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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
COMMISSION FILE NUMBER 1-10863
YORK INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3473472
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
631 SOUTH RICHLAND AVENUE, YORK, PA 17403
(717) 771-7890
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 3, 2005
----- ---------------------------
Common Stock, par value $.005 41,990,783 shares
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations - (unaudited)
Three Months Ended March 31, 2005 and 2004 3
Condensed Consolidated Balance Sheets -
March 31, 2005 (unaudited) and December 31, 2004 4
Condensed Consolidated Statements of Cash Flows - (unaudited)
Three Months Ended March 31, 2005 and 2004 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits 26
Signatures 27
Exhibits 28
2
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share data)
THREE MONTHS ENDED MARCH 31,
2005 2004
----------- -----------
Net sales:
Products $ 913,375 $ 833,718
Services 120,430 105,649
----------- -----------
Net sales 1,033,805 939,367
Cost of goods sold:
Products (748,226) (678,584)
Services (102,451) (89,727)
----------- -----------
Cost of goods sold (850,677) (768,311)
----------- -----------
Gross profit 183,128 171,056
Selling, general, and administrative expenses (184,718) (165,853)
Restructuring and other charges, net (1,223) --
----------- -----------
(Loss) income from operations (2,813) 5,203
Interest expense, net (11,478) (10,861)
Equity in earnings of affiliates 1,283 492
----------- -----------
Loss before income taxes (13,008) (5,166)
Benefit from income taxes 3,781 1,291
----------- -----------
Net loss $ (9,227) $ (3,875)
=========== ===========
Basic and diluted net loss per share $ (0.22) $ (0.10)
=========== ===========
Cash dividends per share $ 0.20 $ 0.20
=========== ===========
Basic and diluted weighted average common shares
and common equivalents outstanding 41,564 40,607
See accompanying notes to condensed consolidated financial statements.
3
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands)
MARCH 31, 2005 DECEMBER 31,
(UNAUDITED) 2004
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 46,260 $ 42,881
Receivables, net 743,043 804,141
Inventories:
Raw material 174,265 167,089
Work in progress 158,843 143,799
Finished goods 337,991 304,243
----------- -----------
Total inventories 671,099 615,131
Prepayments and other current assets 145,768 144,489
----------- -----------
Total current assets 1,606,170 1,606,642
Deferred income taxes 150,666 152,259
Investments in affiliates 35,150 35,725
Property, plant, and equipment, net 540,122 556,629
Goodwill 535,534 542,851
Intangibles, net 37,659 39,357
Deferred charges and other assets 79,923 76,952
----------- -----------
Total assets $ 2,985,224 $ 3,010,415
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 23,389 $ 19,539
Accounts payable and accrued expenses 1,030,574 1,144,464
Income taxes 37,390 40,829
----------- -----------
Total current liabilities 1,091,353 1,204,832
Long-term warranties 48,864 49,379
Long-term debt 671,968 545,468
Postretirement and postemployment benefits 222,081 226,213
Other long-term liabilities 100,101 105,660
----------- -----------
Total liabilities 2,134,367 2,131,552
Commitments and contingencies
Stockholders' equity 850,857 878,863
----------- -----------
Total liabilities and stockholders' equity $ 2,985,224 $ 3,010,415
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
THREE MONTHS ENDED MARCH 31,
2005 2004
------------ ----------
Cash flows from operating activities:
Net loss $ (9,227) $ (3,875)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization of property, plant, and
equipment 19,757 17,435
Amortization of deferred charges and intangibles 1,264 790
Provision for doubtful receivables 1,791 3,673
Deferred income taxes (906) 5,095
Loss on sale of property, plant, and equipment 182 420
Other 2,029 1,164
Change in assets and liabilities net of effects from
acquisitions and divestitures:
Receivables, net 31,359 26,014
Increase (reduction) in sale of receivables 15,000 (5,000)
Inventories (67,014) (48,243)
Prepayments and other current assets (3,324) 3,187
Accounts payable and accrued expenses (97,652) 2,681
Income taxes (3,459) (16,517)
Other long-term assets and liabilities (7,746) (11,146)
------------ ----------
Net cash used by operating activities (117,946) (24,322)
------------ ----------
Cash flows from investing activities:
Purchases of other companies, net of cash acquired -- (728)
Capital expenditures (12,041) (17,780)
Proceeds from sale of property, plant, and equipment 540 865
Dividends received from affiliates 1,030 1,012
------------ ----------
Net cash used by investing activities (10,471) (16,631)
------------ ----------
Cash flows from financing activities:
Net proceeds (payments) of short-term debt 3,793 (12,714)
Net proceeds from other long-term debt 131,175 59,470
Common stock issued 5,347 5,843
Dividends paid (8,383) (8,206)
------------ ----------
Net cash provided by financing activities 131,932 44,393
------------ ----------
Effect of exchange rate changes on cash and cash equivalents (136) (159)
------------ ----------
Net increase in cash and cash equivalents 3,379 3,281
Cash and cash equivalents at beginning of period 42,881 49,650
------------ ----------
Cash and cash equivalents at end of period $ 46,260 $ 52,931
============ ==========
See accompanying notes to condensed consolidated financial statements.
5
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Notes To Condensed Consolidated Financial Statements (unaudited)
(1) FINANCIAL STATEMENTS
The condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission, and certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. We believe that the information presented is not
misleading and the disclosures are adequate. In our opinion, the condensed
consolidated financial statements contain all adjustments necessary to
present fairly our financial position as of March 31, 2005 and December
31, 2004 and results of operations and cash flows for the three months
ended March 31, 2005 and 2004. Our results of operations for interim
periods are not necessarily indicative of results expected for the full
year.
Certain reclassifications have been made to the 2004 condensed
consolidated financial statements to conform to the 2005 presentation.
These reclassifications include adjustments to the presentation of cash
flows due to balance sheet reclassifications recorded in connection with
our December 31, 2004 Form 10-K, the reclassification of the sale of trade
receivables to operating activities, and other miscellaneous items.
During the three months ended September 30, 2004, we retroactively adopted
a new accounting standard related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003. As a result, our condensed
consolidated statement of operations for the three months ended March 31,
2004 includes a reduction of expenses of $0.3 million from the impact of
adoption as of January 1, 2004. See Note 12 of Item 8. Financial
Statements and Supplementary Data of our Form 10-K for the year ended
December 31, 2004.
