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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER: 1-10863
YORK INTERNATIONAL CORPORATION
(EXACT NAME OF THE 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
COMMON STOCK, $.005 PAR VALUE PER SHARE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether 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, and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
As of the last business day of the registrant's most recently completed second
fiscal quarter (June 30, 2004), the aggregate market value of the Common Stock
held by non-affiliates was $1,673,160,053 based on the closing price of the
Common Stock on the New York Stock Exchange Composite Transactions of such date.
(Only officers and directors of the registrant are assumed to be affiliates for
purposes of this calculation.)
As of March 11, 2005, there were 41,839,484 shares of the registrant's common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement pertaining to the Annual
Meeting, to be held May 26, 2005, are incorporated by reference into Part III.
YORK INTERNATIONAL CORPORATION
FORM 10-K
YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
Item
Number Page
- ------ ----
PART I 1
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 14
ITEM 3. LEGAL PROCEEDINGS 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II 17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES 17
ITEM 6. SELECTED FINANCIAL DATA 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 94
ITEM 9A. CONTROLS AND PROCEDURES 94
ITEM 9B. OTHER INFORMATION 94
PART III 94
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 94
ITEM 11. EXECUTIVE COMPENSATION 95
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 95
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 95
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 95
PART IV 95
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 95
PART I
ITEM 1. BUSINESS
GENERAL
York International Corporation and its consolidated subsidiaries (the Company,
which may be referred to as we, us, or our) are a global provider of heating,
ventilating, air conditioning, and refrigeration (HVAC&R) products and services.
Our air conditioning systems, generally used for comfort cooling, range from a
one ton* unit for a small residence to large systems installed in high-rise
residential and commercial buildings. We believe that we are the third largest
supplier of such products in the United States and one of the leading companies
in the HVAC&R industry internationally. Our refrigeration systems are used in
industrial applications where process cooling is needed in manufacturing,
distribution and cold storage. Additionally, we sell replacement parts,
replacement equipment, and controls, and deliver various services and service
solutions. We are the largest services provider to the HVAC&R industry and have
leading positions in several equipment lines. Our multi-site commercial service
contracts include CVS Pharmacies, Sears, Firestone, Family Dollar, Ritz Camera,
Nextel and others. Our products are sold in over 125 countries and are in use in
such diverse locations as the Petronas Towers in Malaysia, the British Houses of
Parliament, the Tokyo World Trade Center, Pudong International Airport in
Shanghai, the Pentagon, NASA's Vehicle Assembly Building at Kennedy Space
Center, NASA's Johnson Space Center, the Los Angeles International Airport, the
Jeddah Airport, the Dubai Airport, the Overseas Union Bank Centre in Singapore,
the Sydney Opera House, the Atlantic City Convention Center, the English Channel
Eurotunnel, the Hong Kong Convention and Exhibition Centre, and the Lantau
Airport Railway in Hong Kong.
We were founded in 1874 in York, Pennsylvania, and over the years we have
undergone various ownership changes. Since 1991, we have been an independent,
publicly held company. During the 1990s, we expanded our worldwide presence
through growth and acquisitions. In 1999, we further expanded our industrial
refrigeration business by acquiring all of the outstanding capital stock of
Sabroe A/S, a Danish company.
Headquartered in York, Pennsylvania, we have manufacturing facilities in nine
states and eight foreign countries. As of December 31, 2004, we employed
approximately 23,200 people worldwide. Our principal offices are located at 631
South Richland Avenue, York, Pennsylvania 17403, and our telephone number is
(717) 771-7890.
STRATEGY
Our mission is to be the world's premier provider of HVAC&R systems and
services. We remain focused solely within this industry. Our objectives are to
deliver profitable growth, strong cash flows, and superior returns on invested
capital. We focus on maintaining a competitive cost structure by controlling
manufacturing and operating expenses, and investing in global standardization,
information technology infrastructure and product development. We continue to
emphasize further improvement in the cost, quality, and services of our supply
chain.
We are uniquely positioned in the market as we own and operate our global
service and parts operations and have the broadest range of air conditioning and
refrigeration skills in the HVAC&R industry. Our global parts and service
strategy is designed to meet demanding requirements, reduce customer down time,
and leverage our national and global service capabilities to provide the best
service to our customers.
- --------
* The cooling capacity of air conditioning units is measured in tons. One ton of
cooling capacity is equivalent to 12,000 BTUs and is generally adequate to air
condition approximately 500 square feet of residential space.
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We believe that our planning processes, capital allocation, investment choices,
and management incentive compensation plans are aligned with our overall
objectives and are key elements in the implementation of our strategies to
achieve our financial goals. In addition, we will leverage revenue growth and
the benefits of prior cost saving initiatives, raise selling prices, and
moderate spending on information technology projects.
In 2005, we will focus on: growing revenue within the service and parts
businesses, maintaining a leadership position in the fast growing China and
Middle East markets, and continuing our market share growth in the middle market
product lines, controls, unitary products, and the replacement market.
ORGANIZATION
Effective January 1, 2003, we consolidated our former York Refrigeration Group
and Engineered Systems Group segments and reorganized management of the combined
business. Our organization is comprised of three groups, consisting of: Global
Applied, Unitary Products Group, and Bristol Compressors. The Global Applied
business is comprised of three geographic regions: the Americas; Europe, Middle
East, and Africa (EMEA); and Asia. These three regions, Unitary Products Group
and Bristol Compressors represent our reportable segments.
The following tables provide net sales by segment and geographic market:
(in thousands) 2004 2003 2002
- --------------------------------- ------------ ------------ ------------
Global Applied:
Americas $ 1,520,645 $ 1,388,930 $ 1,335,392
Europe, Middle East, and Africa 1,512,006 1,343,138 1,161,605
Asia 611,655 490,063 418,599
Intragroup sales (234,865) (194,537) (165,443)
----------- ----------- -----------
3,409,441 3,027,594 2,750,153
Unitary Products Group 854,100 760,059 736,789
Bristol Compressors 426,657 451,241 515,372
Eliminations (180,055) (162,840) (158,941)
----------- ----------- -----------
Total net sales $ 4,510,143 $ 4,076,054 $ 3,843,373
----------- ----------- -----------
2004 2003 2002
------------ ------------ ------------
U.S. 43% 45% 48%
Non-U.S. 57% 55% 52%
Additional financial information about our segments, U.S. and non-U.S.
operations, and export sales is incorporated herein by reference to Note 17 of
Item 8. Financial Statements and Supplementary Data.
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BACKLOG
The following table provides backlog by segment:
DECEMBER 31,
(in thousands) 2004 2003
- ------------------------------- ----------- -----------
Global Applied:
Americas $ 421,261 $ 385,335
Europe, Middle East, and Africa 531,608 439,451
Asia 89,644 89,801
----------- -----------
1,042,513 914,587
Unitary Products Group 66,495 47,288
Bristol Compressors 60,153 64,718
----------- -----------
Total backlog $ 1,169,161 $ 1,026,593
----------- -----------
Substantially all orders are expected to be fulfilled within the next 12 months.
GLOBAL APPLIED
Global Applied designs, produces, sells, and services HVAC&R solutions
worldwide. Our HVAC&R solutions are sold for both the new construction and the
replacement markets for a full range of commercial buildings and various
industrial applications, including: the food and beverage industry; commercial
marine; and the pharmaceutical, petrochemical, textile, and electronics
industries' process cooling operations. Our Global Applied products are also
used in sporting venues, such as ice rinks, and we are the world leader in
snowmaking equipment and snow inducers. Global Applied's service business
includes both after market service and part replacement, in addition to
equipment sales and rentals. The Global Applied group is comprised of three
geographic regions: the Americas; EMEA; and Asia. No single customer accounted
for more than 10% of revenues of the Americas, EMEA, or Asia.
The global equipment markets are driven by new construction and replacement
sales in almost equal proportions. Commercial construction tends to move in the
general direction of the global economies. Replacements are strongest in those
areas of the world where the installed base of equipment is largest, such as
North America. Replacement sales are driven by the age of the equipment, the
economics of repair versus replacement (with increasing emphasis on energy
efficiency), global economics driving capital investment, the potential for
better energy efficiency, and greater environmental concerns of replacing old
with new equipment. Demand for replacement products, repair parts, and services
generally increases during summer months. The overall effect of seasonality is
partially mitigated by sales of new equipment for which demand is less seasonal.
We believe that developing countries offer opportunities for increasing sales of
our equipment.
We focus our product development efforts by emphasizing improving energy
efficiency, reducing operating noise levels, improving indoor air quality,
achieving higher environmental standards, using alternative refrigerants,
lowering cost, and reducing the product size. Nearly all of our Global Applied
products make use of the latest controls technology to enhance all areas of
performance and we are developing our next generation of controls to meet global
and regional market demands. We are committed to providing a line of Global
Applied products developed for regional markets that are aggressively positioned
to meet local needs.
Products
Products include air-cooled and water-cooled chillers, large packaged rooftop
units, indoor and outdoor air handling and ventilating equipment, variable air
volume units, and mini-split and room air conditioning units primarily for
high-rise residential and commercial buildings. Air handling equipment
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covers all the traditional applications, as well as FlexSys, an innovative
underfloor air distribution system and a new ductless system called AirFixture.
Centrifugal, screw, and reciprocating compressors, condensers, evaporators, heat
exchangers, industrial and marine chillers, ice makers, process refrigeration
systems, and gas compression systems are used for many diverse industrial
applications such as preserving food and beverages, hygienic air-cooling for
pharmaceutical, healthcare, and electronics industries, and snowmaking. Many of
these products are engineered and manufactured to unique customer
specifications. They are operated by control systems that are designed for an
individual unit, automated plant control systems, or advanced control systems
for refrigerated containers. Current products utilize HCFC, HFC, HC, and natural
refrigerants such as carbon dioxide and ammonia, which all meet the requirements
of applicable international environmental protocols.
Services and Parts
Our Global Applied service business provides maintenance, repair and rental
services, and related products, including manufactured parts and equipment,
purchased parts and equipment, controls, remanufactured reciprocating
compressors, and product commissioning. Our worldwide service organizations are
owned and operated by us and utilize factory-trained technicians.
Brands
We market Global Applied products under the "YORK", "MILLER-PICKING", "PACE",
"SABROE", "FRICK", "NOVENCO", "FRIGID COIL", "IMECO", "ACUAir", and "GRAM"
brands. Service is marketed under the "YORK", "NATKIN", "UNITED MECHANICAL
SERVICES", and "SABROE" brands and parts are marketed under the "YORK", "FRICK",
"SABROE", "GRAM", "STAL" and "SOURCE 1" brands. Remanufactured reciprocating
compressors are marketed under the "GR COMPRESSORS" and "YORK" brands.
U. S. Government
Historically, approximately 4% of the Americas' sales and approximately 1% of
consolidated sales are related to contracts for the U.S. Navy, for equipment and
research and development. Contracts vary in duration from less than one year to
several years. If these contracts were to be terminated, we would be entitled to
reimbursement of costs incurred and to a payment of a reasonable allowance for
profit on work actually performed. We also sell equipment on standard commercial
terms to contractors and others who incorporate our products into U.S.
government projects.
Competition
All of the markets in which Global Applied participates are very competitive.
Products compete on the basis of product design, reliability, quality, price,
efficiency, acoustics, and post-installation service. Architects and engineers
play an important part in determining which manufacturer's products will be
specified and ultimately used in an application. In the domestic U.S. market, we
compete primarily with Carrier, a United Technologies Corporation company; Trane
Company, a division of American Standard Companies Inc.; McQuay International, a
division of OYL Industries Berhad; GEA-Grasso, a division of MG Technologies AG;
Baltimore Aircoil Company; Evapco; Krack Corp., a subsidiary of Ingersoll-Rand
Co., Ltd; and Mycom Compressors. In the international market, we compete
primarily with the above manufacturers, other local manufacturers in Europe, and
a number of Asian HVAC manufacturers.
Our Global Applied service business competes in a very large but fragmented
market, where individual market shares are typically in the single digit range.
Most of our competition consists of thousands of independent mechanical
contracting companies delivering services and purchased products. Other
competitors include manufacturers such as Trane and Carrier and some
non-manufacturing national companies such as Johnson Controls.
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Manufacturing and Distribution
Products are manufactured in York and Waynesboro, Pennsylvania; San Antonio,
Texas; Roanoke, Virginia; Albany, Missouri; Hattiesburg, Mississippi; Dixon,
Illinois; Santa Fe Springs, California; Durango and Monterrey, Mexico; Sao Paulo
and Curitiba, Brazil; Basildon, England; Carquefou and Nantes, France;
Johannesburg, South Africa; Aarhus and Naestved, Denmark; Wuxi and Guangzhou,
China; and Laem Chabang, Thailand. Many product components, such as motors,
control elements, castings and refrigerant, are purchased from outside
suppliers. Other components are custom manufactured by us. Using these
components and design specifications, products are machined, assembled, tested,
and shipped from the above locations.
Products are distributed globally through a combination of sales and service
offices, sales agents, and independent distributors. Sales engineers operating
out of sales and service offices around the world account for the majority of
equipment sales, with the remaining portion coming from sales agents and
independent distributors. Aftermarket products and services are sold from
substantially all sales and service offices. Parts are also sold from major
regional distribution centers in Baltimore, Maryland; Shanghai, China; Dubai,
U.A.E.; Aarhus, Denmark; and Basildon, England.
Recent Developments
In 2004, Global Applied continued to enhance the packaged centrifugal chiller
line by focusing on improved compressors and chiller-energy efficiency
supporting a wide range of alternate refrigerants. Efforts were focused on our
hermetic water-cooled screw chiller line to reduce manufacturing cost and
improve reliability. New features were added to our 45 to 90 ton packaged
rooftop line to cover a wider range of end use applications. An entirely new
line of airhandling equipment, Solution airhandlers, was introduced in 2003 and
will continue to be expanded through 2005. Solution airhandling units offer
customization options, previously only available on high-end custom airhandlers,
at prices more aligned to standard applications. Solution airhandlers utilize
advanced specification and design software that feeds the manufacturing process
and enables better flexibility, shorter lead times, and reduced costs at a given
feature level. Innovative enhancements to our industrial screw compressor
technologies continue to improve operating performance for the food and beverage
equipment market, as well as natural gas gathering and air conditioning
applications. Screw compressors are a reliable alternative to reciprocating
compressors, requiring less maintenance and featuring lower overall operating
costs. The Rotatune range of variable speed screw compressors was completed with
the introduction of the SAB 110R series. Market acceptance of the PowerPAC
ammonia chiller continues to be strong, with year-over-year increases in demand
since introduction. PowerPAC chillers utilize environmentally friendly
refrigerants such as ammonia that do not deplete the ozone layer, feature high
efficiency and use negligible refrigerant charges.
In the service business, strong efforts to expand our position in the low-rise
commercial market continued with particular emphasis on multi-site owners and
the related replacement equipment. We expanded our presence in the rental
chiller business in 2004 with emphasis on meeting the temporary cooling needs of
our existing customer base. Global Applied continued to develop remote
monitoring and diagnostic management capabilities to allow us to monitor system
performance and control plant rooms remotely. These remote monitoring and
diagnostic management capabilities will allow the Global Applied service
business to identify additional service opportunities. In addition we began
deploying YORKConnect, our service business information technology system, in
North America.
UNITARY PRODUCTS GROUP
Unitary Products Group (UPG) produces heating and air conditioning solutions
designed for use in residential and light commercial applications and
distributes proprietary and non-proprietary parts to the aftermarket, in the
U.S. and Canada. We market our UPG products to the replacement and new
5
construction (new installation) markets. We estimate more than half of UPG
revenues in the U.S. are attributable to the replacement market. The replacement
market is not affected by levels of new home construction and therefore tends to
be less cyclical. The replacement market is affected by ambient temperature. Hot
weather in the spring season causes existing older units to fail earlier in the
season, leading customers to accelerate replacement of a unit that might
otherwise be deferred in the case of a late season failure. Sales of products
used in new construction are mostly dependent upon the overall growth or decline
in new residential construction markets. Sales to Ferguson Electronics accounted
for more than 10% of UPG's revenues in 2004.
We continually redesign our UPG product offering for lower sound ratings and
greater energy efficiency on UPG's premium product line, and manufacturing cost
effectiveness on their entry-level value line. In addition, our premium product
line is designed to capture the essential elements of today's trends in consumer
product design particularly in the replacement market.
Products
UPG's products include ducted central air conditioning and heating systems (air
conditioners, heat pumps, and furnaces), and light commercial heating and
cooling equipment. These products consist of split systems and packaged
products. A split system consists of an outdoor unit containing a compressor and
condenser; a connected indoor unit containing a heat exchanger; an electric,
gas, or oil heating section; an indoor blower system; and associated controls. A
packaged product is a single, self-contained unit with compressor; condenser;
heat exchanger; electric, gas, or oil heating section; blower; and associated
controls. These units are typically installed on rooftops or beside a structure.
Ducted products distribute conditioned air throughout building structures with
ductwork connected to the system's blower, whereas ductless installations
provide conditioned air directly from indoor blowers.
Brands and Distribution
We market our UPG products under the "YORK", "LUXAIRE", "FRASER-JOHNSON", and
"COLEMAN" brands. Service parts are sold under the "SOURCE 1" brand. "YORK" is
our full line brand, which is sold through our company-owned distribution
centers and exclusive independent distributors. The "YORK" brand is sold with a
high level of customer service and sales support. Our other brands are sold
through more than 200 non-exclusive distributors primarily for resale to
contractors. We also sell unitary products in the manufactured housing industry
in North America on an original equipment manufacturer basis through an
exclusive distributor.
Competition
All of the markets in which UPG participates are very competitive. Unitary
product manufacturers compete on the basis of price, reliability, delivery,
efficiency, acoustics, and maximum market coverage. Price competition and
maximum market coverage are of particular importance in residential product
lines as there is often less perceived differentiation. In the U.S. market, UPG
competes with three large worldwide manufacturers, Carrier, Trane, and Lennox,
in addition to numerous national manufacturers such as Goodman, Rheem, Nordyne
and new market entrants from Asia.
Manufacturing
Residential and light commercial products are manufactured in plants located in
Norman, Oklahoma; Wichita, Kansas; and Monterrey, Mexico. Our manufacturing
process relies on the purchase of certain components (including hermetic
compressors, copper tubing, fan motors, fan blades, refrigerant, and control
elements) from outside suppliers, and in-house fabrication of sheet metal
cabinets and refrigerant coils. The various unitary products are then assembled
and tested before shipment.
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Recent developments
In 2004, UPG launched a new line of residential air conditioners and heat pumps
to target the growing residential replacement segment. The new product line is
marketed under the York "Affinity", Luxaire "Acclimate", and Coleman "Echelon"
brand names, and features a swept wing fan designed to provide lower sound
ratings. These product lines are capable of utilizing alternate refrigerants.
Each brand has its own distinct look and feature set, allowing UPG to promote
three differentiated product lines to the marketplace. The York Affinity product
line was also the first air conditioner brand to offer the consumer a choice of
colors for their outdoor unit. UPG is currently designing a new residential
evaporator coil and air handler line designed to match the recently released air
conditioner and heat pump line targeted at the residential replacement market.
In the second half of 2004, UPG launched a new furnace product line. The furnace
product launch, which was the largest in UPG's history, provided differentiated
designs for the York, Luxaire, and Coleman brands, differentiated features, and
significantly enhanced aesthetics and serviceability. The new products also
offer the "ClimaTrak" heating feature, which allows a consumer to customize
their furnace airflow to the climate and geography where they reside.
Beginning in 2004, UPG initiated product development projects to ensure the
residential product line will comply with the 13/13 Seasonal Energy Efficiency
Ratio (13 SEER) requirements of the Department of Energy and will align with
marketing strategies for 2006 and beyond. These efforts will include development
of new indoor equipment (furnaces, air handlers, and evaporator coils) that will
be required to complete a matching system using the higher SEER outdoor
equipment. Since coil and cabinet sizes are larger in higher SEER equipment,
investments are also being made in manufacturing equipment to ensure production
capacities are adequate to meet the increased requirements starting in January
2006. With the investments being made in product development and manufacturing
capacity, we believe UPG will be able to maintain and grow its position in the
residential HVAC market.
BRISTOL COMPRESSORS
Bristol Compressors (Bristol) manufactures reciprocating compressors from 1 to
25 tons and, through its joint venture in Scroll Technologies, scroll
compressors from 2 to 7 1/2 tons. A compressor is an essential part of a heat
pump and/or air conditioning system. Compressors are mechanical pumps driven by
electric motors, and are responsible for circulating and increasing the pressure
of refrigerant. Bristol brand compressors are used in our products and are sold
to original equipment manufacturers and wholesale distributors. UPG purchases
compressors manufactured by Bristol and Scroll Technologies. Sales of Bristol
products are directly correlated to the factors affecting demand for unitary
products discussed previously in the UPG section. Approximately 75% of Bristol's
revenues are attributable to sales of products to other air conditioning
equipment manufacturers or wholesale distributors other than UPG. Sales to
Carrier and National Factory (a Middle East manufacturer of room air
conditioners) each accounted for more than 10% of Bristol's revenue in 2004.
Bristol develops compressors to match compression technology precisely to
customer needs by providing quiet operation, reliability and high efficiency
above the compressors offered by competitors, while maintaining competitive
prices.
Products
Bristol's products include both reciprocating and scroll compressors.
Reciprocating compressors have one or more pistons driven by a motor that turns
a crankshaft. Certain reciprocating compressors include "TS Technology", or
twin-single piston system, which allows for optimum heat pump performance in
both heating and cooling modes with just one compressor. Scroll compressors use
fixed and orbiting spiral-shaped scrolls to compress gas, and require fewer
parts than reciprocating compressors.
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Brands and Distribution
We market our Bristol products under the "BRISTOL", "INFINITY" and "BENCHMARK"
brands. A majority of Bristol's products are sold directly to customers by an
in-house sales force. Third party sales representatives are primarily utilized
for international sales.
Competition
Bristol competes directly with two U. S. manufacturers, Copeland Corporation, a
subsidiary of Emerson Electric Inc., and Tecumseh, a division of Tecumseh
Corporation. International competitors include L.G. Electronics, Matsushita
Electric Industrial Co., Ltd., and SANYO Electric Co., Ltd. The compressor
market competes primarily on price, noise levels and efficiency.
Manufacturing
Bristol products are manufactured at our factory in Bristol, Virginia, and by
Scroll Technologies in Arkadelphia, Arkansas. As with our other products,
Bristol products are assembled using purchased parts (including motors,
castings, forgings, and electronic components) as well as parts manufactured by
us. Bristol relies on a single vendor for certain components used in its
compressors. 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 production and loss of
sales, which would adversely impact the results of operations of Bristol and our
consolidated results of operations.
Recent Developments
Bristol introduced the "Benchmark" compressor line in 2003. Benchmark
compression solutions meet or exceed efficiency and sound performance of any
competitive technology, and is offered in the 1 1/2 to 3 1/2 ton reciprocating
compressor range and the 3 1/2 to 5 ton scroll compressor range. The Benchmark
compressor has been developed to meet the mandated 13 SEER legislation effective
in 2006 for the unitary domestic market. An improvement in sound performance of
Benchmark is possible due to lower vibration from a rigid low noise cylindrical
housing and a unique suction muffler. Additionally, reliability is enhanced due
to the product requiring less components to protect against loss of charge and
indoor fan failure. Benchmark is offered with R-22 (HCFC), R-407C (HFC), and
R-410A (HFC) refrigerants.
RAW MATERIALS AND PURCHASED COMPONENTS
We purchase compressors, steel, copper, aluminum, electric motors, castings,
forgings, heat exchangers, electric panels, condensers, evaporators, oil, pumps,
stampings, fabricated copper tubes, electronic starters and controls, aluminum
fins, fan blades, capacitors, transformers, refrigerant gases, valves, fittings,
and other components from many outside suppliers. Except for certain components
purchased by Bristol for use in its compressors (see "Manufacturing" sub-heading
under "Bristol Compressors" above), alternate sources of supply are available
for all raw materials and components for which we use a single supplier. In
order to hedge against certain raw material price increases, we enter into
commodity forward contracts for the purchase of certain raw materials,
principally copper. However, we are exposed to raw material price increases
related to commodities where no forward markets exist and compressors, electric
motors, and other components purchased from suppliers that may not hedge raw
material prices. Additional information related to raw material and component
cost increases is contained under the caption "Results of Operations" of Item 7.
Management's Discussion and Analysis of Results of Operations and Financial
Condition, and is incorporated herein by reference. Additional information about
our commodity forward contracts contained under the caption "Market Risk" of
Item 7A. Quantitative and Qualitative Disclosures About Market Risk is
incorporated herein by reference.
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PATENTS AND TRADEMARKS
We hold numerous patents that relate to the design and use of our products that
we consider important, but not essential, to the overall conduct of our
business. It is our policy to obtain patent protection for as many of our new
and developmental products as possible, and to enforce such patent rights as
appropriate. No patents which we consider material will expire within the next
five years.
We own several trademarks that we consider important in the marketing of our
products as discussed in each of the business sections. We believe that our
rights in these trademarks are adequately protected and of unlimited duration.
JOINT VENTURES IN U.S. AND NON-U.S. MARKETS
In addition to our wholly-owned and majority-owned production and distribution
facilities, we produce, distribute, and service products through participation
in several joint ventures, which are described in the following table:
JOINT VENTURE
PRINCIPAL JOINT VENTURE (PERCENT OWNED BY THE PRINCIPAL
LOCATION PARTNER COMPANY) PRODUCTS/SERVICES MARKETS SERVED
- ------------ ------------------------ -------------------------- ----------------------- --------------
Spain Compania Roca Radiadores Clima Roca-York S.L. (50%) Manufacture of unitary Europe
S.A. products
Denmark Three Danish pension Jernstoberiet Dania A/S Castings Europe
funds (40%)
South Africa Spoormakers & Partners Shared Energy Management Energy management South Africa
Inc. (Pty) Ltd. (50%) services
Saudi Arabia Al Salem United Al Salem-York Services Ltd. Service and repair of Saudi Arabia
Contracting Co. (50%) air conditioning
equipment
Saudi Arabia Al Salem United Al Salem York Manufacturing Production of central Saudi Arabia
Contracting Co. Co. Ltd. (50%) and split air
conditioning units, fan
coils, and air handling
units
Malaysia OYL Industries BHD. OYL-Condair Industries Manufacture of unitary Asia Pacific
SDN.BHD. (49%) and applied products
Malaysia OYL Industries BHD. York (Malaysia) Service Sales and service of air Malaysia
SDN.BHD. (30%) conditioning equipment
9
JOINT VENTURE
PRINCIPAL JOINT VENTURE (PERCENT OWNED BY THE PRINCIPAL
LOCATION PARTNER COMPANY) PRODUCTS/SERVICES MARKETS SERVED
- ---------- ----------------------- --------------------------- ------------------------ --------------
Malaysia Kumpulan Nametech Sdn. Airvenco Sdn. Bhd. (21%) Sales and service of air Malaysia
Bhd. handling equipment
Japan Nissin Refrigeration & York-Nissin Corp. Ltd.(50%) Sales and service of Japan
(Flakt) Engineering Ltd. refrigeration products
Japan Individual Japanese Novenco Nippon Ltd. (23%) Sales and service of air Japan
(Novenco) shareholder handling equipment
Korea Individual Korean Hi-Pres Korea Co. Ltd.(20%) Sales and service of air Korea
shareholder handling equipment
U.S. Carrier Corporation Scroll Technologies (50%) Manufacture of scroll U.S.
compressors
We received dividends from affiliates of $3.9 million, $2.2 million, and $2.1
million in 2004, 2003, and 2002, respectively. Our total investments in
affiliates were $35.7 million and $28.2 million as of December 31, 2004 and
2003, respectively. Our sales to affiliates are less than 1% of our net sales,
and our purchases from affiliates are less than 2% of our total purchases.
RESEARCH AND DEVELOPMENT
Our product development activities include ongoing research and development
programs to redesign existing products to reduce manufacturing costs and to
increase product efficiencies, develop electronic controls for current product
offerings, and create a wide range of new products. During 2004, 2003, and 2002,
we spent $47.7 million, $42.3 million, and $42.2 million, respectively, for all
product development activities.
EMPLOYEES
As of December 31, 2004, we employed approximately 23,200 persons worldwide.
Approximately 10,200 persons are employed in the U.S. and 13,000 persons are
employed in foreign countries. Approximately 3,400 U.S. employees are covered by
collective bargaining agreements that expire at various dates and generally
range from three to six years. We are in current negotiations with union
representatives at the UPG Wichita factory to renew the contract that expires on
July 31, 2005.
REGULATIONS AND ENVIRONMENTAL MATTERS
Environmental laws that affect or could affect our U.S. operations include,
among others, the Clean Air Act, the Clean Water Act, the Resource Conservation
and Recovery Act, the Occupational Safety and Health Act, the National
Environmental Policy Act, the Toxic Substances Control Act, any regulations
associated with these acts, and various other Federal, state, and local laws and
regulations governing environmental matters.
