10-Q 1 w99481e10vq.txt FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 6/30/04 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 JUNE 30, 2004 COMMISSION FILE NUMBER 1-10863 YORK INTERNATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3473472 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 631 SOUTH RICHLAND AVENUE, YORK, PA 17403 (717) 771-7890 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 3, 2004 ----- ----------------------------- Common Stock, par value $.005 41,421,197 shares YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 INDEX
Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations - (unaudited) Three and Six Months Ended June 30, 2004 and 2003 3 Condensed Consolidated Balance Sheets - June 30, 2004 (unaudited) and December 31, 2003 4 Condensed Consolidated Statements of Cash Flows - (unaudited) Six Months Ended June 30, 2004 and 2003 5 Notes to Condensed Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 Item 4. Controls and Procedures 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings 27 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 27 Item 3. Defaults Upon Senior Securities 27 Item 4. Submission of Matters to a Vote of Security Holders 27 Item 5. Other Information 28 Item 6. Exhibits 28 Signatures 30 Exhibit Index 31
2 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Statements of Operations (unaudited) (in thousands, except per share data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2004 2003 2004 2003 ----------- ------------ ----------- ----------- Net sales: Products $ 1,104,388 $ 975,073 $ 1,938,106 $ 1,744,116 Services 117,320 109,344 222,969 208,658 ----------- ----------- ----------- ----------- Net sales 1,221,708 1,084,417 2,161,075 1,952,774 Cost of goods sold: Products (902,001) (771,758) (1,580,586) (1,398,963) Services (94,032) (86,295) (183,758) (167,347) ----------- ----------- ----------- ----------- Cost of goods sold (996,033) (858,053) (1,764,344) (1,566,310) ----------- ----------- ----------- ----------- Gross profit 225,675 226,364 396,731 386,464 Selling, general and administrative expenses (177,303) (156,796) (343,484) (305,828) Restructuring and other charges, net -- (33,060) -- (49,154) ----------- ----------- ----------- ----------- Income from operations 48,372 36,508 53,247 31,482 Interest expense, net (10,072) (12,115) (20,933) (24,131) Equity in earnings of affiliates 4,227 2,477 4,719 3,565 ----------- ----------- ----------- ----------- Income before income taxes 42,527 26,870 37,033 10,916 Provision for income taxes (4,131) (7,664) (2,840) (5,346) ----------- ----------- ----------- ----------- Net income $ 38,396 $ 19,206 $ 34,193 $ 5,570 =========== =========== =========== =========== Basic earnings per share $ 0.94 $ 0.48 $ 0.84 $ 0.14 =========== =========== =========== =========== Diluted earnings per share $ 0.91 $ 0.48 $ 0.81 $ 0.14 =========== =========== =========== =========== Cash dividends per share $ 0.20 $ 0.15 $ 0.40 $ 0.30 =========== =========== =========== =========== Weighted average common shares and common equivalents outstanding: Basic 41,037 39,631 40,819 39,594 Diluted 42,270 39,861 42,050 39,748
See accompanying supplemental notes to condensed consolidated financial statements. 3 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands)
JUNE 30, 2004 DECEMBER 31, (UNAUDITED) 2003 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 50,584 $ 49,650 Receivables, net 797,079 638,510 Inventories: Raw material 147,051 138,108 Work in progress 172,203 147,094 Finished goods 253,116 227,512 ------------ ------------ Total inventories 572,370 512,714 Prepayments and other current assets 130,863 129,921 ------------ ------------ Total current assets 1,550,896 1,330,795 Deferred income taxes 101,132 107,566 Investments in affiliates 32,193 28,200 Property, plant and equipment, net 537,061 541,118 Goodwill 526,822 529,182 Intangibles, net 35,711 36,744 Deferred charges and other assets 99,033 99,530 ------------ ------------ Total assets $ 2,882,848 $ 2,673,135 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ 20,448 $ 30,755 Accounts payable and accrued expenses 1,018,774 899,093 Income taxes 26,662 38,453 ------------ ------------ Total current liabilities 1,065,884 968,301 Long-term warranties 52,460 46,888 Long-term debt 671,011 582,027 Postretirement and postemployment benefits 242,915 249,912 Other long-term liabilities 51,438 49,607 ------------ ------------ Total liabilities 2,083,708 1,896,735 Stockholders' equity 799,140 776,400 ------------ ------------ Total liabilities and stockholders' equity $ 2,882,848 $ 2,673,135 ============ ============
See accompanying supplemental 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)
SIX MONTHS ENDED JUNE 30, 2004 2003 ---------- ---------- Cash flows from operating activities: Net income $ 34,193 $ 5,570 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization of property, plant and equipment 35,038 33,288 Amortization of deferred charges and intangibles 1,649 1,764 Provision for doubtful receivables 6,712 7,038 Effect of non-cash charges -- 31,185 Deferred income taxes (6,560) 9,699 Loss on sale of fixed assets 535 761 Other 537 (1,709) Change in assets and liabilities net of effects from acquisitions and divestitures: Receivables, net (171,684) (68,380) Inventories (63,624) (49,730) Prepayments and other current assets 10,490 (31,478) Accounts payable and accrued expenses 124,131 92,939 Income taxes (11,831) (1,074) Other long-term assets and liabilities 1,174 4,917 ---------- ---------- Net cash (used) provided by operating activities (39,240) 34,790 ---------- ---------- Cash flows from investing activities: Purchases of other companies, net of cash acquired (728) (3,160) Capital expenditures (37,105) (35,916) Proceeds from sale of fixed assets 954 170 ---------- ---------- Net cash used by investing activities (36,879) (38,906) ---------- ---------- Cash flows from financing activities: Net payments of short-term debt (9,899) (245) Net proceeds from credit agreement -- 20,000 Payment of senior notes -- (100,000) Net proceeds from other long-term debt 88,751 49,621 Net reduction in sale of receivables -- (5,000) Common stock issued 14,980 322 Treasury stock purchases (74) (5) Dividends paid (16,478) (11,904) ---------- ---------- Net cash provided (used) by financing activities 77,280 (47,211) ---------- ---------- Effect of exchange rate changes on cash and cash equivalents (227) (421) ---------- ---------- Net increase (decrease) in cash and cash equivalents 934 (51,748) Cash and cash equivalents at beginning of period 49,650 92,940 ---------- ---------- Cash and cash equivalents at end of period $ 50,584 $ 41,192 ========== ==========
See accompanying supplemental 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 June 30, 2004 and December 31, 2003, results of operations for the three and six months ended June 30, 2004 and 2003, and cash flows for the six months ended June 30, 2004 and 2003. Our results of operations for interim periods are not necessarily indicative of results expected for the full year. Certain reclassifications have been made to the 2003 condensed consolidated financial statements to conform to the 2004 presentation. (2) STOCK-BASED COMPENSATION We apply the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our stock-based compensation plans. Accordingly, no compensation expense has been recognized for our stock-based compensation plans other than restricted stock and performance-based awards. Had compensation expense for all stock and employee stock purchase plans been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as amended, our net income and earnings per share would have been adjusted to the pro forma amounts as follows (in thousands, except per share data):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net income - as reported $ 38,396 $ 19,206 $ 34,193 $ 5,570 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 571 256 877 279 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,633) (977) (2,733) (3,166) ------------ ------------ ------------ ------------ Pro forma net income $ 37,334 $ 18,485 $ 32,337 $ 2,683 ============ ============ ============ ============ Earnings per share: Basic - as reported $ 0.94 $ 0.48 $ 0.84 $ 0.14 Basic - pro forma 0.91 0.47 0.79 0.07 Diluted - as reported 0.91 0.48 0.81 0.14 Diluted - pro forma 0.88 0.46 0.77 0.07
Since the determination of fair value of all stock options granted includes variable factors, including volatility, and additional stock option grants are expected to be made each year, the above pro forma disclosures are not representative of pro forma effects on reported net income and earnings per share for future periods. 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 of an undivided interest in trade receivables as of June 30, 2004 and December 31, 2003. The proceeds from the sale were reflected as a reduction of net receivables reflected in our condensed consolidated balance sheets as of June 30, 2004 and December 31, 2003. The discount rate on trade receivables sold was 1.26% and 1.12% as of June 30, 2004 and December 31, 2003, respectively. The program fee on trade receivables sold was 0.4% and 0.5% as of June 30, 2004 and December 31, 2003, respectively. (4) GOODWILL The changes in the carrying amount of goodwill for the six months ended June 30, 2004 by segment, are as follows (in thousands):
