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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
COMMISSION FILE NUMBER 1-10863
YORK INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3473472
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
631 SOUTH RICHLAND AVENUE, YORK, PA 17403
(717) 771-7890
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 13, 2003
----- ---------------------------
Common Stock, par value $.005 39,655,465 shares
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - (unaudited)
Three Months Ended March 31, 2003 and 2002 3
Consolidated Condensed Balance Sheets -
March 31, 2003 (unaudited) and December 31, 2002 4
Consolidated Condensed Statements of Cash Flows - (unaudited)
Three Months Ended March 31, 2003 and 2002 5
Supplemental Notes to Consolidated Condensed
Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
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 MARCH 31,
------------------------------
2003 2002
--------- ---------
Net sales $ 868,357 $ 841,532
Cost of goods sold (708,257) (691,535)
--------- ---------
Gross profit 160,100 149,997
Selling, general, and administrative expenses (149,032) (140,582)
Restructuring and other charges, net (16,094) (2,730)
--------- ---------
(Loss) income from operations (5,026) 6,685
Interest expense, net (12,016) (12,713)
Loss on divestiture -- (10,683)
Equity in earnings of affiliates 1,088 570
--------- ---------
Loss before income taxes and cumulative effect
of a change in accounting principle (15,954) (16,141)
Benefit for income taxes 2,318 1,396
--------- ---------
Loss before cumulative effect of
a change in accounting principle (13,636) (14,745)
Cumulative effect of a change in accounting
principle -- (179,436)
--------- ---------
Net loss $ (13,636) $(194,181)
========= =========
Basic and diluted loss per share:
Loss before cumulative effect of
a change in accounting principle $ (0.34) $ (0.38)
Cumulative effect of a change in
accounting principle -- (4.57)
========= =========
Net loss $ (0.34) $ (4.95)
========= =========
Cash dividends per share $ 0.15 $ 0.15
========= =========
Weighted average common shares and common equivalents outstanding:
Basic and diluted 39,623 39,253
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)
MARCH 31, 2003 DECEMBER 31,
(UNAUDITED) 2002
-------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 49,705 $ 92,940
Receivables, net 637,154 627,067
Inventories
Raw material 143,077 126,227
Work in process 134,955 116,784
Finished goods 226,964 230,768
---------- ----------
Total inventories 504,996 473,779
Prepayments and other current assets 100,376 81,461
---------- ----------
Total current assets 1,292,231 1,275,247
Deferred income taxes 63,125 69,696
Investments in affiliates 29,981 29,389
Property, plant, and equipment, net 486,346 500,318
Goodwill 508,916 504,963
Intangibles, net 32,318 32,000
Deferred charges and other assets 97,079 94,509
---------- ----------
Total assets $2,509,996 $2,506,122
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 32,513 $ 32,709
Accounts payable and accrued expenses 786,281 768,748
Income taxes 31,518 37,202
---------- ----------
Total current liabilities 850,312 838,659
Long-term warranties 46,298 44,748
Long-term debt 616,770 618,224
Postretirement and postemployment benefits 250,608 244,522
Other long-term liabilities 74,686 77,155
---------- ----------
Total liabilities 1,838,674 1,823,308
Stockholders' equity 671,322 682,814
---------- ----------
Total liabilities and stockholders' equity $2,509,996 $2,506,122
========== ==========
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)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss $ (13,636) $(194,181)
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Cumulative effect of a change in accounting principle -- 179,436
Depreciation and amortization of property, plant, and equipment 16,326 14,911
Amortization of deferred charges and intangibles 882 743
Provision for doubtful receivables 2,859 7,604
Effect of non-cash charges 15,234 1,631
Loss on divestiture -- 10,683
Deferred income taxes 6,829 11,759
Loss on sale of fixed assets 262 1,992
Other (869) (120)
Change in assets and liabilities net of effects from
acquisitions and divestitures:
Receivables, net 18,951 (8,995)
Inventories (31,764) (1,482)
Prepayments and other current assets (18,180) (12,651)
Accounts payable and accrued expenses 16,069 (47,387)
Income taxes (5,461) 15,851
Other long-term assets and liabilities 2,250 (633)
--------- ---------
Net cash provided (used) by operating activities 9,752 (20,839)
--------- ---------
Cash flows from investing activities:
Purchases of other companies, net of cash acquired (325) (2,248)
Proceeds from divestiture, net -- 12,071
Capital expenditures (15,191) (16,252)
Proceeds from sale of fixed assets 95 10
--------- ---------
Net cash used by investing activities (15,421) (6,419)
--------- ---------
Cash flows from financing activities:
Net proceeds from short-term debt 990 838
Net proceeds of commercial paper borrowings -- 23,355
Proceeds from credit agreement 95,000 --
Payment of senior notes (100,000) --
Net proceeds (payments) on other long-term debt 3,394 (1,946)
Reduction in sale of receivables (31,000) --
Common stock issued 94 1,876
Treasury stock purchases (5) --
Dividends paid (5,948) (5,892)
--------- ---------
Net cash (used) provided by financing activities (37,475) 18,231
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (91) 26
--------- ---------
Net decrease in cash and cash equivalents (43,235) (9,001)
Cash and cash equivalents at beginning of period 92,940 39,434
--------- ---------
Cash and cash equivalents at end of period $ 49,705 $ 30,433
========= =========
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) FINANCIAL STATEMENTS
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 accounting
principles generally accepted in the United States of America have been
condensed or omitted. We believe that the information presented is not
misleading and the disclosures are adequate. In our opinion, our
consolidated condensed financial statements contain all adjustments
necessary to present fairly the financial position as of March 31, 2003
and December 31, 2002 and the results of operations and cash flows for the
three months ended March 31, 2003 and 2002. The results of operations for
interim periods are not necessarily indicative of the results expected for
the full year.