10
Environmental Remediation
We have remediation activities ongoing at certain of our U.S. facilities as a
result of releases that occurred in the past. From time to time, we have
received notice that we are a potentially responsible party, along with other
potentially responsible parties, in Superfund proceedings under the
Comprehensive Environmental Response, Compensation and Liability Act for the
cleanup of hazardous substances at certain sites to which potentially
responsible parties are alleged to have sent waste. Our non-U.S. operations are
also subject to various environmental statutes and regulations. Generally, these
requirements tend to be no more restrictive than those in effect in the U.S. In
1993, the Council of European Communities agreed on European Community
regulation number 1836/93 that recommended that each company voluntarily
complete an ECO-Audit. We have completed these audits at our European
facilities. On the basis of our historical experience and other information
currently available to us, we do not believe that either our remediation
activities or any Superfund proceedings will have a material adverse effect on
our financial condition, ongoing results of operations, or liquidity. However,
additional environmental remediation sites may be identified in the future,
including properties previously disposed. Currently, we are unable to estimate
the remediation cost of these sites because their existence, environmental
impact and required remediation activities are not known to us.
Montreal Protocol and Clean Air Act
In September 1987, the U.S. became a signatory to an international agreement
titled the Montreal Protocol on Substances that Deplete the Ozone Layer, or the
Montreal Protocol. The Montreal Protocol requires its signatories to reduce
production and consumption of CFCs and halons, some of which are utilized in air
conditioning and refrigeration equipment. In 1988, the Environmental Protection
Agency (EPA) issued regulations under the Clean Air Act implementing the
Montreal Protocol in the U.S. Many other countries have also become signatories
to the Montreal Protocol. The manner in which these countries implement the
Montreal Protocol and regulate CFCs could differ from the approach taken in the
U.S.
The Clean Air Act allows the EPA to accelerate the statutory phase-out schedule
for any Class I (CFC) or Class II (HCFC) substance. In November 1992, the
parties to the Montreal Protocol agreed to amend the Protocol to require the
complete phase-out of CFC production by the beginning of 1996. Further, the
parties agreed to a 1996 production cap on HCFCs and a complete phase-out of
HCFC production by 2030. In May 1995, EPA published a final rule requiring
accelerated phase-out of the production of all CFCs by 1996 and of all HCFCs by
2030.
None of our manufactured products contain Class I substances. Class I substances
previously used by us have been substituted with Class II substances or
substances that are currently unregulated. We continue to expect revenues from
servicing, updating, and repairing existing equipment that uses Class I
substances. These activities are regulated by the EPA, which imposes guidelines
affecting service and maintenance of equipment that uses Class I and Class II
substances. We train and license our service technicians in service and
maintenance procedures that comply with the regulations. Therefore, we believe
that the regulations will not have a material adverse effect on our operations.
The phase-out of Class I substances will require modifications to existing air
conditioning equipment as availability of recycled Class I substances decreases.
Since our technology enables us to modify existing equipment for use with Class
II substances, we believe that this will continue to generate additional
opportunities. While we expect to derive substantial revenue from the sale of
products utilizing Class II substances, it is not expected that any phase-out
will have a significant impact on the sales of such products since new products
that use unregulated refrigerants such as HFCs are now readily available.
Nonetheless, as the supply of virgin and recycled Class II substances falls, it
will be necessary to address the need to substitute permitted substances for
Class II substances.
11
We, in conjunction with major chemical manufacturers, are continually in the
process of reviewing and addressing the impact of refrigerant regulations on our
products. We believe that the combination of those products that presently
utilize Class II substances and those products in the field that can be
retrofitted to such refrigerants provides a complete line of commercial and
industrial products. Therefore, we do not foresee any material adverse impact on
our business or competitive position as a result of the Montreal Protocol, the
1990 Clean Air Act amendments, or their implementing regulations. However, we
believe that the implementation of severe restrictions on the production,
importation, or use of refrigerants employed in larger quantities by us could
have such an impact. We believe that the applied systems products that we have
produced will be well positioned to utilize the next generation of refrigerants
without substantial modification. If the next generation of refrigerants is
incompatible with the hermetic compressors used by us and all of our competitors
for unitary products, design modifications would be required.
National Appliance Energy Conservation Act
We are also subject to regulations promulgated under the National Appliance
Energy Conservation Act of 1987, as amended, and various state regulations
concerning the energy efficiency of our products. In 2004 the Department of
Energy concluded its rule making process and established a higher minimum
efficiency rating for residential air conditioning and heat pump products
effective January 23, 2006. The new efficiency will be raised to a 13 SEER
level, a 30% increase in energy efficiency from prior standards. We have
developed and continue to develop products that will comply with these
regulations, and do not believe that such regulations will have a material
adverse effect on our financial condition, results of operations, or liquidity.
EXECUTIVE OFFICERS
As of March 14, 2005, our executive officers are as follows:
NAME AGE POSITION
- -------------------- --- --------------------------------------------------------------------
C. David Myers 41 President and Chief Executive Officer
Kim Buchwald 47 Vice President and President of York Europe, Middle East, and Africa
Iain A. Campbell 43 Vice President and President of York Americas
Thomas F. Huntington 52 Vice President and President of Unitary Products Group
Wayne J. Kennedy 62 Vice President and President of Bristol Compressors
Wilson Sun 56 Vice President and President of York Asia Pacific
M. David Kornblatt 45 Vice President and Chief Financial Officer
Jane G. Davis 55 Vice President, Secretary and General Counsel
Jeffrey D. Gard 50 Vice President, Human Resources
Helen S. Marsteller 44 Vice President, Investor Relations
12
Peter C. Spellar 60 Senior Corporate Vice President of Strategy, Technology, and Market
Competitiveness
James P. Corcoran 59 Vice President and Treasurer
David R. Heck 50 Chief Governance Officer and Director, Internal Audit
David C. Elder 36 Controller
Mr. Myers has been President and Chief Executive Officer of the Company since
February 2004. Prior thereto, he was President of the Company from June 2003 to
February 2004, Executive Vice President and Chief Financial Officer of the
Company from January to June 2003, Vice President and Chief Financial Officer of
the Company from 2000 to 2002, Vice President Finance, Engineered Systems Group
from 1998 to 2000, Corporate Controller from 1995 to 1998, Director of Finance
for the Airside Products Group from 1994 to 1995, and Director of Financial
Planning and Controls in 1994.
Mr. Buchwald has been Vice President of the Company and President of York
Europe, Middle East, and Africa since January 2005. Prior thereto, he was Vice
President, Marine and Refrigeration Products & Systems from March 2003 to
December 2004, Vice President, Marine and Managing Director of York
Refrigeration Marine and Controls from April 2000 to February 2003, and Vice
President of Human Resources for Sabroe A/S and York Refrigeration from
September 1997 to March 2000. Prior to joining the Company, he was a Senior
Management Consultant with Mercuri Urval A/S in Denmark.
Mr. Campbell has been Vice President of the Company and President of York
Americas since January 2003. Prior thereto, he was Vice President, North America
Sales and Service from June 2002 to December 2002, Vice President, Finance,
Engineered Systems Group from 2000 to 2002, Director, Finance, Europe from 1997
to 2000, and Assistant Treasurer from 1994 to 1997.
Mr. Huntington has been Vice President of the Company and President of Unitary
Products Group since October 2000. Prior thereto, he was Senior Vice President,
Engineering, Bristol Compressors from 1999 to 2000, Vice President, Sales and
Distribution, Unitary Products Group North America from 1997 to 1999, Vice
President and General Manager, Evcon Coleman Division from 1996 to 1997, and
Vice President, Sales and Marketing, Evcon Industries from 1992 to 1996.
Mr. Kennedy has been Vice President of the Company and President of Bristol
Compressors since March 2000. Prior thereto, he was Vice President, Human
Resources from 1993 to 2000. Prior to joining the Company, he was Vice President
of Human Resources for the Millipore Corporation.
Mr. Sun has been Vice President of the Company and President of York Asia
Pacific since January 2005. Prior thereto, he was Vice President and General
Manager, York Asia Pacific from April 2001 to December 2004, Vice President and
General Manager, North Asia from January 1998 to March 2001, Vice President,
People's Republic of China from 1997 to 1998, Regional Manager, People's
Republic of China from 1993 to 1997, and various management positions with the
Company from 1973 to 1992.
Mr. Kornblatt has been Vice President and Chief Financial Officer since June
2003. Prior thereto, he was Vice President, Finance, York Americas from June
2002 to June 2003. Prior to re-joining the Company, he was Director, Taxes,
Europe for The Gillette Company from December 1998 to June 2002. He was
previously Tax Director of the Company from January 1993 to December 1998. Prior
to joining the Company, he was with KPMG LLP and Ernst & Whinney.
Ms. Davis has been Vice President, Secretary and General Counsel of the Company
since March 1995. Prior to joining the Company, she was Vice President, General
Counsel and Secretary of Joy Technologies Inc. from 1988 to 1995.
13
Mr. Gard has been Vice President, Human Resources since June 2003. Prior
thereto, he was Director, Corporate Compensation, Benefits and Human Resource
Information Systems from February 1999 to June 2003. Prior to joining the
Company, he was with Millipore Corporation.
Ms. Marsteller has been Vice President, Investor Relations since March 2004.
Prior to rejoining the Company, she was President of Stellar Partners, an
investor relations and corporate communications consulting firm, from July 2000
to March 2004. She was previously Vice President, Investor Relations and
Corporate Communications for the Company from 1997 to 2000 and Director of
Investor Relations from 1992 to 1997. Prior thereto, she held various financial
positions in the Unitary Products Group from 1986 to 1992. Prior to joining the
Company, she held leadership positions at Honeywell, Inc. and Armco, Inc.
Mr. Spellar has been Senior Corporate Vice President of Strategy, Technology,
and Market Competitiveness since January 2005. Prior thereto, he was Vice
President of the Company and President of York Europe, Middle East, and Africa
from January 2003 to December 2004, Vice President of the Company and President,
Engineered Systems Group from 2000 to 2002, Vice President, Marketing and
Strategic Accounts from 1999 to 2000, Vice President of the Company and
President, Applied Systems Worldwide from 1995 to 1999, Vice President of the
Company and Vice President, European Operations from 1992 to 1995, President,
Frick Division from 1987 to 1992, and President of the Frick Company from 1979
to 1987.
Mr. Corcoran has been Vice President and Treasurer of the Company since March
2001. Prior thereto, he was Treasurer of the Company from 1992 to 2001. Prior to
joining the Company, he was with Griffith Laboratories, AM International, and
Borg-Warner Corporation.
Mr. Heck has been Chief Governance Officer and Director, Internal Audit since
December 2003. Prior thereto, he was Controller from January 2000 to December
2003. Prior to joining the Company, he held various financial and audit related
positions with Superior Group, Inc., LFC Financial Corp., and Deloitte, Haskins,
& Sells.
Mr. Elder has been Controller since December 2003. Prior thereto, he was the
Director, Financial Planning and Analysis from August 2000 to December 2003 and
Manager, Financial Reporting from May 1997 to August 2000. Prior to joining the
Company, he was with Hershey Foods Corporation and KPMG LLP.
WEBSITE ACCESS TO INFORMATION
We make available free of charge through our website, our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the U.S. Securities and
Exchange Commission. Our website address is: www.york.com.
ITEM 2. PROPERTIES
Our principal offices are located in York, Pennsylvania on an approximately 71
acre site owned by us. The following table lists our principal manufacturing
facilities:
APPROXIMATE ENCLOSED
LOCATION SEGMENT AREA (SQ. FT.)
- -------------------------- ----------------------- --------------------
OWNED
York, PA Americas 1,200,000
Wichita, KS Unitary Products Group 840,000
Bristol, VA Bristol Compressors 672,000
Norman, OK Unitary Products Group 539,000
Waynesboro, PA Americas 438,000
14
Aarhus, Denmark Europe, Middle East, and Africa 372,000
Naestved, Denmark Europe, Middle East, and Africa 276,000
Basildon, England Europe, Middle East, and Africa 254,000
Guangzhou, China Asia 215,000
Wuxi, China Asia 182,000
Durango, Mexico Americas 146,000
San Antonio, TX Americas 145,000
Monterrey, Mexico Americas 118,000
Dixon, IL Americas 113,000
Roanoke, VA Americas 72,000
Sao Paulo, Brazil Americas 70,000
Carquefou, France Europe, Middle East, and Africa 32,000
LEASED
Laem Chabang, Thailand Asia 215,000
Monterrey, Mexico Unitary Products Group 165,000
Albany, MO Americas 135,000
York, PA Americas 120,000
Johannesburg, South Africa Europe, Middle East, and Africa 109,000
Hattiesburg, MS Americas 84,000
Santa Fe Springs, CA Americas 82,000
Curitiba, Brazil Americas 58,000
Nantes, France Europe, Middle East, and Africa 34,000
At the York, Pennsylvania location that we own, approximately 550,000 square
feet are currently unused.
In addition to the properties described above, we lease facilities worldwide for
use as sales and service offices and regional warehouses. In the ordinary course
of business, we monitor the condition of our facilities to ensure that they
remain adequate to meet our long-term sales goals and production plans. We
believe that our properties are in good condition and adequate for our
requirements. We make capital expenditures intended to upgrade existing
facilities and equipment to increase production efficiency and, when
appropriate, to adapt them to the requirements of manufacturing new product
lines.
ITEM 3. LEGAL PROCEEDINGS
As discussed in our Form 10-Q filed October 31, 2003 and our Form 10-K/A for the
fiscal year ended December 31, 2003, on September 11, 2003, the City of Elyria,
Ohio, the Lorain County Board of Commissioners, the Lorain County Auditor, the
Lorain County Treasurer and two school districts filed suit against us in the
Court of Common Pleas for Lorain County, Ohio. The plaintiffs allege that we
breached two incentive agreements entered into with the City of Elyria in 1991
and 1993, respectively, by closing our plant in Elyria in 2001. The plaintiffs
assert that they would have collected additional taxes had the plant remained
open and are seeking approximately $3 million in allegedly lost taxes and $200
million in punitive damages. We have removed the suit to the United States
District Court for the District of Ohio and intend to defend it vigorously. We
believe the suit is without merit.
As is the case with many other companies, we have been named as one of many
defendants in lawsuits alleging personal injury to one or more individuals as a
result of exposure to asbestos contained in products previously manufactured by
us or by companies from which we purchased product lines. Information concerning
our asbestos litigation is incorporated herein by reference to Note 13 of Item
8. Financial Statements and Supplementary Data.
In January 2004, we received a request for documents from the staff (the
"Staff") of the Enforcement Division of the Securities and Exchange Commission
(the "Commission") in connection with the Staff's investigation of our approval
of option exercises by three of our executives during an open window
15
period in the last quarter of 2003. We have provided the requested documents and
have fully cooperated with the Staff's investigation. In December 2004, we
received a notice from the Staff, generally known as a "Wells Notice," alleging
that we violated certain federal securities laws. The Wells Notice indicated
that the Staff may propose to the Commission that it file an enforcement action
against us seeking an injunction and a penalty. In January 2005, we submitted a
written response, generally known as a "Wells submission," denying the Staff's
allegation of federal securities law violations. In response to our Wells
submission, the Staff has requested additional information from us, which we
intend to provide. We are unable to predict the outcome of this investigation or
the outcome of any enforcement action, if commenced.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of our security holders during the
fourth quarter of 2004.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the New York Stock Exchange under the symbol "YRK."
On March 11, 2005, we had 5,012 holders of record of our common stock.
TRADING AND DIVIDEND INFORMATION
The high and low sales prices for which our common stock traded and the
dividends declared in each quarterly period within 2004 and 2003 are as follows:
DIVIDENDS
HIGH LOW DECLARED
- --------------- --------- --------- ---------
2004
Fourth quarter $ 38.92 $ 29.14 $ 0.20
Third quarter 41.14 30.25 0.20
Second quarter 43.10 34.76 0.20
First quarter 39.64 35.80 0.20
2003
Fourth quarter $ 40.74 $ 33.65 $ 0.15
Third quarter 36.00 23.31 0.15
Second quarter 26.72 21.00 0.15
First quarter 26.04 18.82 0.15
17
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(in thousands, except per share data
and other information) 2004 2003 2002 2001 2000
- ---------------------------------------------- ----------- ----------- ----------- ----------- -----------
Statements of Operations Data:
Net sales $ 4,510,143 $ 4,076,054 $ 3,843,373 $ 3,920,096 $ 3,883,207
Gross profit (a) 830,817 783,250 727,752 740,205 811,753
Restructuring and other charges, net (b) (1,007) (91,395) 111 (70,504) (49,679)
Gain (loss) on divestiture -- 345 (10,319) -- 26,902
Income from operations (a)(c) 128,181 56,021 151,196 101,671 196,188
Interest expense, net (41,773) (47,535) (48,485) (67,150) (81,587)
Income before income taxes and
cumulative effect of changes in
accounting principles (a)(c) 94,977 14,068 106,891 36,965 120,969
(Provision) benefit for income taxes (13,398) (2,653) (25,715) 9,024 (14,362)
Income before cumulative effect of
changes in accounting principles (a)(c) 81,579 11,415 81,176 45,989 106,607
Net income (loss) (a)(c)(d) 81,579 (3,998) (98,260) 45,989 106,607
Basic earnings (loss) per share (a)(c):
Income before cumulative effect
of changes in accounting principles 1.99 0.29 2.06 1.19 2.80
Net income (loss)(d) 1.99 (0.10) (2.50) 1.19 2.80
Diluted earnings (loss) per share (a)(c):
Income before cumulative effect
of changes in accounting principles 1.96 0.28 2.04 1.17 2.78
Net income (loss) (d) $ 1.96 $ (0.10) $ (2.47) $ 1.17 $ 2.78
Weighted average common shares and
common equivalents outstanding:
Basic 41,072 39,684 39,351 38,626 38,107
Diluted 41,623 40,206 39,770 39,147 38,281
Cash dividends per share $ 0.80 $ 0.60 $ 0.60 $ 0.60 $ 0.60
Capital expenditures 82,696 84,704 69,562 98,126 93,971
Depreciation and amortization of
property, plant, and equipment 75,047 69,990 62,167 59,655 63,115
Amortization of deferred charges,
intangibles, and goodwill (c) 4,540 3,966 2,768 27,024 28,443
Balance Sheet Data (d):
Working capital (e) 401,810 354,175 417,593 451,918 534,621
Total assets (c)(e) 3,010,415 2,729,823 2,560,917 2,620,348 2,864,968
Long-term debt 545,468 582,027 618,224 724,378 831,354
Stockholders' equity (c) $ 878,863 $ 776,400 $ 682,814 $ 739,434 $ 748,976
Other information:
Employees 23,200 22,300 22,800 23,600 24,600
Backlog (in thousands) $ 1,169,161 $ 1,026,593 $ 928,499 $ 873,359 $ 1,018,464
Total debt as a percent of total capital 39.1% 44.1% 48.8% 50.7% 54.5%
Current ratio (e) 1.33 1.35 1.47 1.55 1.57
Book value per share (a)(c)(d) $ 21.04 $ 19.02 $ 17.22 $ 18.85 $ 19.52
(a) In 2004, we recorded a $20 million warranty charge for the Unitary
Products Group furnace and inspection program. See Note 1 of Item 8.
Financial Statements and Supplementary Data.
(b) In all years presented, we recorded charges to operations for
restructuring and other cost reduction initiatives. Also, in 2000, we
recorded charges for acquisition, integration, and restructuring
activities related to the 1999 Sabroe acquisition. See Note 16 of Item 8.
Financial Statements and Supplementary Data.
(c) Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142. Under the Statement, we no longer amortize goodwill.
Goodwill amortization expense was $24.4 million and $25.6 million in 2001
and 2000, respectively. In 2002, we recorded a transitional goodwill
impairment charge of $179.4 million as a cumulative effect of a change in
accounting principle. See Note 1 of Item 8. Financial Statements and
Supplementary Data.
(d) In 2003, 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 was recorded as a
cumulative effect of a change in accounting principle adjustment. See Note
1 of Item 8. Financial Statements and Supplementary Data.
(e) Certain reclassifications have been made to the 2003, 2002, 2001, and 2000
financial data to conform to the 2004 presentation.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
EXECUTIVE SUMMARY
We earn revenues and generate cash by manufacturing and selling products and
services to the heating, ventilating, air conditioning and refrigeration
(HVAC&R) industry. The Global Applied business designs, produces, sells and
services HVAC&R solutions for commercial buildings and industrial refrigeration
applications. The Unitary Products Group (UPG) produces and sells residential
and light commercial heating and air conditioning systems primarily in the
United States (U.S.). Bristol Compressors manufactures compressors, which are
used in our UPG products and sold to original equipment manufacturers (OEM).
Our business is sensitive to many business and economic factors (see Inflation,
Cyclicality, Market Risk and Seasonality sections for further discussion).
Overall, our results are impacted by changes in sales volume and manufacturing
costs. Changes in our sales volume are closely correlated to changes in global
economies and the gross domestic product of countries and, more specifically, to
worldwide commercial and residential construction markets. As these markets
grow, our sales volume tends to increase. Sales volume is also impacted by our
ability to increase market share. Changes in manufacturing costs (including raw
materials) directly impact our gross profit margin. Our ability to successfully
implement actions to reduce the impact of higher manufacturing costs or capture
increased pricing in the market is key to our profitability.
U.S., European, and most Asia Pacific commercial construction markets have
experienced relatively low growth over the past three years while certain
international commercial markets (Middle East and China) strengthened. U.S.
residential construction has grown modestly over the same period. In 2005, we
expect commercial and residential construction markets to grow inline with
recent historical rates. Approximately 56% of our 2004 product sales relate to
new construction. We partially mitigate our exposure to changes in new
construction markets by offering products that are strategic to the replacement
market and offering services that are essential to maintaining equipment to
prolong its life. The replacement market is mainly driven by the age of
existing, installed equipment and cost benefits to be gained from newer, more
efficient equipment.
The cost of raw materials has increased substantially over the last two years.
Our products include raw materials, such as steel and copper, and purchased
components that include steel and copper that are essential to our equipment and
parts. We raised our selling prices in 2004 to partially offset increased raw
material costs. Our raw material and component cost increases in excess of
selling price increases were approximately $46 million for the year ended
December 31, 2004. We expect raw material costs to continue increasing in 2005.
In addition, we will continue with our raw material hedging programs to help
offset the negative impact of rising raw material costs.
In 2005, our main priority is price realization as we anticipate raw material
component costs to increase an additional $100 million over 2004 levels and
continued rising energy and transportation costs. We generally expect stable to
improving markets in our Global Applied regions, with stronger growth
opportunities in China and the Middle East and a weaker outlook in the remainder
of Europe, Middle East, and Africa (EMEA). We plan to continue growing our
Global Applied business by capturing market share with our new products and
focusing on our service business by leveraging our global service and parts
capabilities and multi-site commercial service market in the U.S. In UPG, we
expect 2004 new product introductions and price increases to improve
profitability. In addition, price increases at Bristol are expected to improve
profitability. Finally, investment in our information technology (IT) systems
and infrastructure, continued efforts to develop more efficient manufacturing
processes, leverage the global scale of our support structure, and improvements
in the supply chain will contribute to meeting future financial goals.
19
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS 2004 AS COMPARED TO 2003
Consolidated Operations
DOLLAR PERCENT
(in thousands, except percentages) 2004 2003 CHANGE CHANGE
- ---------------------------------- ---- ---- ------ -------
U.S. sales $1,953,474 $1,836,270 $ 117,204 6.4%
Non-U.S. sales 2,556,669 2,239,784 316,885 14.1%
---------- --------- -------
Net sales 4,510,143 4,076,054 434,089 10.6%
Gross profit 830,817 783,250 47,567 6.1%
Gross profit % 18.4% 19.2%
Net sales
Our revenue growth was mainly attributable to increased Global Applied and UPG
equipment volume and Global Applied service business (consisting of services,
parts and replacement equipment) growth partially offset by changes in product
mix at Bristol Compressors. We enacted general selling price increases
throughout 2004; however, conditions were not favorable for price realization in
certain markets. Selling price increases had an immaterial impact on revenue
growth. The net strengthening of global currencies increased net sales by $111.8
million. 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 OEMs
to international customers. Continued strength of European currencies may impact
the level of capital investment in the region causing further declines in our
equipment markets and create a competitive disadvantage on products exported
from our EMEA equipment business. See further discussion below under Segment
Analysis.
Gross profit
Overall, gross profit grew due to increased equipment volume in Global Applied
and UPG, improved factory performance, and realization of 2003 restructuring
benefits. These improvements were offset by the $20 million warranty charge for
the UPG 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 and inefficiencies related to Americas'
YORKConnect deployment (service business IT 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 raw
materials, as well as surcharges on our steel purchases. Raw material and
component cost increases in excess of selling price increases were approximately
$46 million. We anticipate approximately $100 million of raw material cost
increases in 2005 and have implemented or plan to implement selling price
increases to offset these cost increases. The net strengthening of foreign
currencies increased our gross profit $19.4 million or 2.5%. In 2003, cost of
goods sold included $8.8 million resulting from manufacturing overhead
duplication and $5.5 million of inventory write-downs related to strategic
actions to rationalize our manufacturing capacity in Global Applied.
20
Order backlog
DECEMBER 31, DOLLAR PERCENT
(in thousands) 2004 2003 CHANGE CHANGE
-------------- ---- ---- ------ -------
Global Applied:
Americas $ 421,261 $ 385,335 $ 35,926 9.3 %
Europe, Middle East, and Africa 531,608 439,451 92,157 21.0 %
Asia 89,644 89,801 (157) (0.2)%
---------- ---------- ----------
1,042,513 914,587 127,926 14.0 %
Unitary Products Group 66,495 47,288 19,207 40.6 %
Bristol Compressors 60,153 64,718 (4,565) (7.1)%
---------- ---------- ----------
Total $1,169,161 $1,026,593 $ 142,568 13.9 %
---------- ---------- ---------- ----
Global Applied increased as a result of strong orders in EMEA's marine and
Middle East markets and improvements in commercial equipment markets in North
America and Latin America for refrigeration and air conditioning products. Order
backlog increased 3.7% due to the net strengthening of foreign currencies. UPG
and Bristol backlog increased a combined 13.1%, which typically are not backlog
driven businesses.
DOLLAR PERCENT
(in thousands, except percentages) 2004 2003 CHANGE CHANGE
---------------------------------- ---- ---- ------ -------
Selling, general, and administrative
(SG&A) expenses $701,629 $636,179 $ 65,450 10.3 %
SG&A as a % of net sales 15.6% 15.6%
Restructuring and other charges, net 1,007 91,395 (90,388) (98.9)%
Income from operations 128,181 56,021 72,160 128.8 %
Income from operations as a % of sales 2.8% 1.4%
SG&A expenses
We incurred higher selling and administrative expenses related to our
initiatives to improve our IT capabilities, new product development, equipment
volume gains, and marketing of new products. We expect to benefit from these
improvement initiatives in 2005 and beyond. These investments will enable us to
better standardize our global processes and enable future growth. The IT
investments will leverage our cost structure, assist in achieving operational
efficiencies, and enhance supply chain capabilities. The net strengthening of
foreign currencies increased our SG&A expenses $17.6 million. In addition, 2003
SG&A expenses include non-cash curtailment costs of $14 million related to the
transition of certain U.S. defined benefit pension plans to defined contribution
plans. These curtailment losses represent acceleration of pension expenses that
would have been amortized to expense over a longer period of time.
Restructuring and other charges, net
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 (ESG) and York Refrigeration Group (YRG) segments, additional
actions included the further reduction of manufacturing capacity, elimination of
certain product lines, and exiting of several small, non-core businesses. In
2004, we initiated further actions to reduce our overall manufacturing cost
structure in the Americas and realign our EMEA business from a country
organization to a pan European organization resulting in charges of $0.3 million
and $2.1 million, respectively. In 2004 and 2003, we recorded restructuring and
other charges of $1.3 million and
21
$97.3 million, respectively, related to these actions, including $5.5 million
charged to cost of goods sold in 2003. Our 2003 restructuring initiatives
resulted in savings of $31.9 million in 2004, compared to 2003. In 2004 and
2003, we recorded credits of $0.3 million and $0.5 million, respectively,
related to 2000 and 2001 initiatives.
DOLLAR PERCENT
(in thousands, except percentages) 2004 2003 CHANGE CHANGE
---------------------------------- ---- ---- ------ -------
Interest expense, net $ 41,773 $ 47,535 $ (5,762) (12.1)%
Equity in the earnings of affiliates 8,569 5,582 2,987 53.5 %
Provision for income taxes 13,398 2,653 10,745 405.0 %
Income before cumulative effect of changes
in accounting principles 81,579 11,415 70,164 614.7 %
Interest expense, net
Net interest expense declined due to lower average borrowing rates. Our debt mix
is 35% fixed and 65% variable. Weighted average fixed and variable interest
rates were 4.9% in 2004 compared to 5.5% in 2003.
