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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 SEPTEMBER 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 November 8, 2002
Common Stock, par value $.005 39,447,559 shares
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - (unaudited)
Three Months and Nine Months Ended September 30, 2002 and 2001 3
Consolidated Condensed Balance Sheets -
September 30, 2002 (unaudited) and December 31, 2001 4
Consolidated Condensed Statements of Cash Flows - (unaudited)
Nine Months Ended September 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
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 20
Item 6. Exhibits and Reports on Form 8-K 20
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 Sept. 30, Nine Months Ended Sept. 30,
2002 2001 2002 2001
-------- -------- ---------- ----------
Net sales $ 946,774 $ 944,484 $ 2,832,399 $ 2,958,923
Cost of goods sold 767,373 769,678 2,290,150 2,398,373
-------- -------- ---------- ----------
Gross profit 179,401 174,806 542,249 560,550
Selling, general and administrative expenses 135,267 132,926 416,084 418,391
Restructuring charges, net -- 3,840 2,730 61,015
-------- -------- ---------- ----------
Income from operations 44,134 38,040 123,435 81,144
Interest expense, net 11,746 16,197 36,895 54,428
Loss on divestiture -- -- 10,683 --
Equity in (earnings) of affiliates (1,206) (441) (3,814) (2,390)
-------- -------- ---------- ----------
Income before income taxes and
cumulative effect of a change
in accounting principle 33,594 22,284 79,671 29,106
Provision (benefit) for income taxes 7,559 5,593 20,162 (11,407)
-------- -------- ---------- ----------
Income before cumulative effect of
a change in accounting principle 26,035 16,691 59,509 40,513
Cumulative effect of a change in accounting
Principle -- -- (179,436) --
-------- -------- ---------- ----------
Net income (loss) $ 26,035 $ 16,691 $ (119,927) $ 40,513
======== ======== ========== ==========
Basic earnings (loss) per share:
Income before cumulative effect of
a change in accounting principle $ 0.66 $ 0.43 $ 1.51 $ 1.05
Cumulative effect of a change in
accounting principle -- -- (4.56) --
-------- -------- ---------- ----------
Net income (loss) $ 0.66 $ 0.43 $ (3.05) $ 1.05
======== ======== ========== ==========
Diluted earnings (loss) per share:
Income before cumulative effect of
a change in accounting principle $ 0.65 $ 0.42 $ 1.49 $ 1.04
Cumulative effect of a change in
accounting principle -- -- (4.50) --
-------- -------- ---------- ----------
Net income (loss) $ 0.65 $ 0.42 $ (3.01) $ 1.04
======== ======== ========== ==========
Cash dividends per share $ 0.15 $ 0.15 $ 0.45 $ 0.45
======== ======== ========== ==========
Weighted average common shares and
common equivalents outstanding:
Basic 39,445 38,710 39,355 38,526
Diluted 39,786 39,285 39,852 39,043
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)
Sept. 30, 2002 December 31,
(unaudited) 2001
--------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 47,171 $ 39,434
Receivables, net 606,203 613,892
Inventories
Raw material 128,885 143,148
Work in process 139,425 101,575
Finished goods 223,125 270,537
-------------- ---------------
Total inventories 491,435 515,260
Prepayments and other current assets 82,536 81,883
-------------- ---------------
Total current assets 1,227,345 1,250,469
Deferred income taxes 43,270 56,149
Investments in affiliates 28,498 24,957
Property, plant and equipment, net 490,847 480,999
Goodwill 492,808 651,673
Intangibles, net 30,809 28,415
Deferred charges and other assets 81,073 79,847
-------------- ---------------
Total assets $ 2,394,650 $ 2,572,509
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 32,041 $ 36,604
Accounts payable and accrued expenses 752,967 735,962
Income taxes 19,006 5,073
-------------- ---------------
Total current liabilities 804,014 777,639
Long-term warranties 44,203 43,751
Long-term debt 602,496 724,378
Postretirement and postemployment benefits 208,243 208,195
Other long-term liabilities 77,899 79,112
-------------- ---------------
Total liabilities 1,736,855 1,833,075
Stockholders' equity 657,795 739,434
-------------- ---------------
Total liabilities and stockholders' equity $ 2,394,650 $ 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)
Nine Months Ended Sept. 30,
2002 2001
--------------- --------------
Cash flows from operating activities:
Net (loss) income $ (119,927) $ 40,513
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 45,363 48,594
Amortization of deferred charges, intangibles and goodwill 2,039 20,722
Provision for doubtful receivables 12,097 6,749
Effect of non-cash charges 1,631 27,610
Loss on divestiture 10,683 --
Deferred income taxes 12,176 6,737
Loss on sale of fixed assets 982 2,800
Other (1,359) 222
Change in assets and liabilities net of effects from
acquisitions and divestitures:
Receivables (11,199) (12,518)
Inventories 20,269 34,843