(2) STOCK-BASED COMPENSATION
We apply the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for our stock-based
compensation plans. Accordingly, no compensation expense has been
recognized for our stock-based compensation plans other than for
restricted stock and performance-based awards. Had compensation expense
for all stock and employee stock purchase plans been determined based upon
the fair value at the grant date for awards under these plans consistent
with the methodology prescribed under Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as
amended, our net loss and loss per share would have been adjusted to the
pro forma amounts as follows (in thousands, except per share data):
THREE MONTHS ENDED MARCH 31,
2005 2004
------------ -------------
Net loss - as reported $ (9,227) $ (3,875)
Add: Stock-based employee compensation expense included in reported
net loss, net of related tax effects 1,296 501
Deduct: Total stock-based employee compensation expense determined
under fair-value-based method for all awards, net of related tax effects (2,343) (1,295)
------------ -------------
Pro forma net loss $ (10,274) $ (4,669)
============ =============
Basic and diluted loss per share:
As reported $ (0.22) $ (0.10)
Pro forma (0.25) (0.11)
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.
6
(3) RECEIVABLES, NET
Pursuant to the terms of an annually renewable revolving facility, we sell
certain of our trade receivables to a wholly-owned, consolidated
subsidiary, York Receivables Funding LLC (YRFLLC). In turn, YRFLLC sells,
on a revolving basis, an undivided ownership interest in the purchased
trade receivables to bank-administered asset-backed commercial paper
vehicles. In May 2004, we amended the facility, increasing the
availability from $150 million to $200 million. We continue to service
sold trade receivables. No servicing asset or liability has been
recognized as our cost to service sold trade receivables approximates the
servicing income.
In accordance with the facility, YRFLLC has sold $150 million and $135
million of an undivided interest in trade receivables as of March 31, 2005
and December 31, 2004, respectively. The proceeds from the sale were
reflected as a reduction of net receivables in our condensed consolidated
balance sheets as of March 31, 2005 and December 31, 2004. The discount
rate on trade receivables sold was 2.8% and 2.38% as of March 31, 2005 and
December 31, 2004, respectively. The program fee on trade receivables sold
was 0.4% as of March 31, 2005 and December 31, 2004.
(4) GOODWILL
The changes in the carrying amount of goodwill for the three months ended
March 31, 2005 by segment are as follows (in thousands):
FOREIGN
BALANCE AS OF CURRENCY BALANCE AS OF
DEC. 31, 2004 FLUCTUATION MARCH 31, 2005
------------- ------------ --------------
Global Applied:
Americas $ 93,153 $ (79) $ 93,074
Europe, Middle East, and Africa 143,369 (7,157) 136,212
Asia 109,576 (81) 109,495
------------- ------------ --------------
346,098 (7,317) 338,781
Unitary Products Group 140,440 - 140,440
Bristol Compressors 56,313 - 56,313
------------- ------------ --------------
$ 542,851 $ (7,317) $ 535,534
============= ============ ==============
(5) INTANGIBLES, NET
The following table summarizes the major intangible asset classes subject
to amortization included in our condensed consolidated balance sheets as
of March 31, 2005 and December 31, 2004 (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
March 31, 2005
Trade names and trademarks $ 43,391 $ 8,400 $ 34,991
Other 4,316 1,648 2,668
-------------- ------------ ------------
$ 47,707 $ 10,048 $ 37,659
============== ============ ============
December 31, 2004
Trade names and trademarks $ 45,593 $ 8,428 $ 37,165
Other 3,679 1,487 2,192
-------------- ------------ ------------
$ 49,272 $ 9,915 $ 39,357
============== ============ ============
Amortization expense for trade names and trademarks and other intangible
assets for the three months ended March 31, 2005 and 2004 was $0.6 million
and $0.4 million, respectively.
7
The following table estimates the amount of amortization expense for trade
names and trademarks and other intangible assets for the remainder of 2005
and each of the fiscal years indicated (in thousands):
2005 (April 1 - December 31) $ 2,073
2006 2,120
2007 1,769
2008 1,769
2009 1,654
Thereafter 28,274
-------------
$ 37,659
=============
(6) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of (in thousands):
MARCH 31, DECEMBER 31,
2005 2004
------------ -------------
Notes payable and current portion of long-term debt:
Bank loans (primarily foreign currency) $ 20,004 $ 16,211
Current portion of long-term debt 3,385 3,328
------------ -------------
Total $ 23,389 $ 19,539
============ =============
Long-term debt:
Domestic bank lines at an average rate of 3.21% in 2005 $ 133,000 $ 31,850
and 2.11% in 2004
Five Year Credit Agreement, 4.075% interest, due May 29, 2006 30,000 --
Senior notes, 6.625% interest, due August 2006 200,000 200,000
Senior notes, 6.7% interest, due June 2008 200,000 200,000
Senior notes, 5.8% interest, due November 2012 100,000 100,000
Other (primarily foreign bank loans) at an average
rate of 5.81% in 2005 and 5.99% in 2004 12,353 16,946
------------ -------------
Total 675,353 548,796
Less current portion (3,385) (3,328)
------------ -------------
Noncurrent portion $ 671,968 $ 545,468
============ =============
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.
8
The following table summarizes the terms of our lines of credit:
LIMIT AVAILABILITY (a)
MARCH 31, DEC. 31, MARCH 31, DEC. 31, BORROWING ANNUAL
(in thousands) 2005 2004 2005 2004 EXPIRES RATE (b) FEE
- -------------- --------- -------- --------- -------- --------- --------- ------
Five Year
Credit May 29, LIBOR +
Agreement $ 400,000 $400,000 $ 370,000 $400,000 2006 1.175% 0.2%
364-Day
Credit March 11, LIBOR +
Agreement (c) 200,000 200,000 200,000 200,000 2006 0.63% 0.15%
Domestic Uncom-
bank lines 160,000 160,000 27,000 128,150 mitted Various -
Non-U.S.
bank credit Uncom-
facilities 456,818 443,247 298,840 295,544 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 2.9% and
2.38% as of March 31, 2005 and December 31, 2004, 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 March 31, 2005 and December 31, 2004.