Equity in earnings of affiliates
The increase was primarily the result of improved performance of Clima Roca, our
Spanish joint venture, as demand for residential HVAC equipment grew
substantially and product was purchased at a lower cost from new Chinese
suppliers.
Provision for income taxes
Our income tax provision of $13.4 million or effective rate of 14.1% in 2004
relates to both U.S. and non-U.S. operations. The 2004 income tax provision was
lower than the U.S. statutory rate of 35% primarily due to the benefits of tax
holidays in certain jurisdictions of $11.3 million, an $8.2 million tax benefit
recorded in the second quarter following the conclusion of an examination by the
IRS of our federal income tax returns for the years 1997 through 1999, export
incentives claimed of $3.8 million, other favorable foreign rate differences of
$11 million, research and development (R&D) credits of $4.7 million, $1.6
million reduction in the valuation allowance associated with a foreign tax loss
carryforward, a $1.5 million benefit recorded in connection with a prior year
restructuring action involving the disposition of foreign operations, and
recognition of $1.3 million in foreign tax credits following enactment of the
American Jobs Creation Act of 2004. These benefits were partially offset by
increases to valuation allowances recorded in connection with certain foreign
tax loss carryforwards of $7.7 million, operating losses in jurisdictions where
no tax benefit was recognized of $6.7 million, the unfavorable tax impact of
deemed and actual distributions of $8.9 million and a $2.1 million charge
resulting from an adjustment in the rate at which state deferred income taxes
are recorded.
Our effective tax rate decreased to 14.1% in 2004 compared to 18.9% in 2003. The
decline in the effective tax rate was primarily due to the impact of the $8.2
million benefit recorded in the second quarter following the conclusion of the
IRS examination of the years 1997-1999, offset by a decline in export incentive
benefits of $4 million. It is anticipated that the effective tax rate will
gradually increase in future years, primarily due to the phase-out of certain
tax holidays, and a different geographic distribution of earnings.
Net deferred tax assets increased $25.5 million in 2004, primarily attributable
to a reduction in the net deferred tax liability associated with plant,
equipment, and intangible assets of $25.1 million and an
22
increase in deferred tax assets of $8.8 million relating to accrued expenses,
offset by decreases in net deferred tax assets related to foreign tax loss
carryforwards of $7.6 million. Based on our historical and current pre-tax
earnings as well as projections of future taxable income, we believe it is more
likely than not that we will realize the net deferred tax assets. The increase
in the valuation allowance associated with U.S. state tax loss carryforwards is
attributable to the increase in U.S. state tax loss carryforwards for which no
benefit has been recorded. The valuation allowance on foreign tax loss
carryforwards increased $9.5 million primarily due to adjustments to the
beginning of the year balances resulting from continuing losses in certain
jurisdictions ($7.7 million), and due to additional losses in jurisdictions
where the deferred tax assets are not expected to be realized ($3.4 million),
offset by the reduction of a valuation allowance in a jurisdiction due to
improved operating performance ($1.6 million). Of the $40.5 million of gross
deferred tax assets relating to foreign tax loss carryforwards, $5.3 million are
subject to expiration limitations, and approximately $3.3 million ($1.9 million
net of valuation allowance) are set to expire over the next three years. The
remaining tax losses carry no expiration date.
The IRS is examining our Federal income tax returns for 2000, 2001, 2002, and
2003. Various other federal, state, and foreign tax returns are under
examination by the applicable authorities. We do not anticipate any material
adverse effect to our consolidated financial statements resulting from these
examinations.
Cumulative effect of changes in accounting principles
On July 1, 2003 we adopted FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities," (FIN 46). 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.
23
Segment Analysis
DOLLAR PERCENT
(in thousands) 2004 2003 CHANGE CHANGE
-------------- ---- ---- ------ -------
Net sales:
Global Applied:
Americas $ 1,520,645 $ 1,388,930 $ 131,715 9.5 %
Europe, Middle East, and Africa 1,512,006 1,343,138 168,868 12.6 %
Asia 611,655 490,063 121,592 24.8 %
Intragroup sales (234,865) (194,537) (40,328) 20.7 %
----------- ----------- -----------
3,409,441 3,027,594 381,847 12.6 %
Unitary Products Group 854,100 760,059 94,041 12.4 %
Bristol Compressors 426,657 451,241 (24,584) (5.4)%
Eliminations (180,055) (162,840) (17,215) 10.6 %
----------- ----------- -----------
Net sales $ 4,510,143 $ 4,076,054 $ 434,089 10.6 %
----------- ----------- -----------
Income from operations:
Global Applied:
Americas $ 50,387 $ 54,855 $ (4,468) (8.1)%
Europe, Middle East, and Africa 47,085 44,691 2,394 5.4 %
Asia 69,656 69,634 22 --
----------- ----------- -----------
167,128 169,180 (2,052) (1.2)%
Unitary Products Group 75,454 60,698 14,756 24.3 %
Bristol Compressors 5,220 25,405 (20,185) (79.5)%
General corporate expenses, eliminations, and
other non-allocated items (118,614) (79,858) (38,756) 48.5 %
Charges and other expenses (1,007) (119,749) 118,742 (99.2)%
Gain on divestiture -- 345 (345) (100.0)%
----------- ----------- -----------
Income from operations $ 128,181 $ 56,021 $ 72,160 128.8 %
----------- ----------- ----------- ------
Global Applied
Americas benefited from volume increases for HVAC (mainly large tonnage
chillers, commercial products, and air handling units) and refrigeration
equipment driven by improved market conditions in North America and Latin
America. EMEA sales growth is attributable to the favorable impact of foreign
currency translation of $102 million; volume increases for HVAC 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 as China continued to grow and other regional economies resumed growth
after an extended period of minimal growth. We expect China to provide further
growth opportunities, however, slower growth rates may result from the Chinese
government economic policy aimed at regulating expansion. Service business sales
grew $79.1 million or 7.5% to $1,135.7 million, of which 3.8% is due to
currency. Our service business (consisting of services, parts, and replacement
equipment) continued to benefit from demand for repair and replacement work and
multi-site commercial service arrangements. North American service business
sales were negatively impacted by increased costs and inefficiencies due to the
YORKConnect deployment in North America. We intend to continue to grow our
service business as we change our business model to expand commercial service
activities, offer new solutions to our customers, and improve our parts
distribution. Additionally, the new business model is enabling us to
successfully capture multi-site service contracts, which allow us to pull
through our equipment as replacement of YORK and non-YORK equipment occurs. We
will continue to focus on service business opportunities to capitalize on our
installed base of equipment outside the U.S. and leverage our service business
model.
24
Income from operations declined due to rising raw material and component cost
increases net of price realization of approximately $21 million, costs and
inefficiencies related to Americas' YORKConnect deployment, and pricing pressure
in Asia and Europe partially offset by higher equipment volume, 2003
restructuring benefits, and improved profitability in Latin America. In 2005, we
expect continued inefficiencies resulting from the deployment of YORKConnect to
negatively impact income from operations in the first half of 2005 on a year
over year basis. We believe the benefits of YORKConnect will be realized
starting in 2006.
Unitary Products Group (UPG)
UPG revenues benefited 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, such as
the "Affinity" product line. Residential, light commercial, and manufactured
housing equipment volume increased year-over-year as new construction and
replacement activity increased. North American unitary air conditioning industry
shipments of compressor bearing units and furnaces increased 8.7% and 7.6%,
respectively. UPG revenue growth compared to industry shipments indicates an
overall market share gain in 2004 demonstrating market acceptance of our new
products in the replacement market.
Income from operations improved mainly due to higher equipment volume, improved
production efficiencies, and a positive product mix. These improvements were
partially offset by increased raw material and component costs net of price
increases of $9 million, investments in IT capabilities, marketing, and product
development. During the first quarter of 2005, UPG raised selling prices again
to counter the effect of 2005 steel and copper commodity cost increases. We
expect our 2005 pricing actions to offset increasing costs above the 2004
levels.
Bristol Compressors (Bristol)
Revenue declined due to lower shipments to domestic OEMs partially offset by
increased volume of lower priced applications to international customers.
Reduced operating results are mainly attributable to increased raw material and
component costs net of price increases of $16 million, lower priced applications
to international customers, and product mix. We expect selling price increases
to improve profitability in 2005. In addition, the successful introduction and
market acceptance of the "Benchmark" compressor in 2005 is expected to improve
Bristol's results in 2006.
General corporate expenses, eliminations, and other non-allocated items
General corporate expenses, eliminations, and other non-allocated items
increased primarily due to the $20 million warranty charge for the UPG furnace
inspection and remediation program discussed below; increased costs related to
improving our IT capabilities of $20 million; and net decreased costs related to
other non-allocated items of $1.2 million.
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 temperature, which may contribute to failures in
certain furnace models manufactured in the years 1995 to 2000. We no longer
produce these furnace models and our program for remediation has been approved
by the U.S. Consumer Product Safety Commission. As a result, we recorded a $20
million warranty charge to cost of goods sold 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 to $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.
25
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 quarterly results or further
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 of $5.4 million was
charged against the warranty reserve in 2004.
Charges and other expenses are as follows:
(in thousands) 2004 2003
-------------- ---- ----
By segment:
Global Applied:
Americas $ 320 $ 31,640
Europe, Middle East, and Africa 2,056 56,581
Asia (28) 2,989
--------- ---------
2,348 91,210
Unitary Products Group -- 9,654
Bristol Compressors (491) 2,135
Corporate (850) 16,750
--------- ---------
$ 1,007 $ 119,749
--------- ---------
By type:
Restructuring and other charges, net $ 1,007 $ 91,395
Restructuring and other charges reflected in cost of goods sold -- 5,484
Related operating expenses included in cost of goods sold -- 8,828
Selling, general, and administrative expenses -- 14,042
--------- ---------
$ 1,007 $ 119,749
--------- ---------
Restructuring and other charges related to the 2004 and 2003 initiatives and the
2001 and 2000 initiatives are discussed in the Consolidated Operations section
above. Operating expenses in 2003 related to the Americas' cost reduction
actions and consisted of costs related to the relocation of certain product
lines. SG&A expenses in 2003 included a non-cash curtailment loss of $14 million
related to the decision to replace our defined benefit pension plans for U.S.
salaried non-bargaining and certain U.S. salaried bargaining employees with a
new defined contribution plan, effective January 1, 2004.
RESULTS OF OPERATIONS 2003 AS COMPARED TO 2002
Consolidated Operations
DOLLAR PERCENT
(in thousands, except percentages) 2003 2002 CHANGE CHANGE
- ---------------------------------- ---- ---- ------ ------
U.S. sales $1,836,270 $1,838,740 $ (2,470) (0.1)%
Non-U.S. sales 2,239,784 2,004,633 235,151 11.7 %
---------- ---------- ----------
Net sales 4,076,054 3,843,373 232,681 6.1 %
Gross profit 783,250 727,752 55,498 7.6 %
Gross profit % 19.2% 18.9 %
26
Net sales
The net strengthening of global currencies increased net sales by $177.1 million
or 4.6%. Our revenue growth was mainly attributable to growth in Global Applied
service business sales (services, parts and replacement equipment) while
equipment sales were flat. Higher commercial equipment sales in Asia were offset
by lower commercial equipment sales in the Americas and EMEA. Growth in UPG
sales was more than offset by a reduction in Bristol revenue. Continued strong
residential new construction markets aided UPG growth, and Bristol sales were
down due to lower sales to international OEMs and the loss of certain
applications at U.S. OEMs. See further discussion below under Segment Analysis.
The net strengthening of global currencies, primarily those in our EMEA region,
resulted in 8.8% of the increase in non-U.S. sales.
Gross profit
The net strengthening of global currencies increased gross profit by $34
million. Increased profits also resulted from continued sales growth in Asia due
primarily to economic growth in China, sales increases in the service business,
and UPG sales growth and factory efficiencies resulting from prior restructuring
actions. These improvements were offset by lower commercial equipment sales and
competitive margin pressures in EMEA due to continued market softness; lower
volume in Bristol, resulting in less absorption of fixed costs; and significant
increases in the cost of steel. In 2003, cost of goods sold included $8.8
million resulting from manufacturing overhead duplication and $5.5 million of
inventory write-downs related to strategic actions to rationalize our
manufacturing capacity in Global Applied. In 2002, cost of goods sold included
$0.1 million of restructuring charges, $6.8 million of costs related to cost
reduction actions, and $0.8 million related to a discontinued product line.
27
Order backlog
DECEMBER 31, DOLLAR PERCENT
(in thousands) 2003 2002 CHANGE CHANGE
-------------- ------------ ---- ------ -------
Global Applied:
Americas $ 385,335 $ 356,040 $ 29,295 8.2 %
Europe, Middle East, and Africa 439,451 368,368 71,083 19.3 %
Asia 89,801 79,028 10,773 13.6 %
---------- ---------- ----------
914,587 803,436 111,151 13.8 %
Unitary Products Group 47,288 39,118 8,170 20.9 %
Bristol Compressors 64,718 85,945 (21,227) (24.7)%
---------- ---------- ----------
Total $1,026,593 $ 928,499 $ 98,094 10.6 %
---------- ---------- ---------- -----
Order backlog increased 6.8% due to the net strengthening of foreign currencies.
The remaining improvement in Global Applied backlog is the result of continued
strong orders in Asia, mainly China, and some improvement in North America
commercial equipment markets. UPG and Bristol decreased a combined 1.4%, which
typically are not backlog driven businesses.
DOLLAR PERCENT
(in thousands, except percentages) 2003 2002 CHANGE CHANGE
---------------------------------- ---- ---- ------ -------
SG&A expenses $ 636,179 $ 566,348 $ 69,831 12.3 %
SG&A as a % of net sales 15.6% 14.7 %
Restructuring and other charges, net 91,395 (111) 91,506 824.4 %
Gain (loss) on divestiture 345 (10,319) 10,664 103.3 %
Income from operations 56,021 151,196 (95,175) (62.9)%
Income from operations as a % of sales 1.4% 3.9 %
SG&A expenses
The net strengthening of global currencies increased SG&A expenses $26 million
or 4.5%. In 2003, SG&A expenses included $14 million of curtailment costs
related to the transition of certain U.S. defined benefit pension plans to
defined contribution plans. These curtailment losses represent acceleration of
pension expenses that would have been amortized to expense over a longer period
of time. This change is not expected to significantly alter pension expense or
funding requirements in the short-term; however, we expect to benefit by
reducing volatility in our pension expense and future funding requirements.
Other increases include higher compensation expense, pension, medical and
insurance costs, and continued investment in IT to improve our overall business
systems and infrastructure.
Restructuring and other charges, net
In 2003, we initiated actions to further reduce our overall cost structure and
support the implementation of our new geographic organization. These actions
included the further reduction of manufacturing capacity, the elimination of
certain product lines, the exiting of several small, non-core businesses, and
the write-down of assets associated with a European joint venture, as well as
cost reductions associated with the consolidation of our former ESG and YRG
segments. In 2003, we recorded restructuring and other charges of $91.4 million,
consisting of $91.9 million related to the 2003 actions and $0.5 million of cost
reversals related to our prior years' restructuring actions. Included in the
$91.4 million are $35.8 million of asset write-downs, $28 million of severance
costs, $14.1 million of contractual and other
28
obligation costs of which $9.7 million relates to a product liability settlement
associated with a discontinued product line, and $13.5 million of other costs.
Other charges to operations included $5.5 million charged to cost of goods sold
as discussed above. These charges are more fully discussed in Note 16 of Item 8.
Financial Statements and Supplementary Data.
In 2000, we initiated a cost reduction process, which included plant closures
and divestitures, product line and facility rationalizations, SG&A expense
reductions, and other actions. In 2001, we expanded the scope of the cost
reduction process to include additional plant closings and staff reductions. In
2002, we recorded a credit of $0.1 million related to these cost reduction
actions.
Gain (loss) on divestiture
In 2002, we sold our air conditioning operations in Australia for $12.1 million.
The sale resulted in a loss of $10.3 million. There was no similar transaction
in 2003 and finalization of the Australia sale resulted in a gain of $0.3
million.
DOLLAR PERCENT
(in thousands, except percentages) 2003 2002 CHANGE CHANGE
---------------------------------- ---- ---- ------ -------
Interest expense, net $ 47,535 $ 48,485 $ (950) (2.0)%
Equity in the earnings of affiliates 5,582 4,180 1,402 33.5 %
Provision for income taxes 2,653 25,715 (23,062) (89.7)%
Income before cumulative effect of changes
in accounting principles 11,415 81,176 (69,761) (85.9)%
Interest expense, net
Net interest expense decreased due to lower average debt levels and a shift of
debt from fixed to floating as a result of paying off $100 million of senior
notes (interest rate of 6.75%) in March 2003. Lower average debt levels were
somewhat offset by slightly higher average borrowing rates mainly due to higher
interest rates in some non-U.S. markets and the increase in debt associated with
the termination of our 1999 equipment sale-leaseback.
Equity in earnings of affiliates
The increase in equity in earnings of affiliates was primarily the result of
improved performance of our Scroll Technologies joint venture.
Provision for income taxes
Our income tax provision of $2.7 million or effective rate of 18.9% in 2003
relates to both U.S. and non-U.S. operations. The 2003 income tax provision was
lower than the U.S. statutory rate of 35% primarily due to the benefits of tax
holidays in certain jurisdictions of $15.4 million, export incentives claimed of
$7.8 million, other favorable foreign rate differences of $2.4 million, and R&D
credits of $2.3 million. These benefits were partially offset by restructuring
actions for which the tax benefit was less than the U.S. statutory rate of $14.7
million, operating losses in jurisdictions where no tax benefit was recognized
of $3.6 million, and the unfavorable tax impact of deemed and actual
distributions of $6.1 million.
Our effective tax rate decreased to 18.9% in 2003 compared to 24.1% in 2002. The
decline in the effective tax rate was primarily due to the impact of export
incentive benefits of $7.8 million on income before income taxes and cumulative
effect of changes in accounting principles of $14.1 million in 2003 as compared
to export incentive benefits of $3 million on income before income taxes and
cumulative
29
effect of changes in accounting principles of $106.9 million in 2002. The impact
of export incentive benefits was partially offset by an increase in taxes on
foreign earnings in 2003.
Net deferred tax assets increased $49.9 million in 2003, primarily attributable
to benefits associated with certain U.S. carry forward items, including U.S.
foreign tax credits of $14 million; U.S. federal and state tax losses of $8.3
million; and U.S. R&D credits of $3.9 million; increases in deferred tax assets
of $6.9 million and $5.6 million relating to inventories and warranties,
respectively; and a decrease in deferred tax liabilities of $10.7 million
associated with adoption of FIN 46.
Cumulative effect of changes in accounting principles
On July 1, 2003 we adopted FIN 46, as discussed above in the Results of
Operation 2004 as Compared to 2003.
Segment Analysis
DOLLAR PERCENT
(in thousands) 2003 2002 CHANGE CHANGE
-------------- ---- ---- ------ -------
Net sales:
Global Applied:
Americas $ 1,388,930 $ 1,335,392 $ 53,538 4.0 %
Europe, Middle East, and Africa 1,343,138 1,161,605 181,533 15.6 %
Asia 490,063 418,599 71,464 17.1 %
Intragroup sales (194,537) (165,443) (29,094) 17.6 %
----------- ----------- -----------
3,027,594 2,750,153 277,441 10.1 %
Unitary Products Group 760,059 736,789 23,270 3.2 %
Bristol Compressors 451,241 515,372 (64,131) (12.4)%
Eliminations (162,840) (158,941) (3,899) 2.5 %
----------- ----------- -----------
Net sales $ 4,076,054 $ 3,843,373 $ 232,681 6.1 %
----------- ----------- -----------
Income from operations:
Global Applied:
Americas $ 54,855 $ 39,710 $ 15,145 38.1 %
Europe, Middle East, and Africa 44,691 50,550 (5,859) (11.6)%
Asia 69,634 55,945 13,689 24.5 %
----------- ----------- -----------
169,180 146,205 22,975 15.7 %
Unitary Products Group 60,698 40,262 20,436 50.8 %
Bristol Compressors 25,405 29,002 (3,597) (12.4)%
General corporate expenses, eliminations, and
other non-allocated items (79,858) (44,037) (35,821) 81.3 %
Charges and other expenses (119,749) (9,917) (109,832) 1,107.5 %
Gain (loss) on divestiture 345 (10,319) 10,664 103.3 %
----------- ----------- -----------
Income from operations $ 56,021 $ 151,196 $ (95,175) (62.9)%
----------- ----------- ----------- --------
Global Applied
The net strengthening of global currencies, almost entirely in EMEA, increased
net sales by $172 million or 6%. Our service business sales (service, parts, and
replacement equipment) increased 15% to $1,057 million, of which 6% was due to
currency. Commercial equipment sales were flat with higher sales levels in Asia
offset by lower sales in the Americas and EMEA. Our pricing for large commercial
equipment in the U.S. stabilized during 2003. Growth in Asia was mainly the
result of the growing Chinese economy and to a lesser extent a mild recovery in
other Asian economies. European commercial equipment markets declined in 2003.
30
The net strengthening of global currencies increased income from operations by
$8.2 million, almost entirely in EMEA. Americas' increase is directly related to
improved performance in Latin American countries where significant actions were
taken to reduce operating costs by combining our former ESG and YRG businesses
and improvement in markets, mainly Argentina. Additionally, improved equipment
performance in Americas resulted from higher refrigeration product sales mainly
to the food and beverage industry and cost reductions resulting from the
relocation of assembly of large tonnage products, somewhat offset by continued
large tonnage volume declines. Asia growth resulted from continued sales growth
of equipment due mainly to China's economic growth and our strong market share
in China. These increases were offset by declines in EMEA. Our EMEA decrease is
primarily in the UK, Italy, Sweden and Germany, and is a direct result of lower
equipment sales and competitive margin pressures in product and service markets.
Unitary Products Group (UPG)
UPG residential product sales improved, aided by the strength of the new home
construction markets, and our light commercial sales were flat following
spending patterns in commercial building. In 2003, we experienced an additional
decline in sales of manufactured housing products. The manufactured housing
market has declined steadily over the past three years. Overall, our air
conditioning market share was generally flat compared to 2002.
The increase in income from operations was primarily due to $7.8 million related
to improvements in production and logistics efficiencies in our Wichita factory
and $20 million due to a more positive product mix, volume, and better pricing
versus 2002. These increases were somewhat offset by $13.3 million of increased
costs for steel and other operating expenses. Also included in the improvement
was a 2002 write-off of a $5.9 million receivable related to a distributor that
became insolvent.
Bristol Compressors (Bristol)
The decline in Bristol sales is primarily related to an 18% decrease in sales to
international OEM customers and to a lesser extent, lower shipments to U.S. OEM
manufacturers. In 2003, our new Benchmark compressor was introduced. Income from
operations declined due to the continued decreases in larger applications and
reductions in sales volume partially offset by steel cost increases.
General corporate expenses, eliminations and other non-allocated items
The increase in general corporate expenses, eliminations, and other
non-allocated items was primarily due to $13.3 million for postretirement
medical expenses, $10.5 million for incentive compensation expense, $6.4 million
for IT project spending, and a net $5.6 million increase in other corporate and
non-allocated costs including pension, insurance, minority interest, and
corporate departments.
31
Charges and other expenses are as follows:
(in thousands) 2003 2002
-------------- ---- ----
By segment:
Global Applied:
Americas $ 31,640 $ 205
EMEA 56,581 1,248
Asia 2,989 209
-------- --------
91,210 1,662
Unitary Products Group 9,654 6,771
Bristol Compressors 2,135 1,466
Corporate 16,750 18
-------- --------
$119,749 $ 9,917
-------- --------
By type:
Restructuring and other charges, net $ 91,395 $ (111)
Restructuring and other charges reflected in cost of goods sold 5,484 88
Related operating expenses included in cost of goods sold 8,828 7,658
Selling, general, and administrative expenses 14,042 2,282
-------- --------
$119,749 $ 9,917
-------- --------
Restructuring and other charges related to the 2003 initiatives and the 2001 and
2000 initiatives are discussed in the Consolidated Operations section above.
Operating expenses in 2003 related to the Americas' cost reduction actions and
consisted of costs related to the relocation of certain product lines. SG&A
expenses in 2003 included non-cash curtailment costs of $14 million related to
the transition of certain U.S. defined benefit pension plans to defined
contribution plans. In 2002, SG&A expenses included executive retirement costs
of $2.3 million.
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.
32
In the ordinary course of business, we enter into various types of transactions
that involve contracts and financial instruments. We enter into these financial
instruments to manage financial market risk, including foreign exchange,
commodity price, and interest rate risk. Financial instruments are more fully
discussed in Note 11 of Item 8. Financial Statements and Supplementary Data and
under the caption "Market Risk" below.
The following tables summarize our contractual obligations and other commercial
commitments as of December 31, 2004:
PAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS LESS THAN AFTER 5
(in thousands) TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
----------------------- ----- --------- --------- --------- --------
Debt repayments $ 565,007 $ 19,539 $ 238,865 $ 200,677 $ 105,926
Operating leases 137,394 44,084 57,599 26,218 9,493
Information technology service contracts (a) 400,388 59,128 106,214 85,205 149,841
Unconditional purchase obligations (b) 125,138 75,138 50,000 -- --
Purchase orders in normal course of business 221,267 204,262 16,982 23 --
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $1,449,194 $ 402,151 $ 469,660 $ 312,123 $ 265,260
---------- ---------- ---------- ---------- ----------
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
TOTAL
OTHER COMMERCIAL COMMITMENTS AMOUNTS LESS THAN OVER 5
(in thousands) COMMITTED 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
---------------------------- --------- --------- --------- --------- ------
Standby letters of credit and surety bonds $115,134 $112,246 $ 2,882 $ 1 $ 5
Performance guarantees 205,817 193,232 9,928 2,312 345
Commercial letters of credit 2,724 2,724 -- -- --
Guarantee of affiliate debt (c) 30,000 -- -- -- 30,000
-------- -------- -------- -------- --------
Total commercial commitments $353,675 $308,202 $ 12,810 $ 2,313 $ 30,350
-------- -------- -------- -------- --------
(a) Unconditional payments of $43.9 million are included in IT service
contracts and have been excluded from the caption "Unconditional purchase
obligations." We are currently renegotiating one of our information
technology service contracts and expect to significantly reduce our future
contractual obligation. This service contract represents $382 million of
total information technology service contracts as of December 31, 2004.
(b) We own 50% of a small refrigeration company and are contingently obligated
to purchase the remaining 50% no later than 2014. Our purchase commitment
can be accelerated under certain circumstances. The purchase price will be
determined based upon the profitability of the company but cannot be less
than $5 million, which amount is included in the table.
(c) We and another company participate in a manufacturing joint venture,
Scroll Technologies (Scroll). We have guaranteed our share of the
indebtedness of Scroll. In the event Scroll would default on its debt
obligation, we are required to assume 50% of Scroll's outstanding debt.
We have postretirement and postemployment benefit obligations to certain
employees and former employees. We are obligated to make contributions to our
pension plans and postretirement health and life insurance plans. We are unable
to determine the amount of plan contributions due to the inherent uncertainties
of obligations of this type, including timing, interest rate charges, investment
performance and amounts of benefit payments. Consequently, contributions are not
included in the contractual obligations table above. We expect to contribute
$19.3 million to postretirement and postemployment plans in 2005. These plans
and our estimates of future contributions and benefit payments are more fully
described in Note 12 of Item 8. Financial Statements and Supplementary Data.
As of December 31, 2004, our accrued postretirement and postemployment
obligations were $245.5 million. In determining these obligations we make a
number of estimates such as discount rate, rate of compensation increase,
expected return on plan assets, and rate of increasing health care costs.
Changes
33
in our assumptions could have a significant impact on our financial position,
results of operations, and liquidity. A one-percentage point change in the
discount rate would impact postretirement and postemployment benefit expense by
approximately $8.2 million, and impact postretirement and postemployment benefit
obligation by approximately $112.3 million. A one-percentage point change in the
estimated rate of return on plan assets would impact postretirement and
postemployment benefit expense by approximately $4.8 million. A one-percentage
point increase in assumed health care cost trend rates would have increased our
expense in 2004 $1.3 million and increased our postretirement benefit
obligations $20.5 million.
WORKING CAPITAL
DOLLAR PERCENT
(in thousands) 2004 2003 CHANGE CHANGE
-------------- ---- ---- ------ -------
Current assets:
Cash and cash equivalents $ 42,881 $ 49,650 $ (6,769) (13.6)%
Receivables, net 804,141 662,525 141,616 21.4 %
Inventories 615,131 512,714 102,417 20.0 %
Prepayments and other current assets 144,489 137,342 7,147 5.2 %
---------- ---------- ----------
Total current assets $1,606,642 $1,362,231 $ 244,411 17.9 %
---------- ---------- ----------
Current liabililties:
Notes payable and current portion of long-term debt $ 19,539 $ 30,755 $ (11,216) (36.5)%
Accounts payable and accrued expenses 1,144,464 932,266 212,198 22.8 %
Income taxes 40,829 45,035 (4,206) (9.3)%
---------- ---------- ----------
Total current liabilities 1,204,832 1,008,056 196,776 19.5 %
---------- ---------- ----------
Working capital $ 401,810 $ 354,175 $ 47,635 13.4 %
---------- ---------- ---------- -----
During 2004, the Euro and other European currencies appreciated significantly
against the U.S. dollar. The impact of the net strengthening of foreign
currencies on working capital is quantified within the respective captions below
where significant.
