of the severance accrual will be utilized in 2004.
(15) CHANGE IN ACCOUNTING PRINCIPLE FOR VARIABLE INTEREST ENTITIES
On July 1, 2003 we adopted FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements." Upon adoption we
consolidated the variable interest entity used to transact our December
1999 sale-leaseback. As a result, we recorded approximately $82.4 million
of incremental debt, $23.9 million of incremental net machinery and
equipment, $10.7 million of incremental deferred tax assets, a $15.4
million reduction to stockholders' equity, and a $32.4 million reduction
to other long-term liabilities. The reduction in stockholders' equity
represents a reduction in retained earnings recorded as a
cumulative-effect adjustment as of July 1, 2003 in our condensed
consolidated statement of operations. The retained earnings reduction
represents the cumulative differences between our prior accounting of the
transaction as a lease of equipment and the consolidation, which resulted
in the reflection of the assets as owned depreciable equipment with a
related debt obligation. The obligation relating to the sale-leaseback was
repaid in full during the third quarter of 2003.
(16) PROPOSED ACCOUNTING STANDARDS
In March 2004, the FASB 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 July 1, 2005. The impact the proposed statement will have on our
condensed consolidated financial statements is not known at this time,
however, it may reduce net income and earnings per share similar to the
amounts disclosed in note 2 to our condensed consolidated 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.
18
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 $150.3 million or 14.9% to $1,159.3 million in the third quarter
of 2004 compared to 2003 (including a benefit of $26.4 million due to the net
strengthening of foreign currencies mainly in our Europe, Middle East and Africa
(EMEA) operations). In the first nine months of 2004, net sales grew $358.6
million or 12.1% to $3,320.3 million compared to 2003 (including a benefit of
$86.5 million due to the net strengthening of foreign currencies, mainly in our
EMEA operations). Consistent with the first half of 2004, our revenue growth was
mainly attributable to increased Global Applied and Unitary Products Group
equipment volume and Global Applied service business (consisting of services,
parts and replacement equipment) growth. Revenue growth in the first nine months
of 2004 was partially offset by changes in product mix at Bristol Compressors.
We have announced general selling price increases, however, conditions have not
been favorable for price realization in certain markets. Selling price increases
had an immaterial impact on revenue growth. (See further discussion below under
Segment Analysis.) Net sales in the United States (U.S.) increased 7.9% to
$501.8 million and international net sales increased 20.9% to $657.4 million in
the third quarter of 2004 compared to 2003. In the first nine months of 2004,
net sales in the U.S. increased 6.8% to $1,478.2 million and international net
sales increased 16.8% to $1,842.1 million compared to 2003. International
revenue grew at a faster rate than domestic U.S. net sales due to stronger
exports from our U.S. factories to international projects in the Middle East and
Asia and a shift in volume at Bristol from domestic original equipment
manufacturers (OEM) to international customers. Order backlog increased to
$1,200.6 million as of September 30, 2004 as compared to $1,090.5 million as of
September 30, 2003. Backlog in Global Applied increased $125.6 million
(including a benefit of $30.6 million due to the net strengthening of foreign
currencies, mainly in EMEA operations) primarily due to projects in Middle East,
Europe, Asia and North America, as well as in the longer lead time commercial
marine markets. Unitary Products Group and Bristol backlog decreased $15.5
million reflecting changes in ordering patterns of our customers, as well as,
OEM and market activity levels. As of December 31, 2003, order backlog was
$1,026.6 million.
Gross profit increased $29.8 million or 15.6% to $220.8 million (19.0% of net
sales) in the third quarter of 2004 compared to $191.1 million (18.9% of net
sales) in 2003. In the first nine months of 2004, gross profit increased $40
million or 6.9% to $617.5 million (18.6% of net sales) compared to $577.5
million (19.5% of net sales) in 2003. The net strengthening of foreign
currencies increased our gross profit $4.3 million and $14.7 million in the
third quarter and first nine months of 2004, respectively. Overall, gross profit
grew due to increased equipment volume in Global Applied and Unitary Products
Group and realization of 2003 restructuring benefits. These improvements were
offset by the $20 million warranty charge for the Unitary Products Group furnace
inspection and remediation program recorded in the second quarter of 2004 (see
further discussion below under Segment Analysis); pricing pressure in EMEA and
Asia; higher raw material (principally steel and copper) and component costs;
and increased costs for inefficiencies related to Americas' YORKConnect
deployment (service business information technology system in North America).