Effective January 1, 2003, we consolidated our former York Refrigeration
Group and Engineered Systems Group segments and reorganized management of
the combined business. Our new organization is being reported in three
groups, consisting of: Global Applied, Unitary Products Group, and Bristol
Compressors. The Global Applied business is comprised of three geographic
regions: the Americas; Europe, Middle East, and Africa (EMEA); and Asia.
(2) RECEIVABLES, NET
Pursuant to the terms of an annually renewable revolving facility, we sell
certain of our trade receivables to a wholly-owned, consolidated
subsidiary, York Receivables Funding LLC (YRFLLC). In turn, YRFLLC sells,
on a revolving basis, undivided ownership interest in the purchased trade
receivables to bank administered asset-backed commercial paper vehicles.
In April 2003, we amended the facility, reducing it from $175 million to
$150 million. We continue to service sold trade receivables. No servicing
asset or liability has been recognized as our cost to service sold trade
receivables approximates the servicing income.
In accordance with the facility, YRFLLC has sold $124 million and $155
million of an undivided interest in trade receivables as of March 31, 2003
and December 31, 2002, respectively. The proceeds from the sale were
reflected as a reduction of receivables in our consolidated condensed
balance sheets as of March 31, 2003 and December 31, 2002. The discount
rate on trade receivables sold was 1.28% and 1.40% as of March 31, 2003
and December 31, 2002, respectively.
(3) GOODWILL
On January 1, 2002 we adopted Statement of Financial Accounting Standards
(SFAS) No. 142, "Goodwill and Other Intangible Assets." Upon adoption, we
were required to perform a transitional goodwill impairment test as of
January 1, 2002. We completed the transitional goodwill impairment test
during the second quarter of 2002. The transitional impairment analysis
indicated an impairment existed in one of our reporting units. The
projected financial performance of the former York Refrigeration Group,
which included the entities acquired in the Sabroe acquisition, was
insufficient to support the related goodwill. We employed a third-party
appraisal firm to determine the fair value of the reporting unit as well
as the reporting unit's property, plant, and equipment and intangibles. As
a result, we recognized a non-cash transitional goodwill impairment charge
of $179.4 million. As required, the transitional goodwill impairment
charge was recorded as a cumulative effect of a change in accounting
principle in our consolidated condensed statement of operations as of
January 1, 2002.
6
The changes in the carrying amount of goodwill for the three months ended
March 31, 2003 by segment, are as follows (in thousands):
NET FOREIGN
BALANCE AS OF GOODWILL CURRENCY BALANCE AS OF
DEC. 31, 2002 ACQUIRED FLUCTUATION MARCH 31, 2003
------------- -------- ----------- --------------
Global Applied:
Americas $ 92,464 $ -- 82 $ 92,546
EMEA 107,873 (4) 2,812 110,681
Asia 107,873 1,027 $ 36 108,936
-------- -------- -------- --------
308,210 1,023 2,930 312,163
Unitary Products Group 140,440 -- -- 140,440
Bristol Compressors 56,313 -- -- 56,313
-------- -------- -------- --------
$504,963 $ 1,023 $ 2,930 $508,916
======== ======== ======== ========
(4) INTANGIBLES, NET
The following table summarizes the major intangible asset classes subject
to amortization included in our consolidated condensed balance sheets as
of March 31, 2003 and December 31, 2002 (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING
March 31, 2003 AMOUNT AMORTIZATION AMOUNT
- -------------- -------------- ------------ -------------
Trade names and trademarks $35,907 $ 4,877 $31,030
Other 2,097 809 1,288
------- ------- -------
$38,004 $ 5,686 $32,318
======= ======= =======
December 31, 2002
Trade names and trademarks $35,693 $ 4,375 $31,318
Other 1,448 766 682
------- ------- -------
$37,141 $ 5,141 $32,000
======= ======= =======
Amortization expense for trade names and trademarks and other intangible
assets for the three months ended March 31, 2003 and 2002 was $0.5 million
and $0.3 million, respectively.