(7) POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
PENSION PLANS
Net periodic benefit cost includes the following components (in
thousands):
THREE MONTHS ENDED MARCH 31,
2005 2004
---------- -----------
Components of net periodic benefit cost:
Service cost $ 3,540 $ 3,226
Interest cost 8,677 8,452
Expected return on plan assets (9,841) (10,262)
Amortization of prior service cost 610 572
Amortization of net loss 952 668
Settlements and other - 1,049
---------- -----------
Net periodic benefit cost $ 3,938 $ 3,705
========== ===========
We previously disclosed in our consolidated financial statements for the
year ended December 31, 2004 that we expected to contribute $11.8 million
to our pension plans in 2005. As of March 31, 2005, $3.1 million of
contributions have been made. We currently anticipate contributing an
additional $9.5 million to fund our plans in the remainder of 2005 for a
total 2005 contribution of $12.6 million.
9
DEFINED CONTRIBUTION PLANS
Certain U.S. employees participate in a defined contribution plan. We
contribute a cash amount to the plan on an annual basis, based on
employees' eligible earnings, vesting service, and age. In the first
quarter of 2005, we made our first annual contribution of $9.7 million. We
recorded expense of approximately $2.8 million related to the plan in the
three months ended March 31, 2005 and 2004.
Certain employees participate in various other investment plans. Under the
plans, the employees may voluntarily contribute a percentage of their
compensation. We contribute a cash amount based on the participants'
contributions. Our contributions to the plans were approximately $1.2
million and $0.8 million in the three months ended March 31, 2005 and
2004, respectively. We recorded expense of approximately $1.1 million and
$1.0 million related to the plans in the three months ended March 31, 2005
and 2004, respectively.
POSTRETIREMENT HEALTH AND LIFE INSURANCE PLANS
Net periodic benefit cost includes the following components (in
thousands):
THREE MONTHS ENDED MARCH 31,
2005 2004
-------- ----------
Components of net periodic benefit cost:
Service cost $ 379 $ 354
Interest cost 1,805 1,939
Amortization of prior service cost (1,365) (1,360)
Amortization of net loss 862 894
-------- ----------
Net periodic benefit cost $ 1,681 $ 1,827
======== ==========
We previously disclosed in our consolidated financial statements for the
year ended December 31, 2004 that we expected to contribute $7.5 million
to our postretirement health and life insurance plans in 2005. As of March
31, 2005, $1.8 million of contributions have been made. We currently
anticipate contributing an additional $5.7 million to fund our plans in
the remainder of 2005 for a total 2005 contribution of $7.5 million.
(8) COMMITMENTS AND CONTINGENCIES
Guarantees and Warranties
We issue various types of guarantees in the normal course of business. As
of March 31, 2005, we have the following guarantees outstanding (in
thousands):
Standby letters of credit and surety bonds $116,646
Performance guarantees 208,532
Commercial letters of credit 2,863
Guarantee of affiliate debt 30,000
Changes in our warranty liabilities for the three months ended March 31,
2005 are as follows (in thousands):
BALANCE PAYMENTS ACCRUALS FOR BALANCE
AS OF MADE UNDER WARRANTIES AS OF
DEC. 31, 2004 WARRANTIES ISSUED MARCH 31, 2005
- -------------- ---------- ------------ --------------
$ 121,211 $ 24,148 $ 19,237 $ 116,300
Warranties include standard warranties and extended warranty contracts
sold to customers to increase the warranty period beyond the standard
period. Extended warranty contracts sold are reflected as accruals for
warranties issued and amortized revenue is reflected as payments made
under warranties.
10
During the second quarter of 2004, we finalized field and factory testing
to investigate failures found in heat exchangers of certain sealed
combustion gas furnaces used in the manufactured housing industry. We
found that installation and application factors combined with component
part variation can result in excessive heat exchanger temperatures, which
may contribute to failures in certain furnace models manufactured in the
years 1995 to 2000. We no longer produce these furnace models 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 the second quarter of 2004. The $20 million
warranty charge represents our best estimate of inspection and repair
costs within a reasonable estimated range of $13 million 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 $6.5 million was charged
against the warranty reserve during the three months ended March 31, 2005.
For the entire program to date we have charged $11.9 million against the
reserve.
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 we have previously disclosed in Note 13 of Item 8. Financial Statements
and Supplementary Data of our Form 10-K for the year ended December 31,
2004, 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 condensed
consolidated financial statements.
We have recorded a liability of $2.1 million and $2.3 million for the
estimated loss for known open asbestos-related claims as of March 31, 2005
and December 31, 2004, respectively, and a receivable of $1.8 million and
$1.9 million for estimated recoveries from our insurance carriers as of
March 31, 2005 and December 31, 2004, respectively.
The following table presents a summary of asbestos-related claims activity
for the three months ended March 31, 2005 and 2004:
2005 2004
------- --------
Open claims - beginning of period 603 427
New claims filed 39 32
Claims settled (1) (4)
Claims dismissed (59) (2)
--- ---
Open claims - end of period 582 453
=== ===
We incurred minimal settlement costs for the three months ended March 31,
2005 and 2004, with all amounts paid by insurance carriers. Our average
settlement cost per claims settled was $3 thousand and $23 thousand for
the three months ended March 31, 2005 and 2004, respectively.
11
We have not recognized any losses for unasserted asbestos claims. Our
experience to date has generally indicated a lack of asbestos-related
exposure from 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 condensed consolidated financial
statements.
Other Commitments
As disclosed previously in Note 13 of Item 8. Financial Statements and
Supplementary Data of our Form 10-K for the year ended December 31, 2004,
we had a $382 million purchase obligation, of which $43.9 million was
unconditional, related to an information technology service contract that
we were in the process of renegotiating. In April of 2005, the contract
was renegotiated and, as a result, our purchase obligation was reduced to
less than $10 million.
(9) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to market risk associated with changes in interest rates,
foreign currency exchange rates, and certain commodity prices. To enhance
our ability to manage these market risks, we enter into derivative
instruments for periods consistent with the related underlying hedged
exposures. The changes in fair value of these hedging instruments are
offset in part or in whole by corresponding changes in fair value or cash
flows of the underlying hedged exposures. We mitigate the risk that the
counterparty 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 we
do not hold or issue derivative instruments for trading purposes.
Recognized gains or losses in cost of goods sold due to discontinued
currency and commodity cash flow hedges for the three months ended March
31, 2005 and 2004 were immaterial.
Currency Rate Hedging
We manufacture and sell our products in a number of countries throughout
the world, and therefore, are exposed to movements in various currencies
against the U.S. dollar and against the currencies in which we
manufacture. Through our currency hedging activities, we seek to minimize
the risk that cash flows resulting from the sale of products, manufactured
in a currency different from the currency used by the selling subsidiary,
will be affected by changes in foreign currency exchange rates. Foreign
currency derivative instruments (forward contracts) are matched to the
underlying foreign currency exposures and are executed to minimize foreign
exchange transaction costs.