Worldwide demand for steel and copper continued to increase our raw material
cost and cost of components containing these materials. While we hedge a portion
of our copper and aluminum purchases and have contracts for steel purchases, we
experienced cost increases for unhedged portions and components containing these
commodities, as well as surcharges on our steel purchases. In the third quarter
and first nine months of 2004, raw material and component cost increases in
excess of selling price increases were $15.8 million and $28 million,
respectively. We anticipate $15 million to $20 million of raw material cost
increases in excess of selling price increases in the fourth quarter of 2004. We
also expect the cost of raw materials and components to remain above 2003 levels
in 2005. In the third quarter and first nine months of 2003, we recorded
inventory write-downs related to strategic actions to rationalize our
manufacturing capacity in Global Applied of $0.6 million and $3.7 million,
respectively.
Selling, general and administrative (SG&A) expenses increased $8.7 million or
5.3% to $171.7 million (14.8% of net sales) in the third quarter of 2004
compared to $163.0 million (16.2% of net sales) in 2003. In the first nine
months of 2004, SG&A expenses increased $45.7 million or 9.7% to $514.5 million
(15.5% of net sales) compared to $468.9 million (15.8% of net sales) in 2003.
Higher selling and administrative expenses related to our initiatives to improve
our information technology capabilities and new product development, equipment
volume gains, and marketing of new products. We expect to benefit from
improvement initiatives in 2005 and beyond. The net strengthening of foreign
currencies increased our SG&A expenses
19
$3.9 million and $14 million in the third quarter and first nine months of 2004,
respectively. In addition, SG&A expenses in the third quarter of 2003 include a
non-cash curtailment loss of $12.4 million related to the decision to replace
our defined benefit pension plans for U.S. salaried non-bargaining employees
with a defined contribution plan, effective January 1, 2004.
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 include
the further reduction of manufacturing capacity, elimination of certain product
lines, and exiting of several small, non-core businesses. In the third quarter
and first nine months of 2003, we recorded restructuring and other charges of
$13.2 million and $65.5 million, respectively, related to these actions,
including $0.6 million and $3.7 million, respectively, charged to cost of goods
sold. Our 2003 restructuring initiatives resulted in savings of $7 million and
$26 million in the third quarter and first nine months of 2004, respectively,
compared to 2003. In the third quarter of 2003, we recorded a credit of $0.5
million related to 2000 and 2001 initiatives.
As a result of the above factors, income from operations increased $33.2 million
to $49.1 million (4.2% of net sales) in the third quarter of 2004 compared to
$15.9 million (1.6% of net sales) in 2003. In the first nine months of 2004,
income from operations grew $55.6 million to $103 million (3.1% of net sales)
compared to $47.4 million (1.6% of net sales) in 2003. (See further discussion
below under Segment Analysis.)
Net interest expense declined $1.4 million or 11.2% to $10.9 million in the
third quarter of 2004 compared to 2003. In the first nine months of 2004, net
interest expense decreased $4.6 million or 12.6% to $31.9 million compared to
2003. The decline resulted from lower average borrowing rates.
Equity in earnings of affiliates grew $0.7 million or 30.8% to $2.8 million in
the third quarter of 2004 compared to 2003. In the first nine months of 2004,
equity in earnings of affiliates increased $1.8 million or 31.8% to $7.5 million
compared to 2003. The increase was primarily the result of improved performance
of Clima Roca and other affiliates partially offset by reduced earnings at
Scroll Technologies.