NET FOREIGN BALANCE AS OF GOODWILL CURRENCY BALANCE AS OF DEC. 31, 2003 ACQUIRED FLUCTUATION JUNE 30, 2004 ------------- -------- ----------- ------------- Global Applied: Americas $ 92,949 $ -- $ (197) $ 92,752 Europe, Middle East and Africa 130,166 429 (2,512) 128,083 Asia 109,314 -- (80) 109,234 ------------- -------- ----------- ------------ 332,429 429 (2,789) 330,069 Unitary Products Group 140,440 -- -- 140,440 Bristol Compressors 56,313 -- -- 56,313 ------------- -------- ----------- ------------ $ 529,182 $ 429 $ (2,789) $ 526,822 ============= ======== =========== ============
(5) INTANGIBLES, NET The following table summarizes the major intangible asset classes subject to amortization included in our condensed consolidated balance sheets as of June 30, 2004 and December 31, 2003 (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING AMOUNT AMORTIZATION AMOUNT -------------- ------------ ------------- June 30, 2004 Trade names and trademarks $40,821 $ 6,865 $33,956 Other 3,005 1,250 1,755 ------- ------- ------- $43,826 $ 8,115 $35,711 ======= ======= ======= December 31, 2003 Trade names and trademarks $42,028 $ 6,723 $35,305 Other 2,536 1,097 1,439 ------- ------- ------- $44,564 $ 7,820 $36,744 ======= ======= =======
Amortization expense for trade names and trademarks and other intangible assets for the three and six months ended June 30, 2004 was $0.4 million and $0.8 million, respectively. For the three and six months ended June 30, 2003, amortization expense for trade names and trademarks and other intangible assets was $0.5 million and $0.9 million, respectively. 7 The following table estimates the amount of amortization expense for trade names and trademarks and other intangible assets for the remainder of 2004 and each of the fiscal years indicated (in thousands): 2004 (July 1 - December 31) $ 791 2005 1,655 2006 1,655 2007 1,555 2008 1,555 Thereafter 28,500 -------------- $ 35,711 ==============
(6) NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt consist of (in thousands):
JUNE 30, DECEMBER 31, 2004 2003 --------- ------------ Notes payable and current portion of long-term debt: Bank loans (primarily foreign currency) $ 17,885 $ 27,784 Current portion of long-term debt 2,563 2,971 --------- --------- Total $ 20,448 $ 30,755 ========= ========= Long-term debt: Domestic bank lines at an average rate of 2.05% in 2004 and 1.58% in 2003 $ 117,200 $ 25,000 Danish retail notes, 2% interest, due October 2004 40,950 41,844 Senior notes, 6.625% interest, due August 2006 200,000 200,000 Senior notes, 6.7% interest, due June 2008 200,000 200,000 Senior notes, 5.8% interest, due November 2012 100,000 100,000 Other (primarily foreign bank loans) at an average rate of 6.08% in 2004 and 6.3% in 2003 15,424 18,154 --------- --------- Total 673,574 584,998 Less current portion (2,563) (2,971) --------- --------- Noncurrent portion $ 671,011 $ 582,027 ========= =========
The domestic bank lines and the Danish retail notes are classified as long-term, as they are supported by our Five Year Credit Agreement. 8 The following table summarizes the terms of our lines of credit (in thousands):
LIMIT AVAILABILITY (a) JUNE 30, DEC. 31, JUNE 30, DEC. 31, BORROWING ANNUAL 2004 2003 2004 2003 EXPIRES RATE (b) FEE -------- -------- -------- -------- ---------- --------- ------ Five Year Credit LIBOR + Agreement $400,000 $400,000 $400,000 $400,000 May 29, 2006 1.175% 0.2% 364-Day Credit LIBOR + Agreement (c) 200,000 200,000 200,000 200,000 March 11, 2005 0.85% 0.15% Domestic bank lines 150,000 135,000 32,800 110,000 Uncommitted Various -- Non-U.S bank credit facilities 386,100 355,246 251,072 246,298 Uncommitted Various --
(a) Availability is reduced for outstanding borrowings and bank guarantee and letters of credit usage. (b) The one-month LIBOR (London Interbank Offering Rate) rate was 1.37% and 1.12% as of June 30, 2004 and December 31, 2003, respectively. (c) We renewed our 364-Day Credit Agreement in March 2004. (7) POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PENSION PLANS Effective January 1, 2004, we replaced our defined benefit pension plans for U.S. salaried non-bargaining and certain U.S. salaried bargaining employees with a new defined contribution plan. Net periodic benefit cost includes the following components (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Components of net periodic benefit cost: Service cost $ 2,917 $ 4,741 $ 6,143 $ 10,546 Interest cost 7,971 7,418 16,423 16,572 Expected return on plan assets, income (10,062) (8,198) (20,324) (18,477) Amortization of prior service cost 550 736 1,122 1,705 Amortization of net loss 664 457 1,332 932 Settlement and other -- 289 1,049 289 ------------- ------------- ------------- ------------- Net periodic benefit cost $ 2,040 $ 5,443 $ 5,745 $ 11,567 ============= ============= ============= =============
We previously disclosed in our consolidated financial statements for the year ended December 31, 2003 that we expected to contribute $14.3 million to our pension plans in 2004. As of June 30, 2004, $9.7 million of contributions have been made. We currently anticipate contributing an additional $4.4 million to fund our plans in 2004 for a total of $14.1 million. 9 DEFINED CONTRIBUTION PLANS Effective January 1, 2004, certain U.S. employees participate in our new defined contribution plan. We contribute a cash amount to the plan on an annual basis, based on employees' eligible earnings, vesting service, and age. We recorded expense of approximately $2.4 million and $5.2 million related to the plan in the three and six months ended June 30, 2004, respectively. Certain employees participate in various other investment plans. Under the plans, the employees may voluntarily contribute a percentage of their compensation. We contribute a cash amount based on the participants' contributions. Our contributions to plans were approximately $0.9 million and $1.7 million in the three and six months ended June 30, 2004, respectively, and $0.4 million and $0.7 million in the three and six months ended June 30, 2003, respectively. We recorded expense of approximately $1 million and $2 million related to the plans in the three and six months ended June 30, 2004, respectively, and $0.4 million and $0.8 million related to the plans in the three and six months ended June 30, 2003, respectively. POSTRETIREMENT HEALTH AND LIFE INSURANCE PLANS Net periodic benefit cost includes the following components (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Components of net periodic benefit cost: Service cost $ 321 $ 618 $ 675 $ 1,032 Interest cost 1,908 2,863 3,969 4,782 Amortization of prior service cost (1,370) (838) (2,730) (1,400) Amortization of net loss 872 1,110 1,972 1,855 ------------- ------------- ------------- ------------- Net periodic benefit cost $ 1,731 $ 3,753 $ 3,886 $ 6,269 ============= ============= ============= =============
We previously disclosed in our consolidated financial statements for the year ended December 31, 2003 that we expected to contribute $7.4 million to our postretirement health and life insurance plans in 2004. As of June 30, 2004, $4.4 million of contributions have been made. We currently anticipate contributing an additional $3.6 million to fund our plans in 2004 for a total of $8 million. (8) GUARANTEES AND WARRANTIES We issue various types of guarantees in the normal course of business. As of June 30, 2004, we have the following guarantees outstanding (in thousands): Standby letters of credit and surety bonds $ 111,402 Performance guarantees 170,185 Commercial letters of credit 4,013 Guarantee of affiliate debt 30,000
Changes in our warranty liabilities for the three and six months ended June 30, 2004 are as follows (in thousands):
ACCRUALS BALANCE PAYMENTS ACCRUALS FOR FOR BALANCE AS OF MADE UNDER WARRANTIES PREEXISTING AS OF MARCH 31, 2004 WARRANTIES ISSUED WARRANTIES JUNE 30, 2004 ---------------- ---------- ------------ ----------- ------------- $102,683 $(17,580) $18,997 $20,000 $124,100
10
ACCRUALS BALANCE PAYMENTS ACCRUALS FOR FOR BALANCE AS OF MADE UNDER WARRANTIES PREEXISTING AS OF DEC. 31, 2003 WARRANTIES ISSUED WARRANTIES JUNE 30, 2004 ------------- ---------- ------------ ----------- ------------- $ 101,675 $ (35,172) $ 37,597 $ 20,000 $ 124,100
