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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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 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 13, 2002
----- -----------------------------
Common Stock, par value $.005 39,445,405 shares
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - (unaudited)
Three Months and Six Months Ended June 30, 2002 and 2001 3
Consolidated Condensed Balance Sheets -
June 30, 2002 (unaudited) and December 31, 2001 4
Consolidated Condensed Statements of Cash Flows - (unaudited)
Six Months Ended June 30, 2002 and 2001 5
Supplemental Notes to Consolidated Condensed
Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
2
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1
FINANCIAL STATEMENTS
Consolidated Condensed Statements of Operations (unaudited)
(in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Net sales $ 1,047,094 $ 1,077,472 $ 1,891,476 $ 2,019,577
Cost of goods sold 831,242 867,914 1,522,777 1,628,695
---------------- ---------------- ---------------- ----------------
Gross profit 215,852 209,558 368,699 390,882
Selling, general and administrative expenses 143,236 142,339 286,668 290,603
Restructuring charges, net -- 35,224 2,730 57,175
---------------- ---------------- ---------------- ----------------
Income from operations 72,616 31,995 79,301 43,104
Interest expense, net 12,436 18,282 25,149 38,231
Loss on divestiture -- -- 10,683 --
Equity in earnings of affiliates (2,038) (1,847) (2,608) (1,949)
---------------- ---------------- ---------------- ----------------
Income before income taxes and
cumulative effect of a change
in accounting principle 62,218 15,560 46,077 6,822
Provision (benefit) for income taxes 13,999 (17,256) 12,603 (17,000)
---------------- ---------------- ---------------- ----------------
Income before cumulative effect of
a change in accounting principle 48,219 32,816 33,474 23,822
Cumulative effect of a change in accounting
principle -- -- (179,436) --
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 48,219 $ 32,816 $ (145,962) $ 23,822
================ ================ ================ ================
Basic earnings (loss) per share:
Income before cumulative effect of
a change in accounting principle $ 1.23 $ 0.85 $ 0.85 $ 0.62
Cumulative effect of a change in
accounting principle -- -- (4.56) --
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 1.23 $ 0.85 $ (3.71) $ 0.62
================ ================ ================ ================
Diluted earnings (loss) per share:
Income before cumulative effect of
a change in accounting principle $ 1.21 $ 0.84 $ 0.84 $ 0.61
Cumulative effect of a change in
accounting principle -- -- (4.49) --
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 1.21 $ 0.84 $ (3.65) $ 0.61
================ ================ ================ ================
Cash dividends per share $ 0.15 $ 0.15 $ 0.30 $ 0.30
================ ================ ================ ================
Weighted average common shares and
common equivalents outstanding:
Basic 39,362 38,472 39,309 38,430
Diluted 39,998 39,006 39,955 38,922
See accompanying supplemental notes to consolidated condensed financial
statements.
3
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(in thousands)
June 30, 2002 December 31,
(unaudited) 2001
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 40,804 $ 39,434
Receivables, net 691,952 613,892
Inventories
Raw material 141,471 143,148
Work in process 122,455 101,575
Finished goods 235,130 270,537
------------------- -------------------
Total inventories 499,056 515,260
Prepayments and other current assets 104,226 81,883
------------------- -------------------
Total current assets 1,336,038 1,250,469
Deferred income taxes 42,951 56,149
Investments in affiliates 26,918 24,957
Property, plant and equipment, net 493,143 480,999
Goodwill 492,268 651,673
Intangibles, net 30,764 28,415
Deferred charges and other assets 79,299 79,847
------------------- -------------------
Total assets $ 2,501,381 $ 2,572,509
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 38,337 $ 36,604
Accounts payable and accrued expenses 778,467 735,962
Income taxes 28,767 5,073
------------------- -------------------
Total current liabilities 845,571 777,639
Long-term warranties 44,970 43,751
Long-term debt 681,515 724,378
Postretirement and postemployment benefits 208,743 208,195
Other long-term liabilities 74,430 79,112
------------------- -------------------
Total liabilities 1,855,229 1,833,075
Stockholders' equity 646,152 739,434
------------------- -------------------
Total liabilities and stockholders' equity $ 2,501,381 $ 2,572,509
=================== ===================
See accompanying supplemental notes to consolidated condensed financial
statements.
4
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (unaudited)
(in thousands)
Six Months Ended June 30,
2002 2001
--------------- ----------------
Cash flows from operating activities:
Net (loss) income $ (145,962) $ 23,822
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Cumulative effect of a change in accounting principle 179,436 --
Depreciation and amortization of property, plant and equipment 30,217 33,313
Amortization of deferred charges, intangibles and goodwill 1,358 13,883
Provision for doubtful receivables 8,849 4,411
Effect of non-cash charges 1,631 26,690
Loss on divestiture 10,683 --
Deferred income taxes 13,233 4,047
Loss on sale of fixed assets 1,201 1,829
Other (179) 1,427
Change in assets and liabilities net of effects from
acquisitions and divestitures:
Receivables (92,871) (80,833)
Inventories 13,855 33,715
Prepayments and other current assets (23,893) 14,711
Accounts payable and accrued expenses 49,358 (66,512)
Income taxes 23,758 (4,680)
Other long-term assets and liabilities 2,361 8,490
--------------- ----------------
Net cash provided by operating activities 73,035 14,313
--------------- ----------------
Cash flows from investing activities:
Purchases of other companies, net of cash acquired (2,248) --
Proceeds from divestiture, net 12,071 --
Capital expenditures (35,915) (35,301)
Proceeds from sale of fixed assets 4,699 450
--------------- ----------------
Net cash used by investing activities (21,393) (34,851)
--------------- ----------------
Cash flows from financing activities:
Net proceeds on short-term debt 1,729 68,746
Net (payments) proceeds of commercial paper borrowings (29,305) 22,841
Net payments on other long-term debt (16,732) (66,044)
Common stock issued 6,163 3,875
Treasury stock purchases (30) (38)
Dividends paid (11,809) (11,544)
--------------- ----------------
Net cash (used) provided by financing activities (49,984) 17,836
--------------- ----------------
Effect of exchange rate changes on cash and cash equivalents (288) 123
--------------- ----------------
Net increase (decrease) in cash and cash equivalents 1,370 (2,579)
Cash and cash equivalents at beginning of period 39,434 26,425
--------------- ----------------
Cash and cash equivalents at end of period $ 40,804 $ 23,846
=============== ================
See accompanying supplemental notes to consolidated condensed financial
statements.