Prepayments and other current assets (2,390) 14,123
Accounts payable and accrued expenses 19,576 (72,264)
Income taxes 13,173 (8,102)
Other long-term assets and liabilities 4,360 478
------------ ------------
Net cash provided by operating activities 186,910 110,507
------------ ------------
Cash flows from investing activities:
Purchases of other companies, net of cash acquired (2,248) (987)
Proceeds from divestiture, net 12,071 --
Capital expenditures (49,321) (65,437)
Proceeds from sale of fixed assets 5,658 187
------------ ------------
Net cash used by investing activities (33,840) (66,237)
------------ ------------
Cash flows from financing activities:
Net (payments) proceeds on short-term debt (4,507) 8,800
Net payments of commercial paper borrowings (127,769) (179,825)
Net proceeds from issuance of senior notes - 197,623
Net payments on other long-term debt (1,300) (63,075)
Common stock issued 6,246 12,384
Treasury stock purchases (32) (44)
Dividends paid (17,727) (17,377)
------------ ------------
Net cash used by financing activities (145,089) (41,514)
------------ ------------
Effect of exchange rate changes on cash and cash equivalents (244) 218
------------ ------------
Net increase in cash and cash equivalents 7,737 2,974
Cash and cash equivalents at beginning of period 39,434 26,425
------------ ------------
Cash and cash equivalents at end of period $ 47,171 $ 29,399
============ ============
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 September 30, 2002 and
December 31, 2001, the results of operations for the three and nine
months ended September 30, 2002 and 2001, and cash flows for the nine
months ended September 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 September 30,
2002 and December 31, 2001 (in thousands):
September 30, December 31,
2002 2001
--------------- --------------
Notes payable and current portion of long-term debt:
Bank loans (primarily foreign currency) $ 28,456 $ 32,963
Current portion of long-term debt 3,585 3,641
------------- ------------
Total $ 32,041 $ 36,604
============= ============
Long-term debt:
Domestic bank lines at an average rate of 1.98 % in 2002 $ 15,800 $ --
Commercial paper, 1.90% interest in 2002
and 2.38% interest in 2001 69,933 197,702
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 6.56% in 2002 and 6.38% in 2001 20,348 30,317
------------- ------------
Total 606,081 728,019
Less current portion (3,585) (3,641)
------------- ------------
Noncurrent portion $ 602,496 $ 724,378
============= ============
As of September 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 September 30, 2002,
it is expected that commercial paper will be issued to redeem the $100
million senior notes due March 2003. Pursuant to our July 2001
registration statement, we may issue up to $100 million of additional
debt securities, the specific terms of which will be determined at the
time of sale. 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
September 30, 2002 and December 31, 2001, no amounts were outstanding
under the Agreements.
6
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 September 30, 2002 and
December 31, 2001, the three-month LIBOR rate was 1.80 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 September 30, 2002 and December 31, 2001.
We have additional domestic bank lines that provide for total
borrowings of $100 million as of September 30, 2002 and December 31,
2001, of which $84.2 million and $100.0 million, respectively, were
unused. Our non-U.S. subsidiaries maintain bank credit facilities in
various currencies that provided for available borrowings of $361.0
million and $386.3 million as of September 30, 2002 and December 31,
2001, respectively, of which $275.8 million and $276.1 million,
respectively, were unused.
See note 6 for discussion regarding the revolving trade receivable
purchase facility.
(3) The following table summarizes our stockholders' equity as of
September 30, 2002 and December 31, 2001 (in thousands, except
per share data):
September 30, December 31,
2002 2001
------------- -----------
Common stock $.005 par value; 200,000 shares authorized;
issued 45,616 shares at September 30, 2002
and December 31, 2001 $ 228 $ 228
Additional paid-in capital 722,540 723,980
Retained earnings 311,435 449,089
Accumulated other comprehensive losses (147,794) (196,870)
Treasury stock, at cost; 6,169 shares at September 30, 2002
and 6,394 shares at December 31, 2001 (228,601) (236,938)
Unearned compensation (13) (55)
--------- ---------
Total stockholders' equity $ 657,795 $ 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 hedged exposures. We
mitigate the risk that the counter-party to these derivative
instruments will fail to perform by only entering into derivative
instruments with major financial institutions. We do not typically
hedge our market risk exposures beyond three years and do not hold or
issue derivative instruments for trading purposes.