The income tax provision of $9.6 million and $12.5 million in the third quarter
and first nine months of 2004, respectively, and the benefit of $4.3 million and
provision of $1.1 million in the third quarter and first nine months of 2003,
respectively, relate to both U.S. and non-U.S. operations. The effective tax
rates were 23.5% and (74.6)% in the third quarter of 2004 and 2003,
respectively, and 15.9% and 6.5% in the first nine months of 2004 and 2003,
respectively. The third quarter 2004 income tax provision was lower than the
U.S. statutory rate of 35% primarily due to pretax earnings in non-U.S.
jurisdictions where income is taxed at rates that are less than 35%. The income
tax provision for the first nine months of 2004 was lower than the U.S.
statutory rate of 35% primarily due to pretax earnings in non-U.S. jurisdictions
where income is taxed at rates that are less than 35%; the favorable impact of
the settlement of prior years' tax returns (tax benefit of $8.2 million)
partially offset by deferred tax adjustments (tax expense of $5.6 million); and
a 39.8% tax benefit associated with the $20 million warranty charge for the
Unitary Products Group furnace inspection and remediation program. The third
quarter 2003 income tax benefit arose primarily due to a $2.5 million tax
benefit associated with higher than previously anticipated export incentives,
and tax benefits associated with certain restructuring and related actions
recorded in the quarter. The income tax provision for the first nine months of
2003 was lower than the U.S. statutory rate of 35% due to pretax earnings in
non-U.S. jurisdictions where income is taxed at rates that are less than 35%, a
tax benefit recorded in the third quarter of $2.5 million associated primarily
with higher than previously anticipated export incentives, and tax benefits
associated with certain restructuring and related actions recorded in 2003.
As a result of the above factors, income before cumulative effect of a change in
accounting principle increased $21.3 million to $31.3 million (2.7% of net
sales) in the third quarter of 2004 as compared to $10 million (1.0% of net
sales) in 2003. In the first nine months of 2004, income before cumulative
effect of a change in accounting principle grew $50.6 million to $66.2 million
(2.0% of net sales) compared to $15.6 million (0.5% of net sales) in 2003.
On July 1, 2003 we adopted Financial Accounting Standards Board Interpretation
No. 46, "Consolidation of Variable Interest Entities," an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." Upon
adoption we consolidated the variable interest entity used to transact our
December 1999 sale-leaseback. As a result, we recorded a $15.4 million reduction
to stockholder's equity. The reduction in stockholders' equity represents a
reduction in retained earnings recorded as a cumulative-effect adjustment as of
July 1, 2003. The retained earnings reduction represents the cumulative
differences between our prior accounting of the transaction as a lease of
property and the consolidation, which resulted in the reflection of the assets
as owned depreciable equipment with a related debt obligation. The obligation
relating to the sale-leaseback was repaid in full during the third quarter of
2003.
20
SEGMENT ANALYSIS
The following table sets forth net sales and income from operations by segment
(in thousands):
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales:
Global Applied:
Americas $ 379,335 $ 339,041 $ 1,106,558 $ 999,293
Europe, Middle East, and Africa 384,498 321,888 1,067,322 919,642
Asia 176,845 129,927 443,114 352,033
Intragroup sales (63,180) (48,495) (167,641) (143,113)
----------- ----------- ----------- -----------
877,498 742,361 2,449,353 2,127,855
Unitary Products Group 227,878 207,471 666,384 593,962
Bristol Compressors 100,483 99,455 352,926 375,854
Eliminations (46,585) (40,329) (148,314) (135,939)
----------- ----------- ----------- -----------
Net sales $ 1,159,274 $ 1,008,958 $ 3,320,349 $ 2,961,732
=========== =========== =========== ===========
Income from operations:
Global Applied:
Americas $ 11,457 $ 15,663 $ 36,456 $ 29,722
Europe, Middle East, and Africa 11,888 11,710 26,479 24,750
Asia 21,029 20,381 52,685 52,497
----------- ----------- ----------- -----------
44,374 47,754 115,620 106,969
Unitary Products Group 24,859 18,807 67,076 51,076
Bristol Compressors 187 2,204 8,507 25,463
General corporate expenses, eliminations,
and other non-allocated items (20,326) (23,808) (88,206) (54,053)
Charges and other expenses -- (29,067) -- (82,083)
----------- ----------- ----------- -----------
Income from operations $ 49,094 $ 15,890 $ 102,997 $ 47,372
=========== =========== =========== ===========
Global Applied
Global Applied net sales grew $135.1 million or 18.2% to $877.5 million in the
third quarter of 2004 compared to 2003. In the first nine months of 2004, net
sales increased $321.5 million or 15.1% to $2,449.4 million compared to 2003.