5
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Supplemental Notes To Consolidated Condensed Financial Statements (unaudited)
(1) The consolidated condensed 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 generally
accepted accounting principles have been condensed or omitted. We
believe that the information presented is not misleading and the
disclosures are adequate. In our opinion, the accompanying consolidated
condensed financial statements contain all adjustments necessary to
present fairly the financial position as of June 30, 2002 and December
31, 2001, the results of operations for the three and six months ended
June 30, 2002 and 2001, and cash flows for the six months ended June
30, 2002 and 2001. The results of operations for interim periods are
not necessarily indicative of the results expected for the full year.
Certain reclassifications have been made to the 2001 consolidated
condensed financial statements to conform to the 2002 presentation.
(2) The following table summarizes our indebtedness as of June 30, 2002 and
December 31, 2001 (in thousands):
June 30, December 31,
2002 2001
---------------- ----------------
Notes payable and current portion of long-term debt:
Bank loans (primarily foreign currency) $ 34,692 $ 32,963
Current portion of long-term debt 3,645 3,641
---------------- ----------------
Total $ 38,337 $ 36,604
================ ================
Long-term debt:
Commercial paper, 2.05% interest in 2002
and 2.38% interest in 2001 $ 168,397 $ 197,702
Senior notes, 6.75% interest, due March 2003 100,000 100,000
Senior notes, 6.625% interest, due August 2006 200,000 200,000
Senior notes, 6.70% interest, due June 2008 200,000 200,000
Other (primarily foreign bank loans) at an average
rate of 6.57% in 2002 and 6.38% in 2001 16,763 30,317
---------------- ----------------
Total 685,160 728,019
Less current portion (3,645) (3,641)
---------------- ----------------
Noncurrent portion $ 681,515 $ 724,378
================ ================
As of June 30, 2002 and December 31, 2001, our borrowings consisted of
senior notes, commercial paper issuances and various other bank and
term loans. The commercial paper issuances and certain bank loans are
expected to be reborrowed in the ordinary course of business, depending
on our financing needs. As of June 30, 2002, it is expected that
commercial paper will be issued to redeem the $100 million senior notes
due March 2003. In May 2002, we amended our Five Year Credit Agreement
and renewed our 364-Day Credit Agreement. We have available a $400
million Five Year Credit Agreement, which expires on May 29, 2006, and
a $300 million 364-Day Credit Agreement, which expires on May 28, 2003
(collectively, the Agreements). As of December 31, 2001, we had
available the $400 million Five Year Credit Agreement, and a $300
million 364-Day Credit Agreement, which expired on May 28, 2002. As of
June 30, 2002 and December 31, 2001, no amounts were outstanding under
the Agreements.
6
(continued)
The $400 million Five Year Credit Agreement provides for borrowings at
the London Interbank Offering Rate (LIBOR) plus 0.75% or 0.875%, and
the $300 million 364-Day Credit Agreement provides for borrowings at
LIBOR plus 0.775% or 0.90%, based on the amount of facility
utilization. We pay annual fees of 0.125% on the $400 million facility
and 0.10% on the $300 million facility. The Agreements allow for
borrowings at specified bid rates. As of June 30, 2002 and December 31,
2001, the three-month LIBOR rate was 1.87% and 1.86%, respectively. The
Agreements contain financial covenants requiring us to maintain certain
financial ratios and standard provisions limiting leverage and liens.
We were in compliance with these financial covenants as of June 30,
2002 and December 31, 2001.
We have additional unused domestic bank lines that provide for total
borrowings of $100 million as of June 30, 2002 and December 31, 2001.
Our non-U.S. subsidiaries maintain bank credit facilities in various
currencies that provided for available borrowings of $383.9 million and
$386.3 million as of June 30, 2002 and December 31, 2001, respectively,
of which $293.0 million and $276.1 million, respectively, were unused.
See note 6 for discussion regarding revolving trade receivable
purchase facility.
(3) The following table summarizes our stockholders' equity as of June 30,
2002 and December 31, 2001 (in thousands, except per share data):
June 30, December 31,
2002 2001
---------------- ----------------
Common stock $.005 par value; 200,000 shares authorized; issued 45,616 shares at
June 30, 2002 and December 31, 2001 $ 228 $ 228
Additional paid-in capital 722,558 723,980
Retained earnings 291,318 449,089
Accumulated other comprehensive losses (139,221) (196,870)
Treasury stock, at cost; 6,172 shares at June 30, 2002
and 6,394 shares at December 31, 2001 (228,706) (236,938)
Unearned compensation (25) (55)
--------- ---------
Total stockholders' equity $ 646,152 $ 739,434
========= =========
(4) 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 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 exposures being hedged. 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 for the six months ended June 30, 2002 as a
result of the discontinuance of cash flow hedges were not significant.
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 United States 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 and purchased option contracts) are
matched to the underlying foreign currency exposures and are executed
to minimize foreign exchange transaction costs.
7
(continued)
As of June 30, 2002, we forecasted that $1.2 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 forward contracts to effectively
fix our cost of the commodity. These contracts require each settlement
between our counterparty and us to coincide with cash market purchases
of the actual commodity.
As of June 30, 2002, we forecasted that $0.7 million of net losses 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 at the lowest possible costs. In addition, we enter
into interest rate swap contracts in order to achieve a cost effective
mix of fixed and variable rate indebtedness.
As of June 30, 2002, we had interest rate swap contracts to pay
variable interest, based on the six-month LIBOR rate, and received a
fixed rate of interest of 6.625% on a notional amount of $100 million.
As of June 30, 2002, the fair value of these swap contracts was an
unrealized gain of $5.3 million. We have designated our outstanding
interest rate swap contracts as fair value hedges of an underlying
fixed rate debt obligation. The fair value of these contracts is
recorded in other long-term assets or liabilities with a corresponding
increase or decrease in the fixed rate debt obligation. The change in
fair values of both the fair value hedge instruments and the underlying
debt obligations are recorded as equal and offsetting unrealized gains
and losses in the interest expense component of the consolidated
condensed statements of operations. All existing fair value hedges are
100% effective under Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." As a result, there is no impact on current earnings
resulting from hedge ineffectiveness.