During the nine months ended September 30, 2002, certain commodity
hedges were discontinued. The discontinuance of these cash flow hedges
did not result in any significant gains or losses.
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
As of September 30, 2002, we forecasted that $1.3 million of net gains
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 September 30, 2002, we forecasted that $3.7 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. In addition, we enter into interest rate swap
contracts in order to achieve a balanced mix of fixed and variable rate
indebtedness.
As of September 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 September 30, 2002, the fair value of these swap contracts was an
unrealized gain of $9.3 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
determined to be 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 Sept. 30, Nine Months Ended Sept. 30,
2002 2001 2002 2001
-------- -------- ---------- ---------
Net income (loss) $ 26,035 $ 16,691 $ (119,927) $ 40,513
Other comprehensive income (loss):
Foreign currency translation adjustment (3,875) 19,787 47,284 (31,919)
Cash flow hedges:
Transition adjustment, net of tax -- -- -- (976)
Reclassification adjustment, net of tax 351 900 3,764 2,119
Net derivative losses, net of tax (5,049) (3,199) (1,972) (8,127)
------ ------ ------- -------
Comprehensive income (loss) $ 17,462 $ 34,179 $ (70,851) $ 1,610
====== ====== ======= =======
(6) Pursuant to the terms of an annually renewable 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 administered asset-backed
commercial paper vehicles. 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 September 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 September 30, 2002 and December 31, 2001. The
discount rate on the trade receivables sold was 1.81% and 2.00% as of
September 30, 2002 and December 31, 2001, respectively.
8
(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 not considered 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 nine months
ended September 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 Sept. 30, 2002
------------- -------- ---------- ----------- --------------
Engineered Systems Group $ 83,872 $ 801 $ -- $ (113) $ 84,560
York Refrigeration Group 371,048 704 (179,436) 19,179 211,495
Unitary Products Group 140,440 -- -- -- 140,440
Bristol Compressors 56,313 -- -- -- 56,313
------- ----- -------- ------ -------
$ 651,673 $ 1,505 $ (179,436) $ 19,066 $ 492,808
======= ===== ======== ====== =======
9
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 Nine Months
Ended Ended
Sept. 30, 2001 Sept. 30, 2001
-------------- --------------
Reported net income $ 16,691 $ 40,513
Add back: goodwill amortization 6,215 18,543
------ ------
Adjusted net income $ 22,906 $ 59,056
====== ======
Basic earnings per share:
Reported net income $ 0.43 $ 1.05
Add back: goodwill amortization 0.16 0.48
------ ------
Adjusted net income $ 0.59 $ 1.53
====== ======
Diluted earnings per share:
Reported net income $ 0.42 $ 1.04
Add back: goodwill amortization 0.16 0.47
------ ------
Adjusted net income $ 0.58 $ 1.51
====== ======
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 September 30, 2002 and December 31, 2001
(in thousands):
10
Gross Carrying Accumulated Net Carrying
September 30, 2002 Amount Amortization Amount
- ------------------ -------------- ------------- ------------
Trade names and trademarks $ 33,964 $ 3,867 $ 30,097
Other 1,427 715 712
------ ----- ------
$ 35,391 $ 4,582 $ 30,809
====== ===== ======
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 months ended September 30, 2002 and
2001 was $0.3 million and the nine months ended September 30, 2002 and
2001 was $0.9 million.