During the second quarter of 2004, we finalized field and factory testing to investigate failures found in heat exchangers of certain sealed combustion gas furnaces used in the manufactured housing industry. We found that installation and application factors combined with component part variation can result in excessive heat exchanger temperatures, which may contribute to failures in certain furnace models manufactured in the years 1995 to 2000. We no longer produce these furnace models. As a result, we recorded a $20 million warranty charge for the Unitary Products Group furnace inspection and remediation program during the second quarter of 2004. The $20 million warranty charge represents our best estimate of repair costs within a reasonable estimated range of $13 million and $30 million. Repair cost estimates are mainly comprised of the expected cost of repair kits or new heat exchangers and installation labor. Our estimates are based upon the projected number of furnace units to be serviced (find rate), current repair costs, and the estimated number of furnace units requiring repair. Differences between estimated and actual find rate, costs to manufacture and install repair kits or heat exchangers, and number of furnace units that require repair could have a significant impact on our consolidated results of operations. We expect to begin repairs in the third quarter of 2004 and complete repairs by the end of 2006. 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. (9) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We are exposed to market risk associated with changes in interest rates, foreign currency exchange rates, and certain commodity prices. To enhance our ability to manage these market risks, we enter into derivative instruments for periods consistent with the related underlying hedged exposures. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in fair value or cash flows of the underlying hedged exposures. We mitigate the risk that the counter-party to these derivative instruments will fail to perform by only entering into derivative instruments with major financial institutions. We do not typically hedge our market risk exposures beyond three years and do not hold or issue derivative instruments for trading purposes. Recognized gains or losses in cost of goods sold due to the discontinuance of ineffective currency and commodity cash flow hedges for the three and six months ended June 30, 2004 and 2003 were immaterial. Currency Rate Hedging We manufacture and sell our products in a number of countries throughout the world, and therefore, are exposed to movements in various currencies against the U.S. dollar and against the currencies in which we manufacture. Through our currency hedging activities, we seek to minimize the risk that cash flows resulting from the sale of products, manufactured in a currency different from the currency used by the selling subsidiary, will be affected by changes in foreign currency exchange rates. Foreign currency derivative instruments (forward contracts) are matched to the underlying foreign currency exposures and are executed to minimize foreign exchange transaction costs. As of June 30, 2004, we forecasted that $0.4 million of net gains in accumulated other comprehensive losses will be reclassified into earnings within the next twelve months. Hedges of Net Investment We issued Danish denominated, retail notes as a hedge to protect the value of a portion of our net investment in a Danish subsidiary. Hedges of a net investment are accounted for under SFAS No. 52, "Foreign Currency Translation." Under SFAS No. 52, the gains or losses on a foreign-denominated, nonderivative financial instrument designated as a hedge of a net investment are recorded in foreign currency translation adjustments within accumulated other comprehensive losses. The gains and losses are accounted for in a similar manner as the foreign denominated net assets, offsetting a portion of the change in net assets due to foreign currency fluctuations. As of June 30, 2004, we have designated $41 million in Danish retail notes as a hedge of a net investment. 11 Commodity Price Hedging We purchase raw material commodities and are at risk for fluctuations in the market price of those commodities. In connection with the purchase of major commodities, principally copper for manufacturing requirements, we enter into commodity swap contracts to effectively fix our cost of the commodity. These contracts require each settlement between us and our counterparty to coincide with cash market purchases of the actual commodity. As of June 30, 2004, we forecasted that $10.1 million of net gains in accumulated other comprehensive losses will be reclassified into earnings within the next twelve months. Interest Rate Hedging We manage our interest rate risk by entering into both fixed and variable rate debt. In addition, we enter into interest rate swap contracts in order to achieve a balanced mix of fixed and variable rate indebtedness. In May 2004, we entered into a $100 million notional amount interest rate swap contract with a final maturity at November 2012. As of June 30, 2004, we had interest rate swap contracts to pay variable interest, based on the six-month LIBOR rate, and receive a blended fixed rate of interest of 6.2125% on a notional amount of $200 million ($100 million related to the senior notes due August 2006 and $100 million related to the senior notes due November 2012). As of June 30, 2004, the fair value of these swap contracts was an unrealized gain of $6.9 million. We have designated our outstanding interest rate swap contracts as fair value hedges of underlying fixed rate debt obligations. The fair value of these contracts is recorded in other long-term assets or liabilities with a corresponding increase or decrease in the fixed rate debt obligations. The change in fair values of both the fair value hedge instruments and the underlying debt obligations are recorded as equal and offsetting unrealized gains and losses in the net interest expense component of the condensed consolidated statements of operations. All existing fair value hedges are determined to be 100% effective under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. As a result, there is no impact on current earnings resulting from hedge ineffectiveness. (10) COMPREHENSIVE INCOME Comprehensive income is determined as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2004 2003 2004 2003 ----------- ------------ ---------- ----------- Net income $ 38,396 $ 19,206 $ 34,193 $ 5,570 Other comprehensive (loss) income: Foreign currency translation adjustment (3,401) 50,194 (12,601) 57,925 Cash flow hedges: Reclassification adjustment, net of tax 2,147 (674) 3,437 (1,285) Net derivative (loss) income, net of tax (7,811) 1,457 (4,116) 2,305 Available for sale securities, net of tax (35) (21) 2 (21) ----------- ----------- ---------- ---------- Comprehensive income $ 29,296 $ 70,162 $ 20,915 $ 64,494 =========== =========== ========== ==========
12 (11) STOCKHOLDERS' EQUITY The following table summarizes our stockholders' equity as of June 30, 2004 and December 31, 2003 (in thousands, except per share data):
JUNE 30, DECEMBER 31, 2004 2003 --------- ------------ Common stock $.005 par value; 200,000 shares authorized; issued 46,278 shares at June 30, 2004 and 46,248 shares at December 31, 2003 $ 231 $ 231 Additional paid-in capital 732,325 732,339 Retained earnings 316,910 299,195 Accumulated other comprehensive losses (64,875) (51,597) Treasury stock, at cost; 4,962 shares at June 30, 2004 and 5,420 shares at December 31, 2003 (183,866) (200,856) Unearned compensation (1,585) (2,912) --------- --------- Total stockholders' equity $ 799,140 $ 776,400 ========= =========
(12) EARNINGS PER SHARE Net income as set forth in our condensed consolidated statements of operations is used in the computation of basic and diluted earnings per share information. Reconciliations of shares used in the computations of earnings per share are as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2004 2003 2004 2003 ------------ ------------ ----------- ----------- Weighted average common shares outstanding used in the computation of basic earnings per share 41,037 39,631 40,819 39,594 Effect of dilutive securities: Non-vested restricted shares 371 96 371 96 Stock options 862 134 860 58 ------ ------ ------ ------ Weighted average common shares and equivalents used in the computation of diluted earnings per share 42,270 39,861 42,050 39,748 ====== ====== ====== ====== Stock options not included in the earnings per share computation as their effect would have been anti- dilutive 984 4,072 984 4,072 ====== ====== ====== ======