As of March 31, 2005, we forecasted that $0.7 million of net losses in
accumulated other comprehensive losses will be reclassified into earnings
within the next twelve months.
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 a portion of our
commodity costs. These contracts require each settlement between our
counterparty and us to coincide with cash market purchases of the actual
commodity.
As of March 31, 2005, we forecasted that $16.4 million of net gains in
accumulated other comprehensive losses will be reclassified into earnings
increasing or decreasing cost of goods sold within the next twelve months.
Interest Rate Hedging
We manage our interest rate risk by entering into both fixed and variable
rate debt. In addition, we enter into interest rate swap contracts in
order to achieve a balanced mix of fixed and variable rate indebtedness.
As of March 31, 2005, we had interest rate swap contracts to pay variable
interest, based on the six-month LIBOR rate, and receive a blended fixed
rate of interest of 6.213% on a notional amount of $200 million ($100
million related to senior notes due August 2006 and $100 million related
to senior notes due November 2012). As of March 31, 2005, the fair value
of these swap contracts was an unrealized gain of $4.2 million. We have
designated our outstanding interest rate swap contracts as fair value
hedges of underlying fixed rate debt obligations. The fair value of these
contracts is recorded in other long-term assets or liabilities with a
corresponding increase or decrease in the
12
fixed rate debt obligations. The change in fair values of both the fair
value hedge instruments and the underlying debt obligations are recorded
as equal and offsetting unrealized gains and losses in the net interest
expense component of the condensed consolidated statements of operations.
All existing fair value hedges are determined to be 100% effective under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. As a result, there is no impact on current
earnings resulting from hedge ineffectiveness.
(10) COMPREHENSIVE LOSS
Comprehensive loss is determined as follows (in thousands):
THREE MONTHS ENDED MARCH 31,
2005 2004
------------ ------------
Net loss $ (9,227) $ (3,875)
Other loss income:
Foreign currency translation adjustment (17,569) (9,200)
Cash flow hedges:
Reclassification adjustment, net of tax (1,443) 1,290
Net derivative (loss) income, net of tax (57) 3,695
Available for sale securities, net of tax 13 37
------------ ------------
Comprehensive loss $ (28,283) $ (8,053)
============ ============
(11) STOCKHOLDERS' EQUITY
The following table summarizes our stockholders' equity as of March 31,
2005 and December 31, 2004 (in thousands, except per share data):
MARCH 31, DECEMBER 31,
2005 2004
--------- -------------
Common stock $.005 par value; 200,000 shares authorized;
issued 46,712 shares at March 31, 2005
and 46,666 shares at December 31, 2004 $ 233 $ 233
Additional paid-in capital 747,361 743,790
Retained earnings 329,999 347,609
Accumulated other comprehensive losses (44,958) (25,902)
Treasury stock, at cost; 4,781 shares at March 31, 2005
and 4,895 shares at December 31, 2004 (175,740) (179,943)
Unearned compensation (6,038) (6,924)
--------- ------------
Total stockholders' equity $ 850,857 $ 878,863
========= ============
(12) LOSS PER SHARE
Net loss as set forth in the condensed consolidated statements of
operations is used in the computation of basic and diluted loss per share.
Our basic and diluted loss per share is based upon the weighted average
common shares outstanding during the period. The computation of diluted
loss per share excludes non-vested restricted shares and stock options of
4.3 million and 5.6 million for the three months ended March 31, 2005 and
2004, respectively, as their effect would have been anti-dilutive.
(13) SEGMENT INFORMATION
Our global business operates in the heating, ventilating, air
conditioning, and refrigeration (HVAC&R) industry. Our organization
consists of Global Applied, Unitary Products Group, and Bristol
Compressors. The Global Applied business is comprised of three geographic
regions: Americas; Europe, Middle East, and Africa (EMEA);
13
and Asia. Global Applied's three geographic regions, Unitary Products
Group, and Bristol Compressors represent our reportable segments.
Global Applied designs, produces, markets, and sells HVAC&R equipment and
solutions and provides maintenance and service of equipment manufactured
by us and by others. Types of equipment include air-cooled and
water-cooled chillers, large packaged rooftop units, indoor and outdoor
air handling and ventilating equipment, variable air volume units,
centrifugal, screw, scroll, and reciprocating compressors, condensers,
evaporators, heat exchangers, industrial and marine chillers, ice makers,
mini-splits, process refrigeration systems, hygienic air distribution
systems, gas compression systems, and control equipment to monitor and
control the entire system. Heating and air conditioning solutions are
provided for buildings ranging from small office buildings and fast food
restaurants to large commercial and industrial complexes. Refrigeration
systems are provided for industrial applications in the food and beverage,
electronic, chemical and petroleum industries. Cooling and refrigeration
systems are also supplied for use on naval, commercial and passenger
vessels.
Unitary Products Group (UPG) produces heating and air conditioning
solutions for buildings ranging from private homes and apartments to small
commercial buildings. UPG products include ducted central air conditioning
and heating systems (air conditioners, heat pumps, and furnaces), and
light commercial heating and cooling equipment.
Bristol Compressors (Bristol) manufactures reciprocating and scroll
compressors for our use and for sale to original equipment manufacturers
and wholesale distributors. Bristol purchases an essential component from
one vendor. Due to consolidation in the vendor's industry, there are
limited alternate sources of supply. We believe an alternate source of
supply is attainable in the event the current vendor is unable to supply
the component. However, a change in vendors would cause a delay in
manufacturing and loss of sales, which would adversely impact the results
of operations of Bristol and our consolidated results of operations.
General corporate expenses and charges and other expenses are not
allocated to the individual segments for management reporting purposes.
General corporate expenses include certain incentive compensation,
pension, medical and insurance costs; corporate administrative costs;
development costs for information technology applications and
infrastructure; restructuring charges recorded in 2005; LIFO and
intercompany profit elimination provisions and other corporate 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 earnings before interest and taxes, segment net
capital employed, and consolidated earnings per share.