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 (October 1 - December 31) $ 313
2003 1,253
2004 1,253
2005 1,253
2006 1,253
Thereafter 25,484
(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 Sept. 30, Nine Months Ended Sept.30,
2002 2001 2002 2001
------ ------ ------ ------
Weighted average common shares
outstanding used in the computation
of basic earnings (loss) per share 39,445 38,710 39,355 38,526
Effect of dilutive securities:
Non-vested restricted shares 1 3 1 3
Stock options 340 572 496 514
------ ------ ------ ------
Weighted average common shares and
equivalents used in the computation
of diluted earnings (loss) per share 39,786 39,285 39,852 39,043
======= ====== ====== ======
Stock options not included in the
earnings (loss) per share computation
as their effect would have been anti-
dilutive 3,849 3,327 3,849 3,327
======= ====== ====== ======
(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
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
2002 2001 2002 2001
---------- ---------- ------------ ------------
Net sales:
Engineered Systems Group $ 471,616 $ 478,607 $ 1,349,614 $ 1,436,897
York Refrigeration Group 222,879 226,959 643,260 672,987
Unitary Products Group 207,578 187,388 580,721 583,701
Bristol Compressors 97,509 102,910 417,163 433,733
Eliminations(1) (52,808) (51,380) (158,359) (168,395)
-------- -------- ---------- ----------
946,774 944,484 2,832,399 2,958,923
======== ======== ========== ==========
(1)Eliminations include the following
intersegment sales:
Engineered Systems Group 5,347 3,539 11,246 19,363
York Refrigeration Group 7,502 5,322 22,415 15,693
Unitary Products Group 13,364 17,034 37,911 46,109
Bristol Compressors 26,595 25,485 86,787 87,230
-------- -------- ---------- ----------
Eliminations 52,808 51,380 158,359 168,395
======== ======== ========== ==========
Income from operations:
Engineered Systems Group 26,562 32,465 65,648 94,486
York Refrigeration Group 11,399 11,492 38,061 39,934
Unitary Products Group 18,724 14,978 34,566 52,500
Bristol Compressors (1,033) 4,909 28,090 38,975
General corporate expenses,
eliminations, and other non-allocated items (11,518) (11,070) (32,454) (41,490)
Charges and operating expenses -- (14,734) (10,476) (103,261)
-------- -------- ---------- ----------
44,134 38,040 123,435 81,144
======== ======== ========== ==========
Equity in (earnings) of affiliates:
Engineered Systems Group (382) (473) (1,236) (1,587)
York Refrigeration Group (301) (77) (1,062) (336)
Bristol Compressors (523) 109 (1,516) (467)
-------- -------- ---------- ----------
(1,206) (441) (3,814) (2,390)
======== ======== ========== ==========
Earnings before interest and taxes:
Engineered Systems Group 26,944 32,938 66,884 96,073
York Refrigeration Group 11,700 11,569 39,123 40,270
Unitary Products Group 18,724 14,978 34,566 52,500
Bristol Compressors (510) 4,800 29,606 39,442
General corporate expenses,
eliminations, and other non-allocated items (11,518) (11,070) (32,454) (41,490)
Charges and operating expenses -- (14,734) (10,476) (103,261)
Loss on divestiture -- (10,683) --
-------- -------- ---------- ----------
45,340 38,481 116,566 83,534
Interest expense, net 11,746 16,197 36,895 54,428
-------- -------- ---------- ----------
Income before income taxes and
cumulative effect of a change in
accounting principle 33,594 22,284 79,671 29,106
Provision (benefit) for income taxes 7,559 5,593 20,162 (11,407)
-------- -------- ---------- ----------
Income before cumulative effect of
a change in accounting principle $ 26,035 $ 16,691 $ 59,509 $ 40,513
======== ======== ========== ==========
12
Sept. 30, 2002 Dec. 31, 2001
--------------- ---------------
Total assets:
Engineered Systems Group $ 1,031,458 $ 1,049,536
York Refrigeration Group 778,298 917,541
Unitary Products Group 447,078 447,359
Bristol Compressors 252,649 270,943
Eliminations and other non-allocated assets (114,833) (112,870)
------------ -----------
$ 2,394,650 $ 2,572,509
============ ===========
(11) In 2000, we initiated a cost reduction process, which included plant
closures and divestitures, product line and facility rationalizations,
selling, general and administrative expense reductions and other
one-time costs. In 2001, we expanded the scope of the cost reduction
process to include additional plant closings and staff reductions. In
the nine months ended September 30, 2002, the nine months ended
September 30, 2001, and the three months ended September 30, 2001, we
recorded restructuring charges of $2.8 million, $74.8 million and $7.4
million, respectively, including $0.1 million, $13.8 million, and $3.5
million, respectively, charged to cost of goods sold, relating to the
cost reduction process. We incurred no similar charges in the three
months ended September 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