Receivables
Receivables increased due to the overall increase in sales, foreign currency
translation ($32.3 million), and mix of international sales with longer payment
terms, partially offset by initiatives to improve cash collections. Average days
sales outstanding remained at 50 days due to the offsetting effects of increased
sales and cash collection initiatives.
Inventories
The rise in inventory levels was due to increased production to support current
backlog in Global Applied, increased steel and copper commodity costs, foreign
currency translation ($18.1 million), and strategies to manage business and
component cost risk. We attempt to reduce the business risk related to
inefficient IT implementations by increasing finished goods inventory prior to
implementation. At the end of the third quarter, UPG manufactured additional
finished goods inventory in order to meet demand in the event the implementation
of the IT system caused production slow-downs. In addition, we partially
mitigated the impact of expected higher component costs by purchasing additional
components prior to the effective date of announced vendor price increases. In
the fourth quarter of 2004, Bristol purchased additional motors to reduce the
impact of vendor price increases that went into effect on January 1, 2005.
Inventory turns decreased to 6.3 from 6.5 due to the aforementioned factors.
34
Prepayments and Other Current Assets
Prepayments and other current assets increased mainly due to appreciation in our
foreign currency forward and commodity swap contracts ($10.2 million) and short
term deferred income taxes ($5.8 million) partially offset by reduced prepaid
insurance ($13.7 million). The fair value of our foreign currency forward and
commodity swap contracts increased due to changes in foreign currency and
commodity market prices. Our financial instruments are more fully described in
Note 11 of Item 8. Financial Statements and Supplementary Data. Our deferred
taxes are more fully described in Note 14 of Item 8. Financial Statements and
Supplementary Data.
Accounts Payable and Accrued Expenses
The increase is due to foreign currency translation ($40.1 million); higher
trade payables related to higher inventory levels; increased variable accrued
expenses resulting from sales growth; and the current portion of the accrual for
the UPG furnace and inspection remediation program. These increases were
partially offset by a net decrease in restructuring accruals ($14.9 million).
Restructuring accruals were the direct result of the 2004 and 2003 restructuring
initiatives. Remaining accruals are expected to be utilized in 2005. Other
payables and accruals increased due to increases in IT infrastructure spending
and freight costs.
CASH FLOWS
Our operating cash flows funded our liquidity and capital resource needs in
2004, 2003 and 2002. We expect 2005 operating cash flows to be slightly higher
than 2004. Seasonal working capital needs of approximately $100 million in the
first half of 2005 are expected to be satisfied by a combination of uncommitted
credit lines and committed bank lines of credit from our $400 million Five Year
Credit Agreement. Positive net cash flow will be first applied to pay down
committed lines of credit to ensure maximum availability of committed sources of
capital.
Operating Activities
We generated $128.9 million of cash from operating activities in 2004. Net cash
flows of $21.7 million were consumed from the change in assets and liabilities
net of effects from acquisitions and divestitures. Remaining cash flows of
$150.6 million were generated from our results of operations. Operating cash
flows were utilized to fund our investing and financing activities.
We have consumed cash flows from the change in assets and liabilities net of
effects from acquisitions and divestitures of $21.7 million in 2004, and
generated $41.3 million, and $76.4 million, in 2003 and 2002, respectively. Our
use of cash in 2004 reflects working capital increases, as discussed above.
These increases in working capital were primarily in receivables and inventory,
offset partially by increases in accounts payable and accrued expenses. In 2005,
we do not expect to generate cash flows from reductions in working capital due
to continued increases in raw material and component costs and the continued
growth of our business.
Investing Activities
Cash used in investing activities of $80.1 million was mainly comprised of
capital expenditures of $82.7 million for IT systems and replacement of
manufacturing equipment. Capital expenditures are expected to be $95 million in
2005, an increase of $12.3 million mainly due to increased investment in
manufacturing equipment to produce 13 SEER unitary products.
Financing Activities
Cash used in financing activities of $56 million included $46.4 million of net
debt payments and $33.2 million of common stock dividend payments partially
offset by proceeds from issuance of common
35
stock of $23.6 million. Net debt payments are consistent with our stated goals
to reduce debt obligations. We do not anticipate the issuance of additional
senior notes or purchase of our common stock during 2005. We paid annual cash
dividends of $0.80 per share in 2004 and $0.60 per share in 2003 and 2002. We
currently expect 2005 dividends to be consistent with 2004. Proceeds from
issuance of common stock represents cash received from employee stock purchases
and exercise of stock options under our employee stock plans. Employee stock
plans include the 1992 Employee Stock Purchase Plan (ESPP), as amended, the 2002
Omnibus Stock Plan (2002 Plan), and the Amended and Restated 1992 Omnibus Stock
Plan (1992 Plan). The ESPP authorizes employees to purchase up to 3 million
shares of our common stock, inclusive of 0.5 million shares authorized by the
stockholders in May 2004. The 2002 Plan was approved by shareholders in May 2002
and authorized the issuance of up to 3.8 million shares of our common stock as
stock option or restricted stock awards. As of December 31, 2004, 0.4 million
and 1.9 million shares remained available for purchase or grant under the ESPP
and 2002 Plan, respectively. The 1992 Plan, which authorized the issuance of up
to 8.4 million shares, expired in August 2002 and the remaining shares of 0.9
million were cancelled.
Our financing activities have used cash of $56 million, $114.8 million, and
$133.2 million in 2004, 2003, and 2002, respectively. The declining trend is
mainly attributable to the changes in working capital discussed above. As our
business grows and we make additional investments, less cash is used by
financing activities.
BORROWINGS AND AVAILABILITY
Total indebtedness was $565 million as of December 31, 2004, primarily
consisting of $500 million of senior notes and $31.8 million outstanding under
domestic bank lines. 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 following table summarizes the terms of our lines of credit:
LIMIT AVAILABILITY (a)
DEC. 31, DEC. 31, DEC. 31, DEC. 31, BORROWING ANNUAL
(in thousands) 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 2006 0.85% 0.15%
Domestic Uncom-
bank lines 160,000 135,000 128,150 110,000 mitted Various --
Non-U.S
bank credit Uncom-
facilities 443,247 355,246 295,544 246,298 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 2.38% and
1.10% as of December 31, 2004 and December 31, 2003, respectively.
(c) We renewed our 364-Day Credit Agreement in March 2005.
36
We expect to renew the Five Year Credit Agreement prior to expiration. If we are
unable to renew or replace the agreement, any amounts outstanding, including
amounts outstanding under domestic bank lines, will be reported in current
liabilities in our consolidated balance sheet and reduce our working capital.
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 December 31, 2004 and 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 December 31, 2004, our EBITDA interest coverage was 5.16
times, exceeding the minimum requirement of 3.5 times. As of December 31, 2004,
our debt to capital ratio, as defined in the Agreements, was 39%, 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,
undivided ownership interests 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 $135 million and $150 million
of undivided interests in trade receivables as of December 31, 2004 and 2003,
respectively, resulting in a reduction of receivables reflected in our
consolidated balance sheets. The discount rate on trade receivables sold was
2.38% and 1.12% as of December 31, 2004 and 2003, respectively. The program fee
on trade receivables sold was 0.40% and 0.50% as of December 31, 2004 and 2003,
respectively.
The bank-administered commercial paper vehicles that purchase the YRFLLC trade
receivables provide a lower cost of funds than the committed credit lines. We
expect to renew the revolving facility at a level equal to or greater than $200
million.
The trade receivable balances reflect the seasonal nature of the business
segments in which we are a competitor. Receivable balances reach a peak in the
second quarter then continue to decline until the end of the first quarter. On a
seasonal basis the total receivable balance has trended downward for the past
two years and as a result we have reduced the amount outstanding accordingly. We
believe the trade receivable program is an effective source of financing at
current competitive rates. While we do not anticipate making major changes to
this agreement, we do not believe any changes would have a significant impact on
our liquidity.
37
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. Our contractual obligations under operating
leases are included in the summary of contractual obligations in the "Liquidity
and Capital Resources" section above.
OUTLOOK
Overall, we expect 2005 revenues and net income to exceed 2004 results without
considering the effects of new accounting standards. We anticipate 2005 net
income to improve in dollars and as a percent of net sales. We expect increased
revenue in our service business (services, parts and replacement equipment)
within Global Applied; modest growth in Asia, Americas, and UPG; and stability
at Bristol partially offset by an overall decline in EMEA equipment revenue. Our
expectations are challenged by the continual rise in commodity costs,
principally steel and copper. We have announced general selling price increases
that we expect will mitigate the expected rise in raw material and component
costs. We expect incremental raw material and component cost increases in 2005
of $100 million above 2004 levels, without considering realization of selling
price increases. Our pricing actions are expected to fully offset expected
rising commodity costs.
Global Applied
We have positioned our service business for further growth as a result of our
large installed base, service capabilities and our focus on multi-site
commercial service arrangements. Our service business sales are expected to grow
10% or more in 2005 as we leverage our service business model. Inefficiencies
resulting from the deployment of YORKConnect are expected to continue to
negatively impact income from operations in the first half of 2005 on a year
over year basis. We believe the benefits of YORKConnect will be realized
starting in 2006.
We expect continued growth and market share gain in the middle market product
lines. Americas is expected to continue benefiting from new air handling and
chiller products introduced in 2004 and strength in Latin American economies.
Pricing for large commercial equipment in the United States is expected to
remain consistent with 2004 levels based upon current backlog and slightly
higher new orders. Anticipated Asia growth is mainly the result of the growing
Chinese economy. China's economic and commercial construction expansion
continues to drive demand for large commercial equipment and, as a result, our
sales growth rate in China is expected to be twice the growth rate of the
Chinese economy again in 2005. Large commercial equipment sales are expected to
be robust in the Middle East as substantial investments are being made in the
region. European commercial equipment markets declined in 2003 and 2004 and are
expected to continue to decline in 2005 due to general economic conditions. We
expect pricing pressures in EMEA and China.
Unitary Products Group
UPG growth is expected from continued strength in the U.S. light commercial and
residential markets and replacement markets demand for our recently introduced
products. Residential construction and replacement activity was strong in 2004
and we expect our residential sales to be in line with market expectations in
2005.
Bristol
Bristol revenue is expected to remain at 2004 levels as sales of the new
"Benchmark" compressor begin to replace older compressor technologies. The
expectation is that Bristol will ship fewer compressors to international OEMs,
but price increases will offset this revenue reduction.
38
Information Technology Projects
We expect investments in business applications and global IT infrastructure to
remain consistent with 2004. These investments will leverage our cost structure,
achieve operational efficiencies, and enhance supply chain capabilities. These
investments are necessary to standardize global processes and enable future
growth.
Financing Costs and Income Taxes
We expect higher net interest expense due to rising average borrowing rates. Our
tax rate is expected to be 27% for 2005 based upon current estimated income
levels and employed tax strategies. Our tax rate does not include the effects,
if any, from the special one-time dividends received deduction on the
repatriation of certain foreign earnings as allowed by the American Jobs
Creation Act of 2004.
Cash Flow
We anticipate positive cash flow of approximately $55 million in 2005 before
dividends, acquisitions, divestitures, and net debt payments. We expect capital
expenditures to be approximately $95 million and depreciation and amortization
expense of approximately $79 million. The higher level of capital spending is
directly related to manufacturing equipment to produce 13 SEER unitary products.
In addition, we currently anticipate paying annual dividends of approximately
$34 million in 2005 consistent with 2004.
Other
As a result of the appreciation of our common stock price, we expect an increase
in our average shares outstanding in 2005 due to the dilutive impact of stock
options.
INFLATION
We believe inflation, other than rising raw material costs, has not had a
significant impact on our consolidated results of operations for the periods
presented. We were able to substantially offset the effect of inflation through
our cost reduction programs implemented in 2003. We do not anticipate inflation
having a significant impact on our future consolidated results of operations.
However, as we enter 2005, steel and copper prices continue to increase, and
represent an inflationary risk. See discussion on commodity price risk in the
Market Risk section (Item 7a. Quantitative and Qualitative Disclosure About
Market Risk).
CYCLICALITY
We are exposed to cyclicality, particularly as it relates to new construction.
Generally, Global Applied is impacted by changes in commercial construction,
while UPG and Bristol are impacted by residential construction. Exposure to
cyclicality is partially mitigated by our emphasis on the service, repair, and
replacement market. As the installed base of HVAC&R equipment has grown and
aged, we derive a significant portion of our revenue from the service, repair,
and replacement market. In 2004, 2003, and 2002 on a worldwide basis, service,
repair, and replacement end-use application sales accounted for an estimated
44%, 48%, and 46%, respectively, of our net sales, while new construction
revenue accounted for the remainder.
SEASONALITY
Sales of UPG equipment historically have been seasonal. Demand for residential
air conditioning equipment in the new construction and replacement market varies
according to the season, with increased demand generally in the summer months.
Demand in the residential replacement market generally peaks in early summer for
air conditioners and in the fall for furnaces. Similarly, demand for
39
hermetic compressors in the original equipment market generally increases from
January through July as manufacturers increase production to meet anticipated
seasonal demand. Requirements for service and repair parts for HVAC products and
the refrigeration contracting business also increase during summer months. The
overall effect of seasonality is partially mitigated by sales of our Global
Applied equipment, for which demand is less seasonal.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Preparation of our consolidated financial statements, in conformity with
accounting principles generally accepted in the United States of America,
requires us to make estimates that affect the reported amounts of assets,
liabilities, revenues and expenses, and disclosures of contingent assets and
liabilities. Many of the estimates require us to make significant judgments and
assumptions. Actual results could differ from our estimates and could have a
significant impact to our consolidated results of operations, financial
position, and cash flows. We consider the estimates used to account for
warranty, postretirement and postemployment benefits, income taxes, and the
impairment of long-lived assets and goodwill our most significant judgments.
We base many of our assumptions on our historical experience, recent trends,
internal budgets, and forecasts. We develop our budgets and forecasts based upon
current and historical operating performance, expected industry and market
trends, and expected overall economic conditions. Our assumptions about future
experience, cash flows, and profitability require significant judgment since
actual results have fluctuated in the past and are expected to continue to do
so.
Warranty
We sell equipment with standard and extended warranties. Warranties include
extended warranty contracts sold to customers to increase the warranty period
beyond the standard period. Our warranty policies require us to estimate
warranty costs. Generally, estimated warranty costs are calculated as the ratio
of historical warranty costs to historical actual sales from the most recent
five fiscal years. When no warranty history is available for new or reengineered
products, estimated warranty costs are based upon the warranty history of
similar products. We estimate warranty costs for any known defects separately
(see Note 1 of Item 8. Financial Statements and Supplementary Data regarding the
UPG furnace inspection and remediation program). Warranty costs include the cost
of labor and parts to repair equipment under warranty. Differences between our
estimates and actual cost of labor or parts, frequency of repairs, or defects
could have a significant impact to our consolidated results of operations,
financial position, and cash flows.
Postretirement and Postemployment Benefits
We provide postretirement and postemployment benefits to certain of our
employees and former employees. Our postretirement and postemployment benefit
plans provide pension, salary continuance, severance, life insurance, and health
care. The actual amounts of benefits we pay are ultimately based upon each
employee's years of service, total amount of compensation during employment, and
medical services provided. We fund most of our pension plans by contributing
assets to a trust that invests those assets in various stocks, bonds, and other
investments. We accrue estimated postretirement and postemployment benefits over
the period of service or at the date of the event triggering benefits.
When calculating our projected postretirement and postemployment liabilities, we
must make a number of estimates such as discount rate, rate of compensation
increase, expected return on plan assets, and rate of increasing health care
costs (see Note 12 of Item 8. Financial Statements and Supplementary Data
regarding our calculation of our projected postretirement and postemployment
liabilities). Our estimates are based upon prevailing interest rates and current
market conditions, as well as, health care cost and compensation trends.
Differences between our estimates of future investment returns and actual
returns
40
could have a significant effect on future expense and funding requirements.
Similarly, differences between our calculations of future benefits and actual
benefits could also have a significant impact to our consolidated results of
operations, financial position, and cash flows.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the Act) became law. The Act provides for prescription drug
benefits to retirees and federal subsidies to sponsors of certain retiree
health-care plans (see Note 12 of Item 8. Financial Statements and Supplementary
Data regarding the effects of these subsidies in our postretirement and
postemployment benefits).
Income Taxes
We account for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets are reduced by a
valuation allowance to the amount that more likely than not will be realized.
We assess the recoverability of deferred tax assets based upon our estimated
future taxable income and our tax strategies. Our estimated future taxable
income is based upon our internal budgets and forecasts. Differences between our
estimates and actual taxable income could have a significant impact to our
consolidated results of operations and financial position.
We also recognize a liability for expected tax contingencies. We assess the
liability based on our review of various tax issues and internal and external
interpretations of tax law. Differences between our estimates and actual future
tax payments could have a significant impact to our consolidated results of
operations, financial position, and cash flows.
Our income tax provision is impacted by several factors, including, but not
limited to, the geographical distribution of our pre-tax income, the extent to
which tax holidays may apply, changes in tax legislation in the various
jurisdictions where we operate, and estimates of future results and their impact
on the recoverability of deferred tax assets.
Impairment of Long-Lived Assets and Goodwill
We review long-lived assets and certain identifiable intangibles to be held and
used for impairment whenever events or changes in circumstances indicate that
the recoverability of the carrying amount of an asset or asset group should be
assessed. We assess the carrying amount of the asset or asset group by comparing
the carrying amount to our estimate of future cash inflows, net of outflows. If
the estimated net cash inflows are less than the asset carrying amount, the
asset is written down to fair value. Fair value is based upon quoted market
prices, if available. When quoted market prices are not available, we estimate
fair value based upon the selling prices of similar assets or valuation
techniques. We must estimate the net future cash inflows to assess the
recoverability of an asset or asset group, and its fair value. Our estimates are
based upon our internal budgets and forecasts. A change in the utilization of
our assets or a decision to exit certain product lines or manufacturing
locations could impact our estimates of future cash flows. A decrease in
estimated future cash flows could reduce the fair values of long-lived assets,
increasing the likelihood of impairment, which could have a significant impact
to our consolidated results of operations and financial position.
We are required to test goodwill for impairment at least annually or between
annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a segment below its carrying amount. We
identify potential goodwill impairment by comparing the fair value of a segment
with its carrying amount, including goodwill. If the fair value of a segment
exceeds its carrying amount, goodwill of the segment is not considered impaired.
If the carrying amount of a segment
41
exceeds its fair value, the amount of goodwill impairment loss, if any, must be
measured. We measure the amount of goodwill impairment loss by comparing the
implied fair value of segment goodwill with the carrying amount of that
goodwill. If the carrying amount of the segment goodwill exceeds the implied
fair value of goodwill, an impairment loss is recognized as an operating
expense.
A goodwill impairment test requires us to estimate the fair value of our
segments. We estimate reporting unit fair value using a discounted cash flow and
market-multiple approach. In estimating future cash flows, we use our internal
budgets and forecasts.
In the second quarter of 2002, we completed the transitional goodwill impairment
test. As required, the transitional goodwill impairment test was performed as of
January 1, 2002. The transitional goodwill impairment test resulted in an
impairment charge in our former YRG reporting unit. The projected financial
performance of YRG, which includes the entities acquired in the Sabroe
acquisition, was insufficient to support the related goodwill as of January 1,
2002.
We completed our annual goodwill impairment test in the fourth quarter of 2004.
Our 2004 annual goodwill impairment test indicated that the estimated fair
values of our segments exceeded carrying amounts. As a result, no goodwill
impairment was recognized. A decrease in estimated future cash flows or
profitability would reduce the fair values of our segments and increase the
likelihood of goodwill impairment which could have a significant impact to our
consolidated results of operations and financial position.
Management has discussed the development and selection of critical accounting
policies with the audit committee of our board of directors, and the audit
committee has reviewed this disclosure.
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 was $1.3 million, consisting of lower
amortization of actuarial losses of $0.8 million and lower interest costs of
$0.5 million.
In October 2004, the American Jobs Creation Act of 2004 became law. The act
provides tax relief to U.S. domestic manufacturers by providing a tax deduction
up to nine percent (when fully phased-in) of the lesser of (a) "qualified
production activities income," as defined in the act, or (b) taxable income
after the deduction of the utilization of net operating loss carryforwards. In
December 2004, the FASB issued Staff Position No. FAS 109-1, "Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004," effective upon issuance. The standard provides guidance that the
deduction should be accounted for as a special deduction in accordance with SFAS
No. 109. We believe the impact of adoption will be immaterial to our
consolidated financial statements.
42
In addition to the tax deduction provided by the American Jobs Creation Act of
2004, the act also allows a special one-time dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer. In December 2004,
the FASB issued Staff Position No. FAS 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004." The staff position allows companies time beyond the
financial reporting period of enactment to evaluate the effect of the act on its
plan for reinvestment or repatriation of foreign earnings and requires
disclosures for reasons why a company has not completed its evaluation of the
repatriation provision for purposes of applying SFAS No. 109 (see Note 14 of
Item 8. Financial Statements and Supplementary Data regarding our evaluation of
the effect of the act).
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." This standard
amends the guidance in Accounting Research Bulletin No. 43, and requires the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material to be treated as current-period charges. In addition,
the standard requires that allocation of fixed production overheads to the costs
of conversion be based on the normal capacity of the production facilities. The
standard is effective for inventory costs incurred beginning July 1, 2005. This
standard is not expected to materially impact our consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment." This standard 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 standard, 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 standard will
have on our 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 1 of Item 8. Financial Statements and Supplementary Data.
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 management's current
expectations or plans for the 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
- - Legal actions, including pending and unasserted claims
- - Loss of patented technology
- - Events that create a negative image for our trademarks
- - Work stoppages
43
- Price and availability of raw materials, components, and energy
- Realization of benefits from our cost reduction initiatives
- Changes in individual country or regional 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 IT 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
- Changes in tax legislation in jurisdictions where we have
significant operations
Unseasonably cool weather in various parts of the world could adversely affect
our Global Applied air conditioning businesses and, similarly, unseasonably cool
weather in the U.S. could impact our UPG and 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
We are exposed to market risk associated with changes in foreign currency
exchange rates, certain commodity prices, and interest rates.
We do not typically hedge our market risk exposures beyond three years and do
not anticipate any material changes in our primary market risk exposures in
2005. We do not hold or issue derivative instruments for trading purposes.
We mitigate the risk that the counter-party to currency, commodity, and interest
rate financial instruments will fail to perform by only entering into financial
instruments with major international financial institutions. Financial
instruments are more fully discussed in Note 11 of Item 8. Financial Statements
and Supplementary Data.
Currency Rate Risk
We have manufacturing facilities in eight foreign countries and our products are
sold in over 125 countries throughout the world. As a result, we are exposed to
movements in various currencies against the U.S. dollar and against the
currencies in which we manufacture. The major foreign currencies in
44
which foreign currency risks exist are the Euro, Danish Krone, British Pound
Sterling, Chinese Renminbi, Hong Kong Dollar, Canadian Dollar, Mexican Peso, and
Brazilian Real.
Based on a sensitivity analysis of our estimated 2005 foreign exchange currency
exposures, a uniform 10% strengthening of the value of the U.S. dollar against
these foreign exchange currency exposures is estimated to result in a $13.8
million reduction in 2005 forecasted income from operations when translated from
functional currencies. In addition to its direct effect, changes in foreign
currency exchange rates will also potentially affect future sales volumes,
foreign currency sales prices, and hedging strategies. The sensitivity analysis
described above does not reflect these potential changes.
We manage our foreign currency risks by hedging our foreign currency exposure
with foreign currency forward contracts and purchased option contracts. Through
our foreign 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. We do not, however, hedge foreign exposures
that are considered immaterial or in highly correlated currencies. Foreign
currency derivative instruments (forward contracts) are matched to the
underlying foreign currency exposures and are executed to minimize foreign
exchange transaction costs.
The functional currency for the majority of our foreign operations is the
applicable local currency. Adjustments resulting from translating foreign
functional currency financial statements into U.S. dollars are included in
currency translation adjustments in accumulated other comprehensive losses. We
issued Danish Kroner denominated, retail notes as a hedge to protect the value
of a portion of our net investment in a Danish subsidiary. The notes were repaid
in full in 2004. The gains and losses on a foreign denominated debt instrument
designated as a hedge of a net investment are recorded in accumulated other
comprehensive losses; therefore, the gains and losses of the Danish Kroner
denominated retail notes offset a portion of the change in net assets of our
investment in a Danish subsidiary. We redeemed the 250 million Danish Kroner
denominated retail notes in October 2004. Based on a sensitivity analysis of our
December 31, 2004 foreign functional currency balance sheets, a uniform 10%
strengthening of the value of the U.S. dollar would increase other comprehensive
losses by $54.8 million.
Commodity Price Risk
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 counter-party to coincide
with cash market purchases of the actual commodity.
Interest Rate Risk
We manage our interest rate risk by entering into both fixed and variable rate
debt at the lowest possible costs. Short-term borrowings, typically bank loans,
are entered into and renewed in the ordinary course of business and have
maturity dates that support seasonal working capital needs. Our non-U.S.
subsidiaries maintain bank credit facilities for borrowings in their functional
currency. In addition, we enter into interest rate swap contracts in order to
achieve a balanced mix of fixed and variable rate indebtedness.
The following table provides information, as of December 31, 2004, concerning
our derivative financial instruments and other financial instruments that are
sensitive to changes in interest rates, including interest rate swaps and debt
obligations. For debt obligations, the table presents principal cash flows and
related weighted average interest rates by contractual maturity dates. For
interest rate swaps, the table presents notional principal amounts and weighted
average interest rates by contractual maturity dates.
45
Notional amounts are used to calculate the contractual payments to be exchanged
under the interest rate swaps. Weighted average variable rates are generally
based on LIBOR as of the reset dates. The cash flows of these instruments are
denominated in a variety of currencies. The information is presented in U.S.
dollar equivalents.
PRINCIPAL PAYMENTS AND INTEREST RATE DETAIL BY CONTRACTUAL MATURITY DATES
FAIR VALUE
(ASSETS)/
(in thousands) 2005 2006 2007 2008 2009 THEREAFTER TOTAL LIABILITIES
- -------------- ------- -------- ------- -------- ------ ---------- --------- -----------
Short-term debt
Variable rate (U.S. dollars) $ 425 $ -- $ -- $ -- $ -- $ -- $ 425 $ 425
Average interest rate 2.89% -- -- -- -- --
Variable rate (other currencies) $15,786 $ -- $ -- $ -- $ -- $ -- $ 15,786 $ 15,786
Average interest rate 5.41% -- -- -- -- --
Long-term debt
Fixed rate (U.S. dollars) $ 2,145 $204,945 $ 280 $200,298 $ -- $ 104,043 $ 511,711 $ 537,921
Average interest rate 2.36% 6.63% 6.36% 6.70% -- 5.80%
Fixed rate (other currencies) $ 1,175 $ 1,253 $ 332 $ 191 $ 188 $ 1,883 $ 5,022 $ 5,022
Average interest rate 6.80% 7.43% 7.80% 7.12% 7.12% 6.94%
Variable rate (U.S. dollars) $ 8 $ 31,952 $ 103 $ -- $ -- $ -- $ 32,063 $ 32,063
Average interest rate (a) 5.25% 1.59% 5.25% -- -- --
Interest Rate Derivatives
Fixed to variable rate interest
rate swaps (U.S. dollars) $ -- $100,000 $ -- $ -- $ -- $ 100,000 $ 200,000 $ (8,725)
Average pay rate (b) -- -- -- -- -- --
Average receive rate -- 6.63% -- -- -- 5.80%
(a) Variable rate specified is based upon LIBOR plus the specified margin over
LIBOR.
(b) The average pay rate is based upon the 6-month LIBOR rate and is reset
biannually. The applicable LIBOR rate was 2.2% as of December 31, 2004.
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Exchange Act Rules 13a - 15(f).
Our internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. Our internal control over financial reporting
includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorization of management and directors of
the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on our evaluation under that framework we concluded our internal control over
financial reporting, as of December 31, 2004, was effective. KPMG LLP, an
independent registered public accounting firm, has issued an attestation report,
included herein, on our assessment of the effectiveness of our internal control
over financial reporting, as of December 31, 2004.