14
The table below represents our operating results and assets by segment (in
thousands):
THREE MONTHS ENDED MARCH 31,
2005 2004
-------------- ---------------
Net sales:
Global Applied:
Americas $ 384,998 $ 332,799
Europe, Middle East, and Africa 318,296 298,421
Asia 132,071 102,784
Intragroup sales (61,729) (44,991)
-------------- ---------------
773,636 689,013
Unitary Products Group 210,104 180,391
Bristol Compressors 101,155 113,478
Eliminations(1) (51,090) (43,515)
-------------- ---------------
$ 1,033,805 $ 939,367
============== ===============
(1)Eliminations include the following
intersegment sales:
Global Applied $ (293) $ (731)
Unitary Products Group (19,256) (13,734)
Bristol Compressors (31,541) (29,050)
-------------- ---------------
Eliminations $ (51,090) $ (43,515)
============== ===============
(Loss) income from operations:
Global Applied:
Americas $ 2,941 $ 1,686
Europe, Middle East, and Africa (9,297) (9)
Asia 9,410 9,574
-------------- ---------------
3,054 11,251
Unitary Products Group 12,861 12,026
Bristol Compressors 8,170 4,078
General corporate expenses, eliminations, and
other non-allocated items (26,898) (22,152)
-------------- ---------------
(2,813) 5,203
-------------- ---------------
Interest expense, net (11,478) (10,861)
-------------- ---------------
Equity in earnings (loss) of affiliates:
Global Applied:
Europe, Middle East, and Africa 144 384
Asia 299 116
-------------- ---------------
443 500
Bristol Compressors 840 (8)
-------------- ---------------
1,283 492
-------------- ---------------
Loss before income taxes (13,008) (5,166)
Benefit from income taxes 3,781 1,291
-------------- ---------------
Net loss $ (9,227) $ (3,875)
============== ===============
15
MARCH 31, 2005 DEC. 31, 2004
-------------- ---------------
Total assets:
Global Applied:
Americas $ 807,397 $ 774,015
Europe, Middle East, and Africa 959,871 1,033,824
Asia 528,633 511,703
Eliminations and other non-allocated assets (206,885) (206,719)
-------------- ---------------
2,089,016 2,112,823
Unitary Products Group 465,543 438,933
Bristol Compressors 280,102 242,473
Eliminations and other non-allocated assets 150,563 216,186
-------------- ---------------
$ 2,985,224 $ 3,010,415
============== ===============
(14) CHARGES TO OPERATIONS
In 2003, we initiated actions to further reduce our overall cost structure
and support the implementation of our new geographic organization. In
addition to cost reductions associated with the consolidation of our
former Engineered Systems Group and York Refrigeration Group segments,
additional actions included the further reduction of manufacturing
capacity, the elimination of certain product lines, and the exiting of
several small, non-core businesses. All actions were substantially
completed by December 31, 2003.
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.
In the three months ended March 31, 2005, we incurred costs by segment as
follows (in thousands):
Global Applied:
Americas $ --
Europe, Middle East, and Africa 1,223
Asia --
------------
Restructuring and other charges, net $ 1,223
============
Charges included severance related to the closure of under performing
businesses in Germany and Holland that served local fishery markets.
Detail of activity relating to the 2003 and 2004 initiatives in the three
months ended March 31, 2005 is as follows (in thousands):
ACCRUALS
ESTABLISHED UTILIZED
IN THE THREE IN THE THREE
MONTHS MONTHS REMAINING
ACCRUALS AT ENDED ENDED ACCRUALS AT
DEC. 31, MARCH 31, MARCH 31, MARCH 31,
2004 2005 2005 2005
------------ ------------ ------------ -----------
Severance $ 6,326 $ 1,223 $ 2,131 $ 5,418
Contractual obligations 2,730 -- 163 2,567
Other 7 -- 7 --
------------ ------------ ------------ -----------
$ 9,063 $ 1,223 $ 2,301 $ 7,985
============ ============ ============ ===========
16
(15) NEW ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board (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 January 1, 2006. This standard is not expected to materially
impact our condensed consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" (SFAS 123R). 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, companies are required to
recognize compensation cost for share-based compensation issued to or
purchased by employees under stock-based compensation plans using a
fair-value-based method effective July 1, 2005. The impact the standard
will have on our condensed consolidated financial statements is not known
at this time; however, it may reduce net income and earnings per share
similar to the amounts disclosed in Note 2 to our condensed consolidated
financial statements and Note 1 of Item 8. Financial Statements and
Supplementary Data of our Form 10-K for the year ended December 31, 2004.
In March 2005, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 107 which provided further clarification on the
implementation of SFAS 123R. On April 14, 2005, the SEC announced a
deferral of the effective date of SFAS 123R for calendar year public
companies until the beginning of 2006.
17
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
CONSOLIDATED OPERATIONS
THREE MONTHS ENDED MARCH 31, DOLLAR PERCENT
(in thousands, except percentages) 2005 2004 CHANGE CHANGE
- ---------------------------------- ------------- ------------ ---------- -------
U.S. sales $ 488,313 $ 425,833 $ 62,480 14.7%
Non-U.S. sales 545,492 513,534 31,958 6.2%
------------- ------------ ----------
Net sales 1,033,805 939,367 94,438 10.1%
Gross profit 183,128 171,056 12,072 7.1%
Gross profit % 17.7% 18.2%
Our revenue growth is mainly attributable to increased equipment volume
(excluding equipment sold through our service business) in Global Applied of
$55.3 million and Unitary Products Group (UPG) of $29.7 million; strong service
business (consisting of services, parts, and replacement equipment) growth of
$29.3 million in Global Applied; and the net strengthening of foreign currencies
$19.2 million, primarily in our Europe, Middle East, and Africa (EMEA)
operations. Revenue growth was partially offset by sales decreases in European
equipment markets and Bristol Compressors.
The increase in gross profit was primarily due to volume growth, productivity
gains and selling price increases. These increases were partially offset by
weakness in Europe caused by overall slow economies, increased material costs,
pricing pressure in Asia, and inefficiencies in our service operations in North
America. Raw material and component cost increases (principally steel and
copper) net of selling price increases were approximately $8 million. We expect
realization of selling price increases to fully offset the estimated $100
million rise in raw material and component costs for the full 2005 year. In
addition, we experienced substantial cost increases for transportation and
refrigerants, particularly R134a.