the severance of approximately 2,350 salary and wage employees
throughout the company. Detail of the activity in the nine months ended
September 30, 2002 is as follows:
Additional
Non-cash Accrual Accrual
Write-downs Established Utilized Reduction
in Nine in Nine in Nine in Nine
Remaining Months Months Months Months Remaining
Accruals at Ended Ended Ended Ended Accruals at
Dec. 31 Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 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 8,613 464 2,645
Contractual obligations 3,011 -- 5 879 6 2,131
Other 2,580 -- 658 1,144 -- 2,094
------- -------- -------- -------- ------- --------
$ 16,319 $ 1,631 $ 1,657 $ 10,636 $ 470 $ 6,870
======= ======== ======== ======== ======= ========
(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 Sept. 30, Nine Months Ended Sept. 30,
2002 2001 2002 2001
------- ------- --------- ---------
Net sales:
Engineered Systems Group $ 471,616 $ 478,607 $ 1,349,614 $ 1,436,897
York Refrigeration Group 222,879 226,959 643,260 672,987
Unitary Products Group 207,578 187,388 580,721 583,701
Bristol Compressors 97,509 102,910 417,163 433,733
Eliminations (52,808) (51,380) (158,359) (168,395)
------- ------- --------- ---------
Net sales $ 946,774 $ 944,484 $ 2,832,399 $ 2,958,923
======= ======= ========= =========
EBIT:
Engineered Systems Group $ 26,944 $ 32,938 $ 66,884 $ 96,073
York Refrigeration Group 11,700 11,569 39,123 40,270
Unitary Products Group 18,724 14,978 34,566 52,500
Bristol Compressors (510) 4,800 29,606 39,442
General corporate expenses,
eliminations, and other
non-allocated items (11,518) (11,070) (32,454) (41,490)
Charges and operating expenses -- (14,734) (10,476) (103,261)
Loss on divestiture -- -- (10,683) --
------- -------- --------- ---------
EBIT $ 45,340 $ 38,481 $ 116,566 $ 83,534
======= ======== ========= =========
Consolidated Operations
Net sales for the three months ended September 30, 2002 increased 0.2% to $946.8
million from $944.5 million for the same period in 2001. Increased sales of
residential unitary products and increased service revenues were partially
offset by reduced chiller shipments in North America and lower equipment sales
in Latin America. Net sales for the nine months ended September 30, 2002
decreased 4.3% to $2,832.4 million as compared to $2,958.9 million for the nine
months ended September 30, 2001. Reduced equipment sales in virtually all
markets except for China and North America residential products were somewhat
offset by service growth. (See further discussion below under Segment Analysis.)
For the three months ended September 30, 2002, net sales in the United States
increased 5.9% to $470.4 million and international net sales decreased 4.8% to
$476.4 million. Order backlog as of September 30, 2002 was $937.5 million
compared to $995.5 million as of September 30, 2001 and $852.0 million as of
December 31, 2001.
Gross profit increased 2.6% to $179.4 million (18.9% of net sales) in the three
months ended September 30, 2002 as compared to $174.8 million (18.5% of net
sales) in the same period of 2001. During the nine months ended September 30,
2002, gross profit decreased 3.3% to $542.2 million (19.1% of net sales) from
$560.6 million (18.9% of net sales) for the nine months ended September 30,
2001. Included in cost of goods sold for the nine months ended September 30,
2002 and the nine months ended September 30, 2001, were $0.1 million and $13.8
million, respectively, of restructuring charges, $6.8 million and $20.8 million,
respectively, of one-time costs related to cost reduction actions, and $0.8
million and $7.6 million, respectively, related to a discontinued product line.
In the three months ended September 30, 2001, $3.5 million of restructuring
charges and $7.4 million of one-time costs related
14
to cost reduction actions were included in cost of goods sold. We incurred no
similar charges in the three months ended September 30, 2002.
Excluding the charges discussed above, gross profit decreased 3.4% to $179.4
million (18.9% of net sales) in the three months ended September 30, 2002 from
$185.7 million (19.7% of net sales) in the same period of 2001. The decrease
resulted from lower equipment sales, competitive margin pressures, lower than
expected productivity resulting from a plant consolidation, production cost
overruns, and inventory variances. These were partially offset by increased
service margin and increased volume of residential unitary products. For the
nine months ended September 30, 2002, gross profit, excluding the charges
discussed above, decreased 8.8% to $550.0 million (19.4% of net sales) from
$602.8 million (20.4% of net sales) for the nine months ended September 30,
2001. Lower equipment volume, competitive margin pressures, and manufacturing
inefficiencies were primary contributors to the reduction.