York International Corporation
March 14, 2005
47
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
York International Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting that York
International Corporation maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). York International
Corporation's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that York International Corporation
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, York International Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
York International Corporation and subsidiaries as of December 31, 2004 and
2003, and the related consolidated statements of operations, comprehensive
income (loss), cash flows and stockholders' equity for each of the years in the
three-year period ended December 31, 2004, and our report dated March 14, 2005
expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Harrisburg, Pennsylvania
March 14, 2005
48
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
York International Corporation:
We have audited the accompanying consolidated balance sheets of York
International Corporation and subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of operations, comprehensive income (loss),
cash flows and stockholders' equity for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of York International
Corporation and subsidiaries as of December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of York
International Corporation's internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 14, 2005 expressed an
unqualified opinion on management's assessment of, and the effective operation
of, internal control over financial reporting.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for variable interest entities in 2003 and its
method of accounting for goodwill and other intangible assets in 2002.
/s/ KPMG LLP
Harrisburg, Pennsylvania
March 14, 2005
49
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(in thousands, except per share data) 2004 2003
- ------------------------------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 42,881 $ 49,650
Receivables, net 804,141 662,525
Inventories:
Raw material 167,089 138,108
Work in progress 143,799 135,544
Finished goods 304,243 239,062
------------ ------------
Total inventories 615,131 512,714
Prepayments and other current assets 144,489 137,342
------------ ------------
Total current assets 1,606,642 1,362,231
------------ ------------
Deferred income taxes 152,259 133,298
Investments in affiliates 35,725 28,200
Property, plant, and equipment, net 556,629 541,118
Goodwill 542,851 529,182
Intangibles, net 39,357 36,744
Deferred charges and other assets 76,952 99,050
------------ ------------
Total assets $ 3,010,415 $ 2,729,823
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 19,539 $ 30,755
Accounts payable and accrued expenses 1,144,464 932,266
Income taxes 40,829 45,035
------------ ------------
Total current liabilities 1,204,832 1,008,056
------------ ------------
Long-term warranties 49,379 46,888
Long-term debt 545,468 582,027
Postretirement and postemployment benefits 226,213 233,841
Other long-term liabilities 105,660 82,611
------------ ------------
Total liabilities 2,131,552 1,953,423
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock $.005 par value; 200,000 shares authorized;
issued 46,666 shares in 2004 and 46,248 shares in 2003 233 231
Additional paid-in capital 743,790 732,339
Retained earnings 347,609 299,195
Accumulated other comprehensive losses (25,902) (51,597)
Treasury stock, at cost; 4,895 shares in 2004 and
5,420 shares in 2003 (179,943) (200,856)
Unearned compensation (6,924) (2,912)
------------ ------------
Total stockholders' equity 878,863 776,400
------------ ------------
Total liabilities and stockholders' equity $ 3,010,415 $ 2,729,823
------------ ------------
The accompanying notes are an integral part of these statements.
50
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
(in thousands, except per share data) 2004 2003 2002
- ------------------------------------- ------------ ------------ ------------
Net sales:
Products $ 4,040,756 $ 3,648,386 $ 3,459,038
Services 469,387 427,668 384,335
------------ ------------ ------------
Net sales 4,510,143 4,076,054 3,843,373
------------ ------------ ------------
Cost of goods sold:
Products (3,286,427) (2,942,720) (2,793,895)
Services (392,899) (350,084) (321,726)
------------ ------------ ------------
Cost of goods sold (3,679,326) (3,292,804) (3,115,621)
------------ ------------ ------------
Gross profit 830,817 783,250 727,752
Selling, general, and administrative expenses (701,629) (636,179) (566,348)
Restructuring and other charges, net (1,007) (91,395) 111
Gain (loss) on divestiture -- 345 (10,319)
------------ ------------ ------------
Income from operations 128,181 56,021 151,196
Interest expense, net (41,773) (47,535) (48,485)
Equity in earnings of affiliates 8,569 5,582 4,180
------------ ------------ ------------
Income before taxes and cumulative effect of changes in accounting principles 94,977 14,068 106,891
Provision for income taxes (13,398) (2,653) (25,715)
------------ ------------ ------------
Income before cumulative effect of changes in accounting principles 81,579 11,415 81,176
Cumulative effect of changes in accounting principles, net of tax of
$10,686 in 2003 and $0 in 2002 -- (15,413) (179,436)
------------ ------------ ------------
Net income (loss) $ 81,579 $ (3,998) $ (98,260)
------------ ------------ ------------
Basic earnings (loss) per share:
Income before cumulative effect of changes in accounting principles $ 1.99 $ 0.29 $ 2.06
Cumulative effect of changes in accounting principles -- (0.39) (4.56)
------------ ------------ ------------
Net income (loss) 1.99 (0.10) (2.50)
------------ ------------ ------------
Diluted earnings (loss) per share:
Income before cumulative effect of changes in accounting principles 1.96 0.28 2.04
Cumulative effect of changes in accounting principles -- (0.38) (4.51)
------------ ------------ ------------
Net income (loss) $ 1.96 $ (0.10) $ (2.47)
------------ ------------ ------------
Weighted average common shares and common equivalents outstanding:
Basic 41,072 39,684 39,351
Diluted 41,623 40,206 39,770
------------ ------------ ------------
The accompanying notes are an integral part of these statements.
51
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2004 2003 2002
- -------------- ---------- ---------- ----------
Net income (loss) $ 81,579 $ (3,998) $ (98,260)
---------- ---------- ----------
Other comprehensive income (loss):
Foreign currency translation adjustments 34,673 85,861 71,964
Cash flow hedges:
Reclassification adjustment, net of tax of $3,332, $(305), and
$2,027 in 2004, 2003, and 2002, respectively 6,188 (567) 3,764
Net derivative (loss) income, net of tax of $(1,887), $5,589,
and $93 in 2004, 2003, and 2002, respectively (3,504) 10,379 172
Minimum pension liability adjustments, net of tax of
$(4,613), $(3,002) and $(11,380) in 2004, 2003, and 2002,
respectively (11,665) (5,035) (21,496)
Available for sale securities, net of tax of $5, $65 and $85 in
2004, 2003, and 2002, respectively 3 109 122
---------- ---------- ----------
Total other comprehensive income 25,695 90,747 54,526
---------- ---------- ----------
Comprehensive income (loss) $ 107,274 $ 86,749 $ (43,734)
---------- ---------- ----------
The accompanying notes are an integral part of these statements.
52
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(IN THOUSANDS) 2004 2003 2002
- -------------- --------- ---------- ---------
Cash flows from operating activities:
Net income (loss) $ 81,579 $ (3,998) $ (98,260)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Cumulative effect of changes in accounting principles -- 15,413 179,436
Depreciation and amortization of property, plant, and equipment 75,047 69,990 62,167
Amortization of deferred charges and intangibles 4,540 3,966 2,768
Provision for doubtful receivables 8,248 11,862 18,587
Effect of non-cash charges -- 55,317 1,631
(Gain) loss on divestiture -- (345) 10,319
Deferred income taxes (21,895) (38,545) (12,033)
Loss on sale of property, plant, and equipment 3,053 1,772 1,968
Other 21 (435) (1,346)
Change in assets and liabilities net of effects from acquisitions and divestitures:
Receivables, net (102,172) 25,743 (23,178)
Reduction in sale of receivables (15,000) (5,000) (20,000)
Inventories (84,175) (15,074) 39,299
Prepayments and other current assets 214 (29,878) (2,085)
Accounts payable and accrued expenses 169,891 74,055 38,924
Income taxes (4,176) 2,180 31,753
Other long-term assets and liabilities 13,678 (10,689) 11,700
--------- ---------- ---------
Net cash provided by operating activities 128,853 156,334 241,650
--------- ---------- ---------
Cash flows from investing activities:
Purchases of and investments in other companies, net of cash acquired (409) (5,976) (2,248)
Capital expenditures (82,696) (84,704) (69,562)
Proceeds from divestiture, net -- -- 12,071
Proceeds from sale of property, plant, and equipment 3,036 4,104 5,696
--------- ---------- ---------
Net cash used by investing activities (80,069) (86,576) (54,043)
--------- ---------- ---------
Cash flows from financing activities:
Net payments on short-term debt (11,573) (1,577) (3,602)
(Payments) proceeds from Danish retail notes (42,470) 41,844 --
Net payments of commercial paper borrowings -- -- (197,702)
Net (payments) proceeds from senior notes -- (100,000) 99,149
Net proceeds (payments) on other long-term debt 7,628 23,432 (17,350)
Payment of sale-leaseback obligation -- (82,397) --
Common stock issued 23,623 27,892 10,046
Treasury stock purchases (74) (7) (39)
Dividends paid (33,165) (23,983) (23,653)
--------- ---------- ---------
Net cash used by financing activities (56,031) (114,796) (133,151)
--------- ---------- ---------
Effect of exchange rate changes on cash and cash equivalents 478 1,748 (950)
--------- ---------- ---------
Net (decrease) increase in cash and cash equivalents (6,769) (43,290) 53,506
Cash and cash equivalents at beginning of year 49,650 92,940 39,434
--------- ---------- ---------
Cash and cash equivalents at end of year $ 42,881 $ 49,650 $ 92,940
--------- ---------- ---------
Supplemental disclosure of cash paid (received) for:
Interest $ 41,641 $ 49,216 $ 48,771
Income taxes 30,487 35,707 (5,513)
Non-cash investing activities, acquisitions of businesses:
Fair value of tangible and intangible assets acquired $ 1,886 $ 3,659 $ 4,830
Liabilities assumed (paid) 1,457 (2,317) 2,582
--------- ---------- ---------
The accompanying notes are an integral part of these statements.
53
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUM-
ULATED
OTHER
ADDITIONAL COMPRE- UNEARNED
COMMON PAID-IN RETAINED HENSIVE TREASURY COMPEN- COMMON SHARES
(in thousands, except per share data) STOCK CAPITAL EARNINGS LOSSES STOCK SATION TOTAL ISSUED TREASURY
- ------------------------------------- ------ ---------- --------- ---------- ---------- ------- -------- ------ --------
Balance, December 31, 2001 $ 228 $723,980 $ 449,089 $ (196,870) $ (236,938) $ (55) $739,434 45,616 6,394
Net loss -- -- (98,260) -- -- -- (98,260) -- --
Cash dividends ($.60 per share) -- -- (23,653) -- -- -- (23,653) -- --
Purchase of treasury stock, at cost -- -- -- -- (39) -- (39) -- 1
Issuance of common stock:
Employee stock purchase plan 1 3,803 -- -- -- -- 3,804 174 --
Executive stock agreements, net -- 710 -- -- -- (710) -- 30 --
Stock options exercised and other -- (2,144) -- -- 8,386 -- 6,242 -- (226)
Tax effect of options exercised -- 682 -- -- -- -- 682 -- --
Other comprehensive income -- -- -- 54,526 -- -- 54,526 -- --
Amortization of unearned compensation -- -- -- -- -- 78 78 -- --
----- -------- --------- ---------- ---------- ------- -------- ------ -----
Balance, December 31, 2002 $ 229 $727,031 $ 327,176 $ (142,344) $ (228,591) $ (687) $682,814 45,820 6,169
Net loss -- -- (3,998) -- -- -- (3,998) -- --
Cash dividends ($.60 per share) -- -- (23,983) -- -- -- (23,983) -- --
Purchase of treasury stock, at cost -- -- -- -- (7) -- (7) -- --
Issuance of common stock:
Employee stock purchase plan 2 5,727 -- -- (2) -- 5,727 264 --
Executive stock agreements, net -- 3,191 -- -- -- (3,191) -- 136 --
Stock options exercised and other -- (5,579) -- -- 27,744 -- 22,165 28 (749)
Tax effect of options exercised -- 1,969 -- -- -- -- 1,969 -- --
Other comprehensive income -- -- -- 90,747 -- -- 90,747 -- --
Amortization of unearned compensation -- -- -- -- -- 966 966 -- --
----- -------- --------- ---------- ---------- ------- -------- ------ -----
Balance, December 31, 2003 $ 231 $732,339 $ 299,195 $ (51,597) $ (200,856) $(2,912) $776,400 46,248 5,420
Net income -- -- 81,579 -- -- -- 81,579 -- --
Cash dividends ($.80 per share) -- -- (33,165) -- -- -- (33,165) -- --
Purchase of treasury stock, at cost -- -- -- -- (74) -- (74) -- 2
Issuance of common stock:
Employee stock purchase plan 1 5,289 -- -- -- -- 5,290 180 --
Executive stock agreements, net 1 6,762 -- -- -- (6,762) 1 208 39
Management stock purchase plan -- 1,389 -- -- -- -- 1,389 -- --
Stock options exercised and other -- (4,044) -- -- 20,987 -- 16,943 30 (566)
Tax effect of options exercised -- 2,055 -- -- -- -- 2,055 -- --
Other comprehensive income -- -- -- 25,695 -- -- 25,695 -- --
Amortization of unearned compensation -- -- -- -- -- 2,750 2,750 -- --
----- -------- --------- ---------- ---------- ------- -------- ------ -----
Balance, December 31, 2004 $ 233 $743,790 $ 347,609 $ (25,902) $ (179,943) $(6,924) $878,863 46,666 4,895
----- -------- --------- ---------- ---------- ------- -------- ------ -----
The accompanying notes are an integral part of these statements.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
York International Corporation (the Company, which may be referred to as we, us,
or our) is a global provider of heating, ventilating, air conditioning, and
refrigeration (HVAC&R) products and services. We market our products and
services throughout the world, and our customers range from residential
contractors to design builders, commercial contractors, building owners, and
original equipment manufacturers. Effective January 1, 2003, we consolidated our
former York Refrigeration Group (YRG) and Engineered Systems Group (ESG)
segments and reorganized management of the combined business. Our new
organization consists of: Global Applied, Unitary Products Group, and Bristol
Compressors. The Global Applied business is comprised of three geographic
regions: the 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.
USE OF ESTIMATES
Preparation of the consolidated financial statements, in conformity with
accounting principles generally accepted in the United States of America (U.S.),
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements, and the reported amounts
of revenues and expenses during the reporting period. Our actual results could
differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of York International
Corporation and its wholly-owned and majority-owned subsidiaries. We eliminate
all significant intercompany transactions.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with original maturities of three
months or less to be cash equivalents.
RECEIVABLES
We offer trade terms to our customers in the normal course of business.
Receivables are reported at original carrying value net of the allowance for
doubtful receivables. Trade terms are extended to customers based upon credit
worthiness and general economic and market conditions. We record an allowance
for doubtful receivables based upon our historical experience of bad debts and
when collection of specific receivables is not probable and can be estimated.
INVENTORIES
We state inventories at the lower of cost or market using the last-in, first-out
(LIFO) or first-in, first-out (FIFO) method.
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs."
This standard amends the guidance in Accounting Research Bulletin (ARB) No. 43,
and requires the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material to be treated as current-period
charges. In addition, the standard requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. The standard is effective for inventory costs
55
incurred beginning July 1, 2005. This standard is not expected to materially
impact our consolidated financial statements.
PROPERTY, PLANT, AND EQUIPMENT
We state property, plant, and equipment at cost, less accumulated depreciation.
Maintenance and repairs are expensed as incurred. Significant improvements and
renewals are capitalized and depreciated. Depreciation is computed generally on
a straight-line basis over the estimated useful lives of the assets as follows:
Buildings 15-30 years
Machinery and equipment 3-12 years
GOODWILL
We do not amortize goodwill, instead we test segment goodwill for impairment in
the fourth quarter of each year. Goodwill is tested for impairment between
annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a segment below its carrying amount. We
identify potential goodwill impairment by comparing the fair value of a segment
with its carrying amount, including goodwill. Fair value is determined using a
discounted cash flow and market-multiple approach. If the fair value of a
segment exceeds its carrying amount, goodwill of the segment is not considered
impaired. If the carrying amount of a segment exceeds its fair value, the amount
of goodwill impairment loss, if any, must be measured. The amount of goodwill
impairment loss is measured by comparing the implied fair value of segment
goodwill with the carrying amount of that goodwill. If the carrying amount of
segment goodwill exceeds the implied fair value of goodwill, an impairment loss
is recognized as an operating expense. No impairment of goodwill was recorded in
2004, 2003, or 2002. See Cumulative Effect of Changes in Accounting Principles
regarding the impact of adopting SFAS No. 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142).
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or asset group may
not be recoverable. Recoverability of an asset or asset group to be held and
used is measured by comparing the carrying amount to future net cash flows
expected to be generated. If the carrying amount exceeds estimated future cash
flows, an impairment charge is recognized for the amount by which the carrying
amount exceeds fair value. Assets or asset groups to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell.
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
We provide postretirement and postemployment benefits to certain of our
employees and former employees. These benefits include pension, salary
continuance, severance, life insurance, and health care. Benefits are accrued
over the employees' service periods or at the date of the event triggering the
benefit.
Information related to the adoption of FASB Staff Position No. FAS 106-2,
"Accounting and Disclosure Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003," is presented in Note 12.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We apply SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," and SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," an amendment to SFAS No. 133, in accounting for
derivatives and hedging activities. These statements
56
require that all derivative instruments be recognized in the balance sheet at
fair value and establish criteria for the designation of hedges and the
determination of effectiveness of hedging relationships for fair value and cash
flow hedges.
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.
The recognized amount in cost of goods sold due to the discontinuance of
ineffective commodity cash flow hedges was a gain of $0.4 million for the year
ended December 31, 2003. No gain or loss was recognized in the year ended
December 31, 2004 as we did not discontinue any commodity cash flow hedges.
Certain derivative instruments are not designated as hedging instruments as they
hedge immaterial exposures.
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.
Changes in fair value of foreign currency derivative instruments, qualifying as
cash flow hedges, are reported in accumulated other comprehensive losses. The
gains or losses on these hedges are reclassified to earnings as the underlying
hedged items affect earnings. As of December 31, 2004, we forecasted that $2.4
million of net losses in accumulated other comprehensive losses will be
reclassified into earnings within the next twelve months.
Hedge of Net Investment
We issued Danish Kroner 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. We redeemed the 250 million Danish Kroner
retail notes in October 2004.
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.
57
Changes in the fair value of commodity derivative instruments qualifying as cash
flow hedges are reported in accumulated other comprehensive losses. The gains or
losses are reclassified to earnings as the underlying hedged items affect
earnings. As of December 31, 2004, we forecasted that $15.9 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. Under these
contracts, we agree to exchange, at specified intervals, the difference between
fixed and variable interest amounts calculated from an agreed upon referenced
notional amount. The notional amounts are not exchanged and no other cash
payments are made unless the contract is terminated prior to maturity.
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 net interest expense component of our consolidated statements of operations.
All existing fair value hedges are determined to be 100% effective under SFAS
No. 133, as amended. As a result, there is no impact on current earnings
resulting from hedge ineffectiveness.
REVENUE RECOGNITION
In the normal course of business, we sell HVAC&R products and services. Our
products and services include individual sales of products, long-term contracts,
extended warranty and maintenance arrangements, and other services, such as
repair work, installation, and rental. We also sell our products and services in
bundled arrangements.
Revenue from the sale of products is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the sale price is fixed or
determinable, and collectibility is reasonably assured. Properly executed and
authorized contracts, purchase orders or point of sale receipts provide evidence
that an arrangement exists and the sale price is fixed or determinable. Delivery
occurs when title and the risks and rewards of ownership transfer to the
customer pursuant to shipping terms. Collectibility is determined based upon a
customer's credit worthiness. Revenue under long-term contracts is recognized on
a percentage of completion or completed contracts basis. Percent complete is
determined as the ratio of costs incurred to date to the total estimated costs
under the contract. Revenue under extended warranty and maintenance agreements
is recognized over the terms of the agreements on a straight-line basis, unless
the costs to perform under the agreements are incurred on other than a
straight-line basis. Under those circumstances, revenue under extended warranty
and maintenance agreements is recognized in proportion to the costs expected to
be incurred. Service revenues are recognized upon performance of the service.
Rental revenue is recognized over the term of the agreement on a straight-line
basis.
Our bundled arrangements represent agreements under which we sell multiple
products, multiple services, or multiple products and services. These
arrangements include general rights of return for our failure to perform as
specified under the terms of the agreements. On July 1, 2003, we adopted
Emerging Issues Task Force (EITF) Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables." This requires that we divide bundled arrangements into
separate deliverables. Revenue is allocated to each deliverable based upon the
relative fair value of all elements or the fair value of undelivered elements.
Revenue is recognized for each deliverable as described above. We adopted EITF
Issue No. 00-21 prospectively; therefore, it was only applied to bundled
arrangements entered into after
58
June 30, 2003. Prior to July 1, 2003, we recognized revenue under bundled
arrangements in a similar manner. The adoption did not have a material impact to
our consolidated financial statements.
We record amounts billed to customers for shipping and handling in net sales and
the related shipping and handling costs in cost of goods sold.
PRODUCT RELATED EXPENSES
We charge advertising, research and development, and other product-related costs
to expense as incurred. Advertising expense was $30.2 million, $27.5 million,
and $23.6 million in 2004, 2003, and 2002, respectively. Research and
development (R&D) costs were $47.7 million, $42.3 million, and $42.2 million in
2004, 2003, and 2002, respectively. We record warranty liabilities at the time
of product sale. Estimated warranty costs are based upon the historical trend of
warranty claims and specifically identifiable claims and include estimated costs
for labor and parts. Warranty expense was $83.7 million, $81.2 million, and
$64.9 million in 2004, 2003, and 2002, respectively and is a component of cost
of goods sold. Changes in our warranty liability for the years ended December
31, 2004 and 2003 were as follows:
PAYMENTS
MADE ACCRUALS FOR ACCRUALS FOR
BEGINNING UNDER WARRANTIES PREEXISTING
(in thousands) BALANCE WARRANTIES ISSUED WARRANTIES ENDING BALANCE
- -------------- ------- ---------- ------------ ----------- --------------
2004 $ 101,675 $ 77,267 $ 76,803 $ 20,000 $ 121,211
2003 87,940 78,184 91,919 -- 101,675
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 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 and our program for remediation has been approved by the U.S.
Consumer Product Safety Commission. As a result, we recorded a $20 million
warranty charge to cost of goods sold for the Unitary Products Group furnace
inspection and remediation program in 2004. The $20 million warranty charge
represents our best estimate of inspection and repair costs within a reasonable
estimated range of $13 million to $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 quarterly results or further 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 of $5.4 million was charged against the warranty reserve in
2004.
RESTRUCTURING
On January 1, 2003, we adopted SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The statement addresses financial accounting
and reporting for costs associated with exit or
59
disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." Under the statement, we
recognize liabilities at fair value for costs associated with exit or disposal
activities only when the liability is incurred. Prior to January 1, 2003, we
recognized costs when we committed to an exit or disposal plan in accordance
with EITF Issue No. 94-3.
Information related to our restructuring activities is presented in Note 16.
INCOME TAXES
We account for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Earnings of foreign operations are reinvested in the business and no provision
for domestic income tax or foreign withholding tax is made on such earnings
until distributed.
In October 2004, the American Jobs Creation Act of 2004 became law. The act
provides tax relief to U.S. domestic manufacturers by providing a tax deduction
up to nine percent (when fully phased-in) of the lesser of (a) "qualified
production activities income," as defined in the act, or (b) taxable income
after the deduction of the utilization of net operating loss carryforwards. In
December 2004, the FASB issued Staff Position No. FAS 109-1, "Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004," effective upon issuance. The standard provides guidance that the
deduction should be accounted for as a special deduction in accordance with SFAS
No. 109. We believe the impact of adoption will be immaterial to our
consolidated financial statements.
In addition to the tax deduction provided by the American Jobs Creation Act of
2004, the act also allows a special one-time dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer. In December 2004,
the FASB issued Staff Position No. FAS 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004" (FSP 109-2). The staff position allows companies time
beyond the financial reporting period of enactment to evaluate the effect of the
act on its plan for reinvestment or repatriation of foreign earnings and
requires disclosures for reasons why a company has not completed its evaluation
of the repatriation provision for purposes of applying SFAS No. 109 (see Note 14
regarding our evaluation of the effect of the act).
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
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 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
60
depreciable equipment with a related debt obligation. The obligation relating to
the sale-leaseback was repaid in full during the third quarter of 2003.
Upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," we were
required to perform a transitional goodwill impairment test as of January 1,
2002. The transitional goodwill impairment test indicated an impairment existed
in one of our segments. The projected financial performance of our former York
Refrigeration Group, which included the entities acquired in the Sabroe
acquisition, was insufficient to support the related goodwill. As a result, we
recognized a non-cash transitional goodwill impairment charge of $179.4 million.
As required, the transitional goodwill impairment charge was recorded as a
cumulative effect of a change in accounting principle in our consolidated
statement of operations as of January 1, 2002.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based upon the weighted average common shares
outstanding during the period. Diluted earnings (loss) per share is based upon
the weighted average outstanding common shares and common share equivalents.
FOREIGN CURRENCY TRANSLATION
The functional currency for the majority of our foreign operations is the
applicable local currency. Adjustments resulting from translating foreign
functional currency financial statements into U.S. dollars are included in
foreign currency translation adjustments in accumulated other comprehensive
losses. Gains or losses resulting from foreign currency transactions are
included in our results of operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION
We apply the intrinsic value method in accordance with Accounting Principles
Board (APB) 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 the 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 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:
61
(in thousands, except per share data) 2004 2003 2002
- ------------------------------------- ---- ---- ----
Net income (loss) - as reported $ 81,579 $ (3,998) $ (98,260)
Add: Stock-based employee compensation expense included in reported
net income (loss), net of related tax effects 1,792 609 49
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (5,886) (4,905) (8,230)
-------- -------- ----------
Pro forma net income (loss) $ 77,485 $ (8,294) $ (106,441)
-------- -------- ----------
Earnings (loss) per share:
Basic - as reported $ 1.99 $ (0.10) $ (2.50)
Basic - pro forma 1.89 (0.21) (2.70)
Diluted - as reported $ 1.96 $ (0.10) $ (2.47)
Diluted - pro forma 1.87 (0.21) (2.68)
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.
The per share weighted average fair value of stock options granted during 2004,
2003, and 2002 is calculated as $14.49, $7.74, and $15.13, respectively, on the
date of grant using the Black-Scholes option-pricing model. The weighted average
assumptions based on the date of grant are as follows:
2004 2003 2002
-------- -------- --------
Dividend yield 2.1% 2.8% 1.7%
Volatility 42.7% 41.6% 42.1%
Risk-free interest rate 3.3% 3.9% 5.3%
Expected life 6.9 years 7.0 years 6.6 years
Information related to stock-based compensation awards is presented in Note 18
along with the additional disclosures required under SFAS No. 123.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment." This standard 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 standard, 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 standard will
have on our consolidated financial statements is not known at this time,
however, it may reduce net income and earnings per share similar to the amounts
disclosed above.
GUARANTEES
On December 31, 2002, we adopted FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The interpretation elaborates on the
disclosures to be made in our interim and annual financial statements
62
about obligations under certain guarantees. Effective January 1, 2003, we
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The interpretation did not
have a material impact on our consolidated financial statements.
Information related to our guarantees is presented in Note 13 along with the
additional disclosures required.
COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies, including environmental remediation costs,
arising from claims, assessments, litigation, fines, and penalties and other
sources are recorded when it is probable that a liability has been incurred and
the amount of the assessment or remediation can be reasonably estimated.
Recoveries for environmental remediation cost from third parties, which are
probable of realization, are separately recorded, and are not offset against the
related environmental liability.
Information related to our commitments and contingencies is presented in Note
13.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2003 and 2002 consolidated
financial statements to conform to the 2004 presentation.
These reclassifications include adjustments to current and deferred income tax
assets and liabilities, current portions of postretirement benefits, other
receivables, accrued expenses, and other miscellaneous items. Additionally, the
presentation of cash flows from the sale of trade receivables were reclassified
as operating activities.
NOTE 2-RECEIVABLES, NET
Receivables, net consists of:
(in thousands) 2004 2003
- -------------- --------- ---------
Customers, trade $ 709,413 $ 550,506
Affiliate receivables, trade 4,351 5,139
Other receivables 121,669 136,260
--------- ---------
835,433 691,905
Less allowance for doubtful receivables (31,292) (29,380)
--------- ---------
Receivables, net $ 804,141 $ 662,525
--------- ---------
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, undivided ownership interests 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 $135 million and $150 million
of undivided interests in the trade receivables as of December 31, 2004 and
2003, respectively, resulting in a reduction of receivables reflected in our
consolidated balance sheets. The discount rate on trade receivables sold was
2.38% and 1.12% as of December 31, 2004 and 2003, respectively. The program fee
on trade receivables sold was 0.40% and 0.50% as of December 31, 2004 and 2003,
respectively.
63
NOTE 3--INVENTORIES
Inventories valued under the LIFO method comprised approximately 20% and 21% of
the December 31, 2004 and 2003 totals, respectively. If valued under the FIFO
method, inventories would have been greater by $13.8 million and $11.1 million
as of December 31, 2004 and 2003, respectively.