(13) SEGMENT INFORMATION Our global business operates in the heating, ventilating, air conditioning, and refrigeration (HVAC&R) industry. Our organization consists of Global Applied, Unitary Products Group, and Bristol Compressors. The Global Applied business is comprised of three geographic regions: Americas; Europe, Middle East and Africa (EMEA); and Asia. Global Applied's three geographic regions, Unitary Products Group, and Bristol Compressors represent our reportable segments. 13 Global Applied designs, produces, markets, and sells HVAC&R equipment and solutions and provides maintenance and service of equipment manufactured by us and by others. Types of equipment include air-cooled and water-cooled chillers, central air handling units, variable air volume units, screw and reciprocating compressors, condensers, evaporators, heat exchangers, ductless minisplits, process refrigeration systems, hygienic air distribution systems, gas compression systems, and control equipment to monitor and control the entire system. Heating and air conditioning solutions are provided for buildings ranging from small office buildings and fast food restaurants to large commercial and industrial complexes. Refrigeration systems are provided for industrial applications in the food, beverage, chemical and petroleum industries. Cooling and refrigeration systems are also supplied for use on naval, commercial and passenger vessels. Unitary Products Group (UPG) produces heating and air conditioning solutions for buildings ranging from private homes and apartments to small commercial buildings. UPG products include ducted central air conditioning and heating systems (air conditioners, heat pumps, and furnaces), and light commercial heating and cooling equipment. Bristol Compressors (Bristol) manufactures reciprocating and scroll compressors for our use and for sale to original equipment manufacturers and wholesale distributors. Bristol purchases an essential component from one vendor. Due to consolidation in the vendor's industry, there are limited alternate sources of supply. We believe an alternate source of supply is attainable in the event the current vendor is unable to supply the component. However, a change in vendors would cause a delay in manufacturing and loss of sales, which would adversely impact the results of operations of Bristol and our consolidated results of operations. General corporate expenses and charges and other expenses are not allocated to the individual segments for management reporting purposes. General corporate expenses include certain incentive compensation, pension, medical and insurance costs; corporate administrative costs; development costs for information technology applications and infrastructure; the $20 million warranty charge discussed in note 8; and other corporate costs. Charges and other expenses in 2003 include restructuring and other charges and operating expenses related to cost reduction actions. 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. 14 The table below represents our operating results and assets by segment (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2004 2003 2004 2003 ------------ ------------ ----------- ----------- Net sales: Global Applied: Americas $ 394,424 $ 362,839 $ 727,223 $ 660,252 EMEA 384,403 335,702 682,824 597,754 Asia 163,485 131,987 266,269 222,106 Intragroup sales (59,470) (54,252) (104,461) (94,618) ------------ ------------ ----------- ----------- 882,842 776,276 1,571,855 1,385,494 Unitary Products Group 258,115 222,949 438,506 386,491 Bristol Compressors 138,965 138,837 252,443 276,399 Eliminations(1) (58,214) (53,645) (101,729) (95,610) ------------ ------------ ----------- ----------- 1,221,708 1,084,417 2,161,075 1,952,774 ============ ============ =========== =========== (1)Eliminations include the following intersegment sales: Global Applied (400) (595) (1,131) (1,181) Unitary Products Group (18,058) (17,787) (31,792) (30,476) Bristol Compressors (39,756) (35,263) (68,806) (63,953) ------------ ------------ ----------- ----------- Eliminations (58,214) (53,645) (101,729) (95,610) ============ ============ =========== =========== Income from operations: Global Applied: Americas 23,313 16,815 24,999 14,059 EMEA 14,600 12,451 14,591 13,040 Asia 22,082 22,423 31,656 32,116 ------------ ------------ ----------- ----------- 59,995 51,689 71,246 59,215 Unitary Products Group 30,191 24,049 42,217 32,269 Bristol Compressors 4,242 11,930 8,320 23,259 General corporate expenses, eliminations, and other non-allocated items (46,056) (16,130) (68,536) (30,245) Charges and other -- (35,030) -- (53,016) expenses ------------ ------------ ----------- ----------- 48,372 36,508 53,247 31,482 ------------ ------------ ----------- ----------- Interest expense, net (10,072) (12,115) (20,933) (24,131) ------------ ------------ ----------- ----------- Equity in earnings of affiliates: Global Applied: EMEA 2,706 972 3,090 1,387 Asia 337 332 453 528 ------------ ------------ ----------- ----------- 3,043 1,304 3,543 1,915 Bristol Compressors 1,184 1,173 1,176 1,650 ------------ ------------ ----------- ----------- 4,227 2,477 4,719 3,565 ------------ ------------ ----------- ----------- Income before income taxes 42,527 26,870 37,033 10,916 Provision for income taxes (4,131) (7,664) (2,840) (5,346) ------------ ------------ ----------- ----------- Net income $ 38,396 $ 19,206 $ 34,193 $ 5,570 ============ ============ =========== ===========
15
JUNE 30, 2004 DEC. 31, 2003 ------------- ------------ Total assets: Global Applied: Americas $ 782,789 $ 711,103 EMEA 965,991 937,981 Asia 425,933 389,456 Eliminations and other non-allocated assets (102,615) (111,789) ------------- ------------ 2,072,098 1,926,751 Unitary Products Group 476,120 384,355 Bristol Compressors 283,525 242,375 Eliminations and other non-allocated assets 51,105 119,654 ------------- ------------ $ 2,882,848 $ 2,673,135 ============= ============
(14) CHARGES TO OPERATIONS In 2003, we initiated actions to further reduce our overall cost structure and support the implementation of our new geographic organization. In addition to cost reductions associated with the consolidation of our former Engineered Systems Group and York Refrigeration Group segments, additional actions included the further reduction of manufacturing capacity, the elimination of certain product lines, and the exiting of several small, non-core businesses. All actions were substantially completed by December 31, 2003. In the three and six months ended June 30, 2003, we incurred costs by segment as follows (in thousands):
THREE MONTHS SIX MONTHS ENDED JUNE 30, 2003 ENDED JUNE 30, 2003 ------------------- --------------------- Global Applied: Americas $ 3,144 $ 6,715 EMEA 22,910 35,255 Asia 696 2,766 -------- -------- 26,750 44,736 Unitary Products Group 7,500 7,500 Bristol Compressors 28 28 -------- -------- Total charges to operations, net 34,278 52,264 Charges reflected in cost of goods sold (1,218) (3,110) -------- -------- Restructuring and other charges, net $ 33,060 $ 49,154 ======== ========
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. 16 Detail of activity relating to the 2003 initiatives in the six months ended June 30, 2004 is as follows (in thousands):
ACCRUALS ESTABLISHED UTILIZED IN SIX IN SIX MONTHS MONTHS REMAINING ACCRUALS AT ENDED ENDED ACCRUALS AT DEC. 31, JUNE 30, JUNE 30, JUNE 30, 2003 2004 2004 2004 ----------- ----------- -------- ----------- Severance 16,537 -- 9,353 7,184 Contractual obligations 6,156 -- 1,522 4,634 Other 1,220 -- 1,125 95 ----------- ----------- -------- ----------- $ 23,913 $ -- $ 12,000 $ 11,913 =========== =========== ======== ===========
Substantially all of the severance accrual will be utilized in 2004. (15) PROPOSED ACCOUNTING STANDARDS In March 2004, the Financial Accounting Standards Board (FASB) issued Proposed Statement of Financial Accounting Standards "Share-Based Payment," an amendment of FASB Statements No. 123 and 95. This proposed statement addresses the accounting for share-based compensation in which we exchange employee services for (a) our equity instruments or (b) liabilities that are based on the fair value of our equity instruments or that may be settled by the issuance of our equity instruments. Under the proposed statement, we will recognize compensation cost for share-based compensation issued to or purchased by employees under our stock-based compensation plans using a fair-value-based method effective January 1, 2005. The impact the proposed statement will have on our condensed consolidated financial statements is not known at this time, however, it may reduce net income and earnings per share similarly to the amounts disclosed in note 2 to our condensed consolidated financial statements and note 1 to our consolidated financial statements contained in the Annual Financial Statements and Review of Operations filed as Exhibit 13 to our Form 10-K/A for the year ended December 31, 2003. 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 tax-free federal subsidies to sponsors of certain retiree health-care plans. A final determination has not been made as to whether our plans qualify for the subsidies. Accordingly, any measurements of benefit obligations or costs do not reflect the effects of the Act. 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," effective for the third quarter of 2004. We believe the impact of adoption will be immaterial to our results of operations. 