Selling, general and administrative (SG&A) expense increased 1.8% to $135.3
million (14.3% of net sales) in the three months ended September 30, 2002 from
$132.9 million (14.1% of net sales) in the three months ended September 30,
2001. Increases resulting from higher legal, pension, 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 nine
months ended September 30, 2002, SG&A expense decreased 0.6% to $416.1 million
(14.7% of net sales) from $418.4 million (14.1% of net sales) for the same
period of 2001. In addition to the items which affected third quarter expense,
SG&A expense for the nine 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 2000, we initiated 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 2001, we expanded the scope of the cost
reduction process to include additional plant closings and staff reductions. In
the nine months ended September 30, 2002, the nine months ended September 30,
2001, and the three months ended September 30, 2001, we recorded charges to
operations of $9.6 million, $95.7 million, and $14.7 million, respectively,
related to these cost reduction actions, including the $6.9 million, $34.7
million, and $10.9 million, respectively, charged to cost of goods sold as
discussed above. We incurred no similar charges in the three months ended
September 30, 2002. The charges in the nine months ended September 30, 2002, the
nine months ended September 30, 2001, and the three months ended September 30,
2001 included $1.6 million, $27.6 million, and $0.9 million, respectively, in
write-downs of various assets and $1.2 million, $47.2 million, and $6.4 million,
respectively, in accruals for severance and other costs. 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 $1.2 million during the three months ended
September 30, 2002 as compared to $0.4 million during the three months ended
September 30, 2001. For the nine months ended September 30, 2002, equity in
earnings of affiliates was $3.8 million as compared to $2.4 million for the same
period of 2001. The increase was primarily the result of improved performance of
Scroll Technologies.
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 September 30, 2002, earnings before interest and
taxes (EBIT) increased 17.8% to $45.3 million (4.8% of net sales) from $38.5
million (4.1% of net sales) during the three months ended September 30, 2001.
During the nine months ended September 30, 2002, EBIT increased 39.5% to $116.6
million (4.1% of net sales) from $83.5 million (2.8% of net sales) during the
same period of 2001. Excluding the charges discussed above, EBIT decreased 14.8%
to $45.3 million (4.8% of net sales) in the three months ended September 30,
2002 compared to $53.2 million (5.6% of net sales) in the same period of 2001.
EBIT, excluding the charges discussed above and the loss on divestiture,
decreased 26.3% to $137.7 million (4.9% of net sales) in the nine months ended
September 30, 2002 as compared to $186.8 million (6.3% of net sales) in the same
period of 2001. (See further discussion below under Segment Analysis.)
Net interest expense in the three months ended September 30, 2002 was $11.7
million compared to $16.2 million in the same period of 2001. Net interest
expense in the nine months ended September 30, 2002 was $36.9 million compared
to $54.4 million in the nine months ended September 30, 2001. The decreases
resulted from lower average debt levels and lower interest rates.
15
The income tax provision of $7.6 million for the three months ended September
30, 2002 and $20.2 million for the nine months ended September 30, 2002 relates
to both U.S. and non-U.S. operations. The tax rate for ongoing operations was
22.5% for the first nine months of 2002 compared to 30.0% for the first nine
months of 2001. The tax rate improvement for ongoing operations was the result
of the impact of the adoption of SFAS No. 142, effective tax planning
strategies, and tax holidays.
Net income, as a result of the above factors, was $26.0 million during the three
months ended September 30, 2002 as compared to $16.7 million during the three
months ended September 30, 2001. For the nine months ended September 30, 2002,
net income, excluding the cumulative effect of a change in accounting principle,
was $59.5 million compared to $40.5 million for the same period of 2001.
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.
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 September 30, 2002 decreased 1.5% to
$471.6 million from $478.6 million for the same period in 2001. Net sales for
the nine months ended September 30, 2002 decreased 6.1% to $1,349.6 million as
compared to $1,436.9 million for the same period in 2001. An increase in service
revenues was more than offset by declines in equipment shipments in North
America, Latin America, and Europe.