(5) Comprehensive income (loss) is determined as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------------- ------------ ------------- -------------
Net income (loss) $ 48,219 $ 32,816 $ (145,962) $ 23,822
Other comprehensive income (loss):
Foreign currency translation adjustment 43,196 (20,700) 51,159 (51,706)
Cash flow hedges:
Transition adjustment, net of tax -- -- -- (976)
Reclassification adjustment, net of tax 2,181 667 3,413 1,219
Net derivative (losses) gains, net of tax (635) (2,153) 3,077 (4,928)
------------- ------------ ------------- -------------
Comprehensive income (loss) $ 92,961 $ 10,630 $ (88,313) $ (32,569)
============= ============ ============= =============
(6) Pursuant to the terms of a revolving facility which expires in
December 2004, we sell our trade receivables to a wholly-owned,
consolidated subsidiary, York Receivables Funding LLC (YRFLLC). In
turn, YRFLLC sells, on a revolving basis, up to a $175.0 million
undivided ownership interest in the purchased trade receivables to bank
conduits. We continue to service the receivables. No servicing asset or
liability has been recognized as our cost to service the receivables
approximates the servicing income.
In accordance with the facility, YRFLLC has sold $175.0 million of an
undivided interest in trade receivables as of June 30, 2002 and
December 31, 2001. The proceeds from the sale were reflected as a
8
(continued)
reduction of receivables in the accompanying consolidated condensed
balance sheets as of June 30, 2002 and December 31, 2001. The discount
rate on the trade receivables sold was 1.82% and 2.00% as of June 30,
2002 and December 31, 2001, respectively.
(7) Effective January 1, 2002 we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Under SFAS No. 142, we no longer amortize goodwill,
but instead we test reporting unit goodwill for impairment at least
annually. Commencing in the fourth quarter of 2002, we will perform an
annual goodwill impairment test for each of our reporting units. The
Engineered Systems Group, York Refrigeration Group, Unitary Products
Group and Bristol Compressors segments were identified as our reporting
units, as defined under the standard. We will identify potential
goodwill impairment by comparing the fair value of a reporting unit
with its carrying amount, including goodwill. If the fair value of a
reporting unit exceeds its carrying amount, goodwill of the reporting
unit is considered not impaired. If the carrying amount of a reporting
unit exceeds its fair value, the amount of goodwill impairment loss, if
any, must be measured. We measure the amount of goodwill impairment
loss by comparing the implied fair value of reporting unit goodwill
with the carrying amount of that goodwill. If the carrying amount of
the reporting unit goodwill exceeds the implied fair value of goodwill,
an impairment loss will be recognized as an operating expense.
Upon adoption of SFAS No. 142, we were required to perform a
transitional goodwill impairment test. We completed the transitional
goodwill impairment test during the second quarter of 2002. We tested
our reporting units by comparing carrying value to fair value as of
January 1, 2002. We determined fair value using a discounted cash flow
and market-multiple approach. The transitional impairment analysis
indicated an impairment existed in our York Refrigeration Group
reporting unit. No indication of impairment existed in our other
reporting units. The historic and projected financial performance of
the York Refrigeration Group, which includes the entities acquired in
the Sabroe acquisition, were insufficient to support the related
goodwill. We employed a third-party appraisal firm to determine the
fair value of the York Refrigeration Group reporting unit as well as
York Refrigeration Group's property, plant and equipment and
intangibles. As a result, we recognized a non-cash transitional
goodwill impairment charge of $179 million in our York Refrigeration
Group reporting unit. As required by SFAS No. 142, the transitional
goodwill impairment charge was recorded as a cumulative effect of a
change in accounting principle in the accompanying consolidated
condensed statement of operations as of January 1, 2002.
The changes in the carrying amount of goodwill for the six months ended
June 30, 2002 by segment, are as follows (in thousands):
Net Transitional Foreign
Balance as of Goodwill Impairment Currency Balance as of
Dec. 31, 2001 Acquired Adjustment Fluctuation June 30, 2002
----------------- ------------- ----------------- -------------- -----------------
Engineered Systems Group $ 83,872 $ 801 $ -- $ 560 $ 85,233
York Refrigeration Group 371,048 704 (179,436) 17,966 210,282
Unitary Products Group 140,440 -- -- -- 140,440
Bristol Compressors 56,313 -- -- -- 56,313
--------------- ----------- -------------- ------------ ---------------
$ 651,673 $ 1,505 $ (179,436) $ 18,526 $ 492,268
=============== =========== ============== ============ ===============
9
(continued)
The following table presents net income and basic and diluted earnings
per share excluding goodwill amortization for the periods indicated (in
thousands, except per share data):
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
----------------- -----------------
Reported net income $ 32,816 $ 23,822
Add back: goodwill amortization 5,986 12,328
----------------- -----------------
Adjusted net income $ 38,802 $ 36,150
================= =================
Basic earnings per share:
Reported net income $ 0.85 $ 0.62
Add back: goodwill amortization 0.16 0.32
----------------- -----------------
Adjusted net income $ 1.01 $ 0.94
================= =================
Diluted earnings per share:
Reported net income $ 0.84 $ 0.61
Add back: goodwill amortization 0.15 0.32
----------------- -----------------
Adjusted net income $ 0.99 $ 0.93
================= =================
The following table presents net income and basic and diluted earnings
per share excluding goodwill amortization for the twelve months ended
December 31, 2001, 2000 and 1999 (in thousands, except per share data):
Twelve Months Ended December 31,
2001 2000 1999
------------------ ----------------- -----------------
Reported net income $ 45,989 $ 106,607 $ 75,882
Add back: goodwill amortization 24,447 25,634 20,330
------------------ ----------------- -----------------
Adjusted net income $ 70,436 $ 132,241 $ 96,212
================== ================= =================
Basic earnings per share:
Reported net income $ 1.19 $ 2.80 $ 1.91
Add back: goodwill amortization 0.63 0.67 0.52
------------------ ----------------- -----------------
Adjusted net income $ 1.82 $ 3.47 $ 2.43
================== ================= =================
Diluted earnings per share:
Reported net income $ 1.17 $ 2.78 $ 1.91
Add back: goodwill amortization 0.63 0.67 0.51
------------------ ----------------- -----------------
Adjusted net income $ 1.80 $ 3.45 $ 2.42
================== ================= =================
(8) The following table summarizes the major intangible asset classes
subject to amortization included in the accompanying consolidated
condensed balance sheets as of June 30, 2002 and December 31, 2001 (in
thousands):
10
(continued)
Gross Carrying Accumulated Net Carrying
June 30, 2002 Amount Amortization Amount
- ------------- ------------- ------------- -----------------
Trade names and trademarks $ 33,593 $ 3,574 $ 30,019
Other 1,425 680 745
------------- ------------- -----------------
$ 35,018 $ 4,254 $ 30,764
============= ============= =================
December 31, 2001
Trade names and trademarks $ 30,439 $ 2,734 $ 27,705
Other 1,237 527 710
------------- ------------- -----------------
$ 31,676 $ 3,261 $ 28,415
============= ============= =================
Amortization expense for trade names and trademarks and other
intangible assets for the three and six months ended June 30, 2002 was
$0.3 million and $0.6 million, respectively. For the three and six
months ended June 30, 2001, amortization expense for trade names and
trademarks and other intangible assets was $0.3 million and $0.6
million, respectively.