Order backlog
MARCH 31, DOLLAR PERCENT
(in thousands, except percentages) 2005 2004 CHANGE CHANGE
- ----------------------------------- ----------- ------------ ---------- --------
Global Applied:
Americas $ 454,527 $ 424,525 $ 30,002 7.1%
Europe, Middle East, and Africa 587,891 551,612 36,279 6.6%
Asia 115,657 119,556 (3,899) (3.3)%
----------- ------------ ----------
1,158,075 1,095,693 62,382 5.7%
Unitary Products Group 62,143 64,895 (2,752) (4.2)%
Bristol Compressors 93,954 80,991 12,963 16.0%
----------- ------------ ----------
Total $ 1,314,172 $ 1,241,579 $ 72,593 5.8%
Order backlog increased 3.5% due to the net strengthening of foreign currencies.
The remaining improvement in Global Applied backlog is primarily the result of
strong orders in the Middle East and Latin America.
18
THREE MONTHS ENDED MARCH 31, DOLLAR PERCENT
(in thousands, except percentages) 2005 2004 CHANGE CHANGE
- --------------------------------------------- ---------- --------- --------- --------
Selling, general, and administrative
(SG&A) expenses $ 184,718 $ 165,853 $ 18,865 11.4%
SG&A as a % of net sales 17.9% 17.7%
Restructuring and other charges, net 1,223 -- 1,223 100.0%
(Loss) income from operations (2,813) 5,203 (8,016) (154.1)%
(Loss) income from operations as a % of sales (0.3)% 0.6%
Our selling, general, and administrative (SG&A) expenses increased by $3.6
million due to the net strengthening of foreign currencies. The remaining
increase was due to commission costs associated with higher equipment volume,
marketing costs, and investments in product development.
In 2004, we initiated actions to support the implementation of our new
organization in EMEA. In 2005, we closed under performing businesses in Germany
and Holland that served the local fishery markets. The actions resulted in
additional costs related to severance in the first quarter.
THREE MONTHS ENDED MARCH 31, DOLLAR PERCENT
(in thousands, except percentages) 2005 2004 CHANGE CHANGE
- --------------------------------------------- ---------- --------- --------- --------
Interest expense, net $ 11,478 $ 10,861 $ 617 5.7%
Equity in the earnings of affiliates 1,283 492 791 160.8%
Benefit from income taxes 3,781 1,291 2,490 192.9%
Net loss (9,227) (3,875) (5,352) (138.1)%
The increase in net interest expense resulted mainly from higher average
interest rates in international markets.
The increase in equity in earnings of affiliates was primarily the result of
increased earnings at Scroll Technologies.
The income tax benefits of $3.8 million for the first quarter of 2005 and $1.3
million in 2004 relate to both U.S. and non-U.S. operations. The effective tax
rate was a benefit of 29.1% in the first quarter of 2005 as compared to 25% in
2004. The 2005 and 2004 income tax benefits were lower than the U.S. statutory
rate of 35% primarily due to pre-tax earnings and losses in non-U.S.
jurisdictions where statutory rates are less than 35%, export incentives, and
research and development credits. The change in the effective tax rate is
primarily attributable to a different geographic distribution of pre-tax
earnings.
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 continue to evaluate the effects of the repatriation provision and
expect to make a decision on implementation later in 2005. 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 the Financial Accounting Standards Board's issuance of
Staff Position No. 109-2, "Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Act of 2004," 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.
19
SEGMENT ANALYSIS
The following table sets forth net sales and (loss) income from operations by
segment (in thousands, except percentages):
THREE MONTHS ENDED MARCH 31, DOLLAR PERCENT
2005 2004 CHANGE CHANGE
------------ ------------ ------------ ------------
Net sales:
Global Applied:
Americas $ 384,998 $ 332,799 $ 52,199 15.7%
Europe, Middle East, and Africa 318,296 298,421 19,875 6.7%
Asia 132,071 102,784 29,287 28.5%
Intragroup sales (61,729) (44,991) (16,738) 37.2%
------------ ------------ ------------
773,636 689,013 84,623 12.3%
Unitary Products Group 210,104 180,391 29,713 16.5%
Bristol Compressors 101,155 113,478 (12,323) (10.9)%
Eliminations (51,090) (43,515) (7,575) 17.4%
------------ ------------ ------------
Net sales $ 1,033,805 $ 939,367 $ 94,438 10.1%
(Loss) income from operations:
Global Applied:
Americas $ 2,941 $ 1,686 $ 1,255 74.4%
Europe, Middle East, and Africa (9,297) (9) (9,288) N/M
Asia 9,410 9,574 (164) (1.7)%
------------ ------------ ------------
3,054 11,251 (8,197) (72.9)%
Unitary Products Group 12,861 12,026 835 6.9%
Bristol Compressors 8,170 4,078 4,092 100.3%
General corporate expenses, eliminations, and
other non-allocated items (26,898) (22,152) (4,746) 21.4%
------------ ------------ ------------
(Loss) income from operations $ (2,813) $ 5,203 $ (8,016) (154.1)%
N/M - not meaningful
Global Applied
Global Applied's service business (consisting of services, parts, and
replacement equipment) grew $29.3 million or 11.5% to $283.6 million, of which
2.8% is due to the net strengthening of foreign currencies. The service business
continued to benefit from new multi-site commercial service arrangements in
North America. The Americas benefited from volume increases for HVAC equipment
(mainly middle market products and air handling units) in North America and
Latin America. EMEA sales growth is mainly attributable to the favorable impact
of foreign currency translation of $15.5 million and strong sales growth in the
Middle East markets partially offset by declining sales in European equipment
markets. Asia revenue increased as construction and economic expansion continued
throughout the region.
Income from operations was negatively impacted by rising raw material and
component cost increases net of selling price realization, lower equipment
volume in European markets impacting fixed cost absorption, and pricing pressure
in Asia and Europe partially offset by higher equipment volume in Americas.
Growth in the North American service business was limited due to inefficiencies
related to Americas' YORKConnect deployment. We expect growth in equipment
markets, except large tonnage equipment markets, and pricing pressures to
continue for the remainder of 2005.
Unitary Products Group (UPG)
UPG revenues benefited from the strength of the North American economies,
increased replacement market sales and general selling price increases.
Increased replacement market activity improved sales for higher SEER air
conditioning products as consumers demand greater efficiency and sound quality.
UPG's sales mix includes a higher proportion of replacement sales in comparison
to last year as the replacement market and our market share continued to grow.
Residential and light commercial equipment sales increased year-over-year mainly
due to North American economic growth and new
20
product introduction. Manufactured housing equipment sales decreased on a
year-over-year basis. UPG volume growth compared to industry shipments indicates
an overall market share gain.