Americas experienced volume increases for refrigeration and HVAC equipment
(mainly air handling and commercial equipment) driven by improved market
conditions in Latin America and North America. EMEA sales growth is attributable
to the favorable impact of foreign currency translation ($26.3 million in the
third quarter and $79.3 million in the first nine months of 2004) and volume
increases for refrigeration equipment, mainly in Europe, and large chiller
systems in the Middle East. Asia revenue increased primarily due to overall
strong demand for commercial air conditioning equipment in the region and
China's growing economy. We expect China to provide further growth
opportunities, however, slower growth rates may result from Chinese government
economic policy aimed at regulating expansion. Service business sales grew $17.7
million or 6.5% to $288.9 million in the third quarter of 2004 compared to 2003.
In the first nine months of 2004, service business revenue increased $68.7
million or 8.9% to $839.7 million compared to 2003. Our service business
(consisting of services, parts and replacement equipment) continued to expand as
demand for repair and replacement work and multi-site commercial service
arrangements remained strong. We will continue to focus on service business
opportunities to capitalize on our installed base of equipment outside the U.S.
Global Applied income from operations decreased $3.4 million to $44.4 million
(5.1% of net sales) in the third quarter of 2004 compared to $47.8 million (6.4%
of net sales) in 2003. Higher equipment volume and 2003 restructuring benefits
were more than offset by rising raw material and component costs, inefficiencies
related to Americas' YORKConnect deployment, increased overhead costs in the
service business, and pricing pressure in Asia and Europe. In the first nine
months of 2004, income from operations increased $8.7 million to $115.6 million
(4.7% of net sales) compared to $107 million (5.0% net sales) in 2003. Americas
and EMEA equipment volume increases and 2003 restructuring benefits were
partially offset by rising raw material and component costs and pricing pressure
in Europe. Improved Asian commercial equipment volume was partially offset by
increased material costs and pricing pressure for air conditioning products. For
the remainder of 2004, we
21
expect continued growth in our equipment and service businesses partially offset
by increasing material costs and deployment expenses associated with
YORKConnect.
Unitary Products Group (UPG)
UPG net sales grew $20.4 million or 9.8% to $227.9 million in the third quarter
of 2004 compared to 2003. In the first nine months of 2004, net sales grew $72.4
million or 12.2% to $666.4 million compared to 2003. Consistent with the first
half of 2004, revenues continued to benefit from overall growth in the North
American unitary residential heating and air conditioning market, general
selling price increases enacted in the second quarter of 2004, and new product
introductions. Residential, light commercial, and manufactured housing equipment
volume increased year-over-year as new construction activity increased. Overall
market share increased slightly in the third quarter and for the first nine
months of 2004. Net sales of the new "Affinity" product line continued to
increase since market introduction in the first quarter of 2004. We expect new
product introductions, price increases, and construction market growth to
increase net sales for the remainder of 2004 above 2003 levels.
UPG income from operations grew $6.1 million or 32.2% to $24.9 million (10.9% of
net sales) in the third quarter of 2004 compared to $18.8 million (9.1% of net
sales) in 2003. In the first nine months of 2004, income from operations
increased $16 million or 31.3% to $67.1 million (10.1% of net sales) compared to
$51.1 million (8.6% of net sales) in 2003. Income from operations improved
mainly due to higher equipment volume, improved production efficiencies, and a
positive product mix partially offset by increased raw material and component
costs, and investments in information technology capabilities.