17 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS CONSOLIDATED OPERATIONS Net sales grew $137.3 million or 12.7% to $1,221.7 million in the second quarter of 2004 compared to 2003 (including a benefit of $18.6 million due to the net strengthening of foreign currencies mainly in Europe, Middle East and Africa). In the first half of 2004, net sales grew $208.3 million or 10.7% to $2,161.1 million compared to 2003 (including a benefit of $60.5 million due to the net strengthening of foreign currencies). Our revenue growth was mainly attributable to increased Global Applied and Unitary Products Group equipment volume and Global Applied service business (consisting of services, parts and replacement equipment). Revenue growth in the first half of 2004 in Global Applied and Unitary Products Group was partially offset by reduced equipment volume at Bristol Compressors. (See further discussion below under Segment Analysis.) Net sales in the United States increased 8.3% to $550.5 million and international net sales increased 16.5% to $671.2 million in the second quarter of 2004 compared to 2003. In the first half of 2004, net sales in the United States increased 6.2% to $976.4 million and international net sales increased 14.6% to $1,184.7 million compared to 2003. International revenue grew at a faster rate than domestic U.S. net sales due to a shift in volume at Bristol from domestic original equipment manufacturers (OEM) to international customers and stronger exports from our U.S. factories to international projects in the Middle East and Asia. Order backlog increased to $1,312.9 million as of June 30, 2004 as compared to $1,107.7 million as of June 30, 2003. Backlog in Global Applied increased $161.5 million mainly due to projects in the Middle East, United Kingdom, and Asia, as well as longer lead time in commercial marine markets. Unitary Products Group and Bristol backlog increased $43.6 million reflecting changes in ordering patterns of our customers, OEM and market activity levels. As of December 31, 2003, order backlog was $1,026.6 million. Gross profit declined $0.7 million or 0.3% to $225.7 million (18.5% of net sales) in the second quarter of 2004 compared to $226.4 million (20.9% of net sales) in 2003. In the first half of 2004, gross profit increased $10.3 million or 2.7% to $396.7 million (18.4% of net sales) compared to $386.5 million (19.8% of net sales) in 2003. The net strengthening of foreign currencies increased our gross profit $3.2 million and $10.6 million in the second quarter and first half of 2004, respectively. Overall, gross profit improved due to increased equipment volume in Global Applied and Unitary Products Group and realization of restructuring initiative benefits. These improvements were offset by the $20 million warranty charge for the Unitary Products Group furnace inspection and remediation program (see further discussion below under Segment Analysis); margin pricing pressure in EMEA and Asia; and higher raw material (principally steel and copper) and component costs. In the second quarter and first half of 2004, raw material cost increases in excess of selling price increases were $9.6 million and $12.7 million, respectively. Worldwide demand for steel and copper continued to increase our raw material cost and cost of components containing these materials. While we hedge a portion of our copper and aluminum purchases and have contracts for steel purchases, we experienced cost increases for unhedged portions and components containing these commodities, as well as surcharges on our steel purchases. We expect the cost of raw materials and components to remain above 2003 levels for the remainder of 2004 and 2005. In the second quarter and first half of 2003, we recorded inventory write-downs related to strategic actions to rationalize our manufacturing capacity in Global Applied of $1.2 million and $3.1 million, respectively. Selling, general and administrative (SG&A) expenses increased $20.5 million or 13.1% to $177.3 million (14.5% of net sales) in the second quarter of 2004 compared to $156.8 million (14.5% of net sales) in 2003. In the first half of 2004, SG&A expenses increased $37.7 million or 12.3% to $343.5 million (15.9% of net sales) compared to $305.8 million (15.7% of net sales) in 2003. The net strengthening of foreign currencies increased our SG&A expenses $3 million and $10.2 million in the second quarter and first half of 2004, respectively. Higher selling expenses related to equipment volume gains and marketing of new products, as well as the cost of our initiatives to improve our information technology capabilities and develop products contributed to the increase. We expect to benefit from improvement initiatives in 2005 and beyond. In 2003, we initiated actions to further reduce our overall cost structure and support the implementation of our new geographic organization. In addition to cost reductions associated with the consolidation of our former Engineered Systems Group and York Refrigeration Group segments, additional actions include the further reduction of manufacturing capacity, elimination of certain product lines, and exiting of several small, non-core businesses. In the second quarter and first half of 18 2003, we recorded restructuring and other charges of $34.3 million and $52.3 million, respectively, related to these actions, including $1.2 million and $3.1 million, respectively, charged to cost of goods sold. The charges in the second quarter and first half of 2003 included $16.0 million and $31.2 million, respectively, in write-downs of various assets and $18.3 million and $21.1 million, respectively, in accruals for severance and other costs. Our 2003 restructuring initiatives resulted in savings of $9 million and $19 million in the second quarter and first half of 2004, respectively, compared to 2003. As a result of the above factors, income from operations increased $11.9 million or 32.5% to $48.4 million (4% of net sales) in the second quarter of 2004 compared to $36.5 million (3.4% of net sales) in 2003. In the first half of 2004, income from operations grew $21.8 million or 69.1% to $53.2 million (2.5% of net sales) compared to $31.5 million (1.6% of net sales) in 2003. (See further discussion below under Segment Analysis.) Net interest expense declined $2 million or 16.9% to $10.1 million in the second quarter of 2004 compared to 2003. In the first half of 2004, net interest expense decreased $3.2 million or 13.3% to $20.9 million compared to 2003. The decline resulted from lower average borrowing rates. Equity in earnings of affiliates grew $1.8 million or 70.6% to $4.2 million in the second quarter of 2004 compared to 2003. In the first half of 2004, equity in earnings of affiliates increased $1.2 million or 32.4% to $4.7 million compared to 2003. The increase was primarily the result of improved performance of Clima Roca and other affiliates. The income tax provision of $4.1 million and $2.8 million in the second quarter and first half of 2004, respectively, and $7.7 million and $5.3 million in the second quarter and first half of 2003, respectively, relate to both U.S. and non-U.S. operations. The effective tax rates were 9.7% and 28.5% in the second quarter of 2004 and 2003, respectively, and 7.7% and 49% in the first half of 2004 and 2003, respectively. The 2004 income tax provisions were lower than the U.S. statutory rate of 35% primarily due to pretax earnings in non-U.S. jurisdictions where statutory rates are less than 35%; the favorable impact of the settlement of prior years' tax returns (tax benefit of $8.2 million) partially offset by deferred tax adjustments (tax expense of $5.6 million); and a 39.8% tax benefit associated with the $20 million warranty charge for the Unitary Products Group furnace inspection and remediation program. The income tax provision in the second quarter of 2003 was lower than the U.S. statutory rate of 35% mainly due to pre-tax earnings in non-U.S. jurisdictions where statutory rates are less than 35%. The income tax provision in the first half of 2003 was higher than the U.S. statutory rate of 35% due to restructuring charges, for which the tax benefits were recorded at a lower effective tax rate. As a result of the above factors, net income increased $19.2 million to $38.4 million (3.1% of net sales) in the second quarter of 2004 as compared to $19.2 million (1.8% of net sales) in 2003. In the first half of 2004, net income grew $28.6 million to $34.2 million (1.6% of net sales) as compared to $5.6 million (0.3% of net sales) in 2003. 19 SEGMENT ANALYSIS The following table sets forth net sales and income from operations by segment (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2004 2003 2004 2003 ------------ ------------ ----------- ----------- Net sales: Global Applied: Americas $ 394,424 $ 362,839 $ 727,223 $ 660,252 Europe, Middle East and Africa 384,403 335,702 682,824 597,754 Asia 163,485 131,987 266,269 222,106 Intragroup sales (59,470) (54,252) (104,461) (94,618) ------------ ------------ ----------- ----------- 882,842 776,276 1,571,855 1,385,494 Unitary Products Group 258,115 222,949 438,506 386,491 Bristol Compressors 138,965 138,837 252,443 276,399 Eliminations (58,214) (53,645) (101,729) (95,610) ------------ ------------ ----------- ----------- Net sales $ 1,221,708 $ 1,084,417 $ 2,161,075 $ 1,952,774 ============ ============ =========== =========== Income from operations: Global Applied: Americas $ 23,313 $ 16,815 $ 24,999 $ 14,059 Europe, Middle East and Africa 14,600 12,451 14,591 13,040 Asia 22,082 22,423 31,656 32,116 ------------ ------------ ----------- ----------- 59,995 51,689 71,246 59,215 Unitary Products Group 30,191 24,049 42,217 32,269 Bristol Compressors 4,242 11,930 8,320 23,259 General corporate expenses, eliminations, and other non-allocated items (46,056) (16,130) (68,536) (30,245) Charges and other expenses -- (35,030) -- (53,016) ------------ ------------ ----------- ----------- Income from operations $ 48,372 $ 36,508 $ 53,247 $ 31,482 ============ ============ =========== ===========