The following table estimates the amount of amortization expense for trade
names and trademarks and other intangible assets for the remainder of 2003
and each of the fiscal years indicated (in thousands):
2003 (April 1 - December 31) $ 1,079
2004 1,430
2005 1,406
2006 1,404
2007 1,304
Thereafter 25,695
-------
$32,318
=======
7
(5) NOTES PAYABLE AND LONG-TERM DEBT
As of March 31, 2003 and December 31, 2002, our borrowings consisted of
senior notes and various other bank and term loans. In March 2003, we
amended our Five Year Credit Agreement and renewed our 364-Day Credit
Agreement at a $200 million level. We have available a $400 million Five
Year Credit Agreement, which expires on May 29, 2006, and a $200 million
364-Day Credit Agreement, which expires on March 13, 2004 (collectively,
the Agreements). As of December 31, 2002, we had available the $400
million Five Year Credit Agreement and a $300 million 364-Day Credit
Agreement. As of March 31, 2003, $95 million was outstanding under the
Agreements. No amounts were outstanding under the Agreements as of
December 31, 2002.
The $400 million Five Year Credit Agreement provides for borrowings at the
London InterBank Offering Rate (LIBOR) plus 1.175% or 1.375%, and the $200
million 364-Day Credit Agreement provides for borrowings at LIBOR plus
1.225% or 1.375%, based on the amount of facility utilization. We pay
annual fees of 0.20% on the $400 million facility and 0.15% on the $200
million facility. The Agreements allow for borrowings at specified bid
rates. As of March 31, 2003 and December 31, 2002, the three-month LIBOR
rate was 1.29% and 1.38%, 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 March 31, 2003 and December 31, 2002.
We have additional unused annually renewable domestic bank lines that
provide for total borrowings of up to $75 million and $50 million as of
March 31, 2003 and December 31, 2002, respectively. Our non-U.S.
subsidiaries maintain bank credit facilities in various currencies that
provide for total borrowings of $347.3 million and $384.5 million as of
March 31, 2003 and December 31, 2002, respectively. As of March 31, 2003
and December 31, 2002, $30.1 million and $28.4 million, respectively, were
outstanding under the non-U.S. facilities, with remaining availability of
$256.6 million and $282.5 million, respectively, after bank guarantee and
letters of credit usage.
Notes payable and long-term debt consist of (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
--------- ------------
Notes payable and current portion of long-term debt:
Bank loans (primarily foreign currency) $ 30,351 $ 29,361
Current portion of long-term debt 2,162 3,348
--------- ---------
Total $ 32,513 $ 32,709
========= =========
Long-term debt:
Domestic bank lines at an average rate of 2.01% in 2003 $ 4,800 $ --
Five Year Credit Agreement at an average rate of 2.35% in 2003 95,000 --
Senior notes, 6.75% interest, due March 2003 -- 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
Senior notes, 5.80% interest, due November 2012 100,000 100,000
Other (primarily foreign bank loans) at an average
rate of 6.61% in 2003 and 6.64% in 2002 19,132 21,572
--------- ---------
Total 618,932 621,572
Less current portion (2,162) (3,348)
--------- ---------
Noncurrent portion $ 616,770 $ 618,224
========= =========
8
(6) GUARANTEES
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others."
The interpretation elaborates on the disclosures to be made in our interim
and annual financial statements about obligations under certain
guarantees. Effective January 1, 2003, it requires us to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The interpretation did not have a
material impact to our consolidated condensed financial statements.