NOTE 4--PREPAYMENTS AND OTHER CURRENT ASSETS
Prepayments and other current assets consist of:
(in thousands) 2004 2003
- ------------- --------- ---------
Deferred income taxes, current $ 67,227 $ 61,387
Prepaid insurance 9,252 22,990
Fair value of derivative instruments 22,689 12,518
Prepaid materials and supplies 15,725 11,769
Other 29,596 28,678
--------- ---------
Prepayments and other current assets $ 144,489 $ 137,342
--------- ---------
NOTE 5--INVESTMENTS IN AFFILIATES
We own interests in affiliate operations located in the U.S., Spain, Malaysia,
Saudi Arabia, Denmark, Japan, Korea, and South Africa. These investments are
accounted for using the equity method and total $35.7 million and $28.2 million
as of December 31, 2004 and 2003, respectively. Dividends received from
affiliates were $3.9 million, $2.2 million, and $2.1 million in 2004, 2003, and
2002, respectively. Our sales to affiliates are less than 1% of our net sales,
and our purchases from affiliates are less than 2% of our total purchases.
NOTE 6--PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment, net consists of:
(in thousands) 2004 2003
- -------------- --------- ---------
Land $ 37,227 $ 36,576
Buildings 219,714 204,462
Machinery and equipment 792,074 777,304
Construction in progress 42,414 42,523
Capital leases 3,182 3,253
--------- ---------
1,094,611 1,064,118
Less accumulated depreciation and amortization (537,982) (523,000)
--------- ---------
Property, plant, and equipment, net $ 556,629 $ 541,118
--------- ---------
Amortization of plant and equipment under capital leases has been included in
accumulated depreciation and amortization. Accumulated amortization was $1.9
million and $2.2 million as of December 31, 2004 and 2003, respectively.
NOTE 7--GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31,
2004 and 2003 by segment, are as follows:
64
NET FOREIGN
GOODWILL CURRENCY
(in thousands) 2003 ACQUIRED FLUCTUATION 2004
- -------------- ---- ----------- ----------- ----
Global Applied:
Americas $ 92,949 $ -- $ 204 $ 93,153
EMEA 130,166 729 12,474 143,369
Asia 109,314 -- 262 109,576
------- ------- -------- -------
332,429 729 12,940 346,098
Unitary Products Group 140,440 -- -- 140,440
Bristol Compressors 56,313 -- -- 56,313
-------- ------- -------- --------
$529,182 $ 729 $ 12,940 $542,851
-------- ------- -------- --------
NET FOREIGN
GOODWILL CURRENCY
(in thousands) 2002 ACQUIRED FLUCTUATION 2003
- -------------- ---- --------- ----------- ----
Global Applied:
Americas $ 92,464 $ -- $ 485 $ 92,949
EMEA 107,873 1,950 20,343 130,166
Asia 107,873 1,027 414 109,314
--------- --------- -------- -------
308,210 2,977 21,242 332,429
Unitary Products Group 140,440 -- -- 140,440
Bristol Compressors 56,313 -- -- 56,313
--------- --------- -------- ---------
$ 504,963 $ 2,977 $ 21,242 $ 529,182
--------- --------- -------- ---------
As discussed in Note 1, we perform an annual goodwill impairment test in the
fourth quarter of each year. No impairment of goodwill was required as a result
of this annual test in 2004, 2003, or 2002.
NOTE 8--INTANGIBLES, NET
The following table summarizes the major intangible asset classes subject to
amortization included in our consolidated balance sheets as of December 31, 2004
and 2003:
GROSS
CARRYING ACCUMULATED NET CARRYING
(in thousands) AMOUNT AMORTIZATION AMOUNT
- -------------- ------ ----------------- ------
2004:
Trade names and trademarks $ 45,593 $ 8,428 $ 37,165
Other 3,679 1,487 2,192
-------- ------- --------
$ 49,272 $ 9,915 $ 39,357
-------- ------- --------
2003:
Trade names and trademarks $ 42,028 $ 6,723 $ 35,305
Other 2,536 1,097 1,439
-------- ------- --------
$ 44,564 $ 7,820 $ 36,744
-------- ------- --------
65
Amortization expense for trade names and trademarks and other intangible assets
was $1.6 million, $1.7 million, and $1.2 million for the years ended December
31, 2004, 2003, and 2002, respectively. Estimated amortization expense for trade
names and trademarks and other intangible assets for the fiscal years indicated
is as follows:
(in thousands)
- --------------
2005 $ 1,893
2006 1,893
2007 1,793
2008 1,793
2009 1,675
Thereafter 30,310
--------
Total $ 39,357
--------
NOTE 9--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of:
(in thousands) 2004 2003
- -------------- ---- ----
Accounts payable, trade and other $ 718,345 $ 560,621
Employee compensation, benefits, and related accruals 188,260 160,720
Warranties 71,832 54,787
Postretirement and postemployment benefits, current 19,255 20,071
Accrued insurance 22,455 22,210
Fair value of derivative instruments 8,026 1,542
Accruals for restructuring and other charges 9,063 23,913
Other accrued expenses 107,228 88,402
----------- ---------
Accounts payable and accrued expenses $ 1,144,464 $ 932,266
----------- ---------
66
NOTE 10--NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of:
(in thousands) 2004 2003
- -------------- ---- ----
Notes payable and current portion of long-term debt:
Bank loans (primarily foreign currency) $ 16,211 $ 27,784
Current portion of long-term debt 3,328 2,971
--------- ---------
Total $ 19,539 $ 30,755
--------- ---------
Long-term debt:
Domestic bank lines at an average rate of 2.11% in 2004 and 1.58% in 2003 $ 31,850 $ 25,000
Danish retail notes, 2% interest, paid in October 2004 -- 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 5.99% in 2004 and
6.3% in 2003 16,946 18,154
--------- ---------
Total 548,796 584,998
Less current portion (3,328) (2,971)
--------- ---------
Noncurrent portion $ 545,468 $ 582,027
--------- ---------
The domestic bank lines are classified as long-term, as they are supported by
our Five Year Credit Agreement, which matures on May 29, 2006.
Annual principal payments on long-term debt are as follows for the fiscal years
indicated:
(in thousands)
- --------------
2005 $ 3,328
2006 238,150
2007 715
2008 200,489
2009 188
Thereafter 105,926
----------
Total $ 548,796
----------
Interest expense is net of interest income of $9.5 million, $9 million, and $8.2
million in 2004, 2003, and 2002, respectively.
67
The following table summarizes the terms of our lines of credit:
LIMIT AVAILABILITY (a)
DEC. 31, DEC. 31, DEC. 31, DEC. 31, BORROWING ANNUAL
(in thousands) 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 2006 0.85% 0.15%
Domestic Uncom-
bank lines 160,000 135,000 128,150 110,000 mitted Various --
Non-U.S.
bank credit Uncom-
facilities 443,247 355,246 295,544 246,298 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 2.38% and
1.10% as of December 31, 2004 and December 31, 2003, respectively.
(c) We renewed our 364-Day Credit Agreement in March 2005.
The Five Year Credit Agreement and 364-Day Credit Agreement contain financial
covenants requiring us to maintain certain financial ratios and standard
provisions limiting leverage and liens. We were in compliance with the financial
covenants as of December 31, 2004 and 2003.
NOTE 11--FINANCIAL INSTRUMENTS
FOREIGN CURRENCY INSTRUMENTS
The following table reflects the notional and estimated fair values of forward
currency contracts outstanding as of December 31, 2004 and 2003. Foreign
currency amounts were translated at current exchange rates as of the balance
sheet date. Fair values reflect the estimated net amount that we would pay to
terminate the contracts, as of the reporting date, based on quoted market
prices.
2004 2003
-------------------------- -------------------------
NOTIONAL FAIR NOTIONAL FAIR
(U.S. Dollar equivalents in thousands) AMOUNT VALUE AMOUNT VALUE
- -------------------------------------- ------- ----- -------- -----
Forwards $ 387,908 $ (16,304) $ 230,564 $ (1,959)
68
The following table summarizes our contractual amounts of forward currency
contracts as of December 31, 2004 and 2003. Foreign currency amounts were
translated at current exchange rates as of the reporting date. The "buy" amounts
represent the U.S. dollar equivalent of commitments to purchase currencies and
the "sell" amounts represent the U.S. dollar equivalent of commitments to sell
currencies.
2004 2003
-----------------------------------------
(U.S. Dollar equivalents in thousands) BUY SELL BUY SELL
- ------------------------------------- -------- -------- -------- --------
Brazilian Real $ - $ 3,305 $ - $ 1,037
Canadian Dollar - 37,068 - 35,142
Danish Krone 63,796 177,154 41,831 61,662
Euro 10,441 68,679 11,775 38,539
British Pound Sterling 18,793 12,190 3,214 1,078
Japanese Yen - 465 - 392
Mexican Peso 34,806 - 26,344 1,631
Norwegian Krone 11,010 9,017 21,409 1,796
Singapore Dollar - - 96 3,868
South African Rand 186 4,476 - 3,738
Swedish Krona 11,874 1,207 11,119 1,744
Other Currencies 3,720 13,681 9,770 7,926
U.S. Dollar 238,044 81,733 109,626 78,587
COMMODITY CONTRACTS
The following table reflects the pounds hedged, notional amount, and estimated
fair value of our commodity hedging contracts for copper outstanding as of
December 31, 2004 and 2003.
(in thousands)
POUNDS NOTIONAL FAIR
YEAR HEDGED AMOUNT VALUE
- ---- ------ -------- -------
2004
2005 33,000 $ 30,775 $15,003
2006 15,000 15,269 3,316
------ -------- -------
2003
2004 30,000 $ 22,683 $ 8,398
2005 21,000 17,585 3,606
------ -------- -------
INTEREST RATE INSTRUMENTS
The following table reflects our interest rate swap contracts to pay variable
interest 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). The variable interest
is based on the six-month LIBOR rate and is reset biannually. The applicable
LIBOR rate was 2.20% and 1.18% as of December 31, 2004 and 2003, respectively.
69
2004 2003
-----------------------------------------------
NOTIONAL FAIR NOTIONAL FAIR
(in thousands) AMOUNT VALUE AMOUNT VALUE
- ---------------------------- --------- ------- --------- -------
Interest rate swaps:
Fixed to variable rates $ 200,000 $ 8,725 $ 100,000 $ 8,880
OTHER FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of our other financial
instruments are as follows:
2004 2003
-----------------------------------------
CARRYING FAIR CARRYING FAIR
(in thousands) AMOUNT VALUE AMOUNT VALUE
- ---------------------------- -------- -------- -------- --------
Cash and cash equivalents $ 42,881 $ 42,881 $ 49,650 $ 49,650
Bank loans (primarily foreign currency) 16,211 16,211 27,784 27,784
Long-term debt:
Domestic bank lines 31,850 31,850 25,000 25,000
Danish retail notes -- -- 41,844 41,405
Senior notes at 6.625% 200,000 209,320 200,000 217,800
Senior notes at 6.70% 200,000 214,820 200,000 220,020
Senior notes at 5.80% 100,000 102,070 100,000 102,290
Other (including foreign bank loans) 16,946 16,946 18,154 18,154
The fair values of each of our long-term debt instruments are based on the
amount of future cash flows associated with each instrument discounted using our
current borrowing rate for similar debt instruments of comparable maturity.
NOTE 12--POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
PENSION PLANS
A majority of our U.S. employees participate in noncontributory pension plans,
and some of our non-U.S. employees participate in contributory or
noncontributory pension plans. Plans covering salaried and management employees
generally provide pension benefits that are based on employees' compensation.
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. Plans covering hourly employees and union
members generally provide stated benefit amounts for each year of service.
Contributions to the plans are based upon the projected unit credit actuarial
funding method. We use a December 31 measurement date for our pension plans. We
also have a supplemental benefit plan for certain members of senior management.
70
The following table sets forth the funded status and amounts recognized in our
consolidated balance sheets:
U.S. PENSION NON-U.S. PENSION
BENEFITS BENEFITS
------------------------------------------------
(in thousands) 2004 2003 2004 2003
- ---------------------------------------------- --------- --------- --------- ---------
Change in benefit obligation:
Benefit obligation at beginning of year $(399,475) $(369,824) $(182,210) $(140,755)
Service cost (4,398) (14,616) (8,384) (6,192)
Interest cost (23,389) (23,835) (10,829) (8,849)
Contributions by plan participants - - (970) (852)
Actuarial gain (loss) 6,077 6,742 (12,166) (12,238)
Plan assumptions (24,876) (25,813) (4,701) (668)
Benefits paid 30,830 19,094 6,826 5,909
Plan amendments (1,109) (4,057) - -
Foreign exchange - - (20,150) (18,565)
Curtailments - 12,982 - -
Settlements and other 5,390 (148) - -
--------- --------- --------- ---------
Benefit obligation at end of year (410,950) (399,475) (232,584) (182,210)
--------- --------- --------- ---------
Change in plan assets:
Fair value of plan assets at beginning of year 316,952 246,733 118,106 85,116
Actual return on plan assets 28,110 51,728 17,826 16,828
Contributions by employer 5,710 37,585 5,403 10,756
Contributions by plan participants - - 970 852
Benefits paid (30,830) (19,094) (6,826) (5,909)
Foreign exchange - - 13,038 10,463
--------- --------- --------- ---------
Fair value of plan assets at end of year 319,942 316,952 148,517 118,106
--------- --------- --------- ---------
Funded status (91,008) (82,523) (84,067) (64,104)
Unrecognized prior service cost 13,205 14,097 1,305 909
Unrecognized loss 70,143 55,955 51,892 39,491
--------- --------- --------- ---------
Net amount recognized $ (7,660) $ (12,471) $ (30,870) $ (23,704)
--------- --------- --------- ---------
Amounts recognized in consolidated balance sheets:
Prepaid benefit cost $ 19,903 $ 43,936 $ 972 $ 463
Accrued benefit liability (80,095) (98,451) (52,356) (39,852)
Intangible asset 10,197 11,127 918 949
Accumulated other comprehensive losses 42,335 30,917 19,596 14,736
--------- --------- --------- ---------
Net amount recognized $ (7,660) $ (12,471) $ (30,870) $ (23,704)
--------- --------- --------- ---------
71
Net periodic benefit cost under our defined benefit pension plans includes the
following components:
U.S. PENSION NON-U.S. PENSION
BENEFITS BENEFITS
--------------------------------------------------------------------
(in thousands) 2004 2003 2002 2004 2003 2002
- ---------------------------------------- -------- -------- -------- -------- -------- --------
Components of net periodic benefit cost:
Service cost $ 4,398 $ 14,616 $ 13,080 $ 8,384 $ 6,192 $ 4,872
Interest cost 23,389 23,835 22,881 10,829 8,849 8,680
Expected return on plan assets (30,698) (28,582) (32,285) (11,174) (7,818) (8,008)
Amortization of prior service cost 2,093 3,197 3,223 174 153 123
Amortization of net loss (gain) 738 243 (2,221) 2,651 1,617 (1,516)
Curtailments -- 19,024 419 -- -- --
Settlements and other 1,049 369 -- -- -- --
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 969 $ 32,702 $ 5,097 $ 10,864 $ 8,993 $ 4,151
-------- -------- -------- -------- -------- --------
Other information related to our defined benefit pension plans is as follows:
U.S. PENSION NON-U.S. PENSION
BENEFITS BENEFITS
-----------------------------------------
(in thousands) 2004 2003 2004 2003
- ----------------------------------------------- -------- -------- -------- --------
FOR ALL PLANS:
Accumulated benefit obligation $377,283 $360,431 $194,286 $155,121
FOR PENSION PLANS WITH ACCUMULATED BENEFIT
OBLIGATIONS IN EXCESS OF PLAN ASSETS:
Projected benefit obligation 386,562 360,597 225,178 176,176
Accumulated benefit obligation 354,840 324,849 188,609 149,866
Fair value of plan assets 280,719 239,250 142,082 113,194
Increase in minimum liability included in other
comprehensive income 11,418 7,338 4,860 699
Pension plan weighted-average asset allocations at December 31, 2004 and 2003
and target allocations, by asset category are as follows:
U.S. PENSION NON-U.S. PENSION
BENEFITS BENEFITS
----------------------------------------------------
2004 2003 TARGET 2004 2003 TARGET
---- ---- ------ ---- ---- ------
ASSET ALLOCATIONS:
Equity securities 64% 59% 55-70% 66% 74% 60-70%
Debt securities 36% 41% 30-45% 32% 22% 30-40%
Real estate -- -- -- -- 3% --
Other -- -- -- 2% 1% --
--- --- ----- --- --- -----
100% 100% 100% 100% 100% 100%
--- --- ----- --- --- -----
72
Our investment policies seek to provide for growth of capital with a moderate
level of volatility by investing assets in accordance with the above target
allocations. Our investment performance and policies are reviewed by our Pension
Investment Committee.
Our expected long term rate of investment return is based on the expected
returns of each of the asset categories, weighted based on the median of the
target allocation for each category. Equity securities are expected to return
10% -11% over the long-term, while fixed income and other is expected to return
4% - 6%. Based on historical experience, we expect our plan assets to provide a
modest additional return, when compared to their respective benchmarks.
Assumptions are as follows:
U.S. PENSION NON-U.S. PENSION
BENEFITS BENEFITS
------------------------------------------
2004 2003 2004 2003
---- ---- ----------- -----------
ASSUMPTIONS USED TO DETERMINE BENEFIT
OBLIGATIONS AT DECEMBER 31:
Discount Rate 5.75% 6.25% 5.00 - 6.00% 5.25 - 6.50%
Rate of compensation increase 4.25% 4.25% 2.00 - 4.25% 1.50 - 4.75%
ASSUMPTIONS USED TO DETERMINE NET
PERIODIC BENEFIT COST FOR YEARS
ENDED DECEMBER 31:
Discount rate 6.25% 6.75% 5.25 - 6.50% 4.00 - 5.75%
Expected return on plan assets 8.75% 8.75% 1.50 - 8.00% 2.75 - 8.75%
Rate of compensation increase 4.25% 4.25% 1.50 - 4.75% 3.10 - 3.50%
We expect to contribute $5.9 million and $5.9 million to our U.S. and non-U.S.
plans, respectively, in 2005.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
U.S. NON-U.S.
PENSION PENSION
BENEFITS BENEFITS
-------- --------
2005 $ 20,939 $ 7,915
2006 18,491 7,803
2007 22,913 7,836
2008 21,837 8,328
2009 23,313 8,764
2010-2014 140,866 51,874
DEFINED CONTRIBUTION PLANS
Effective January 1, 2004, certain U.S. employees participate in a defined
contribution plan. We will contribute a cash amount to the plan on an annual
basis, commencing in 2005, based on employees' eligible earnings, vesting
service, and age. We recorded expense for this plan of approximately $9.7
million in 2004, which we expect to contribute in 2005.
73
Certain employees also participate in various investment plans. Under the plans,
the employees may voluntarily contribute a percentage of their compensation. We
contribute a cash amount based on participants' contributions. Our contributions
were approximately $3.8 million, $1.6 million, and $1.6 million in 2004, 2003,
and 2002, respectively. We expect to contribute approximately $4 million to our
investment plans in 2005. We recorded expense of approximately $4.1 million,
$1.7 million, and $1.6 million in 2004, 2003, and 2002, respectively.
POSTRETIREMENT HEALTH AND LIFE INSURANCE PLANS
We have several unfunded postretirement health and life insurance plans covering
certain U.S. employees who were hired before February 1, 1993 and retire under
the normal, early, or disability retirement provisions of any one of our U.S.
defined benefit pension plans. Former employees who retired prior to February 1,
1993, contribute to the cost of the plans, although we pay the majority of the
cost. Employees retiring after February 1, 1993, contribute to the cost of the
plans based on an indexed service-related premium.
We use a December 31 measurement date for our postretirement health and life
insurance plans.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 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 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 was $1.3
million, consisting of lower amortization of actuarial losses of $0.8 million
and lower interest costs of $0.5 million.
74
The following table sets forth the funded status and amounts recognized in our
consolidated balance sheets:
(in thousands) 2004 2003
- ------------------------------------------------- --------- ---------
Change in benefit obligation:
Benefit obligation at beginning of year $(135,524) $(131,760)
Service cost (1,350) (2,091)
Interest cost (7,451) (9,686)
Contributions by plan participants (1,629) (1,369)
Actuarial gain (loss) 638 (5,369)
Plan assumptions (8,710) (16,614)
Benefits paid 10,681 9,539
Plan amendments -- 13,391
Curtailments -- 8,435
Subsidy 7,791 --
--------- ---------
Benefit obligation at end of year (135,554) (135,524)
--------- ---------
Change in plan assets:
Fair value of plan assets at beginning of year -- --
Contributions by employer 9,052 8,170
Contributions by plan participants 1,629 1,369
Benefits paid (10,681) (9,539)
--------- ---------
Fair value of plan assets at end of year -- --
--------- ---------
Funded status (135,554) (135,524)
Unrecognized prior service cost (27,524) (33,005)
Unrecognized loss 50,061 52,920
--------- ---------
Net amount recognized - Accrued benefit liability $(113,017) $(115,609)
--------- ---------
Net periodic benefit cost includes the following components:
(in thousands) 2004 2003 2002
- ---------------------------------------- -------- -------- --------
Components of net periodic benefit cost:
Service cost $ 1,350 $ 2,091 $ 1,222
Interest cost 7,451 9,686 6,485
Amortization of prior service cost (5,460) (2,834) (1,794)
Amortization of net loss (gain) 3,118 3,754 (388)
Curtailments -- 323 --
-------- -------- --------
Net periodic benefit cost $ 6,459 $ 13,020 $ 5,525
-------- -------- --------
75
We expect to contribute $7.5 million to our postretirement health and life
insurance plans in 2005. The following benefit payments, which reflect expected
future service, as appropriate, are expected to be paid:
(in thousands)
------------
2005 $ 7,491
2006 7,018
2007 7,353
2008 7,540
2009 7,854
2010-2014 44,313
Assumptions are as follows:
2004 2003
---- ----
ASSUMPTIONS USED TO DETERMINE BENEFIT OBLIGATIONS AT DECEMBER 31:
Discount rate 5.75% 6.25%
ASSUMPTIONS USED TO DETERMINE NET PERIODIC BENEFIT COST FOR YEARS
ENDED DECEMBER 31:
Discount rate 6.25% 6.75%
---- ----
Assumed health care cost trend rates at December 31 are as follows:
2004 2003
------------------------------------------
MEDICAL DRUG MEDICAL DRUG
------- ------ ------- -----
Health care cost trend rate assumed for next year 6.0% 11.0% 7.0% 13.0%
Rate to which the cost trend rate is assumed to 5.0% 5.0% 5.0% 5.0%
decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate 2006 2008 2006 2008
---- ---- ---- ----
Assumed health care cost trend rates have an effect on the amounts reported for
the health care plan. A one-percentage-point change in assumed health care cost
trend rates would have the following effects:
1% 1%
(in thousands) INCREASE DECREASE
- ------------------ --------- ---------
Effect on total of service and interest cost components $ 1,302 $ (1,067)
Effect on postretirement benefit obligation 20,465 (16,777)
76
NOTE 13--COMMITMENTS AND CONTINGENCIES
LEASES
We have numerous non-cancelable leases with terms exceeding one year. As of
December 31, 2004, lease commitments for all such operating leases are as
follows:
(in thousands)
- -------------
2005 $ 44,084
2006 33,404
2007 24,195
2008 17,304
2009 8,914
Thereafter 9,493
--------
Total $137,394
--------
Total rental expense was $46.8 million, $51.1 million, and $45.2 million in
2004, 2003, and 2002, respectively.
GUARANTEES
We issue various types of guarantees in the normal course of business. As of
December 31, 2004, we have the following guarantees outstanding:
(in thousands)
- --------------
Standby letters of credit and surety bonds $115,134
Performance guarantees 205,817
Commercial letters of credit 2,724
Guarantee of affiliate debt 30,000
Standby letters of credit and surety bonds are issued to guarantee our
performance under contractual obligations. The most significant of these
obligations is collateral to insurance companies for our insurance programs. In
the event we fail to pay insurance claims, the issuing bank or surety may be
asked to release some or all of this collateral to the insurance companies.
Standby letters of credit and surety bonds have a term of one year and
automatically renew. As of December 31, 2004, our consolidated balance sheet
included liabilities of $42.9 million related to these insurance programs.
Performance guarantees provided by standby letters of credit and performance
bonds are issued to certain customers to guarantee the operation of the
equipment we sell or to guarantee our ability to complete a contract. These
performance guarantees have various terms, generally less than one year.
Commercial letters of credit are issued to certain suppliers to guarantee our
payment for purchases under favorable trade terms. Once our suppliers provide
the proper documentation, the issuing bank charges our account and pays the
commercial letters of credit on our behalf. Commercial letters of credit have a
term of one year or less.
The debt obligations of our subsidiaries are reflected in our consolidated
balance sheets. In order to obtain favorable terms, guarantees of subsidiary
debt are issued to local lending institutions requiring the parent company to
repay the debt should our subsidiaries default on their debt obligations. There
is a similar guarantee of affiliate debt relating to our 50% owned joint
venture, Scroll Technologies. In the event Scroll Technologies would default on
its debt obligation, we are required to assume 50% of
77
Scroll's outstanding debt ($20.6 million as of December 31, 2004). The guarantee
of affiliate debt is for the entire term of the borrowing ending in January
2012.
LITIGATION
We are subject to contingencies, including legal proceedings and claims arising
out of the ordinary course of business that cover a range of matters, including,
among others, product liability, contract and employment claims, warranty,
environmental, intellectual property, and property tax disputes. We believe that
such claims and litigation have been adequately provided for or are covered by
insurance and that the resolution of such matters will not have a material
effect on our financial position, ongoing results of operations, or liquidity.
However, if a claim results in a judgment against us or we ultimately settle a
claim, the amount of such judgment and/or settlement may be material to our
results of operations in an individual quarter.
Asbestos-related litigation
As is the case with many other companies, we have been named as one of many
defendants in lawsuits alleging personal injury to one or more individuals as a
result of exposure to asbestos contained in products previously manufactured by
us or by companies from which we purchased product lines. We believe our
exposure to losses related to asbestos claims is minimal based upon the asbestos
content of former products and the availability of insurance and
indemnifications. We do not believe that it is reasonably possible that losses
in excess of amounts recorded will be material to our consolidated financial
statements.
In February 2004 one of our insurance carriers filed a declaratory judgment
action in the Circuit Court of Cook County, Illinois against our former parent
and affiliates, certain excess insurance carriers and us. The insurance carrier
provides us with primary and excess insurance, and defended and indemnified us
in nearly all of our asbestos-related claims. The lawsuit seeks to determine the
extent of insurance coverage available to us including whether the available
limits exhaust on a "per occurrence" or an aggregate basis, and to determine how
the applicable coverage responsibilities should be apportioned to all excess
insurance carriers. The insurers are not seeking to recover amounts paid on
behalf of us prior to February 2004.
During the second half of 2004, we began to operate under an interim
cost-sharing arrangement between the insurance carrier, certain excess insurance
carriers, our former parent, several former affiliates and us. The proposed
interim cost-sharing arrangement establishes a process by which future
asbestos-related costs, formerly paid in full by the insurance carrier, can be
paid. Our negotiated share of these costs is approximately 13% of total
asbestos-related costs. This represents the share of costs that would have been
paid by excess insurance carriers that have gone bankrupt or have been unwilling
to participate in the proposed interim cost-sharing arrangement.
As of December 31, 2004, we have recorded a liability of $2.3 million for the
estimated loss of known open asbestos-related claims and a receivable of $1.9
million for estimated recoveries from our insurance carriers. We estimate our
losses based upon our historical experience of actual losses incurred.
Estimating asbestos losses is subject to numerous uncertainties, including but
not limited to: the variable rate at which new claims are filed; the impact of
bankruptcies of other companies currently or historically defending asbestos
claims; the uncertainties surrounding the litigation process from jurisdiction
to jurisdiction and from case to case; and unknown detail of each individual
claim such as the plaintiff's employment history, severity and type of injury,
age, and other key factors. We estimate our recoveries based upon the terms of
the proposed interim cost-sharing arrangement and availability of other
insurance and indemnification coverage. We believe the likelihood that the
declaratory judgment action filed against us resulting in no recovery of
asbestos-related costs is remote. Our assessment is based upon the merits of the
complaints and defenses available to us. However, if the declaratory
78
judgment action results in an adverse judgment against us, it may impair the
receivable we have recorded for insurance recoveries.
The following table presents a summary of asbestos-related claims activity for
the years ended December 31, 2004 and 2003:
2004 2003
---- ----
Open claims - beginning of year 427 321
New claims filed 227 144
Claims disposed (51) (38)
--- ---
Open claims - end of year 603 427
--- ---
During 2004, the number of new claims filed increased. We believe the increase
in new claims resulted from the practice of plaintiff's bar filing lawsuits
based upon available databases. The history of asbestos lawsuits filed against
us and settlements by our insurance carriers likely placed us in these
databases. Our experience to date with these new claims and plaintiff attorneys
has generally indicated a lack of exposure to our products and has resulted in
dismissals. We incurred settlement costs of $0.8 million and $0.1 million for
claims settled in 2004 and 2003, respectively, of which nearly all were paid by
the insurance carrier.