Global Applied Global Applied net sales grew $106.6 million or 13.7% to $882.8 million in the second quarter of 2004 compared to 2003. In the first half of 2004, net sales increased $186.4 million or 13.5% to $1,571.9 million compared to 2003. The net strengthening of global currencies increased net sales by $18.3 million in the second quarter and by $59.2 million in the first half. Americas equipment growth was driven by increased volume of commercial air conditioning, air handling and refrigeration equipment, and improved market conditions in Latin America. EMEA experienced volume increases throughout Europe, mainly for commercial air conditioning equipment, air handling units, and in refrigeration contracting. Asia revenue increased primarily due to China's economic expansion and overall stronger demand for commercial air conditioning equipment in other Asian countries. Service business sales grew $22.1 million or 8.1% to $296.4 million in the second quarter of 2004 compared to 2003. In the first half of 2004, service business revenue increased $50.8 million or 10.2% to $550.7 million compared to 2003. Our service business (consisting of services, parts and replacement equipment) continued to expand as demand for repair and replacement work and multi-site commercial service arrangements remained strong. Global Applied income from operations increased $8.3 million to $60 million (6.8% of net sales) in the second quarter of 2004 compared to $51.7 million (6.7% of net sales) in 2003. In the first half of 2004, income from operations increased $12 million to $71.2 million (4.5% of net sales) compared to $59.2 million (4.3% net sales) in 2003. Equipment volume increases and 2003 restructuring initiative benefits were partially offset by rising raw material and component costs. In addition, EMEA experienced margin-pricing pressure mainly in Europe due to general economic conditions. Improved Asian commercial equipment volume was more than offset by increased material costs and margin-pricing pressure for mini-split product. Unitary Products Group (UPG) UPG net sales grew $35.2 million or 15.8% to $258.1 million in the second quarter of 2004 compared to 2003. In the first half of 2004, net sales grew $52 million or 13.5% to $438.5 million compared to 2003. Residential, light commercial and 20 manufactured housing equipment volume improved due to overall growth in the North American unitary air conditioning and heating market. Overall market share remained relatively flat. Net sales of the new "Affinity" product line continued to increase since market introduction in the first quarter of 2004. General selling price increases enacted in the second quarter of 2004 partially contributed to net sales growth. We expect new product introductions, price increases, and improvements in construction markets to increase net sales for the remainder of 2004 above 2003 levels. UPG income from operations grew $6.1 million or 25.5% to $30.2 million (11.7% of net sales) in the second quarter of 2004 compared to $24 million (10.8% of net sales) in 2003. In the first half of 2004, income from operations increased $9.9 million or 30.8% to $42.2 million (9.6% of net sales) compared to $32.3 million (8.4% of net sales) in 2003. Improved results are mainly attributable to higher equipment volume, production efficiencies, and a favorable product mix partially offset by increased raw material and component costs and advertising expenses. Bristol Compressors (Bristol) Bristol net sales increased $0.1 million or 0.1% to $139 million in the second quarter of 2004 compared to 2003. In the first half of 2004, net sales declined $24 million or 8.7% to $252.4 million compared to 2003. Revenue has declined in the first half due to lower shipments to domestic OEMs mainly as a result of the loss of a customer in the fourth quarter of 2003. Higher shipments to international customers offset reduced domestic volume in the second quarter of 2004 compared to 2003. Shipments to domestic customers in 2004 are expected to remain below 2003 levels. Net sales of the "Benchmark" compressor continued to improve since market introduction in the first quarter of 2004. Bristol income from operations decreased $7.7 million or 64.4% to $4.2 million (3.1% of net sales) in the second quarter of 2004 compared to $11.9 million (8.6% of net sales) in 2003. In the first half of 2004, income from operations declined $14.9 million or 64.2% to $8.3 million (3.3% of net sales) compared to $23.3 million (8.4% of net sales) in 2003. Reduced results are mainly attributable to domestic shipment declines, product mix, and increased raw material and component costs. The successful introduction and market acceptance of the "Benchmark" compressor is expected to improve Bristol's results beyond 2004. Other General corporate expenses, eliminations, and other non-allocated items increased $29.9 million or 185.5% to $46.1 million in the second quarter of 2004 compared to 2003. In the first half of 2004, general corporate expenses, eliminations, and other non-allocated items increased $38.3 million or 126.6% to $68.5 million compared to 2003. The increase was primarily due to the $20 million warranty charge for the UPG furnace inspection and remediation program discussed below; increased costs related to improving our information technology capabilities in both applications and infrastructure of $4.9 million ($9.4 million in the first half of 2004); and increased costs related to other non-allocated items of $5 million ($8.9 million in the first half of 2004). The year-over-year cost increases for information technology investments are expected to continue, to a lesser extent, for the remainder of the year. During the second quarter of 2004, we finalized field and factory testing to investigate failures found in heat exchangers of certain sealed combustion gas furnaces used in the manufactured housing industry. We found that installation and application factors combined with component part variation can result in excessive heat exchanger temperatures, which may contribute to failures in certain furnace models manufactured in the years 1995 to 2000. We no longer produce these furnace models. As a result, we recorded a $20 million warranty charge for the UPG furnace inspection and remediation program during the second quarter of 2004. The $20 million warranty charge represents our best estimate of repair costs within a reasonable estimated range between $13 million and $30 million. Repair cost estimates are mainly comprised of the expected cost of repair kits or new heat exchangers and installation labor. Our estimates are based upon the projected number of furnace units to be serviced (find rate), current repair costs, and the estimated number of furnace units requiring repair. Differences between estimated and actual find rate, costs to manufacture and install repair kits or heat exchangers, and number of furnace units that require repair could have a significant impact on our consolidated results of operations. We expect to begin repairs in the third quarter of 2004 and complete repairs by the end of 2006. 21 Charges and other expenses in 2003 are as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2003 JUNE 30, 2003 ------------------ ---------------- By segment: Global Applied: Americas $ 3,896 $ 7,467 EMEA 22,910 35,255 Asia 696 2,766 ------- ------- 27,502 45,488 Unitary Products Group 7,500 7,500 Bristol Compressors 28 28 ------- ------- $35,030 $53,016 ======= ======= By type: Restructuring and other charges, net $33,060 $49,154 Restructuring and other charges reflected in cost of goods sold 1,218 3,110 Related operating expenses included in cost of goods sold 752 752 ------- ------- $35,030 $53,016 ======= =======