We issue various types of guarantees in the normal course of business. As
of March 31, 2003, we have the following guarantees outstanding (in
thousands):
Standby letters of credit and surety bonds $ 89,335
Performance guarantees 127,037
Commercial letters of credit 13,070
Guarantee of affiliate debt 30,000
Changes in our warranty liability for the three months ended March 31,
2003 are as follows (in thousands):
BALANCE PAYMENTS ACCRUALS FOR BALANCE
AS OF MADE UNDER WARRANTIES AS OF
DEC. 31, 2002 WARRANTIES ISSUED MARCH 31, 2003
- ---------------- ---------------- ---------------- ----------------
$87,940 $13,156 $15,684 $90,468
(7) 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 three months ended March 31, 2003, certain commodity hedges
were discontinued. The discontinuance of these cash flow hedges did not
result in any significant gains or losses. Recognized gains or losses for
the three months ended March 31, 2003 and 2002 as a result of the
discontinuance of currency cash flow hedges were immaterial.
Currency Rate Hedging
We manufacture and sell our products in a number of countries throughout
the world, and therefore, are exposed to movements in various currencies
against the U.S. dollar and against the currencies in which we
manufacture. Through our currency hedging activities, we seek to minimize
the risk that cash flows resulting from the sale of products, manufactured
in a currency different from the currency used by the selling subsidiary,
will be affected by changes in foreign currency exchange rates. Foreign
currency derivative instruments (forward contracts and purchased option
contracts) are matched to the underlying foreign currency exposures and
are executed to minimize foreign exchange transaction costs.
As of March 31, 2003, we forecasted that $0.4 million of net gains in
accumulated other comprehensive losses will be reclassified into earnings
within the next twelve months.
9
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 March 31, 2003, we forecasted that $0.5 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 March 31, 2003, we had interest rate swap contracts to pay variable
interest, based on the six-month LIBOR rate, and receive a fixed rate of
interest of 6.625% on a notional amount of $100 million. As of March 31,
2003, the fair value of these swap contracts was an unrealized gain of
$9.7 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 SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." As a result, there is no impact on current earnings
resulting from hedge ineffectiveness.
(8) COMPREHENSIVE LOSS
Comprehensive loss is determined as follows (in thousands):
THREE MONTHS ENDED MARCH 31,
------------------------------
2003 2002
--------- ---------
Net loss $ (13,636) $(194,181)
Other comprehensive income (loss):
Foreign currency translation adjustment 7,731 7,963
Cash flow hedges:
Reclassification adjustment, net of tax (611) 1,232
Net derivative income, net of tax 848 3,712
--------- ---------
Comprehensive loss $ (5,668) $(181,274)
========= =========
10
(9) STOCKHOLDERS' EQUITY
The following table summarizes our stockholders' equity as of March 31,
2003 and December 31, 2002 (in thousands, except per share data):
MARCH 31, DECEMBER 31,
2003 2002
--------- ---------
Common stock $.005 par value; 200,000 shares authorized;
issued 45,820 shares at March 31, 2003
and December 31, 2002 $ 229 $ 229
Additional paid-in capital 726,973 727,031
Retained earnings 307,592 327,176
Accumulated other comprehensive losses (134,376) (142,344)
Treasury stock, at cost; 6,165 shares at March 31, 2003
and 6,169 shares at December 31, 2002 (228,444) (228,591)
Unearned compensation (652) (687)
--------- ---------
Total stockholders' equity $ 671,322 $ 682,814
========= =========
(10) STOCK-BASED COMPENSATION
We apply the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for our stock-based
compensation plans. Accordingly, no compensation expense has been
recognized for the stock-based compensation plans other than for
restricted stock and performance-based awards. Had compensation expense
for all stock and employee stock purchase plans been determined based upon
the fair value at the grant date+ for awards under these plans consistent
with the methodology prescribed under SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended, our net loss and loss per share
would have been adjusted to the pro forma amounts as follows (in
thousands, except per share data):
THREE MONTHS ENDED MARCH 31,
----------------------------------
2003 2002
--------- ---------
Net loss - as reported $ (13,636) $(194,181)
Add: Stock-based employee compensation expense included in reported
net loss, net of related tax effects 22 12
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (2,190) (2,058)
--------- ---------
Pro forma net loss (15,804) (196,227)
========= =========
Basic and diluted loss per share
As reported (0.34) (4.95)
Pro forma (0.40) (5.00)
Pro forma net loss and loss per share reflect only stock options granted
after 1994. Therefore, the full impact of calculating compensation expense
under SFAS No. 123 for stock options is not reflected in the pro forma net
loss and loss per share amounts presented above because compensation
expense for stock options granted prior to January 1, 1995 is not
considered. Since the determination of fair value of all stock options
granted includes variable factors, including volatility, and additional
stock option grants are expected to be made each year, the above pro forma
disclosures are not representative of pro forma effects on reported net
income and earnings per share for future years.
11
(11) LOSS PER SHARE
Net loss as set forth in the consolidated condensed statements of
operations is used in the computation of basic and diluted loss per share.