Bristol Compressors (Bristol)
Bristol net sales increased $1 million or 1.0% to $100.5 million in the third
quarter of 2004 compared to 2003. Revenue increased due to higher shipments to
international customers partially offset by reduced domestic volume and lower
pricing. In the first nine months of 2004, net sales declined $22.9 million or
6.1% to $352.9 million compared to 2003. Revenue declined in the first nine
months due to lower shipments to domestic OEMs partially offset by increased
volume with lower priced applications to international customers. Shipments to
domestic customers are expected to remain below 2003 levels for the remainder of
2004.
Bristol income from operations decreased $2.0 million or 91.5% to $0.2 million
(0.2% of net sales) in the third quarter of 2004 compared to $2.2 million (2.2%
of net sales) in 2003. In the first nine months of 2004, income from operations
declined $17 million or 66.6% to $8.5 million (2.4% of net sales) compared to
$25.5 million (6.8% of net sales) in 2003. Reduced results are mainly
attributable to increased raw material and component costs, lower priced
applications to international customers, and product mix. The successful
introduction and market acceptance of the "Benchmark" compressor in 2005 is
expected to improve Bristol's results in 2006.
Other
General corporate expenses, eliminations, and other non-allocated items
decreased $3.5 million or 14.6% to $20.3 million in the third quarter of 2004
compared to 2003. The decline is mainly attributable to reduced incentive
compensation costs of $7.1 million and other non-allocated costs of $3.1 million
partially offset by cost increases of $6.7 million related to improving
information technology capabilities in both applications and infrastructure. In
the first nine months of 2004, general corporate expenses, eliminations, and
other non-allocated items increased $34.2 million or 63.2% to $88.2 million
compared to 2003. The increase was primarily due to the $20 million warranty
charge for the UPG furnace inspection and remediation program discussed below;
increased costs related to improving our information technology capabilities of
$16.1 million; and net decreased costs related to other non-allocated items of
$1.9 million. The year-over-year cost increases for information technology
investments are expected to continue, to a lesser extent, for the remainder of
2004.
During the second quarter of 2004, we finalized field and factory testing to
investigate failures found in heat exchangers of certain sealed combustion gas
furnaces used in the manufactured housing industry. We found that installation
and application factors combined with component part variation can result in
excessive heat exchanger temperatures, which may contribute to failures in
certain furnace models manufactured in the years 1995 to 2000. We no longer
produce these furnace models. As a result, we recorded a $20 million warranty
charge for the UPG furnace inspection and remediation program during the second
quarter of 2004. The $20 million warranty charge represents our best estimate of
inspection and repair costs within a reasonable estimated range between $13
million and $30 million. Repair cost estimates are mainly comprised of the
expected cost of repair kits or new heat exchangers and installation labor. Our
estimates are based upon the projected number of furnace units to be serviced
(find rate), current repair costs, and the estimated number of furnace units
requiring repair.
22
Differences between estimated and actual find rate, costs to manufacture and
install repair kits or heat exchangers, and number of furnace units that require
repair could have a significant impact on our consolidated results of
operations. We began to manufacture replacement parts and repair furnaces in the
third quarter of 2004 and expect to complete the program by the end of 2006.
Repair activity in the third quarter was minimal.
Charges and other expenses in 2003 were as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, SEPT. 30,
2003 2003
------------------ ------------------
By segment:
Global Applied:
Americas $ 9,371 $ 16,838
EMEA 5,600 40,855
Asia (223) 2,543
-------- --------
14,748 60,236
Unitary Products Group 1,100 8,600
Bristol Compressors 107 135
Corporate 13,112 13,112
-------- --------
$ 29,067 $ 82,083
======== ========
By type:
Restructuring and other charges, net $ 12,140 $ 61,294
Restructuring and other charges reflected in cost of goods sold 632 3,742
Related operating expenses included in cost of goods sold 3,881 4,633
Selling, general, and administrative expenses 12,414 12,414
-------- --------
$ 29,067 $ 82,083
======== ========
SG&A expenses in the third quarter of 2003 include a non-cash curtailment loss
of $12.4 million related to the decision to replace our defined benefit pension
plans for U.S. salaried non-bargaining employees with a defined contribution
plan, effective January 1, 2004. No similar charges or other expenses were
incurred in 2004.