No similar charges were incurred in 2004. LIQUIDITY AND CAPITAL RESOURCES Our significant liquidity and capital funding needs are working capital, operating expenses, capital expenditures, debt repayments, restructuring costs, dividends to our shareholders, contractual obligations, and commercial commitments. Liquidity and capital resource needs are met through cash flows from operations, borrowings under our credit agreements and bank lines of credit, financing of trade receivables, and credit terms from suppliers, which approximate receivable terms to our customers. Additional sources of cash include customer deposits and progress payments. We believe that we will be able to satisfy our principal and interest payment obligations and our working capital and capital expenditure requirements from operating cash flows together with the availability under the uncommitted credit lines and committed bank lines of credit. Uncommitted credit lines and committed bank lines of credit support seasonal working capital needs and are available for general corporate purposes. Since certain of our long-term debt obligations and our revolving trade receivables facility bear interest at floating rates, our interest costs are sensitive to changes in prevailing interest rates. WORKING CAPITAL Our working capital is mainly comprised of inventories, net receivables, and accounts payable and accrued expenses. Working capital increased $122.5 million to $485 million as of June 30, 2004 compared to $362.5 million as of December 31, 2003. The increase resulted from higher net receivables and inventories partially offset by an increase in accounts payable and accrued expenses. Net Receivables Net receivables increased $158.6 million in the first half of 2004 primarily due to overall revenue growth and seasonal demand for UPG and Bristol products, as well as a greater mix of receivables from international customers with longer payment terms at Bristol. Overall, days sales outstanding decreased to 49 days at June 30, 2004 from 50 days at December 31, 2003. Inventories Inventories increased $59.7 million in the first half of 2004 mainly as a result of the seasonal nature of our business. Our inventories increase during the first half of the year as we manufacture inventory to support demand in the second half of the year. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses grew $119.7 million primarily due to an increase in raw material and component purchases; the timing of payment cycles in relation to quarter end; an increase in warranty accruals primarily related to the current portion of the warranty charge for the UPG furnace inspection and remediation program; and increases in accruals for value-added tax, customer deposits and employee compensation and benefits. These increases were partially offset by payment of 2003 incentive compensation and restructuring accruals and net weakening of foreign currencies since December 31, 2003. 22 CASH FLOWS Operating Activities We used $39.2 million of cash for operating activities in the first half of 2004. Net cash flows of $111.3 million were used by the change in assets and liabilities net of effects from acquisitions and divestitures, mainly due to the increases in net receivables, inventory, and accounts payable and accrued expenses, as discussed above. Cash flows of $72.1 million were generated from operations. Our operating cash flows in the first half of 2004 reflect the seasonal nature of our business. During the first half of 2003, our operating activities provided $34.8 million mainly due to lower working capital requirements for net receivables and inventories offset by accounts payable and accrued expenses to support lower sales in the first half of 2003 and backlog as of June 30, 2003. Investing Activities Cash used in investing activities of $36.9 million was mainly comprised of capital expenditures for manufacturing equipment and information technology systems consistent with 2003. Financing Activities Cash provided by financing activities of $77.3 million included proceeds of $78.9 million from net borrowings and $15 million from issuance of common stock partially offset by common stock dividend payments of $16.5 million. Net borrowings are consistent with the typical seasonality of our businesses to finance increasing working capital needs during the first half of the year. Proceeds from issuance of common stock represent cash received from employee stock purchases and exercise of stock options under our employee stock plans. We paid cash dividends of $0.40 per share in the first half of 2004 representing a 33% increase compared to 2003. In 2003, our financing activities used cash of $47.2 million mainly due to net debt repayments as a result of cash provided by operating activities. BORROWINGS AND AVAILABILITY Total indebtedness was $691.5 million as of June 30, 2004, primarily consisting of $500 million of senior notes, $117.2 million outstanding under domestic bank lines, and $41 million of Danish retail notes. The senior notes mature at dates ranging from 2006 to 2012 and carry fixed rates ranging from 5.8% to 6.7%. The Danish retail notes are due in October 2004 and have a coupon rate of 2%. Our ability to issue commercial paper is limited due to our credit ratings. The following table summarizes the terms of our lines of credit (in thousands):
LIMIT AVAILABILITY (a) JUNE 30, DEC. 31, JUNE 30, DEC. 31, BORROWING ANNUAL 2004 2003 2004 2003 EXPIRES RATE (b) FEE -------- -------- -------- -------- --------- --------- ------ Five Year Credit May 29, LIBOR + Agreement $400,000 $400,000 $400,000 $400,000 2006 1.175% 0.2% 364-Day Credit March 11, LIBOR + Agreement (c) 200,000 200,000 200,000 200,000 2005 0.85% 0.15% Domestic Uncom- bank lines 150,000 135,000 32,800 110,000 mitted Various -- Non-U.S bank credit Uncom- facilities 386,100 355,246 251,072 246,298 mitted Various --
(a) Availability is reduced for outstanding borrowings and bank guarantee and letters of credit usage. (b) The one-month LIBOR (London Interbank Offering Rate) rate was 1.37% and 1.12% as of June 30, 2004 and December 31, 2003, respectively. (c) We renewed our 364-Day Credit Agreement in March 2004. The Five Year Credit Agreement and 364-Day Credit Agreement (collectively, the Agreements) contain financial covenants requiring us to maintain certain financial ratios and standard provisions limiting leverage and liens. We were in compliance 23 with these financial covenants as of June 30, 2004 and December 31, 2003. We have access to bank lines of credit and have the ability to borrow under the Agreements as long as we continue to meet the financial covenants or until expiration of these arrangements. The primary financial covenants are the earnings before interest, taxes, depreciation, and amortization (EBITDA) interest coverage and the debt to capital ratio, as defined under the Agreements. As of June 30, 2004, our EBITDA interest coverage was 4.4 times, exceeding the minimum requirement of 3.5 times. As of June 30, 2004, our debt to capital ratio, as defined in the Agreements, was 45%, below the maximum allowed of 50%. We also maintain an annually renewable revolving facility under which we sell certain trade receivables - see "Off-Balance Sheet Arrangements" section below. OFF-BALANCE SHEET ARRANGEMENTS Our off-balance sheet arrangements are comprised of a trade receivable revolving facility and operating leases. Trade Receivable Revolving Facility Pursuant to the terms of an annually renewable revolving facility, we sell certain of our trade receivables to a wholly owned consolidated subsidiary, York Receivables Funding LLC (YRFLLC). In turn, YRFLLC sells, on a revolving basis, an undivided ownership interest in the trade receivables to bank-administered asset-backed commercial paper vehicles. In May 2004, we amended the facility, increasing the availability from $150 million to $200 million. We continue to service sold trade receivables. No servicing asset or liability has been recognized as our cost to service sold trade receivables approximates the servicing income. In accordance with the facility, YRFLLC has sold $150 million of an undivided interest in trade receivables as of June 30, 2004 and December 31, 2003, resulting in a reduction of net receivables reflected in our condensed consolidated balance sheets. The discount rate on trade receivables sold was 1.26% and 1.12% as of June 30, 2004 and December 31, 2003, respectively. The program fee on trade receivables sold was 0.4% and 0.5% as of June 30, 2004 and December 31, 2003, respectively. Operating Leases Operating leases provide us with the flexibility to use property, plant and equipment without assuming ownership and related debt. Operating leases reduce our risk associated with disposal and residual fair value of property, plant and equipment at the end of the lease. OUTLOOK Overall, we expect improved net sales and net income in fiscal year 2004 as compared to 2003. We anticipate equipment growth within Global Applied specifically for commercial air conditioning and refrigeration products as we are seeing some improvements in global economies; increased sales of large commercial equipment in our Asian business; and the benefit of new commercial air conditioning products. We anticipate continued strength in our service businesses' (services, parts, and replacement equipment) sales within Global Applied. We also anticipate growth in our UPG equipment business due to continued strength of U.S. residential housing markets (both new construction and replacement) and our new product introductions. Further savings from our 2003 cost reduction actions are expected to be realized throughout 2004. Overall growth and savings are expected to be partially offset by a decline in Bristol sales; increased costs for copper, steel, and components containing copper and steel net of price increases; and continued investments in new products and information technology projects. PROPOSED ACCOUNTING STANDARDS In March 2004, the Financial Accounting Standards Board issued Proposed Statement of Financial Accounting Standards "Share-Based Payment," an amendment of FASB Statements No. 123 and 95. This proposed statement addresses the accounting for share-based compensation in which we exchange employee services for (a) our equity instruments or (b) liabilities that are based on the fair value of our equity instruments or that may be settled by the issuance of our equity instruments. Under the proposed statement, we will recognize compensation cost for share-based compensation issued to or purchased by employees under our stock-based compensation plans using a fair-value-based method effective January 1, 2005. The impact the proposed statement will have on our condensed consolidated financial statements is not known at this time, however, it may reduce net income and earnings per share similarly to the amounts disclosed in note 2 to our condensed 24 consolidated financial statements and note 1 to our consolidated financial statements contained in the Annual Financial Statements and Review of Operations filed as Exhibit 13 to our Form 10-K/A for the year ended December 31, 2003. 