Certain open claims and portions of open claims are not covered by insurance or
indemnifications if the exposure period falls within years of no coverage or are
related to companies that were acquired without insurance. We do not believe the
resolution of these claims will have a material impact to our consolidated
financial statements.
We have not recognized any losses for unasserted asbestos claims. As indicated
above, our experiences to date with new claims have generally indicated a lack
of exposure to our products and results in dismissals in a significant number of
cases. Therefore, we do not consider unasserted claims for purposes of
estimating our asbestos-related loss contingencies, as we have no reason to
believe the manifestation of claims by potential claimants will have a material
impact to our consolidated financial statements.
OTHER COMMITMENTS
We have outstanding purchase obligations as of December 31, 2004 as follows:
(in thousands)
- --------------
Information technology service contracts (a) $ 400,388
Unconditional obligation to purchase remaining share of company (b) 5,000
Unconditional contracts for purchase of raw materials, motors, and controls 120,138
Open purchase orders in the normal course of business 221,267
----------
$ 746,793
----------
(a) Included within our IT service contracts are unconditional payments in the
amount of $43.9 million. We are currently renegotiating one of our
information technology service contracts and expect to significantly
reduce our future contractual obligation. This service contract represents
$382 million of total information technology service contracts as of
December 31, 2004.
(b) We own 50% of a small refrigeration company and are contingently obligated
to purchase the remaining 50% no later than 2014. Our purchase commitment
can be accelerated under certain circumstances. The purchase price will be
determined based upon the profitability of the company but cannot be less
than $5 million.
79
NOTE 14--INCOME TAXES
Components of earnings and taxes consist of:
(in thousands) 2004 2003 2002
- -------------- ---------- ----------- -----------
Income (loss) before taxes and cumulative
effect of changes in accounting principles:
U.S. $ (31,034) $ (46,650) $ 9,134
Non-U.S. 126,011 60,718 97,757
--------- --------- ---------
94,977 14,068 106,891
--------- --------- ---------
Income tax expense:
Current:
U.S. Federal 1,436 -- 3,974
State 1,008 1,078 1,587
Non-U.S. 28,167 31,777 19,819
--------- --------- ---------
Total Current 30,611 32,855 25,380
--------- --------- ---------
Deferred tax (benefit) expense:
U.S. (20,718) (23,037) 2,414
Non-U.S. 3,505 (7,165) (2,079)
--------- --------- ---------
Total Deferred (17,213) (30,202) 335
--------- --------- ---------
Provision for income taxes $ 13,398 $ 2,653 $ 25,715
--------- --------- ---------
Provision for income taxes differed from the amounts computed by applying the
U.S. Federal income tax rate of 35% to income before income taxes and cumulative
effect of changes in accounting principles as a result of the following:
(in thousands) 2004 2003 2002
- -------------- --------- ---------- ----------
Tax expense at statutory rate $ 33,242 $ 4,924 $ 37,412
Increase (decrease) resulting from:
Equity in earnings of affiliates/minority interest 50 1,272 1,098
Taxes on foreign earnings (3,356) 6,588 (9,996)
State income taxes-current 656 701 1,031
State income taxes-deferred (1,193) (1,169) 1,310
Export incentives (3,754) (7,750) (3,000)
Other items (12,247) (1,913) (2,140)
-------- -------- --------
Provision for income taxes $ 13,398 $ 2,653 $ 25,715
-------- -------- --------
In 2004, taxes on foreign earnings were favorably impacted by tax holidays in
certain foreign jurisdictions ($11.3 million), other favorable rate variances
($11 million), the reduction in the valuation allowance recorded in connection
with a foreign tax loss carryforward ($1.6 million), a tax benefit recorded in
connection with a prior year restructuring action involving the disposition of
foreign operations ($1.5 million), and recognition of certain foreign tax
credits following enactment of the
80
American Jobs Creation Act of 2004 ($1.3 million), offset by increases to
valuation allowances recorded in connection with certain foreign tax loss
carryforwards ($7.7 million), operating losses in jurisdictions where no tax
benefit was recognized ($6.7 million), and the unfavorable tax impact of deemed
and actual distributions ($8.9 million). In 2003, taxes on foreign earnings was
impacted by tax holidays in certain foreign jurisdictions ($15.4 million) and
other favorable rate variances ($2.4 million), offset by foreign restructuring
actions for which the tax benefit was less than the statutory rate ($14.7
million), operating losses in jurisdictions where no tax benefit was recognized
($3.6 million), and the unfavorable tax impact of deemed and actual
distributions ($6.1 million). In 2002, taxes on foreign earnings were primarily
impacted by tax holidays in certain foreign jurisdictions ($16.2 million) and
other favorable rate variances ($3.5 million), offset by the unfavorable impact
of deemed and actual distributions ($6 million) and a loss on the disposition of
a foreign operation that yielded no tax benefit ($3.7 million). Included within
state income taxes-deferred in 2004 is a $2.1 million charge associated with an
adjustment in the rate at which state deferred taxes are recorded. Included
within the other items in 2004 is an $8.2 million tax benefit recorded during
the second quarter, following the conclusion of an examination by the IRS of our
federal income tax returns for the years 1997, 1998, and 1999. Other items also
consist primarily of R&D credits of $4.7 million, $2.3 million, and $2 million
for years 2004, 2003, and 2002, respectively.
The provision for income taxes reported above excludes the tax benefit of $10.7
million related to the 2003 cumulative effect of a change in accounting
principle associated with the adoption of FIN 46 related to variable interest
entities. This tax benefit was recorded at applicable U.S. federal and state
income tax rates. No tax benefit was applied to the 2002 cumulative effect of a
change in accounting principle associated with the adoption of SFAS No. 142,
because the goodwill was not tax deductible.
Several foreign subsidiaries continue to operate under separate tax holiday
arrangements as granted by certain foreign jurisdictions. The nature and extent
of such arrangements vary, and the benefits of such arrangements phase out in
future years according to the specific terms and schedules as set forth by the
particular taxing authorities having jurisdiction over the arrangements.
81
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities as of December 31, 2004
and 2003 are presented below:
(in thousands) 2004 2003
- ------------- ---------- -----------
Deferred tax assets:
Receivables, net, principally due to allowance for doubtful receivables $ 4,808 $ 3,556
Inventories, including uniform capitalization 11,752 16,547
Accrued expenses, due to accrual for financial reporting purposes 30,627 21,835
Warranties, due to accrual for financial reporting purposes 38,876 32,307
Postretirement and postemployment benefits 78,091 72,505
Foreign tax loss carryforwards 40,526 38,657
Foreign tax credit carryforwards 22,593 25,627
R&D credit carryforwards 13,942 9,925
U.S. federal tax loss carryforwards -- 6,076
U.S. state tax loss carryforwards 27,754 15,599
Other carryforward items 965 2,829
--------- ---------
269,934 245,463
Valuation allowances for U.S. state tax loss carryforwards (24,432) (12,542)
Valuation allowances for certain foreign tax loss carryforwards (23,730) (14,218)
--------- ---------
Total deferred tax assets, net of valuation allowances 221,772 218,703
--------- ---------
Deferred tax liabilities:
Plant, equipment, and intangible assets due to purchase accounting
adjustments and differences in depreciation and amortization 13,619 38,719
Inventory, due to purchase accounting adjustments 12,130 18,357
Other 9,336 426
--------- ---------
Total deferred tax liabilities 35,085 57,502
--------- ---------
Net deferred tax assets $ 186,687 $ 161,201
--------- ---------
Deferred tax assets and liabilities are included in the consolidated balance
sheet line items as of December 31, 2004 and 2003 as follows:
(in thousands) 2004 2003
- -------------- --------- --------
Deferred tax assets:
Prepayments and other current assets $ 67,227 $ 61,387
Deferred income taxes 152,259 133,298
Deferred tax liabilities:
Other long-term liabillities 32,799 33,484
-------- --------
Net deferred tax assets $186,687 $161,201
-------- --------
Based on our historical and current pre-tax earnings as well as projections of
future taxable income, we believe it is more likely than not that we will
realize the net deferred tax assets. The increase in the valuation allowance
associated with U.S. state tax loss carryforwards is attributable to the
increase in U.S. state tax loss carryforwards for which no benefit has been
recorded. The valuation allowance on foreign tax loss carryforwards increased
$9.5 million primarily due to adjustments to the beginning of the year balances
resulting from continuing losses in certain jurisdictions ($7.7 million), and
due to additional losses (net of expiring losses) in jurisdictions where the
deferred tax assets are not expected to be realized ($3.4 million), offset by
the reduction of a valuation allowance in a jurisdiction, due to
82
improved operating performance ($1.6 million). Of the $40.5 million of gross
deferred tax assets relating to foreign tax loss carryforwards, $5.3 million are
subject to expiration limitations, and approximately $3.3 million ($1.9 million
net of valuation allowance) are set to expire over the next three years. The
remaining tax losses carry no expiration date.
Foreign tax credit carryforwards of $4.8 million, $6.6 million, $1.5 million,
and $9.7 million expire in 2010, 2011, 2012, and 2013, respectively. Of the
$13.9 million in R&D credit carryforwards, $0.6 million of this amount is set to
expire in 2020; the remainder expires in subsequent years.
The IRS is examining our Federal income tax returns for 2000, 2001, 2002, and
2003. Various other federal, state, and foreign tax returns are under
examination by the applicable authorities. We do not anticipate any material
adverse effect to our consolidated financial statements resulting from these
examinations.
Neither income taxes nor foreign withholding taxes have been provided on $342
million and $286 million of cumulative undistributed earnings of foreign
subsidiaries and affiliates at December 31, 2004 and 2003, respectively. These
earnings are considered permanently invested in the businesses and, under the
tax laws, are not subject to such taxes until distributed as dividends. If the
earnings were not considered permanently invested, approximately $82 million and
$71 million of deferred income taxes, consisting of foreign withholding taxes
and additional U.S. tax net of foreign tax credits, would have been provided at
December 31, 2004 and 2003, respectively.
On October 22, 2004, the American Jobs Creation Act (AJCA) was signed into law
in the U.S. The AJCA includes a temporary deduction from U.S. taxable income of
85% of certain foreign earnings that are repatriated to the U.S., as defined in
the AJCA. We may elect to apply this provision to qualifying earnings
repatriations in 2005 only. We have begun an evaluation of the effects of the
repatriation provision of the AJCA; however, we are awaiting the issuance of
further regulatory guidance expected from the Treasury Department and final
resolution on a technical corrections bill that has been introduced in Congress
with respect to certain provisions in the AJCA. We expect to complete our
evaluation within a reasonable period of time following the publication of the
Treasury guidance and resolution on the proposed legislation. The range of
possible amounts that we are considering for repatriation under the AJCA is
between zero and $342 million. The related potential range of income tax is
between zero and $43 million. Pursuant to FSP 109-2, as it has not become
apparent that we will repatriate any foreign earnings, and the earnings are
considered permanently reinvested, no income taxes or foreign withholding taxes
have been provided.
NOTE 15--ACQUISITIONS AND DIVESTITURES
We made cash payments of $0.4 million, $6 million, and $2.2 million during 2004,
2003, and 2002, respectively, related to the acquisition of several small
businesses. In 2002, we sold air conditioning operations in Australia for $12.1
million; the sale resulted in a loss of $10.3 million. Finalization of the
Australia sale resulted in a gain of $0.3 million in 2003. In 2004 and 2003,
there were no similar transactions.
83
NOTE 16--CHARGES TO OPERATIONS
In 2004, 2003, and 2002, we incurred costs (credits) by segment as follows:
(in thousands) 2004 2003 2002
- -------------- --------- --------- ---------
2003 AND 2004 INITIATIVES
Global Applied:
Americas $ 320 $ 22,812 $ --
Europe, Middle East, and Africa 2,056 56,620 --
Asia (28) 3,407 --
-------- -------- --------
2,348 82,839 --
Unitary Products Group -- 9,654 --
Bristol Compressors (198) 2,135 --
Corporate (850) 2,708 --
-------- -------- --------
1,300 97,336 --
-------- -------- --------
2000 AND 2001 INITIATIVES
Global Applied
Americas -- -- 205
Europe, Middle East, and Africa -- (39) (1,034)
Asia -- (418) 209
-------- -------- --------
-- (457) (620)
Unitary Products Group -- -- 2,122
Bristol Compressors (293) -- (1,543)
Corporate -- -- 18
-------- -------- --------
(293) (457) (23)
-------- -------- --------
Total charges to operations, net 1,007 96,879 (23)
Charges reflected in cost of goods sold -- 5,484 88
-------- -------- --------
Restructuring and other charges, net $ 1,007 $ 91,395 $ (111)
-------- -------- --------
2003 and 2004 Initiatives
In 2003, we initiated actions to further reduce our overall cost structure and
support the implementation of our new geographic organization. These actions
include the further reduction of manufacturing capacity, the elimination of
certain product lines, the exiting of several small, non-core businesses, and
the write-down of assets associated with a European joint venture, as well as
cost reductions associated with the consolidation of our former ESG and YRG
segments.
During 2004, we initiated additional actions to support the implementation of
our new geographic organization in EMEA and further reduced the production in
one Americas manufacturing facility. These additional actions were mainly
comprised of severance and are expected to be completed by December 2005.
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. Workforce reductions
included the severance of approximately 1,300 salary and wage employees.
2000 and 2001 Initiatives
In 2000, we initiated a cost reduction process, which included plant closures
and divestitures, product line and facility rationalizations, selling, general,
and administrative expense reductions, and other
84
actions. In 2001, we expanded the scope of the cost reduction process to include
additional plant closings and staff reductions. As of December 31, 2002, all of
the 2000 and 2001 actions were substantially complete.
Detail of activity relating to the 2003 and 2004 initiatives and the 2000 and
2001 initiatives in the years ended December 31, 2004, 2003, and 2002 is as
follows:
ACCRUALS AT
NON-CASH BEGINNING OF ACCRUALS ACCRUAL ACCRUALS AT
(in thousands) WRITE-DOWNS YEAR ESTABLISHED UTILIZED REDUCTION END OF YEAR
- ----------------- ----------- ------------ ----------- -------- --------- ------------
2004 ACTIVITY:
Severance $ -- $16,537 $ 3,765 $11,585 $ 2,391 $ 6,326
Contractual and other obligations -- 6,156 -- 3,062 364 2,730
Other -- 1,220 -- 1,210 3 7
------- ------- ------- ------- ------- -------
-- 23,913 3,765 15,857 2,758 9,063
------- ------- ------- ------- ------- -------
2003 ACTIVITY:
Fixed asset write-downs 18,266 -- -- -- -- --
Inventory write-downs 5,484 -- -- -- -- --
Receivables write-downs 405 -- -- -- -- --
Other asset write-downs 17,120 -- -- -- -- --
Severance -- 1,469 29,167 12,939 1,160 16,537
Contractual and other obligations -- 1,654 14,756 9,644 610 6,156
Warranty -- 599 -- 599 -- --
Other -- 224 13,508 12,455 57 1,220
------- ------- ------- ------- ------- -------
41,275 3,946 57,431 35,637 1,827 23,913
------- ------- ------- ------- ------- -------
2002 ACTIVITY:
Fixed asset write-downs 1,500 -- -- -- -- --
Inventory write-downs 44 -- -- -- -- --
Receivables write-downs 87 -- -- -- -- --
Gain on sale of fixed assets (1,396) -- -- -- -- --
Severance -- 10,728 1,147 9,298 1,108 1,469
Contractual and other obligations -- 3,011 6 925 438 1,654
Warranty -- 563 44 8 -- 599
Other -- 2,017 635 1,884 544 224
------- ------- ------- ------- ------- -------
$ 235 $16,319 $ 1,832 $12,115 $ 2,090 $ 3,946
------- ------- ------- ------- ------- -------
NOTE 17--SEGMENT INFORMATION
Our global business operates in the HVAC&R industry. Effective January 1, 2003,
we consolidated our former YRG and ESG segments and reorganized management of
the combined business. Our new organization consists of Global Applied, Unitary
Products Group, and Bristol Compressors. The Global Applied business is
comprised of three geographic regions: the 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.
Amounts for the year ended December 31, 2002 were reclassified to conform to the
current presentation.
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,
large packaged rooftop units, indoor and outdoor air handling and ventilating
equipment, variable air volume units, centrifugal, screw, and reciprocating
compressors, condensers, evaporators, heat exchangers, industrial and marine
chillers, ice makers, mini-splits, process
85
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 and beverage, electronics, chemical, and petroleum industries. Cooling and
refrigeration systems are also supplied for use on naval, commercial, and
passenger vessels. Products within Global Applied are similar in nature.
Products produced in our factories are utilized in both air conditioning and
refrigeration applications depending on customers needs. The end use application
is the determining factor in labeling a product as refrigeration or air
conditioning. As part of the integration of our former YRG and ESG segments, we
sell our full line of HVAC&R products through one sales channel, regardless of
the application. Also within Global Applied, we sell services in the form of
inspection, service, repair, maintenance, commissioning of equipment, and other
service activities.
The following table summarizes net sales, excluding intragroup sales, by product
and service category within the Global Applied segment:
(in thousands) 2004 2003 2002
- ------------------ ----------- ------------- --------------
Global Applied net sales:
Air conditioning products $ 1,717,072 $ 1,543,737 $ 1,562,488
Refrigeration products 1,222,982 1,056,189 803,330
Services 469,387 427,668 384,335
----------- ----------- -----------
$ 3,409,441 $ 3,027,594 $ 2,750,153
----------- ----------- -----------
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.
86
The following table provides our segment operating results, assets, and other
items:
(in thousands) 2004 2003 2002
- ---------------- ------------- ------------- -------------
Net sales:
Global Applied:
Americas $ 1,520,645 $ 1,388,930 $ 1,335,392
Europe, Middle East, and Africa 1,512,006 1,343,138 1,161,605
Asia 611,655 490,063 418,599
Intragroup sales (234,865) (194,537) (165,443)
----------- ----------- -----------
3,409,441 3,027,594 2,750,153
Unitary Products Group 854,100 760,059 736,789
Bristol Compressors 426,657 451,241 515,372
Eliminations(1) (180,055) (162,840) (158,941)
----------- ----------- -----------
4,510,143 4,076,054 3,843,373
----------- ----------- -----------
(1)Eliminations include the following intersegment net sales:
Global Applied 2,372 2,673 2,623
Unitary Products Group 59,245 52,896 48,105
Bristol Compressors 118,438 107,271 108,213
----------- ----------- -----------
Eliminations 180,055 162,840 158,941
----------- ----------- -----------
Income from operations:
Global Applied:
Americas 50,387 54,855 39,710
Europe, Middle East, and Africa 47,085 44,691 50,550
Asia 69,656 69,634 55,945
---------- ----------- -----------
167,128 169,180 146,205
Unitary Products Group 75,454 60,698 40,262
Bristol Compressors 5,220 25,405 29,002
General corporate expenses, eliminations, and other
non-allocated items (118,614) (79,858) (44,037)
Charges and other expenses (1,007) (119,749) (9,917)
Gain (loss) on divestiture -- 345 (10,319)
----------- ----------- -----------
128,181 56,021 151,196
----------- ----------- -----------
Equity in earnings of affiliates:
Global Applied:
Europe, Middle East, and Africa 5,503 2,554 2,038
Asia 1,037 984 964
----------- ----------- -----------
6,540 3,538 3,002
Bristol Compressors 2,029 2,044 1,178
----------- ----------- -----------
8,569 5,582 4,180
----------- ----------- -----------
Interest expense, net (41,773) (47,535) (48,485)
Income before taxes and cumulative effect of changes
in accounting principles 94,977 14,068 106,891
Provision for income taxes (13,398) (2,653) (25,715)
----------- ----------- -----------
Income before cumulative effect of changes in accounting principles $ 81,579 $ 11,415 $ 81,176
----------- ----------- -----------
87
(in thousands) 2004 2003 2002
- -------------- ------------- ------------- -------------
Total assets:
Global Applied:
Americas $ 774,015 $ 711,103 $ 683,138
Europe, Middle East, and Africa 1,033,824 937,981 831,662
Asia 511,703 389,456 337,303
Eliminations and other non-allocated assets (206,719) (111,789) (51,570)
---------- ---------- ----------
2,112,823 1,926,751 1,800,533
Unitary Products Group 438,933 384,355 419,540
Bristol Compressors 242,473 242,375 264,111
Eliminations and other non-allocated assets 216,186 176,342 76,733
---------- ---------- ----------
3,010,415 2,729,823 2,560,917
---------- ---------- ----------
Depreciation and amortization of property, plant, and equipment:
Global Applied:
Americas 22,245 22,201 17,428
Europe, Middle East, and Africa 19,706 16,435 14,010
Asia 4,467 4,499 4,015
---------- ---------- ----------
46,418 43,135 35,453
Unitary Products Group 11,559 11,231 8,877
Bristol Compressors 12,944 13,316 13,911
Other non-allocated depreciation and amortization 4,126 2,308 3,926
---------- ---------- ----------
75,047 69,990 62,167
---------- ---------- ----------
Capital expenditures:
Global Applied:
Americas 20,163 28,174 23,883
Europe, Middle East, and Africa 14,110 8,849 9,767
Asia 8,354 6,700 4,242
---------- ---------- ----------
42,627 43,723 37,892
Unitary Products Group 21,980 11,921 14,847
Bristol Compressors 6,275 12,925 12,870
Other non-allocated capital expenditures 11,814 16,135 3,953
---------- ---------- ----------
$ 82,696 $ 84,704 $ 69,562
---------- ---------- ----------
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 IT applications and
infrastructure; the $20 million warranty charge recorded in 2004 discussed in
Note 1; and other corporate costs. Charges and other expenses include
restructuring and other charges, operating expenses related to cost reduction
actions, a curtailment loss related to the decision to replace our defined
benefit pension plans for U.S. salaried non-bargaining and certain U.S. salaried
bargaining employees with a new defined contribution plan, effective January 1,
2004, costs related to a discontinued product line and executive retirement
costs. 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.
88
Our net sales to the U.S. and to non-U.S. countries are as follows:
2004 2003 2002
------ ------ ------
Net sales:
United States 43% 45% 48%
Other 57% 55% 52%
--- --- ---
100% 100% 100%
--- --- ---
No single non-U.S. country or single customer accounts for greater than 10% of
our net sales.
Information related to U.S. and non-U.S. sales to outside customers, based on
the location of the assets generating the sales, is as follows:
2004 2003 2002
---- ---- ----
Net sales:
United States 48% 51% 55%
Other 52% 49% 45%
--- --- ---
100% 100% 100%
--- --- ---
Included in U.S. sales are export sales of $252.4 million, $255.5 million, and
$284.9 million in 2004, 2003, and 2002, respectively.
The location of our net property, plant, and equipment is as follows:
2004 2003 2002
---- ---- ----
Net property, plant, and equipment:
United States 54% 55% 56%
Denmark 24% 24% 24%
Other 22% 21% 20%
--- --- ---
100% 100% 100%
--- --- ---
89
NOTE 18--STOCKHOLDERS' EQUITY
EMPLOYEE STOCK PURCHASE PLAN
We provide an employee stock purchase plan that authorizes employees to purchase
up to 3 million shares of our common stock, inclusive of 0.5 million shares
authorized by the stockholders in May 2004. The purchase price is 85% of the
lower of the fair market value of shares at the beginning or end of the period.
No compensation expense is recorded in connection with employee purchases of
shares. As of December 31, 2004, 0.4 million shares were available for employee
purchases. Employees purchased shares under the plan as follows:
2004 2003 2002
------- ------- -------
Shares purchased (in thousands) 180 264 174
Weighted average purchase price per share $ 29.35 $ 21.72 $ 21.74
MANAGEMENT STOCK PURCHASE PLAN
In 2003, we established a management stock purchase plan that allows eligible
employees to defer a percentage of their annual incentive compensation as vested
restricted stock units. We provide a 25% restricted stock unit match which vests
over a three-year period. Common stock is issued on the third anniversary from
the contribution date or upon employee termination. Deferrals of annual
incentive compensation are expensed in the respective incentive period. Matching
contributions are expensed over the vesting period. Approximately 43 thousand
restricted stock units were issued under the management stock purchase plan in
2004.
STOCK PLANS
In 2002, our shareholders approved a stock plan that will expire in 2012. As a
result, we are authorized to issue up to 3.8 million shares of our common stock
through stock option and restricted stock awards. Under a former stock plan,
which was originally approved in 1992 and expired in 2002, we issued stock
options and restricted stock awards of 7.5 million shares. The general terms of
both stock plans are similar. Awards can be granted only to our directors and
employees. The exercise price of stock options cannot be less than the fair
market value of our common stock on the grant date. The maximum term of stock
options is 10 years. Restricted stock awards cannot exceed 3% of our issued and
outstanding common stock. We determine the price of restricted stock awards at
the time of grant. We also determine vesting requirements of stock option and
restricted stock awards at the time of grant.
In 2004, 2003, and 2002, 208 thousand, 136 thousand, and 30 thousand restricted
shares, respectively, were granted to key employees. Accordingly, unearned
compensation of $7.8 million, $3.2 million and $0.7 million was recorded as a
charge to stockholders' equity in 2004, 2003 and 2002, respectively.
90
Information regarding stock options under our stock plans is as follows (shares
in thousands):
2004 2003 2002
------------------ ---------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- ------ -------- ------ ---------
Outstanding, January 1, 4,919 $ 32.94 5,343 $ 34.58 5,185 $ 34.72
Granted 644 37.59 783 21.42 814 35.24
Exercised (596) 28.45 (777) 28.52 (226) 27.56
Canceled (387) 37.95 (430) 39.81 (430) 41.19
----- ------- ----- ------- ----- -------
Outstanding, December 31, 4,580 $ 33.75 4,919 $ 32.94 5,343 $ 34.58
----- ------- ----- ------- ----- -------
Exercisable, December 31, 3,407 $ 34.84 4,061 $ 35.17 4,425 $ 34.62
----- ------- ----- ------- ----- -------
Available, December 31, 1,911 1,015 1,884
----- ----- -----
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -------------------
WEIGHTED
AVERAGE WEIGHTED
EXERCISE REMAINING AVERAGE
PRICE CONTRACTUAL WEIGHTED AVERAGE EXERCISE
RANGES SHARES LIFE EXERCISE PRICE SHARES PRICE
- --------------- ------ ----------- ---------------- ------ ---------
$20.89 - $27.00 1,281 6.8 $22.66 780 $23.55
$28.25 - $35.66 1,478 6.0 33.41 1,460 33.41
$36.27 - $42.50 897 7.3 38.01 243 39.04
$43.69 - $54.50 924 2.2 45.53 924 45.53
----- --- ------ ----- ------
$20.89 - $54.50 4,580 5.7 $33.75 3,407 $34.84
----- --- ------ ----- ------
ACCUMULATED OTHER COMPREHENSIVE LOSSES
Accumulated other comprehensive losses net of tax, consist of:
(in thousands) 2004 2003
- -------------- ---- ----
Foreign currency translation adjustments $ 3,610 $ (31,063)
Gain on cash flow hedges 11,767 9,083
Minimum pension liability adjustments (41,513) (29,848)
Gain on available for sale securities 234 231
--------- ---------
Accumulated other comprehensive losses $ (25,902) $ (51,597)
--------- ---------
91
NOTE 19--EARNINGS (LOSS) PER SHARE RECONCILIATION OF SHARES OUTSTANDING
Net income (loss) as set forth in our 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) per share are as follows:
(in thousands) 2004 2003 2002
- -------------- ---- ---- ----
Weighted average common shares outstanding used
in the computation of basic earnings (loss) per share 41,072 39,684 39,351
Effect of dilutive securities:
Non-vested restricted shares 144 166 31
Stock options 407 356 388
------ ------ ------
Weighted average common shares and equivalents used
in the computation of diluted earnings (loss) per share 41,623 40,206 39,770
------ ------ ------
Stock options not included in the earnings (loss) per share
computation as their effect would have been anti-dilutive 1,763 2,881 3,563
------ ------ ------
92
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
(in thousands, except per share data) FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- ------------------------------------- ------------- -------------- ------------- --------------
2004
Net sales $ 939,367 $ 1,221,708 $ 1,159,274 $ 1,189,794
Gross profit 171,056 225,675 220,814 213,272
Net (loss) income (3,875) 38,724 31,345 15,385
(Loss) earnings per share:
Basic (0.10) 0.94 0.76 0.37
Diluted (0.10) 0.92 0.75 0.37
2003
Net sales $ 868,357 $ 1,084,417 $ 1,008,958 $ 1,114,322
Gross profit 160,100 226,364 191,062 205,724
Net (loss) income (13,636) 19,206 (5,430) (4,138)
(Loss) earnings per share:
Basic (0.34) 0.48 (0.14) (0.10)
Diluted (0.34) 0.48 (0.13) (0.10)
Notes regarding quarterly results:
- - In the third quarter of 2004, we retroactively adopted a new accounting
standard related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. As a result, the first and second quarter net
(loss) income and (loss) earnings per share were restated. See Note 12 to
our consolidated financial statements. In the second quarter of 2004, we
recorded a $20 million warranty charge for the Unitary Products Group
furnace inspection and remediation program. See Note 1.