The following table estimates the amount of amortization expense for
trade names and trademarks and other intangible assets for the
remainder of 2002 and each of the fiscal years indicated (in
thousands):
2002 (July 1 - December 31) $ 626
2003 1,252
2004 1,252
2005 1,252
2006 1,252
Thereafter 25,130
(9) Net income (loss) as set forth in the consolidated condensed statements
of operations is used in the computation of basic and diluted earnings
(loss) per share information. Reconciliations of shares used in the
computations of earnings (loss) per share are as follows (in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------------- -------------- -------------- -------------
Weighted average common shares
outstanding used in the computation
of basic earnings (loss) per share 39,362 38,472 39,309 38,430
Effect of dilutive securities:
Non-vested restricted shares 2 3 2 3
Stock options 634 531 644 489
------------ -------------- -------------- -------------
Weighted average common shares and
equivalents used in the computation
of diluted earnings (loss) per share 39,998 39,006 39,955 38,922
============= ============== ============== =============
Stock options not included in the earnings
(loss) per share computation as their
effect would have been anti-dilutive 1,968 3,436 1,930 3,436
============= ============== ============== =============
(10) In 2002, we reorganized certain portions of our operating segments.
Prior year amounts were reclassified to conform to the current
presentation. Also in 2002, we allocated certain goodwill, which was
previously reflected as a non-allocated asset, to our operating
segments in accordance with SFAS No. 142. Prior year total assets were
reclassified to conform to the current presentation. The table below
represents our operating results by segment (in thousands):
11
(continued)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
--------------- ----------------- ----------------- ----------------
Net sales:
Engineered Systems Group $ 489,346 $ 516,468 $ 877,998 $ 958,290
York Refrigeration Group 231,252 233,783 420,381 446,028
Unitary Products Group 217,809 227,508 378,994 401,451
Bristol Compressors 163,698 162,773 319,654 330,823
Eliminations(1) (55,011) (63,060) (105,551) (117,015)
--------------- ----------------- ----------------- ----------------
1,047,094 1,077,472 1,891,476 2,019,577
=============== ================= ================= ================
(1)Eliminations include the following
intersegment sales:
Engineered Systems Group 3,758 7,262 5,899 15,824
York Refrigeration Group 7,828 4,938 14,913 10,371
Unitary Products Group 10,487 16,572 24,547 29,075
Bristol Compressors 32,938 34,288 60,192 61,745
--------------- ----------------- ----------------- ----------------
Eliminations 55,011 63,060 105,551 117,015
=============== ================= ================= ================
Income from operations:
Engineered Systems Group 35,219 44,026 39,086 62,021
York Refrigeration Group 17,967 18,205 26,662 28,442
Unitary Products Group 18,282 24,770 15,842 37,522
Bristol Compressors 12,788 17,303 29,123 34,066
General corporate expenses,
eliminations, and other
non-allocated items (11,640) (14,264) (20,936) (30,420)
Charges and operating expenses -- (58,045) (10,476) (88,527)
--------------- ----------------- ----------------- ----------------
72,616 31,995 79,301 43,104
=============== ================= ================= ================
Equity in earnings of affiliates:
Engineered Systems Group (720) (1,090) (854) (1,114)
York Refrigeration Group (349) (103) (761) (259)
Bristol Compressors (969) (654) (993) (576)
--------------- ----------------- ----------------- ----------------
(2,038) (1,847) (2,608) (1,949)
=============== ================= ================= ================
Earnings before interest and taxes:
Engineered Systems Group 35,939 45,116 39,940 63,135
York Refrigeration Group 18,316 18,308 27,423 28,701
Unitary Products Group 18,282 24,770 15,842 37,522
Bristol Compressors 13,757 17,957 30,116 34,642
General corporate expenses,
eliminations, and other
non-allocated items (11,640) (14,264) (20,936) (30,420)
Charges and operating expenses -- (58,045) (10,476) (88,527)
Loss on divestiture -- -- (10,683) --
--------------- ----------------- ----------------- ----------------
74,654 33,842 71,226 45,053
Interest expense, net 12,436 18,282 25,149 38,231
--------------- ----------------- ----------------- ----------------
Income before income taxes and
cumulative effect of a change in
accounting principle 62,218 15,560 46,077 6,822
Provision (benefit) for income taxes 13,999 (17,256) 12,603 (17,000)
--------------- ----------------- ----------------- ----------------
Income before cumulative effect of
a change in accounting principle $ 48,219 $ 32,816 $ 33,474 $ 23,822
=============== ================= ================= ================
12
(continued)
June 30, 2002 Dec. 31, 2001
------------------ -----------------
Total assets:
Engineered Systems Group $ 1,025,076 $ 1,049,536
York Refrigeration Group 792,670 917,541
Unitary Products Group 484,981 447,359
Bristol Compressors 316,600 270,943
Eliminations and other non-allocated assets (117,946) (112,870)
------------------ -----------------
$ 2,501,381 $ 2,572,509
================== =================
(11) In October 2000, we announced the initiation of a cost reduction
process, which included plant closures and divestitures, product line
and facility rationalizations, selling, general and administrative
expense reductions and other one-time costs. In the second quarter of
2001, we expanded the scope of the cost reduction process to include
additional plant closings and staff reductions. In the six months ended
June 30, 2002, the six months ended June 30, 2001, and the three months
ended June 30, 2001, we recorded restructuring charges of $2.8 million,
$67.5 million and $42.6 million, respectively, including $0.1 million,
$10.3 million, and $7.4 million, respectively, charged to cost of goods
sold, relating to the cost reduction process. We incurred no similar
charges in the three months ended June 30, 2002.
