10-Q 1 w08525e10vq.txt FORM 10-Q YORK INTERNATIONAL CORPORATION 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 24 - 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. 25 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 28