Income from operations improved mainly due to increased equipment volume, price
increases, sales of higher margin 12 to 15 SEER air conditioning products, and a
favorable mix of sales to the higher margin replacement market. These
improvements were partially offset by increased raw material and component costs
net of price increases and marketing costs.
Bristol Compressors (Bristol)
Revenue declined due to lower shipments to international customers of
approximately 43% partially offset by the impact of selling price increases.
Operating results improved mainly due to selling price increases and
productivity improvements partially offset by increased raw material and
component costs (mainly steel) net of price increases and lower equipment
volume. Bristol's new Benchmark product continues to be tested by customers. We
have received some Benchmark production order commitments for late 2005 and
2006.
Other
The increase in general corporate expenses, eliminations, and other
non-allocated items was primarily due to costs related to an increased LIFO
charge mainly due to escalating material costs and a higher level of
intercompany eliminations of $4.2 million and a net increase of $0.5 million in
other non-allocated costs.
Restructuring and other charges, net are as follows (in thousands):
THREE MONTHS
ENDED
By segment MARCH 31, 2005
- ------------------------------------ --------------
Global Applied:
Americas $ --
Europe, Middle East, and Africa 1,223
Asia --
------------
Restructuring and other charges, net $ 1,223
============
No restructuring and other charges were recorded in the first quarter of 2004.
LIQUIDITY AND CAPITAL RESOURCES
Our significant liquidity and capital funding needs are working capital,
operating expenses, capital expenditures, debt repayments, 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, sale 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 expect working capital needs of up to $200 million in the first
half of 2005, followed by cash generation in the second half of the year.
We believe that we will be able to satisfy our principal and interest payment
obligations and our working capital and capital expenditure requirements from
operating cash flows together with the availability under the uncommitted credit
lines and committed bank lines of credit. Uncommitted credit lines and committed
bank lines of credit support seasonal working capital needs and are available
for general corporate purposes. Since certain of our long-term debt obligations
and our revolving trade receivables purchase facility bear interest at floating
rates, our interest costs are sensitive to changes in prevailing interest rates.
Our commitments and contractual obligations are disclosed in Note 13 of Item 8.
Financial Statements and Supplementary Data of our Form 10-K for the year ended
December 31, 2004. In April of 2005, we renegotiated one of our information
technology service contracts. As a result, our purchase obligation of $382
million ($43.9 million of which was unconditional) as of December 31, 2004 was
reduced to less than $10 million.
21
WORKING CAPITAL
MARCH 31, DEC. 31 DOLLAR PERCENT
(in thousands, except percentages) 2005 2004 CHANGE CHANGE
- ---------------------------------- ----------- ----------- --------- ---------
Current assets:
Cash and cash equivalents $ 46,260 $ 42,881 $ 3,379 7.9%
Receivables, net 743,043 804,141 (61,098) (7.6)%
Inventories 671,099 615,131 55,968 9.1%
Prepayments and other current assets 145,768 144,489 1,279 0.9%
----------- ----------- ---------
Total current assets 1,606,170 1,606,642 (472) (0.0)%
Current liabilities:
Notes payable and current portion of long-term debt 23,389 19,539 3,850 19.7%
Accounts payable and accrued expenses 1,030,574 1,144,464 (113,890) (10.0)%
Income taxes 37,390 40,829 (3,439) (8.4)%
----------- ----------- ---------
Total current liabilities 1,091,353 1,204,832 (113,479) (9.4)%
----------- ----------- ---------
Working capital $ 514,817 $ 401,810 $ 113,007 28.1%
Net Receivables
The decrease in net receivables is primarily due to seasonal sales trends as
Global Applied revenue decreased 19% in the first quarter of 2005 as compared to
the fourth quarter of 2004, primarily in EMEA, partially offset by sales growth
in UPG and Bristol. In addition, inefficiencies related to the YORKConnect
deployment in North America contributed to the rise in receivables.
Overall, days sales outstanding was 50 days at March 31, 2005 and at December
31, 2004.
Inventories
The increase in inventory levels is mainly a result of raw material and work in
progress requirements to support our increasing Global Applied backlog and the
effect of higher raw material and component costs.
Accounts Payable and Accrued Expenses
The decrease in accounts payable and accrued expenses was primarily a result of
the number of elapsed days between the last payment cycle and the end of the
period and the payment of year-end incentive compensation accruals. These
decreases were partially offset by increases in payables due to the rise in
inventory levels.
CASH FLOWS
Operating Activities
We used $117.9 million of cash for operating activities in the first quarter of
2005. Net cash flows of $132.8 million were used by the change in assets and
liabilities net of effects from acquisitions and divestitures, mainly due to the
increase in inventory resulting partially from a decrease in inventory turns to
6.1 as of March 31, 2005 compared to 6.4 as of March 31, 2004 and a decrease in
accounts payable and accrued expenses as discussed above. Remaining cash flows
of $14.9 million were generated from operations.
Investing Activities
Cash used in investing activities of $10.5 million was mainly comprised of
capital expenditures for manufacturing equipment and information technology
systems.
Financing Activities
Cash provided by financing activities of $131.9 million included proceeds of
$135 million from net borrowings and $5.3 million from the issuance of common
stock partially offset by common stock dividend payments of $8.4 million. Net
borrowings are consistent with the typical seasonality of our businesses to
finance increasing working capital needs during the first half of the year.
Proceeds from the issuance of common stock represent cash received from employee
stock purchases and exercise of stock options under our employee stock plans. We
paid a cash dividend of $0.20 per share in the first quarter of 2005 and 2004.
22
BORROWINGS AND AVAILABILITY
The following table summarizes the terms of our lines of credit:
LIMIT AVAILABILITY (a)
MARCH 31, DEC. 31, MARCH 31, DEC. 31, BORROWING ANNUAL
(in thousands) 2005 2004 2005 2004 EXPIRES RATE (b) FEE
- -------------- --------- --------- --------- -------- --------- --------- ------
Five Year
Credit May 29, LIBOR +
Agreement $ 400,000 $ 400,000 $ 370,000 $400,000 2006 1.175% 0.2%
364-Day
Credit March 11, LIBOR +
Agreement (c) 200,000 200,000 200,000 200,000 2006 0.63% 0.15%
Domestic Uncom-
bank lines 160,000 160,000 27,000 128,150 mitted Various -
Non-U.S.
bank credit Uncom-
facilities 456,818 443,247 298,840 295,544 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 2.9% and
2.38% as of March 31, 2005 and December 31, 2004, respectively.