- - In the third quarter of 2003, we recorded a $15.4 million reduction to
stockholders' equity as a cumulative effect of a change in accounting
principle adjustment. See Note 1.
- - We recorded net restructuring and other charges of $16.1 million, $33.1
million, $12.1 million, and $30.1 million in the first, second, third, and
fourth quarters of 2003, respectively. In the fourth quarter of 2004, we
recorded net restructuring charges of $1 million. See Note 16.
93
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of December 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.
(b) Management's Report on Internal Control Over Financial Reporting
Our management's report on internal control over financial reporting
is set forth in Item 8. Financial Statements and Supplementary Data
on page 47 and is incorporated by reference herein.
(c) Changes in Internal Control Over Financial Reporting
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. In the quarter ended December
31, 2004, we implemented a new information technology system in our
UPG business. As a result, certain changes have been made to our
internal control over financial reporting. There were no other
changes in our internal control over financial reporting that
occurred during the fourth quarter of 2004 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the caption "Election of Directors" in our
definitive 2005 Proxy Statement is incorporated herein by reference in response
to this item. See Item 1 above for information concerning executive officers.
Our Employee Code of Conduct, which applies to all employees, including our
principal executive officer, principal financial officer, and principal
accounting officer, is posted on our website at www.york.com. The Employee Code
of Conduct is compliant with Item 406 of Regulation S-K as required by the SEC.
We intend to disclose any amendments to or waivers of any provisions of the
Employee Code of Conduct granted to our principal executive officer, principal
financial officer, principal accounting officer, and persons performing similar
functions, on our website.
The Board of Directors has adopted charters for its Nominating and Governance
Committee, Compensation Committee, and Audit Committee. The Board of Directors
also adopted Corporate Governance Guidelines. The Corporate Governance
Guidelines and each of the charters are available on our website at
www.york.com. These items are also available upon request to the Vice President,
Secretary and General Counsel at York International Corporation, 631 South
Richland Avenue, York, PA 17403, or telephone (717) 771-7890.
94
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the caption "Executive Compensation" in our
definitive 2005 Proxy Statement is incorporated herein by reference in response
to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained under the captions "Election of Directors," "Executive
Compensation," and "Ownership of Common Stock" in our definitive 2005 Proxy
Statement is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "Ownership of Common Stock" in our
definitive 2005 Proxy Statement is incorporated herein by reference in response
to this item.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information contained under the caption "Independent Accountants" in our
definitive 2005 Proxy Statement is incorporated herein by reference in response
to this item.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following financial statements of York International
Corporation and subsidiaries are incorporated herein by reference
to pages 47 to 92 of Form 10-K:
Consolidated Balance Sheets - as of December 31, 2004 and 2003
Consolidated Statements of Operations - years ended December 31,
2004, 2003, and 2002
Consolidated Statements of Comprehensive Income (Loss) - years
ended December 31, 2004, 2003, and 2002
Consolidated Statements of Cash Flow - years ended December 31,
2004, 2003, and 2002
Consolidated Statements of Stockholders' Equity - years ended
December 31, 2004, 2003, and 2002
Notes to Consolidated Financial Statements
(2) The following financial statement schedule for York International
Corporation and subsidiaries is included herein:
II Valuation and Qualifying Accounts - years ended December 31,
2004, 2003, and 2002; (Page 103 of Form 10-K)
All other schedules are omitted as they are not applicable.
Report of Independent Registered Public Accounting Firm Covering
Financial Statement Schedule; (Page 102 of Form 10-K)
(3) The exhibits filed in response to Item 601 of Regulation S-K are as
follows:
EXHIBIT
NUMBER DESCRIPTION
3.1 Amended and Restated Certificate of Registrant (Incorporated by
reference to Exhibit 4.1 to the Registrant's Registration Statement
in Form S-3, File No. 33-91292, filed on June 7, 1995)
95
3.2 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation dated May 3, 1996 (Incorporated by reference to
Exhibit 3.2 to the Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-10863)
3.3 By-Laws of Registrant, restated as of December 17, 1996
(Incorporated by reference to Exhibit 3.3 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996, File No.
1-10863)
4.1 Indenture effective as of June 1, 1998 between the Registrant and
State Street Bank and Trust Company, a Massachusetts chartered trust
company, as Trustee (Incorporated by reference to Exhibit 4 to the
Registrant's Form 8-K, File No. 1-10863, filed on May 28, 1998)
4.2 Senior Indenture dated as of August 9, 2001 between the Registrant
and the Bank of New York, as Trustee (Incorporated by reference to
Exhibit 4.2 to the Registrant's Registration Statement filed on Form
S-3, File No. 333-59678, filed on April 27, 2001)
4.3 Five Year Credit Agreement, dated as of May 29, 2001, among York
International Corporation, as borrower, the initial lenders and
initial issuing bank named therein, as initial lenders and initial
issuing bank, Citibank, N.A., as administrative agent, The Chase
Manhattan Bank, as syndication agent, Bank of Tokyo-Mitsubishi,
First Union National Bank, and Fleet National Bank, as documentation
agents, and JP Morgan Securities, Inc. and Salomon Smith Barney
Inc., as joint lead arrangers and joint bookrunners. (Incorporated
by reference to Exhibit 4.3 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2001, File No. 1-10863)
4.4 Amendment No. 1 to the Five Year Credit Agreement, dated as of May
29, 2002, among York International Corporation, the lenders named
therein, as lenders, and Citibank, N.A., as administrative agent for
the lenders. (Incorporated by reference to Exhibit 4.2 to
Registrant's Form 10-Q for the quarter ended June 30, 2002, File No.
1-10863)
4.5 Amendment No. 2 to The Five Year Credit Agreement, dated as of March
14, 2003, among York International Corporation, the lenders named
therein, as lenders, and Citibank, N.A., as administrative agent for
the lenders (Incorporated by reference to Exhibit 4.2 to
Registrant's Form 10-Q for the quarter ended March 31, 2003, File
No. 1-10863)
4.6 Purchase and Sale Agreement, dated as of December 21, 2001, between
York International Corporation and Bristol Compressors, Inc., as
originators, and York Receivables Funding LLC (Incorporated by
reference to Exhibit 4.7 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 2001, File No. 1-10863)
4.7 364-Day Revolving Credit Agreement, dated as of March 11, 2005,
among York International Corporation, as borrower, Citibank, N.A.,
as administrative agent, J.P. Morgan Chase Bank, N.A., as
syndication agent, Bank of America, N.A., Bank of Tokyo Mitsubishi
Trust Company, BNP Paribas and Nordea Bank Finland PLC, as
co-documentation agents, and a syndicate of 14 lenders described
therein (Incorporated by reference to Exhibit 10.1 to the
Registrant's Form 8-K Current Report filed on March 14, 2005, File
No. 1-10863)
4.8 Amended and Restated Receivables Purchase Agreement dated as of May
17, 2004 among York Receivables Funding LLC, as seller, York
International Corporation, as initial servicer, Gotham Funding
Corporation, as a conduit purchaser, The Bank of Tokyo-Mitsubishi,
LTD., New York Branch, as agent for the Gotham Purchaser Group,
Liberty Street Funding Corp., as a conduit purchaser, The Bank of
Nova Scotia, as agent for the Liberty Street Purchaser Group, and
The Bank of Tokyo-Mitsubishi, LTD., New York Branch as administrator
(Incorporated by reference to Exhibit 4.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004, File No.
1-10863)
4.9 Amendment No. 1 to Amended and Restated Receivables Purchase
Agreement, dated October 1, 2004, among, York International
Corporation, York Receivables Funding LLC, The Members of Various
Purchaser Groups from time to time party hereto, and The Bank of
Tokyo-Mitsubishi, LTD., as administrator (filed herewith)
96
4.10 Amendment No. 2 to Amended and Restated Receivables Purchase
Agreement, dated December 16, 2004, among, York International
Corporation, York Receivables Funding LLC, The Members of Various
Purchaser Groups from time to time party hereto, and The Bank of
Tokyo-Mitsubishi, LTD., as administrator (filed herewith)
*10.1 Registrant's Amended and Restated 1992 Omnibus Stock Plan
(Incorporated by reference to Exhibit 10.1 to Registrant's Annual
Report on Form 10-Q for the quarter ended March 31, 1997, File No.
1-10863)
*10.2 Amendment No. 1 to the York International Corporation Amended and
Restated 1992 Omnibus Stock Plan, dated February 16, 1999
(Incorporated by reference to Exhibit 10.15 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1998,
File No. 1-10863)
*10.3 Amendment No. 2 to the York International Corporation Amended and
Restated 1992 Omnibus Stock Plan, dated February 9, 2000
(Incorporated by reference to Exhibit 10.22 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999,
File No. 1-10863)
*10.4 Amendment No. 3 to the York International Corporation Amended and
Restated 1992 Omnibus Stock Plan, effective July 27, 2000
(Incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000, File No. 1-10863)
*10.5 York International Corporation Supplemental Executive Retirement
Plan (Incorporated by reference to Exhibit 10.12 to Registrant's
Annual Report on form 10-K for the year ended December 31, 1993,
File No. 1-10863)
*10.6 Amendment No. 1 to the York International Corporation Supplemental
Executive Retirement Plan, effective January 1, 1997 (Incorporated
by reference to Exhibit 10.17 to Registrant's Annual Report on
Form 10-K/A for the year ended December 31, 2003, File No.
1-10863)
*10.7 Amendment No. 2 to the York International Corporation Supplemental
Executive Retirement Plan (Incorporated by reference to Exhibit
10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003)
*10.8 York International Corporation Amended and Restated Executive
Deferred Compensation Plan, effective July 1, 2001 (Incorporated
by reference to Exhibit 10.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001, File No.
1-10863)
*10.9 First Amendment to the York International Corporation Executive
Deferred Compensation Plan (Incorporated by reference to Exhibit
10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003, File No. 1-10863)
*10.10 Second Amendment to the York International Corporation Executive
Deferred Compensation Plan, dated December 3, 2003 (Incorporated
by reference to Exhibit 10.12 to Registrant's Annual Report on
Form 10-K/A for the year ended December 31, 2003, File No.
1-10863)
*10.11 York International Corporation Management Stock Purchase Plan
(Incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2003, File No. 1-10863)
*10.12 Form of Restricted Stock Agreement by and between Registrant and
certain of its employees, dated March 26, 2003 (Incorporated by
reference to Exhibit 10.14 to Registrant's Annual Report on Form
10-K/A for the year ended December 31, 2003, File No. 1-10863)
*10.13 Employment Agreement between York International Corporation and
Michael R. Young, dated December 29, 1999 (Incorporated by
reference to Exhibit 10.19 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999, File No. 1-10863)
97
*10.14 Employment Agreement between York International Corporation and
Kam Leong, dated December 29, 1999 (Incorporated by reference to
Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2002, File No. 1-10863)
*10.15 Retirement Agreement between York International Corporation and
Michael R. Young, dated October 6, 2003 (Incorporated by reference
to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K/A
for the year ended December 31, 2003, File No. 1-10863)
*10.16 Form of Amendment No. 1 to Employment Agreement between the
Registrant and certain of its key executives. (Incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002, File No. 1-10863)
*10.17 Employment Agreement between York International Corporation and C.
David Myers, dated December 31, 2003 (Incorporated by reference to
Exhibit 10.25 to the Registrant's Annual Report on Form 10-K/A for
the year ended December 31, 2003, File No. 1-10863)
*10.18 Employment Agreement between York International Corporation and
Thomas F. Huntington, dated December 31, 2003 (Incorporated by
reference to Exhibit 10.26 to the Registrant's Annual Report on
Form 10-K/A for the year ended December 31, 2003, File No.
1-10863)
*10.19 Employment Agreement between York International Corporation and
Peter C. Spellar, dated December 31, 2003 (Incorporated by
reference to Exhibit 10.28 to the Registrant's Annual Report on
Form 10-K/A for the year ended December 31, 2003, File No.
1-10863)
*10.20 Form of Employment Agreement between York International
Corporation and certain other key executives, dated December 31,
2003 (Incorporated by reference to Exhibit 10.29 to the
Registrant's Annual Report on Form 10-K/A for the year ended
December 31, 2003, File No. 1-10863)
*10.21 Employment Agreement between York International Corporation and
David Kornblatt, dated March 24, 2004 (Incorporated by reference
to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004, File No. 1-10863)
*10.22 Employment Agreement between York International Corporation and
Iain A. Campbell, dated March 24, 2004 (Incorporated by reference
to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004, File No. 1-10863)
*10.23 Employment Agreement between York International Corporation and
Jeffrey D. Gard, dated March 24, 2004 (Incorporated by reference
to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004, File No. 1-10863)
*10.24 York International Corporation Amended and Restated 2002 Incentive
Compensation Plan (Incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004, File No. 1-10863)
*10.25 York International Corporation Amended and Restated 2002 Omnibus
Stock Plan (Incorporated by reference to Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004, File No. 1-10863)
*10.26 Form of Director Restricted Stock Agreement (Incorporated by
reference to Exhibit 10.1 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2004, File No. 1-10863)
*10.27 Form of Executive Officer Restricted Stock Agreement (Incorporated
by reference to Exhibit 10.2 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004, File No.
1-10863)
98
*10.28 Form of Executive Officer Stock Option Agreement (Incorporated by
reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, File No. 1-10863)
*10.29 Form of Grant to Corporate Executive under the Amended and Restated
2002 Incentive Compensation Plan (Incorporated by reference to Exhibit
10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004, File No. 1-10863)
*10.30 Form of Grant to Business Unit Executive under the Amended and Restated
2002 Incentive Compensation Plan (Incorporated by reference to Exhibit
10.5 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004, File No. 1-10863)
*10.31 Form of Grant to Executive under the Mid-Term Portion of the Amended
and Restated 2002 Incentive Compensation Plan (Incorporated by
reference to Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, File No. 1-10863)
*10.32 Agreement between York International Corporation and Kam Leong, dated
November 15, 2004 (Incorporated by reference to Exhibit 10.1 to the
Registrant's Form 8-K Current Report filed on November 15, 2004, File
No. 1-10863)
*10.33 Employment Agreement between York International Corporation and Peter
Spellar, dated January 4, 2005 (Incorporated by reference to the
Registrant's Form 8-K Current Report filed on January 11, 2005, File
No. 1-10863)
*10.34 Form of Grant to Business Unit Executive under the Amended and Restated
2002 Incentive Compensation Plan (Incorporated by reference to the
Registrant's Form 8-K Current Report filed on February 1, 2005, File
No. 1-10863)
*10.35 Form of Grant to Corporate Executive under the Amended and Restated
2002 Incentive Compensation Plan (Incorporated by reference to the
Registrant's Form 8-K Current Report filed on February 1, 2005, File
No. 1-10863)
*10.36 Employment Agreement between York International and Kim Buchwald, dated
February 16, 2005 (Incorporated by reference to the Registrant's Form
8-K Current Report filed on February 16, 2005, File No. 1-10863)
12 Statement re: Computation of Ratio of Earnings to Fixed Charges (filed
herewith)
21 Subsidiaries of the Registrant (filed herewith)
23 Consent of Independent Registered Public Accounting Firm (filed
herewith)
24 Power of Attorney (filed herewith)
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 (filed herewith)
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 (filed herewith)
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 (filed herewith)
99
* Required to be filed as management contracts, compensatory plans, or
arrangements required to be identified pursuant to Item 15(a)(3) of the
registrant's report on Form 10-K.
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
YORK INTERNATIONAL CORPORATION
/S/ C. David Myers
---------------------------------
C. DAVID MYERS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 14, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 14th day of March 2005.
SIGNATURE TITLE
--------- -----
/s/ C. David Myers President and Chief Executive Officer
- ------------------------------------- (Principal Executive Officer)
C. DAVID MYERS
/s/ M. David Kornblatt Vice President and Chief Financial Officer
- ------------------------------------- (Principal Financial Officer)
M. DAVID KORNBLATT
/s/ David C. Elder Controller
- -------------------------------------
DAVID C. ELDER (Principal Accounting Officer)
DIRECTORS
*
- -------------------------------------
GERALD C. MCDONOUGH
*
- -------------------------------------
W. MICHAEL CLEVY
*
- -------------------------------------
J. RODERICK HELLER, III
*
- -------------------------------------
ROBERT F. B. LOGAN
*
- -------------------------------------
PAUL J. POWERS
*
- -------------------------------------
DONALD M. ROBERTS
*
- -------------------------------------
JAMES A. URRY
/s/ C. David Myers
- -------------------------------------
C. DAVID MYERS
* By /s/ Jane G. Davis
------------------------------
JANE G. DAVIS
ATTORNEY-IN-FACT
101
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
York International Corporation:
Under date of March 14, 2005, we reported on the consolidated balance sheets of
York International Corporation and subsidiaries as of December 31, 2004 and
2003, and the related consolidated statements of operations, comprehensive
income (loss), cash flows and stockholders' equity for each of the years in the
three-year period ended December 31, 2004, as contained in Item 8. Financial
Statements and Supplementary Data. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
financial statement schedule, Valuation and Qualifying Accounts. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Harrisburg, Pennsylvania
March 14, 2005
102
SCHEDULE II
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(in thousands)
COLUMN A: COLUMN B: COLUMN C: COLUMN D: COLUMN E:
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF COSTS AND CLOSE OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- ---------------------------------- ------------ --------- ---------- ----------
2004
Allowance for doubtful receivables $ 29,380 8,248 6,336 $ 31,292
Warranties $ 101,675 96,803 77,267 $ 121,211
2003
Allowance for doubtful receivables $ 27,946 11,862 10,428 $ 29,380
Warranties $ 87,940 91,919 78,184 $ 101,675
2002
Allowance for doubtful receivables $ 25,675 18,587 16,316 $ 27,946
Warranties $ 87,883 75,877 75,830 $ 87,940
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 in COLUMN C: ADDITIONS COSTS AND EXPENSES
and amortized revenue is reflected in COLUMN D: DEDUCTIONS in the above
schedule.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------
3.1 Amended and Restated Certificate of Registrant (Incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement in Form S-3, File No. 33-91292, filed on June 7, 1995)
3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation dated May 3, 1996
(Incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K for the year ended
December 31, 1996, File No. 1-10863)
3.3 By-Laws of Registrant, restated as of December 17, 1996 (Incorporated by reference to Exhibit 3.3 to
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1- 10863)
4.1 Indenture effective as of June 1, 1998 between the Registrant and State Street Bank and Trust
Company, a Massachusetts chartered trust company, as Trustee (Incorporated by reference to Exhibit 4
to the Registrant's Form 8-K, File No. 1-10863, filed on May 28, 1998)
4.2 Senior Indenture dated as of August 9, 2001 between the Registrant and the Bank of New York, as
Trustee (Incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement filed on
Form S-3, File No. 333-59678, filed on April 27, 2001)
103
4.3 Five Year Credit Agreement, dated as of May 29, 2001, among York International Corporation, as borrower,
the initial lenders and initial issuing bank named therein, as initial lenders and initial issuing bank,
Citibank, N.A., as administrative agent, The Chase Manhattan Bank, as syndication agent, Bank of
Tokyo-Mitsubishi, First Union National Bank, and Fleet National Bank, as documentation agents, and JP
Morgan Securities, Inc. and Salomon Smith Barney Inc., as joint lead arrangers and joint bookrunners.
(Incorporated by reference to Exhibit 4.3 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001, File No. 1-10863)
4.4 Amendment No. 1 to the Five Year Credit Agreement, dated as of May 29, 2002, among York International
Corporation, the lenders named therein, as lenders, and Citibank, N.A., as administrative agent for the
lenders. (Incorporated by reference to Exhibit 4.2 to Registrant's Form 10-Q for the quarter ended June
30, 2002, File No. 1-10863)
4.5 Amendment No. 2 to The Five Year Credit Agreement, dated as of March 14, 2003, among York International
Corporation, the lenders named therein, as lenders, and Citibank, N.A., as administrative agent for the
lenders (Incorporated by reference to Exhibit 4.2 to Registrant's Form 10-Q for the quarter ended March
31, 2003, File No. 1-10863)
4.6 Purchase and Sale Agreement, dated as of December 21, 2001, between York International Corporation and
Bristol Compressors, Inc., as originators, and York Receivables Funding LLC (Incorporated by reference to
Exhibit 4.7 to Registrant's Annual Report on Form 10-K for the year ended December 31, 2001, File No.
1-10863)
4.7 364-Day Revolving Credit Agreement, dated as of March 11, 2005, among York International Corporation, as
borrower, Citibank, N.A., as administrative agent, J.P. Morgan Chase Bank, N.A., as syndication agent,
Bank of America, N.A., Bank of Tokyo Mitsubishi Trust Company, BNP Paribas and Nordea Bank Finland PLC, as
co-documentation agents, and a syndicate of 14 lenders described therein (Incorporated by reference to
Exhibit 10.1 to the Registrant's Form 8-K Current Report filed on March 14, 2005, File No. 1-10863)
4.8 Amended and Restated Receivables Purchase Agreement dated as of May 17, 2004 among York Receivables
Funding LLC, as seller, York International Corporation, as initial servicer, Gotham Funding Corporation,
as a conduit purchaser, The Bank of Tokyo-Mitsubishi, LTD., New York Branch, as agent for the Gotham
Purchaser Group, Liberty Street Funding Corp., as a conduit purchaser, The Bank of Nova Scotia, as agent
for the Liberty Street Purchaser Group, and The Bank of Tokyo-Mitsubishi, LTD., New York Branch as
administrator (Incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2004, File No. 1-10863)
4.9 Amendment No. 1 to Amended and Restated Receivables Purchase Agreement, dated October 1, 2004, among, York
International Corporation, York Receivables Funding LLC, The Members of Various Purchaser Groups from time
to time party Hereto, and The Bank of Tokyo-Mitsubishi, LTD., as administrator (filed herewith)
4.10 Amendment No. 2 to Amended and Restated Receivables Purchase Agreement, dated December 16, 2004, among,
York International Corporation, York Receivables Funding LLC, The Members of Various Purchaser Groups from
time to time party Hereto, and The Bank of Tokyo-Mitsubishi, LTD., as administrator (filed herewith)
*10.1 Registrant's Amended and Restated 1992 Omnibus Stock Plan (Incorporated by reference to Exhibit 10.1 to
Registrant's Annual Report on Form 10-Q for the quarter ended March 31, 1997, File No. 1-10863)
*10.2 Amendment No. 1 to the York International Corporation Amended and Restated 1992 Omnibus Stock Plan, dated
February 16, 1999 (Incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998, File No. 1-10863)
104
*10.3 Amendment No. 2 to the York International Corporation Amended and Restated 1992 Omnibus Stock Plan, dated
February 9, 2000 (Incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1999, File No. 1-10863)
*10.4 Amendment No. 3 to the York International Corporation Amended and Restated 1992 Omnibus Stock Plan,
effective July 27, 2000 (Incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000, File No. 1-10863)
*10.5 York International Corporation Supplemental Executive Retirement Plan (Incorporated by reference to
Exhibit 10.12 to Registrant's Annual Report on form 10-K for the year ended December 31, 1993, File No.
1-10863)
*10.6 Amendment No. 1 to the York International Corporation Supplemental Executive Retirement Plan, effective
January 1, 1997 (Incorporated by reference to Exhibit 10.17 to Registrant's Annual Report on Form 10-K/A
for the year ended December 31, 2003, File No. 1-10863)
*10.7 Amendment No. 2 to the York International Corporation Supplemental Executive Retirement Plan (Incorporated
by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003)
*10.8 York International Corporation Amended and Restated Executive Deferred Compensation Plan, effective July
1, 2001 (Incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001, File No. 1-10863)
*10.9 First Amendment to the York International Corporation Executive Deferred Compensation Plan (Incorporated
by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2003, File No. 1-10863)
*10.10 Second Amendment to the York International Corporation Executive Deferred Compensation Plan, dated
December 3, 2003 (Incorporated by reference to Exhibit 10.12 to Registrant's Annual Report on Form 10-K/A
for the year ended December 31, 2003, File No. 1-10863)
*10.11 York International Corporation Management Stock Purchase Plan (Incorporated by reference to Exhibit 10.1
to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, File No. 1-10863)
*10.12 Form of Restricted Stock Agreement by and between Registrant and certain of its employees, dated March 26,
2003 (Incorporated by reference to Exhibit 10.14 to Registrant's Annual Report on Form 10-K/A for the year
ended December 31, 2003, File No. 1-10863)
*10.13 Employment Agreement between York International Corporation and Michael R. Young, dated December 29, 1999
(Incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999, File No. 1-10863)
*10.14 Employment Agreement between York International Corporation and Kam Leong, dated December 29, 1999
(Incorporated by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2002, File No. 1-10863)
*10.15 Retirement Agreement between York International Corporation and Michael R. Young, dated October 6, 2003
(Incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K/A for the year
ended December 31, 2003, File No. 1-10863)
105
*10.16 Form of Amendment No. 1 to Employment Agreement between the Registrant and certain of its key executives.
(Incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002, File No. 1-10863)
*10.17 Employment Agreement between York International Corporation and C. David Myers, dated December 31, 2003
(Incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on Form 10-K/A for the year
ended December 31, 2003, File No. 1-10863)
*10.18 Employment Agreement between York International Corporation and Thomas F. Huntington, dated December 31,
2003 (Incorporated by reference to Exhibit 10.26 to the Registrant's Annual Report on Form 10-K/A for the
year ended December 31, 2003, File No. 1-10863)
*10.19 Employment Agreement between York International Corporation and Peter C. Spellar, dated December 31, 2003
(Incorporated by reference to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K/A for the year
ended December 31, 2003, File No. 1-10863)
*10.20 Form of Employment Agreement between York International Corporation and certain other key executives,
dated December 31, 2003 (Incorporated by reference to Exhibit 10.29 to the Registrant's Annual Report on
Form 10-K/A for the year ended December 31, 2003, File No. 1-10863)
*10.21 Employment Agreement between York International Corporation and David Kornblatt, dated March 24, 2004
(Incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004, File No. 1-10863)
*10.22 Employment Agreement between York International Corporation and Iain A. Campbell, dated March 24, 2004
(Incorporated by reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004, File No. 1-10863)
*10.23 Employment Agreement between York International Corporation and Jeffrey D. Gard, dated March 24, 2004
(Incorporated by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004, File No. 1-10863)
*10.24 York International Corporation Amended and Restated 2002 Incentive Compensation Plan (Incorporated by
reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2004, File No. 1-10863)
*10.25 York International Corporation Amended and Restated 2002 Omnibus Stock Plan (Incorporated by reference to
Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, File No.
1-10863)
*10.26 Form of Director Restricted Stock Agreement (Incorporated by reference to Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 1-10863)
*10.27 Form of Executive Officer Restricted Stock Agreement (Incorporated by reference to Exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 1-10863)
*10.28 Form of Executive Officer Stock Option Agreement (Incorporated by reference to Exhibit 10.3 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, File No. 1-10863)
106
*10.29 Form of Grant to Corporate Executive under the Amended and Restated 2002 Incentive Compensation Plan
(Incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004, File No. 1-10863)
*10.30 Form of Grant to Business Unit Executive under the Amended and Restated 2002 Incentive Compensation Plan
(Incorporated by reference to Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004, File No. 1-10863)
*10.31 Form of Grant to Executive under the Mid-Term Portion of the Amended and Restated 2002 Incentive
Compensation Plan (Incorporated by reference to Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004, File No. 1-10863)
*10.32 Agreement between York International Corporation and Kam Leong, dated November 15, 2004 (Incorporated by
reference to Exhibit 10.1 to the Registrant's Form 8-K Current Report filed on November 15, 2004, File No.
1-10863)
*10.33 Employment Agreement between York International Corporation and Peter Spellar, dated January 4, 2005
(Incorporated by reference to the Registrant's Form 8-K Current Report filed on January 11, 2005, File No.
1-10863)
*10.34 Form of Grant to Business Unit Executive under the Amended and Restated 2002 Incentive Compensation Plan
(Incorporated by reference to the Registrant's Form 8-K Current Report filed on February 1, 2005, File No.
1-10863)
*10.35 Form of Grant to Corporate Executive under the Amended and Restated 2002 Incentive Compensation Plan
(Incorporated by reference to the Registrant's Form 8-K Current Report filed on February 1, 2005, File No.
1-10863)
*10.36 Employment Agreement between York International and Kim Buchwald, dated February 16, 2005 (Incorporated by
reference to the Registrant's Form 8-K Current Report filed on February 16, 2005, File No. 1-10863)
12 Statement re: Computation of Ratio of Earnings to Fixed Charges (filed herewith)
21 Subsidiaries of the Registrant (filed herewith)
23 Consent of Independent Registered Public Accounting Firm (filed herewith)
24 Power of Attorney (filed herewith)
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 (filed herewith)
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 (filed herewith)
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
(filed herewith)
* Required to be filed as management contracts, compensatory plans, or arrangements required to be
identified pursuant to Item 15(a)(3) of the registrant's report on Form 10-K.
107