The charges included write-downs for the impairment of fixed assets and
other assets relating to facilities to be closed or divested and other
impaired assets. These actions included the plant closure of the
Unitary Products Group factory in Elyria, Ohio, the Engineered Systems
Group Airside factory in Portland, Oregon, the York Refrigeration Group
facility in San Antonio, Texas, the Bristol Compressor plant in Sparta,
North Carolina and factories in Asquith, Australia; Montevideo,
Uruguay; and Barlassina, Italy. Severance and other accruals included
planned reductions in workforce throughout the company. Of the
approximately 2,350 salary and wage employee reductions planned,
approximately 200 remained at June 30, 2002. Detail of the activity in
the six months ended June 30, 2002 is as follows:
Additional
Non-cash Accrual Accrual
Write-downs Established Utilized Reduction
in Six in Six in Six in Six
Remaining Months Months Months Months Remaining
Accruals at Ended Ended Ended Ended Accruals at
Dec. 31 June 30, June 30, June 30, June 30, June 30,
(in thousands) 2001 2002 2002 2002 2002 2002
------------ ------------ ------------ ------------ ------------ ------------
Fixed asset write-downs $ -- $ 1,500 $ -- $ -- $ -- $ --
Inventory write-downs -- 44 -- -- -- --
Other asset write-downs -- 87 -- -- -- --
Severance 10,728 -- 994 7,618 464 3,640
Contractual obligations 3,011 -- 5 737 6 2,273
Other 2,580 -- 658 985 -- 2,253
------------ ------------ ------------ ------------ ------------ ------------
$ 16,319 $ 1,631 $ 1,657 $ 9,340 $ 470 $ 8,166
============ ============ ============ ============ ============ ============
(12) In January 2002, we sold our Engineered Systems Group air conditioning
operations in Australia for $12.1 million. The sale resulted in a loss
of $10.7 million.
13
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
The following table sets forth net sales and earnings before interest and taxes
(EBIT) by segment (in thousands:)
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
--------------- ---------------- ---------------- ----------------
Net sales:
Engineered Systems Group $ 489,346 $ 516,468 $ 877,998 $ 958,290
York Refrigeration Group 231,252 233,783 420,381 446,028
Unitary Products Group 217,809 227,508 378,994 401,451
Bristol Compressors 163,698 162,773 319,654 330,823
Eliminations (55,011) (63,060) (105,551) (117,015)
--------------- ---------------- ---------------- ----------------
Net sales $ 1,047,094 $ 1,077,472 $ 1,891,476 $ 2,019,577
=============== ================ ================ ================
EBIT:
Engineered Systems Group $ 35,939 $ 45,116 $ 39,940 $ 63,135
York Refrigeration Group 18,316 18,308 27,423 28,701
Unitary Products Group 18,282 24,770 15,842 37,522
Bristol Compressors 13,757 17,957 30,116 34,642
General corporate expenses,
eliminations, and other
non-allocated items (11,640) (14,264) (20,936) (30,420)
Charges and operating expenses -- (58,045) (10,476) (88,527)
Loss on divestiture -- -- (10,683) --
--------------- ---------------- ---------------- ----------------
EBIT $ 74,654 $ 33,842 $ 71,226 $ 45,053
=============== ================ ================ ================
Consolidated Operations
Net sales for the three months ended June 30, 2002 decreased 2.8% to $1,047.1
million from $1,077.5 million for the same period in 2001. Net sales for the six
months ended June 30, 2002 decreased 6.3% to $1,891.5 million as compared to
$2,019.6 million for the six months ended June 30, 2001. Reduced shipments of
chillers and lower sales of unitary light commercial products were partially
offset by service growth. (See further discussion below under Segment
Analysis.). For the three months ended June 30, 2002, net sales in the United
States decreased 2.7% to $525.6 million and international net sales decreased
2.9% to $521.5 million. Order backlog as of June 30, 2002 was $971.5 million
compared to $1,052.7 million as of June 30, 2001 and $852.0 million as of
December 31, 2001.
Gross profit increased 3.0% to $215.9 million (20.6% of net sales) in the three
months ended June 30, 2002 as compared to $209.6 million (19.4% of net sales) in
the same period of 2001. During the six months ended June 30, 2002, gross profit
decreased 5.7% to $368.7 million (19.5% of net sales) from $390.9 million (19.4%
of net sales) for the six months ended June 30, 2001. Included in cost of goods
sold for the six months ended June 30, 2002, the six months ended June 30, 2001,
and the three months ended June 30, 2001, were $0.1 million, $10.3 million, and
$7.4 million, respectively, of restructuring charges, $6.8 million, $13.5
million, and $9.6 million, respectively, of one-time costs related to cost
reduction actions, and $0.8 million, $7.6 million, and $5.9 million,
respectively, related to a discontinued product line. We incurred no similar
charges in the three months ended June 30, 2002.
14
(continued)
Excluding the charges discussed above, gross profit decreased 7.1% to $215.9
million (20.6% of net sales) in the three months ended June 30, 2002 from $232.4
million (21.6% of net sales) in the same period of 2001. For the six months
ended June 30, 2002, gross profit, excluding the charges discussed above,
decreased 10.8% to $376.4 million (19.9% of net sales) from $422.2 million
(20.9% of net sales) for the six months ended June 30, 2001. The decreases were
primarily due to reduced volume, the impact of competitive margin pressures,
manufacturing inefficiencies, changes in product mix, and increased investments
relating to our service activities.
Selling, general and administrative (SG&A) expense increased 0.6% to $143.2
million (13.7% of net sales) in the three months ended June 30, 2002 from $142.3
million (13.2% of net sales) in the three months ended June 30, 2001. Increases
resulting from higher medical and information technology costs and the effect of
strengthening European currencies were partially offset by staff reductions and
other cost reduction efforts and the elimination of goodwill amortization in
accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets." For the six months ended June 30, 2002,
SG&A expense decreased 1.4% to $286.7 million (15.2% of net sales) from $290.6
million (14.4% of net sales) for the same period of 2001. In addition to the
items which affected second quarter expense, SG&A expense for the six months
increased as a percent of sales due to a first quarter write-off of a $5.9
million receivable related to a Unitary Products Group distributor that became
insolvent.