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 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 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 $116.4 million
to $478.9 million as of September 30, 2004 compared to $362.5 million as of
December 31, 2003. The increase resulted from higher net receivables and
inventories partially offset by an increase in accounts payable and accrued
expenses.
Net Receivables
Net receivables increased $109 million in the first nine months of 2004
primarily due to overall revenue growth in Americas, Asia, and UPG, as well as a
greater mix of receivables from international customers with longer payment
terms at Bristol. The effect of revenue growth in UPG was partially offset by
shorter payment terms to its customers. Overall, trade receivables days sales
outstanding decreased to 48 days at September 30, 2004 from 50 days at December
31, 2003.
23
Inventories
Inventories increased $131.1 million in the first nine months of 2004 mainly as
a result of material requirements and work in progress to support our increasing
Global Applied backlog and sales volume at UPG and Asia, and the effect of
higher raw material and component costs. In addition, inventory stock levels
were raised in anticipation of production downtime related to information
technology conversions in the fourth quarter of 2004.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses grew $111.9 million attributable to an
increase in inventory stock levels, raw material and component costs, and
warranty accruals primarily related to the current portion of the warranty
charge for the UPG furnace inspection and remediation program. These increases
were partially offset by payment of 2003 incentive compensation and
restructuring accruals.
CASH FLOWS
Operating Activities
We used $8.4 million of cash for operating activities in the first nine months
of 2004. Net cash flows of $132.4 million were used by the change in assets and
liabilities net of effects from acquisitions and divestitures, mainly due to the
increase in working capital, as discussed above. Our use of cash in the first
nine months of 2004 reflects the working capital requirements needed to support
improved markets, mainly the unitary air conditioning markets in the United
States and global commercial air conditioning markets. Uses of cash were
partially offset by benefits from prior restructuring activities as well as
continued improvements in collections and inventory management, resulting in
lower days sales outstanding and stable inventory turns. During the first nine
months of 2003, our operating activities provided $120.5 million due to lower
working capital requirements mainly due to overall market activity in almost all
markets and the impact of activities to improve collections that resulted in
lower days sales outstanding, and factory efficiencies from changes in business
practices that improved inventory turns.
Investing Activities
Cash used in investing activities of $56.4 million was mainly comprised of
capital expenditures for manufacturing equipment and information technology
systems consistent with 2003.
Financing Activities
Cash provided by financing activities of $49.1 million included proceeds of
$58.7 million from net borrowings and $15.3 million from issuance of common
stock partially offset by common stock dividend payments of $24.8 million. Our
net borrowings were used to fund our increased working capital needs for
inventories and receivables as discussed above. 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 cash dividends of $0.60
per share in the first nine months of 2004 representing a 33% increase compared
to 2003. In 2003, our financing activities used cash of $111.6 million mainly
due to net debt repayments as a result of cash provided by operating activities.
BORROWINGS AND AVAILABILITY
Total indebtedness was $674.7 million as of September 30, 2004, primarily
consisting of $500 million of senior notes, $87.4 million outstanding under
domestic bank lines, and $41.2 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% ($200 million of which was swapped to floating rates). The Danish
retail notes are due in October 2004 and have a coupon rate of 2%. In October
2004, we redeemed the Danish retail notes upon maturity with borrowings from our
domestic bank lines. Our ability to issue commercial paper is limited due to our
credit ratings.