(c) We renewed our 364-Day Credit Agreement in March 2005.
The Five Year Credit Agreement and 364-Day Credit Agreement (Agreements) 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 March 31, 2005 and December 31, 2004. We expect to
renew or replace the Five Year Credit Agreement with a similar credit agreement
during the second quarter of 2005. If we do not renew or replace the Five Year
Credit Agreement, borrowings supported by the credit agreement will be
classified as current liabilities. As of March 31, 2005 our working capital
would have been reduced by $163 million.
We have access to bank lines of credit and have the ability to borrow under the
Agreements as long as we continue to meet the financial covenants or until
expiration of the Agreements. The primary financial covenants are the earnings
before interest, taxes, depreciation, and amortization (EBITDA) interest
coverage and the debt to capital ratio, as defined under the Agreements. As of
March 31, 2005, our EBITDA interest coverage was 5.17 times, exceeding the
minimum requirement of 3.5 times. As of March 31, 2005, our debt to capital
ratio, as defined in the agreement, was 43%, which is below the maximum allowed
of 50%. Our ability to issue commercial paper is limited due to our credit
ratings.
We also maintain an annually renewable revolving facility under which we sell
certain trade receivables (see "Off-Balance Sheet Arrangements" section below).
OFF-BALANCE SHEET ARRANGEMENTS
Our off-balance sheet arrangements are comprised of a trade receivable revolving
facility and operating leases.
Trade Receivable Revolving Facility
Pursuant to the terms of an annually renewable revolving facility, we sell
certain of our trade receivables to a wholly-owned consolidated subsidiary, York
Receivables Funding LLC (YRFLLC). In turn, YRFLLC sells, on a revolving basis,
an undivided ownership interest in the 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. The facility is expected to be renewed in 2005 at a level of $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.
23
In accordance with the facility, YRFLLC has sold $150 million and $135 million
of an undivided interest in trade receivables as of March 31, 2005 and December
31, 2004, respectively, resulting in a reduction of net receivables reflected in
our condensed consolidated balance sheets. The discount rate on trade
receivables sold was 2.8% and 2.38% as of March 31, 2005 and December 31, 2004,
respectively. The program fee on trade receivables sold was 0.4% as of March 31,
2005 and December 31, 2004.
Operating Leases
Operating leases provide us with the flexibility to use property, plant, and
equipment without assuming ownership and related debt. Operating leases reduce
our risk associated with disposal and residual fair value of property, plant,
and equipment at the end of the lease.
OUTLOOK
Overall, we expect 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; strong growth in Asia; modest growth in Americas and UPG;
and stability at Bristol. We expect an overall decline in EMEA equipment
revenue. Our expectations are challenged by the continual rise in commodity
costs. We have announced general selling price increases that we expect will
mitigate the expected rise in raw material and component costs throughout 2005.
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.
NEW ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board (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 January 1, 2006. This standard is not
expected to materially impact our condensed consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" (SFAS 123R). 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, companies are required to recognize compensation cost for
share-based compensation issued to or purchased by employees under stock-based
compensation plans using a fair-value-based method effective July 1, 2005. The
impact the standard will have on our condensed consolidated financial statements
is not known at this time; however, it may reduce net income and earnings per
share similar to the amounts disclosed in Note 2 to our condensed consolidated
financial statements and Note 1 of Item 8. Financial Statements and
Supplementary Data of our Form 10-K for the year ended December 31, 2004. In
March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 107 which provided further clarification on the implementation of
SFAS 123R. On April 14, 2005, the SEC announced a deferral of the effective date
of SFAS 123R for calendar year public companies until the beginning of 2006.
FORWARD-LOOKING INFORMATION - RISK FACTORS
This document contains statements which, to the extent they are not statements
of historical or present fact, constitute "forward-looking statements" under the
securities laws. From time to time, oral or written forward-looking statements
may also be included in other materials released to the public. These
forward-looking statements are intended to provide our current expectations or
plans for future operating and financial performance based on assumptions
currently believed to be valid.
To the extent we have made "forward-looking statements," certain risk factors
could cause actual results to differ materially from those anticipated in such
forward-looking statements including, but not limited to:
- Changes in competition within specific markets and/or geographies
- Introduction of new competitive products
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- 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
- 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 information technology systems
- Unfavorable outcome of our UPG furnace inspection and remediation
program including, but not limited to, significant changes in
assumptions used to estimate our repair costs and the number of
units requiring repair
- 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 business and, similarly, unseasonably cool
weather in the U.S. could impact our UPG and Bristol compressor businesses.
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 China's applied systems market impacting our
ability to grow at current levels. Our ability to effectively implement price
increases to offset higher costs is dependent on market conditions and the
competitive environment. The financial position and financial results of our
foreign locations could be negatively impacted by the translation effect of
currency fluctuations and by political changes including nationalization or
expropriation of assets. In addition, our overall performance could be affected
by declining worldwide economic conditions or slowdowns resulting from world
events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information responsive to this item as of December 31, 2004 appears under the
captions "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Market Risk," on pages 44 to 46 of our Form 10-K for the
year ended December 31, 2004. There was no material change in such information
as of March 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
As of March 31, 2005, we carried out an evaluation, under the supervision and
with the participation of Company management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective.
There were no changes in our internal control over financial reporting that
occurred during the quarter ended March 31, 2005 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
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PART II - OTHER INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
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 8 of Part I,
Item 1. Financial Statements.
In March 2005, the Company received a subpoena issued by the U.S. Department of
Justice, Antitrust Division, requesting that the Company produce documents
relating to work performed for one of its customers. The Company is cooperating
fully.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS
Exhibit 31.1 - Certification of the Chief Executive Officer of York
International Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 - Certification of the Chief Financial Officer of York
International Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 - Certification of the Chief Executive Officer and Chief Financial
Officer of York International Corporation pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned unto duly authorized.
YORK INTERNATIONAL CORPORATION
------------------------------
Registrant
Date May 3, 2005 /s/ M. David Kornblatt
------------------------------
M. David Kornblatt
Vice President and
Chief Financial Officer
27
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31.1 Certification of the Chief Executive Officer of York
International Corporation pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002*
31.2 Certification of the Chief Financial Officer of York
International Corporation pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002*
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer of York International Corporation pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002*
* Submitted electronically herewith
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