In October 2000, we announced the initiation of a cost reduction process, which
included plant closures and divestitures, product line and facility
rationalizations, SG&A expense reductions and other one-time costs. In the
second quarter of 2001, we expanded the scope of the cost reduction process to
include additional plant closings and staff reductions. In the six months ended
June 30, 2002, the six months ended June 30, 2001, and the three months ended
June 30, 2001, we recorded charges to operations of $9.6 million, $81.0 million,
and $52.2 million, respectively, related to these cost reduction actions,
including the $6.9 million, $23.8 million, and $17.0 million, respectively,
charged to cost of goods sold as discussed above. We incurred no similar charges
in the three months ended June 30, 2002. The charges in the six months ended
June 30, 2002, the six months ended June 30, 2001, and the three months ended
June 30, 2001 included $1.6 million, $26.7 million, and $20.3 million,
respectively, in write-downs of various assets and $1.2 million, $40.8 million,
and $22.3 million, respectively, in accruals for severance and other costs. As
of June 30, 2002, the closing of one facility was still in process. We do not
anticipate significant additional costs to be incurred during the remainder of
2002 relating to the announced actions.
Equity in earnings of affiliates was $2.0 million during the three months ended
June 30, 2002 as compared to $1.8 million during the three months ended June 30,
2001. For the six months ended June 30, 2002, equity in earnings of affiliates
was $2.6 million as compared to $1.9 million for the same period of 2001. The
increase was primarily the result of improved performance of Scroll Technologies
and our joint venture in Korea.
In January 2002, we sold our Engineered Systems Group air conditioning
operations in Australia for $12.1 million. The sale resulted in a loss of $10.7
million.
During the three months ended June 30, 2002, earnings before interest and taxes
(EBIT) increased 120.6% to $74.7 million (7.1% of net sales) from $33.8 million
(3.1% of net sales) during the three months ended June 30, 2001. During the six
months ended June 30, 2002, EBIT increased 58.1% to $71.2 million (3.8% of net
sales) from $45.1 million (2.2% of net sales) during the same period of 2001.
Excluding the charges discussed above, EBIT decreased 18.8% to $74.7 million
(7.1% of net sales) in the three months ended June 30, 2002 compared to $91.9
million (8.5% of net sales) in the same period of 2001. EBIT, excluding the
charges discussed above and the loss on divestiture, decreased 30.8% to $92.4
million (4.9% of net sales) in the six months ended June 30, 2002 as compared to
$133.6 million (6.6% of net sales) in the same period of 2001. (See further
discussion below under Segment Analysis.)
Net interest expense in the three months ended June 30, 2002 was $12.4 million
compared to $18.3 million in the same period of 2001. Net interest expense in
the six months ended June 30, 2002 was $25.1 million compared to $38.2 million
in the six months ended June 30, 2001. The decrease resulted from lower average
debt levels and lower interest rates.
The income tax provision of $14.0 million for the three months ended June 30,
2002 and $12.6 million for the six months ended June 30, 2002 relates to both
U.S. and non-U.S. operations. The tax rate for ongoing operations was 22.5% for
the first six months of 2002 compared to 30.0% for the first six months of 2001.
The tax rate improvement for ongoing operations was the result of effective tax
planning strategies, tax holidays and the impact of the adoption of SFAS
No. 142.
15
(continued)
Upon adoption of SFAS No. 142 we were required to perform a transitional
goodwill impairment test. The transitional goodwill impairment test was
completed during the second quarter of 2002. As a result, we recognized a
non-cash transitional goodwill impairment charge of $179 million in our York
Refrigeration Group reporting unit. The historic and projected financial
performance of the York Refrigeration Group, which includes the entities
acquired in the Sabroe acquisition, were insufficient to support the related
goodwill. As required, the transitional goodwill impairment charge was recorded
as a cumulative effect of a change in accounting principle as of January 1,
2002.
Net income, as a result of the above factors, was $48.2 million during the three
months ended June 30, 2002 as compared to $32.8 million during the three months
ended June 30, 2001. For the six months ended June 30, 2002, net income,
excluding the cumulative effect of a change in accounting principle, was $33.5
million compared to $23.8 million for the same period of 2001.
Segment Analysis
The discussion below of each segment's EBIT relates to ongoing operations and
excludes the charges and loss on divestiture discussed above.
Engineered Systems Group (ESG)
ESG net sales for the three months ended June 30, 2002 decreased 5.3% to $489.3
million from $516.5 million for the same period in 2001. Net sales for the six
months ended June 30, 2002 decreased 8.4% to $878.0 million as compared to
$958.3 million for the same period in 2001. Strength in global service
businesses was more than offset by a decline in chiller shipments, particularly
in North America and Europe.
EBIT for the three months ended June 30, 2002 decreased 20.3% to $35.9 million
(7.3% of net sales) from $45.1 million (8.7% of net sales) for the same period
in 2001. For the six months ended June 30, 2002, EBIT decreased 36.7% to $39.9
million (4.5% of net sales) as compared to $63.1 million (6.6% of net sales) for
the same period in 2001. The decline resulted from lower volumes and the related
absorption effects of fixed costs, pricing pressure, higher medical costs, and
continued investment in service infrastructure.
York Refrigeration Group (YRG)
YRG net sales for the three months ended June 30, 2002 decreased 1.1% to $231.3
million from $233.8 million for the same period in 2001. Reduced shipments for
petrochemical and cruise ship applications were offset by positive foreign
currency effects. Net sales for the six months ended June 30, 2002 decreased
5.8% to $420.4 million as compared to $446.0 million for the same period in
2001. In addition to the items which affected second quarter revenue, net sales
for the six months were decreased by soft first quarter European equipment
orders and contracting.
EBIT for the three months ended June 30, 2002 remained flat at $18.3 million
(7.9% of net sales) as compared to $18.3 million (7.8% of net sales) for the
same period in 2001. Improved gross margin as a result of aftermarket growth and
better contracting performance was offset by higher production costs and higher
medical costs in the U.S. For the six months ended June 30, 2002, EBIT decreased
4.5% to $27.4 million (6.5% of net sales) as compared to $28.7 million (6.4% of
net sales) for the same period in 2001. The decrease was due to lower volume and
pricing pressures in certain markets.
Unitary Products Group (UPG)
UPG net sales for the three months ended June 30, 2002 decreased 4.3% to $217.8
million from $227.5 million for the same period in 2001. Net sales for the six
months ended June 30, 2002 decreased 5.6% to $379.0 million as compared to
$401.5 million for the same period in 2001. The decreases resulted from declines
in the North American commercial and manufactured housing markets and reduced
export volume.