EBIT for the three months ended September 30, 2002 decreased 18.2% to $26.9
million (5.7% of net sales) from $32.9 million (6.9% of net sales) for the same
period in 2001. EBIT was impacted by lower equipment volumes, pricing pressures,
higher legal costs, and continued investment in service infrastructure. In
addition, a $3.8 million charge relating to differences in a plant's inventory
records was recorded in the quarter. For the nine months ended September 30,
2002, EBIT decreased 30.4% to $66.9 million (5.0% of net sales) as compared to
$96.1 million (6.7% of net sales) for the same period in 2001. Lower equipment
volumes, pricing pressures, and higher costs negatively impacted the results.
York Refrigeration Group (YRG)
YRG net sales for the three months ended September 30, 2002 decreased 1.8% to
$222.9 million from $227.0 million for the same period in 2001. The reduction
resulted from reduced Latin America and Airside equipment sales, which were
partially offset by increased service and positive effects of foreign currency
translation. Net sales for the nine months ended September 30, 2002 decreased
4.4% to $643.3 million as compared to $673.0 million for the same period in
2001. In addition to the items which affected third quarter revenue, net sales
for the nine months were decreased by reduced shipments for petrochemical and
cruise ship applications.
EBIT for the three months ended September 30, 2002 increased 1.1% to $11.7
million (5.2% of net sales) as compared to $11.6 million (5.1% of net sales) for
the same period in 2001. Increased gross margin as a result of aftermarket
growth and strengthening currencies was offset by higher production costs and
higher medical costs in the U.S. For the nine months ended September 30, 2002,
EBIT decreased 2.8% to $39.1 million (6.1% of net sales) as compared to $40.3
million (6.0% of net sales) for the same period in 2001. The reduction in EBIT
was primarily attributed to lower volume and European job cost overruns on
specific large industrial contracts.
Unitary Products Group (UPG)
UPG net sales for the three months ended September 30, 2002 increased 10.8% to
$207.6 million from $187.4 million for the same period in 2001. Higher sales in
the U.S. residential market were partially offset by reduced sales
16
of manufactured housing products and reduced export volume. Net sales for the
nine months ended September 30, 2002 decreased 0.5% to $580.7 million as
compared to $583.7 million for the same period in 2001. In addition to the items
which affected third quarter revenue, net sales for the nine months were
negatively affected by continued softness in the light commercial market.
EBIT for the three months ended September 30, 2002 increased 25.0% to $18.7
million (9.0% of net sales) from $15.0 million (8.0% of net sales) for the same
period in 2001. The increase was primarily due to higher volume and improvements
in production and shipping costs, particularly relating to the Wichita facility.
For the nine months ended September 30, 2002, EBIT decreased 34.2% to $34.6
million (6.0% of net sales) as compared to $52.5 million (9.0% of net sales) for
the same period in 2001. EBIT decreased due to an unfavorable product mix, first
half manufacturing inefficiencies and a write-off of a $5.9 million receivable
related to a distributor that became insolvent during March 2002. The
unfavorable product mix is the result of a shift to lower margin light
commercial products. Manufacturing inefficiencies resulted from 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 September 30, 2002
decreased 5.2% to $97.5 million from $102.9 million for the same period in 2001.
The decline was due to lower shipments to North America unitary customers. Net
sales for the nine months ended September 30, 2002 decreased 3.8% to $417.2
million as compared to $433.7 million for the same period in 2001. Reduced
shipments, primarily of larger compressors, caused the decrease.
EBIT for the three months ended September 30, 2002 decreased 110.6% to $(0.5)
million (-0.5% of net sales) from $4.8 million (4.7% of net sales) for the same
period in 2001. For the nine months ended September 30, 2002, EBIT decreased
24.9% to $29.6 million (7.1% of net sales) as compared to $39.4 million (9.1% of
net sales) for the same period in 2001. Although Bristol benefited from improved
product designs with lower costs, margins were down due to the continued
decreases in larger applications and pricing pressure in the market place.
Bristol had a negative impact of order mix as high-margin large compressors used
in light commercial applications were down significantly, while the volume of
smaller units has grown. The third quarter was impacted by low productivity
levels resulting from the consolidation of products from the closure of the
Sparta, North Carolina facility.
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 decreased $49.5 million to $423.3 million as of September 30,
2002 as compared to $472.8 million as of December 31, 2001. The decrease
resulted from lower inventory levels and increases in accounts payable and
accrued expenses and income taxes. The current ratio was 1.53 as of September
30, 2002 as compared to 1.61 as of December 31, 2001.