24
The following table summarizes the terms of our lines of credit (in thousands):
LIMIT AVAILABILITY (a)
SEPT. 30, DEC. 31, SEPT. 30, DEC. 31, BORROWING ANNUAL
2004 2003 2004 2003 EXPIRES RATE (b) FEE
--------- -------- -------- -------- ------- --------- -------
Five Year
Credit May 29, LIBOR +
Agreement $ 400,000 $ 400,000 $ 400,000 $ 400,000 2006 1.175% 0.2%
364-Day
Credit March 11, LIBOR +
Agreement (c) 200,000 200,000 200,000 200,000 2005 0.85% 0.15%
Domestic Uncom-
bank lines 150,000 135,000 62,646 110,000 mitted Various --
Non-U.S.
bank credit Uncom-
facilities 391,326 355,246 246,826 246,298 mitted Various --
(a) Availability is reduced for outstanding borrowings and bank guarantee
and letters of credit usage.
(b) The one-month LIBOR (London Interbank Offering Rate) rate was 1.84% and
1.12% as of September 30, 2004 and December 31, 2003, respectively.
(c) We renewed our 364-Day Credit Agreement in March 2004.
The Five Year Credit Agreement and 364-Day Credit Agreement (collectively, 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 September 30, 2004 and December
31, 2003. 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 these arrangements. 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 September 30, 2004, our EBITDA interest coverage was 5.0
times, exceeding the minimum requirement of 3.5 times. As of September 30, 2004,
our debt to capital ratio, as defined in the Agreements, was 44%, below the
maximum allowed of 50%.
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 purchased trade receivables to
bank-administered asset-backed commercial paper vehicles. In May 2004, we
amended the facility, increasing the availability from $150 million to $200
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 $150 million of an undivided
interest in trade receivables as of September 30, 2004 and December 31, 2003.
The proceeds from the sale were reflected as a reduction of net receivables
reflected in our condensed consolidated balance sheets as of September 30, 2004
and December 31, 2003. The discount rate on trade receivables sold was 1.84% and
1.12% as of September 30, 2004 and December 31, 2003, respectively. The program
fee on trade receivables sold was 0.4% and 0.5% as of September 30, 2004 and
December 31, 2003, respectively.
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.
25
OUTLOOK
Overall, we expect improved net sales and income before cumulative effect of a
change in accounting principle in fiscal year 2004 as compared to 2003 due to
substantial completion and realization of our 2003 cost reduction actions and
market growth. We anticipate equipment sales growth within Global Applied
specifically for commercial air conditioning and refrigeration products as we
are seeing some improvements in global economies; increased sales of large
commercial equipment in Asia and Middle East; and the benefit of new commercial
air conditioning products. We anticipate continued strength in our service
businesses' (services, parts, and replacement equipment) sales within Global
Applied. We also anticipate growth in our UPG equipment business due to
continued strength of U.S. residential housing markets (both new construction
and replacement) and our new product introductions. Increased costs for steel,
copper, and components containing steel and copper net of price increases;
continued investments in new products and information technology projects; and
rising energy and transportation costs are expected to continue for the reminder
of 2004 and 2005.
NEW AND PROPOSED ACCOUNTING STANDARDS
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (Act) became law. The Act provides for prescription drug benefits to
retirees and federal subsidies to sponsors of certain retiree health-care plans.
In May 2004, the Financial Accounting Standards Board (FASB) issued Staff
Position No. FAS 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003" (FSP
106-2), effective for the first interim or annual period beginning after June
15, 2004. We have determined that certain of our postretirement benefit plans
providing prescription drug benefits are actuarially equivalent to Medicare Part
D and have elected to recognize the effects of the Act by implementing the
provisions of FSP 106-2 retroactively as of January 1, 2004. We have reduced our
accumulated postretirement benefit obligation (APBO) for the effect of the
subsidy related to benefits attributed to past service by $7.8 million. This is
reflected as a decrease in unrecognized net actuarial losses and will be
amortized over current and future periods. In addition, the subsidy will reduce
interest costs on the APBO. The total effect of the subsidy on the measurement
of net periodic benefit cost for 2004 is expected to be $1.3 million, consisting
of lower amortization of actuarial losses of $0.8 million and lower interest
costs of $0.5 million. As the effect of the subsidy will be recognized evenly
throughout the fiscal year, net period benefit cost decreased by $0.3 million
and $1.0 million in the three and nine months ended September 30, 2004,
respectively.