EBIT for the three months ended June 30, 2002 decreased 26.2% to $18.3 million
(8.4% of net sales) from $24.8 million (10.9% of net sales) for the same period
in 2001. For the six months ended June 30, 2002, EBIT decreased 57.8% to $15.8
million (4.2% of net sales) as compared to $37.5 million (9.3% of net sales) for
the same period in 2001. In addition to the impact of lower sales volume, EBIT
decreased due to an unfavorable product mix, manufacturing inefficiencies and
the first quarter write-off of a $5.9 million receivable related to a
distributor that
16
(continued)
became insolvent during March 2002. The unfavorable product mix resulted from a
shift to lower margin products as light commercial products declined more than
residential. While beneficial in the long-term, the UPG residential factory
consolidation was more costly and slower than originally anticipated. Although
plant efficiency levels and shipping improved steadily, UPG experienced
manufacturing inefficiencies and higher logistics and warehousing costs at the
Wichita facility during the first half of 2002.
Bristol Compressors
Bristol Compressors net sales for the three months ended June 30, 2002 increased
0.6% to $163.7 million from $162.8 million for the same period in 2001. Net
sales for the six months ended June 30, 2002 decreased 3.4% to $319.7 million as
compared to $330.8 million for the same period in 2001. Bristol experienced
decreases in international shipments and increased sales to North American
unitary manufacturers.
EBIT for the three months ended June 30, 2002 decreased 23.4% to $13.8 million
(8.4% of net sales) from $18.0 million (11.0% of net sales) for the same period
in 2001. For the six months ended June 30, 2002, EBIT decreased 13.1% to $30.1
million (9.4% of net sales) as compared to $34.6 million (10.5% of net sales)
for the same period in 2001. Although Bristol benefited from improved product
designs with lower costs, margins were down due to continued decreases in larger
applications and pricing pressure in the market place. Bristol is experiencing a
negative impact of order mix as high-margin large compressors used in light
commercial applications are down significantly, while the volume of smaller
units has grown.
Liquidity and Capital Resources
Working capital requirements are generally met through a combination of
internally generated funds, bank lines of credit, commercial paper borrowings,
financing of trade receivables and credit terms from suppliers which approximate
receivable terms to our customers. Additional sources of working capital include
customer deposits and progress payments.
Working capital increased $17.6 million to $490.5 million as of June 30, 2002 as
compared to $472.8 million as of December 31, 2001. The increase resulted from
higher receivables levels due to normal seasonal trends and increases in
prepayments and other current assets, partially offset by increases in accounts
payable and accrued expenses and income taxes. The current ratio was 1.58 as of
June 30, 2002 as compared to 1.61 as of December 31, 2001.
Capital expenditures were $35.9 million for the six months ended June 30, 2002
as compared to $35.3 million for the six months ended June 30, 2001. Capital
expenditures currently anticipated for expanded capacity, cost reductions and
the introduction of new products during 2002 are expected to be in excess of
depreciation and amortization. These expenditures will be funded from a
combination of operating cash flows, availability under credit agreements and
commercial paper borrowings.
Cash dividends of $0.15 per share were paid on common stock in the three months
ended June 30, 2002 and in the three months ended March 31, 2002. The
declaration and payment of future dividends will be at the sole discretion of
the Board of Directors and will depend upon such factors as our profitability,
financial condition, cash requirements, future prospects and other factors
deemed relevant by the Board of Directors.
Total indebtedness was $719.9 million as of June 30, 2002, primarily consisting
of $500.0 million of senior notes and $168.4 million of commercial paper. On
June 1, 1998, we issued $200 million of 6.70% fixed rate senior notes having a
maturity of ten years from the date of issue. On August 6, 2001, we issued $200
million of 6.625% fixed rate senior notes due August 2006. The remaining $100
million ten-year senior notes bear interest at a 6.75% fixed rate and are due
March 2003. As of June 30, 2002, it is expected that commercial paper will be
issued to redeem the $100 million senior notes due March 2003. Commercial paper
borrowings are expected to be reborrowed in the ordinary course of business. The
interest rate on the commercial paper was 2.05% as of June 30, 2002.
As of June 30, 2002, we had available a $400 million Five Year Credit Agreement,
which expires on May 29, 2006, and a $300 million 364-Day Credit Agreement,
which expires on May 28, 2003 (collectively, the Agreements). As of June 30,
2002, no amounts were outstanding under the Agreements.
17
(continued)
The $400 million Five Year Credit Agreement provides for borrowings at the
London Interbank Offering Rate (LIBOR) plus 0.75% or 0.875%, and the $300
million 364-Day Credit Agreement provides for borrowings at LIBOR plus 0.775% or
0.90%, based on the amount of facility utilization. We pay annual fees of 0.125%
on the $400 million facility and 0.10% on the $300 million facility. The
Agreements allow for borrowings at specified bid rates. As of June 30, 2002, the
three-month LIBOR rate was 1.87%. The Agreements contain financial covenants
requiring us to maintain certain financial ratios and standard provisions
limiting leverage and liens. We were in compliance with these financial
covenants as of June 30, 2002.
We have additional unused domestic bank lines that provide for total borrowings
of $100 million as of June 30, 2002 and December 31, 2001. Our non-U.S.
subsidiaries maintain bank credit facilities in various currencies that provided
for available borrowings of $383.9 million and $386.3 million as of June 30,
2002 and December 31, 2001, respectively, of which $293.0 million and $276.1
million, respectively, were unused.
Pursuant to the terms of a revolving facility, we sell our trade receivables to
a wholly-owned, consolidated subsidiary, York Receivables Funding LLC (YRFLLC).
In turn, YRFLLC sells, on a revolving basis up to a $175.0 million undivided
ownership interest in the purchased trade receivables to bank conduits. We
continue to service the receivables. No servicing asset or liability has been
recognized as our cost to service the receivables approximates the servicing
income.
In accordance with the facility, YRFLLC has sold $175.0 million of an undivided
interest in trade receivables as of June 30, 2002 and December 31, 2001. The
proceeds from the sale were reflected as a reduction of receivables in the
accompanying consolidated condensed balance sheets as of June 30, 2002 and
December 31, 2001. The discount rate on the trade receivables sold was 1.82% and
2.00% as of June 30, 2002 and December 31, 2001, respectively.
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 Agreements. The
Agreements and commercial paper borrowings support seasonal working capital
needs and are available for general corporate purposes.