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 tax-free federal subsidies to sponsors of certain retiree health-care plans. A final determination has not been made as to whether our plans qualify for the subsidies. Accordingly, any measurements of benefit obligations or costs do not reflect the effects of the Act. 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," effective for the third quarter of 2004. We believe the impact of adoption will be immaterial to our results of operations. FORWARD-LOOKING INFORMATION - RISK FACTORS This document contains statements which, to the extent they are not statements of historical or present fact, constitute "forward-looking statements" under the securities laws. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These forward-looking statements are intended to provide our current expectations or plans for future operating and financial performance based on assumptions currently believed to be valid. To the extent we have made "forward-looking statements," certain risk factors could cause actual results to differ materially from those anticipated in such forward-looking statements including, but not limited to: - Changes in competition within specific markets or geographies - Introduction of new competitive products - Changes in government regulation, including environmental and tax laws - Legal actions, including pending and unasserted claims - Loss of patented technology - Events that create a negative image for our trademarks - Work stoppages - Price and availability of raw materials and components - Realization of benefits from our cost reduction initiatives - Changes in individual country economics, including but not limited to: Argentina; Brazil; China; Mexico; Saudi Arabia; United Arab Emirates; and Venezuela - 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 review and approval by the United States Consumer Product Safety Commission and significant changes in assumptions used to estimate our repair costs Unseasonably cool weather in various parts of the world could adversely affect our UPG and Global Applied air conditioning businesses and, similarly, the Bristol compressor business. Bristol and UPG are also impacted by the successful development, introduction, and customer acceptance of new products. The Global Applied air conditioning business could also be affected by a further slowdown in the large chiller market and by the acceptance of new product introductions. Global Applied could be negatively impacted by reductions in commercial construction. 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 25 changes including nationalization or expropriation of assets. In addition, our overall performance could be affected by declining worldwide economic conditions or slowdowns resulting from world events. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information responsive to this item as of December 31, 2003 appears under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations, Market Risk," on pages 14 to 16 of the Annual Financial Statements and Review of Operations filed as Exhibit 13 to our Form 10-K/A for the year ended December 31, 2003. There was no material change in such information as of June 30, 2004. ITEM 4. CONTROLS AND PROCEDURES As of June 30, 2004, we carried out an evaluation, under the supervision and with the participation of company management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 26 PART II - OTHER INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES ITEM 1. LEGAL PROCEEDINGS Not Applicable ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS The following table provides information about purchases of registered equity securities by the Company during the quarter ended June 30, 2004:
TOTAL NUMBER OF SHARES PURCHASED MAXIMUM NUMBER OF TOTAL NUMBER AVERAGE AS PART OF PUBLICLY SHARES THAT MAY YET BE OF SHARES PRICE PAID ANNOUNCED PLANS PURCHASED UNDER THE PERIOD PURCHASED PER SHARE OR PROGRAMS (2) PLANS OR PROGRAMS (2) ---------------- ------------ ---------- ------------------- ---------------------- April 1, 2004 - April 30, 2004 1,723 (1) $42.95 (1) -- -- May 1, 2004 - May 31, 2004 -- -- -- -- June 1, 2004 - June 30, 2004 -- -- -- --
(1) Not purchased through a publicly announced plan or program. An affiliated purchaser delivered back to the issuer shares of stock already issued to him in payment of the exercise price of stock options. (2) The Company has no publicly announced repurchase plans or programs. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) Our annual meeting of Stockholders was held on May 20, 2004. (b) Proxies were solicited for the meeting. All nominees for Director were elected and items (c) 2 through 5 (see below) were approved. 27 (c) The following votes were cast at the Annual Meeting for the matters indicated below: 1. Election of Directors Votes For Votes Withheld Gerald C. McDonough 35,817,581 1,545,036 C. David Myers 36,072,238 1,290,379 W. Michael Clevy 34,168,207 3,194,410 J. Roderick Heller, III 34,245,947 3,116,670 Robert F. B. Logan 35,725,555 1,637,062 Paul J. Powers 34,317,450 3,045,167 Donald M. Roberts 35,652,414 1,710,203 James A. Urry 35,725,094 1,637,523 2. Proposal to approve an amendment Votes For Votes Against Abstentions to our Employee Stock Purchase Plan 34,610,157 445,933 24,055 3. Proposal to approve an amendment Votes For Votes Against Abstentions to our Incentive Compensation Plan 26,050,393 8,989,626 40,126 4. Proposal to approve an amendment Votes For Votes Against Abstentions to our Omnibus Stock Plan 32,015,015 3,039,397 25,733 5. The appointment of KPMG LLP Votes For Votes Against Abstentions as independent auditors 36,658,339 689,241 15,037
ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS (a) Exhibits Exhibit 4.1 - 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* Exhibit 10.1 - York International Corporation Amended and Restated 2002 Incentive Compensation Plan* Exhibit 10.2 - York International Corporation Amended and Restated 2002 Omnibus Stock Plan* Exhibit 31.1 - Certification of the Chief Executive Officer of York International Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* Exhibit 31.2 - Certification of the Chief Financial Officer of York International Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* Exhibit 32.1 - Certification of the Chief Executive Officer and Chief Financial Officer of York International Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* * Submitted electronically herewith (b) Reports on Form 8-K 28 Current Report on Form 8-K dated April 22, 2004, containing a press release, dated April 22, 2004, setting forth our first quarter 2004 results (such press release is not incorporated by reference herein or deemed "filed" within the meaning of Section 18 of the Securities Act of 1933) Current Report on Form 8-K dated May 4, 2004, containing a press release, dated May 3, 2004, announcing the resignation of the Vice President and President, York Asia Pacific Current Report on Form 8-K dated May 4, 2004, containing a press release, dated May 4, 2004, commenting on our 2004 expected financial results (such press release is not incorporated by reference herein or deemed "filed" within the meaning of Section 18 of the Securities Act of 1933) 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized. YORK INTERNATIONAL CORPORATION ------------------------------ Registrant Date August 4, 2004 /S/ M. David Kornblatt ------------------------------ M. David Kornblatt Vice President and Chief Financial Officer 30 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 4.1 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* 10.1 York International Corporation Amended and Restated 2002 Incentive Compensation Plan* 10.2 York International Corporation Amended and Restated 2002 Omnibus Stock Plan* 31.1 Certification of the Chief Executive Officer of York International Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 31.2 Certification of the Chief Financial Officer of York International Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 32.1 Certification of the Chief Executive Officer and Chief Financial Officer of York International Corporation pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* * Submitted electronically herewith
31