In March 2004, the FASB 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 July 1, 2005. The impact the proposed
statement will have on our condensed consolidated financial statements is not
known at this time, however, it may reduce net income and earnings per share
similar to the amounts disclosed in note 2 to our condensed consolidated
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, but not limited
to, environmental, tax laws, and economic policy
26
- 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, components, and
energy
- Realization of benefits from our cost reduction initiatives
- Changes in regional or individual country economies, including
but not limited to, Latin America, Middle East, and China
- Acts of war or terrorism
- Changes in commercial and residential construction markets
- Significant changes in customer orders
- Significant product defects or failures
- Failure to successfully implement information technology
systems
- Unfavorable outcome of our UPG furnace inspection and
remediation program including, but not limited to, significant
changes in assumptions used to estimate our repair costs
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 and the establishment of new entrants into the applied systems
China market impacting our ability to continue to grow at current levels. 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 Annual Report on
Form 10-K/A for the year ended December 31, 2003. There was no material change
in such information as of September 30, 2004.
ITEM 4. CONTROLS AND PROCEDURES
As of September 30, 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.
During the quarter ended September 30, 2004, we implemented new information
technology systems at three Global Applied sites and in our service business in
North America. As a result, certain changes have been made to our internal
control over financial reporting. There were no other significant changes in our
internal control over financial reporting that occurred during the quarter ended
September 30, 2004 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
In October 2004, we implemented a new information technology system in our UPG
business.
27
PART II - OTHER INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
The following table provides information about purchases of registered
equity securities by the Company during the quarter ended September 30,
2004:
TOTAL NUMBER OF
SHARES PURCHASED MAXIMUM NUMBER OF
TOTAL NUMBER AVERAGE AS PART OF PUBLICLY SHARES THAT MAY YET BE
OF SHARES PRICE PAID ANNOUNCED PLANS PURCHASED UNDER THE
PERIOD PURCHASED PER SHARE OR PROGRAMS (2) PLANS OR PROGRAMS (2)
- ---------------- -------------- -------------- --------------------- ------------------------
July 1, 2004 -
July 31, 2004 -- -- -- --
August 1, 2004 -
August 31, 2004 1,029 (1) $ 0.005 (1) -- --
September 1, 2004 -
September 30, 2004 -- -- -- --
(1) Not purchased through a publicly announced plan or program. The Company
repurchased unvested restricted shares due to the resignation of a former
executive pursuant to the Amended and Restated 2002 Omnibus Stock Plan.
(2) The Company has no publicly announced repurchase plans or programs.
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
28
ITEM 6. EXHIBITS
Exhibit 10.1 - Form of Director Restricted Stock Agreement*
Exhibit 10.2 - Form of Executive Officer Restricted Stock
Agreement*
Exhibit 10.3 - Form of Executive Officer Stock Option Agreement*
Exhibit 10.4 - Form of Grant to Corporate Executive under the
Amended and Restated 2002 Incentive Compensation Plan*
Exhibit 10.5 - Form of Grant to Executive under the Amended and
Restated 2002 Incentive Compensation Plan*
Exhibit 10.6 - Form of Grant to Executive under the Mid-Term
Portion of the Amended and Restated 2002 Incentive Compensation
Plan*
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*
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*
* Submitted electronically herewith
29
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 November 9, 2004 /S/ M. David Kornblatt
------------------------------
M. David Kornblatt,
Vice President and Chief Financial Officer
30
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Form of Director Restricted Stock Agreement*
10.2 Form of Executive Officer Restricted Stock Agreement*
10.3 Form of Executive Officer Stock Option Agreement*
10.4 Form of Grant to Corporate Executive under the Amended and
Restated 2002 Incentive Compensation Plan*
10.5 Form of Grant to Business Unit Executive under the Amended and
Restated 2002 Incentive Compensation Plan*
10.6 Form of Grant to Executive under the Mid-Term Portion of the
Amended and Restated 2002 Incentive Compensation Plan*
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*
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*
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*
* Submitted electronically herewith
31