Our ability to finance operations in the commercial paper market is dependent
upon maintaining satisfactory credit ratings. If our credit ratings would be
lowered by the rating agencies, we 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 and depreciation and amortization (EBITDA) interest
coverage and the debt to capital ratio, as defined under the Agreements. As of
June 30, 2002, our EBITDA interest coverage was 4.9, exceeding the minimum
requirement of 3.5. As of June 30, 2002, our debt to capital ratio was 49%,
below the maximum allowed of 57%.
In the event we repurchased over 20% of our shares in a twelve month period and
our credit ratings were lowered by one full ratings letter, our senior notes due
in 2003 could be accelerated for payout.
Because our obligations under the Agreements and revolving trade receivables
purchase facility bear interest at floating rates, our interest costs are
sensitive to changes in prevailing interest rates.
In the ordinary course of business, we enter into various types of transactions
that involve contracts and financial instruments. We enter into these financial
instruments to manage financial market risk, including foreign exchange,
commodity price and interest rate risk.
Outlook
During the second half of 2002, we expect continued service and parts revenue
growth, reduced costs and improved plant efficiencies as a result of our cost
reduction efforts, and lower interest and tax expenses than in the second half
of 2001. In addition, we may experience favorable effects in the second half as
a result of strengthening European currencies.
18
(continued)
However, we expect these improvements to be partially offset by the impact of
market conditions and certain cost increases. We expect the negative economic
impact in the commercial air conditioning market to continue during the second
half of 2002. These conditions are evidenced by lower backlogs at both ESG and
YRG at June 30, 2002 versus June 30, 2001. We anticipate that these market
conditions will continue to negatively impact the volume and pricing of
commercial equipment sales. We also expect higher costs in the second half of
the year due to steel price increases and higher legal costs.
Forward-Looking Information - Risk Factors
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 competition, government
regulation, environmental considerations and the successful implementation of
our cost reduction actions. Unseasonably cool weather in various parts of the
world could adversely affect our UPG and ESG air conditioning businesses and,
similarly, the Bristol compressor business. Bristol is also dependent on the
successful development and introduction of new products. The ESG air
conditioning business could also be affected by a slowdown in the large chiller
market and by the acceptance of new product introductions. YRG could be
adversely affected by a decline in the value of European currencies. Both YRG
and ESG could be negatively impacted by reductions in commercial construction.
In addition, our overall performance could be affected by declining worldwide
economic conditions or slowdowns resulting from world events.
19
PART II - OTHER INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Item 1 Legal Proceedings
On November 7, 2001, a case captioned American Standard, Inc. and
American Standard International Inc. v. York International Corporation
and York International, S.A. de C.V. was filed in the Federal District
for the Western District of Wisconsin. American Standard, a competitor
of ours, alleges that two component parts of three models of chillers
manufactured by us infringe two patents held by American Standard.
American Standard has recently alleged that its damages are in the
amount of either $88.7 million or $65 million, depending on the method
of calculation. We believe that we do not infringe the American
Standard patents and that the patents may be invalid, and we are
vigorously defending the action. We were granted summary judgment with
respect to certain claims of one of the patents. Even if we were found
to infringe the patents, we believe any award of damages would not
approach the alleged amounts and would not significantly affect our
financial position. However, any award could be material to the period
it is recorded.
We have also been named among numerous other defendants in 307
asbestos-related lawsuits in various jurisdictions. These primarily
relate to the former use by our Engineered Systems and York
Refrigeration Groups of gaskets made of an asbestos-containing
material. We have been dismissed from eleven of these cases and de
minimis settlements have occurred in eight others. Some insurance
coverage and/or indemnities from parties from whom we purchased
businesses are available. We do not believe that this litigation is
likely to have a significant effect on our financial position.
Item 2 Changes in Securities
Not Applicable
Item 3 Defaults Upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
(a) The Registrant's annual meeting of Stockholders was held on
May 25, 2002
(b) Proxies were solicited for the meeting. All nominees for
Director were elected and item (c) 2, 3 and 4 (see below) were
approved.
(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 34,068,785 1,147,239
Michael R. Young 34,254,073 961,951
W. Michael Clevy 34,262,075 953,949
Malcolm W. Gambill 34,253,897 962,127
J. Roderick Heller, III 34,261,695 954,329
Robert F. B. Logan 33,861,551 1,354,473
Donald M. Roberts 33,862,706 1,353,318
James A. Urry 33,859,062 1,356,962
Paul J. Powers 34,261,871 954,153
20
(continued)
2. Proposal to approve the 2002 Votes For Votes Against Abstentions
Omnibus Stock Plan 25,534,027 5,687,722 46,092
3. Proposal to approve the 2002 Votes For Votes Against Abstentions
Incentive Compensation Plan 29,736,913 1,493,127 37,802
4. The appointment of KPMG LLP Votes For Votes Against Abstentions
as independent auditors 33,702,789 1,497,708 20,528
Item 5 Other Information
Not Applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibit 4.1 - 364-DAY CREDIT AGREEMENT, dated as of May 29,
2002, among YORK INTERNATIONAL CORPORATION, as borrower, the
initial lenders named therein, as initial lenders, CITIBANK,
N.A., as administrative agent for the lenders, JPMORGAN CHASE
BANK, as syndication agent, BANK OF TOKYO-MITSUBISHI TRUST
COMPANY, FLEET NATIONAL BANK and NORDEA BANK FINLAND PLC, as
documentation agents, and JP MORGAN SECURITIES, INC. and
SALOMON SMITH BARNEY INC., as joint lead arrangers and joint
book managers
Exhibit 4.2 - AMENDMENT NO.1 TO THE FIVE YEAR CREDIT
AGREEMENT, dated as of May 29, 2002, among York International
Corporation, the lenders named therein, as lenders, and
Citibank, N.A., as administrative agent for the lenders
Exhibit 10.1 - York International Corporation Amended and
Restated 2002 Omnibus Stock Plan, effective as of May 23,
2002, as amended and restated May 31, 2002
Exhibit 10.2 - York International Corporation 2002 Incentive
Compensation Plan, effective as of January 1, 2002
Exhibit 10.3 - Form of Amendment No. 1 to Severance Agreement
between the registrant and certain of its key executives
Exhibit 10.4 - Form of Amendment No. 1 to Employment Agreement
between the registrant and certain of its key executives
Exhibit 99.1 - Certification of the Chief Executive Officer of
York International Corporation pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.2 - Certification of the Chief Financial Officer of
York International Corporation pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) None
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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 August 13, 2002 /S/ C. David Myers
---------------------------------
C. David Myers
Corporate Vice President and
Chief Financial Officer
22