Capital expenditures were $49.3 million for the nine months ended September 30,
2002 as compared to $65.4 million for the nine months ended September 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 and $0.45 per share were paid on common stock
in the three and nine months ended September 30, 2002, respectively. 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 $634.5 million as of September 30, 2002, primarily
consisting of $500.0 million of senior notes and $69.9 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%
17
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
September 30, 2002, it is expected that commercial paper will be issued to
redeem the $100 million senior notes due March 2003. Pursuant to our July 2001
registration statement, we may issue up to $100 million of additional debt
securities, the specific terms of which will be determined at the time of sale.
Commercial paper borrowings are expected to be reborrowed in the ordinary course
of business. The interest rate on the commercial paper was 1.90% as of September
30, 2002.
As of September 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
September 30, 2002, no amounts were outstanding under the Agreements.
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 September 30,
2002, the three-month LIBOR rate was 1.80%. 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 September 30, 2002.
We have additional domestic bank lines that provide for total borrowings of $100
million as of September 30, 2002 and December 31, 2001, of which $84.2 million
and $100.0 million, respectively, were unused. Our non-U.S. subsidiaries
maintain bank credit facilities in various currencies that provided for
available borrowings of $361.0 million and $386.3 million as of September 30,
2002 and December 31, 2001, respectively, of which $275.8 million and $276.1
million, respectively, were unused.
Pursuant to the terms of an annually renewable 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 administered asset-backed commercial paper vehicles. 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 September 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 September 30, 2002 and
December 31, 2001. The discount rate on the trade receivables sold was 1.81% and
2.00% as of September 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
September 30, 2002, our EBITDA interest coverage was 5.0, exceeding the minimum
requirement of 3.5. As of September 30, 2002, our debt to capital ratio was 46%,
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.
18
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 fourth quarter 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 fourth
quarter of 2001.
However, we expect these improvements to be fully offset by the impact of market
conditions and certain cost increases. We expect the negative economic impact in
the commercial air conditioning and refrigeration markets to continue during the
fourth quarter. 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 fourth quarter due to steel price increases. We
expect the continued softness in the commercial markets and the higher steel
prices to continue into 2003. We also expect additional increases in 2003 for
pension, insurance, and medical expenses.
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, litigation, and environmental considerations. 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.
Both YRG and ESG could be negatively impacted by reductions in commercial
construction. Our ability to effectively implement price increases to offset
higher costs is dependent on market conditions and the competitive environment.
The financial results of our foreign locations could be negatively impacted by
the translation effect of currency fluctuations on comprehensive income. 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, 2001 appears under the
captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations, Market Risk," on pages 10 to 11 of the Annual Financial
Statements and Review of Operations filed as Exhibit 13 to our Annual Report on
Form 10-K for the year ended December 31, 2001. There was no material change in
such information as of September 30, 2002.
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 day period prior to the date of this report, we carried
out an evaluation, under the supervision and with the participation of
company management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures are effective.
(b) Changes in Internal Controls
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to
the date of their evaluation.
19
PART II - OTHER INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1 LEGAL PROCEEDINGS
As discussed in our Form 10-Q filed August 13, 2002, in November 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,
alleged that two component parts of three models of chillers
manufactured by us infringe two patents held by American Standard. In
September 2002, a jury found that both patents were invalid, resulting
in a finding that we had no liability to American Standard. American
Standard has filed a post-trial motion asking the judge to overturn the
jury's finding of invalidity with respect to one of the patents. We do
not believe that any subsequent activities in this case will
significantly affect our financial position or future earnings.
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
Not Applicable
ITEM 5 OTHER INFORMATION
Not Applicable
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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) Reports on Form 8-K
On August 13, 2002, we filed a report on Form 8-K including the
sworn statements submitted to the SEC pursuant to Section 21
(a)(1) of the Securities Exchange Act of 1934 (order No. 4-460,
June 27, 2002)
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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
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Registrant
Date November 8, 2002 /S/ C. David Myers
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C. David Myers
Corporate Vice President and
Chief Financial Officer
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CERTIFICATIONS
I, MICHAEL R. YOUNG, Chief Executive Officer of York International Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of York International
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/S/ Michael R. Young
------------------------------------
Michael R. Young
Chief Executive Officer
22
I, C. DAVID MYERS, Chief Financial Officer of York International Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of York International
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
/S/ C. David Myers
-----------------------------------
C. David Myers
Chief Financial Officer
23