Our basic and diluted loss per share is based upon the weighted average
common shares outstanding during the period. The computation of diluted
loss per share excludes non-vested restricted shares and stock options of
0.1 million and 0.6 million for the three months ended March 31, 2003 and
2002, respectively. These shares are excluded based on their antidilutive
effect as a result of our net loss for the three months ended March 31,
2003 and 2002.
(12) SEGMENT INFORMATION
Effective January 1, 2003, we consolidated our former York Refrigeration
Group and Engineered Systems Group segments and reorganized management of
the combined business. Our new organization is being reported in three
groups, consisting of: Global Applied, Unitary Products Group, and Bristol
Compressors. Prior year amounts were reclassified to conform to the
current presentation.
Global Applied produces and markets heating, ventilating, air
conditioning, and refrigeration equipment and provides maintenance and
service of equipment manufactured by us and by others. Types of equipment
include air-cooled and water-cooled chillers, central air handling units,
variable air volume units, screw and reciprocating compressors,
condensers, evaporators, heat exchangers, process refrigeration systems,
hygienic air distribution systems, gas compression systems, and control
equipment to monitor and control the entire system. Heating and air
conditioning solutions are provided for buildings ranging from small
office buildings and fast food restaurants to large commercial and
industrial complexes. Refrigeration systems are provided for industrial
applications in the food, beverage, chemical, and petroleum industries.
Cooling and refrigeration systems are also supplied for use on naval,
commercial, and passenger vessels. The Global Applied business is
comprised of three geographic regions: the Americas; Europe, Middle East,
and Africa; and Asia.
Unitary Products Group (UPG) produces heating and air conditioning
solutions for buildings ranging from private homes and apartments to small
commercial buildings. UPG products include ducted central air conditioning
and heating systems (air conditioners, heat pumps, and furnaces), ductless
mini-splits, and light commercial heating and cooling equipment.
Bristol Compressors (Bristol) manufactures reciprocating and scroll
compressors for our use and for sale to original equipment manufacturers
and wholesale distributors.
General corporate expenses and charges and other expenses are not
allocated to the individual segments for management reporting. General
corporate expenses include certain pension, medical, and insurance costs,
corporate administrative costs, and other corporate costs. Charges and
other expenses include restructuring and other charges, costs related to
cost reduction actions, and costs related to a discontinued product line.
12
The table below represents our operating results and assets by segment (in
thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------------
2003 2002
--------- ---------
Net sales:
Global Applied:
Americas $ 297,413 $ 303,614
EMEA 262,052 218,017
Asia 90,119 80,701
Intragroup sales (40,366) (33,854)
--------- ---------
609,218 568,478
Unitary Products Group 163,542 158,335
Bristol Compressors 137,562 155,956
Eliminations(1) (41,965) (41,237)
--------- ---------
868,357 841,532
========= =========
(1)Eliminations include the following
intersegment sales:
Global Applied 586 758
Unitary Products Group 12,689 13,399
Bristol Compressors 28,690 27,080
--------- ---------
Eliminations 41,965 41,237
========= =========
(Loss) income from operations:
Global Applied:
Americas (2,756) 3,326
EMEA 589 2,253
Asia 9,693 6,983
--------- ---------
7,526 12,562
Unitary Products Group 8,220 (2,440)
Bristol Compressors 11,329 16,335
General corporate expenses, eliminations, and
other non-allocated items (14,115) (9,296)
Charges and other expenses (17,986) (10,476)
--------- ---------
(5,026) 6,685
--------- ---------
Equity in earnings of affiliates:
Global Applied:
EMEA 415 386
Asia 196 160
--------- ---------
611 546
Bristol Compressors 477 24
--------- ---------
1,088 570
--------- ---------
Interest expense, net (12,016) (12,713)
--------- ---------
Loss on divestiture -- (10,683)
--------- ---------
Loss before income taxes and cumulative effect
of a change in accounting principle (15,954) (16,141)
Benefit for income taxes 2,318 1,396
--------- ---------
Loss before cumulative effect of
a change in accounting principle $ (13,636) $ (14,745)
========= =========
13
MARCH 31, 2003 DEC. 31, 2002
-------------- -------------
Total assets:
Global Applied:
Americas $ 674,868 $ 683,138
EMEA 820,650 831,662
Asia 322,226 337,303
Eliminations and other non-allocated assets (44,549) (51,570)
----------- -----------
1,773,195 1,800,533
Unitary Products Group 433,140 419,540
Bristol Compressors 287,616 264,111
Eliminations and other non-allocated assets 16,045 21,938
----------- -----------
$ 2,509,996 $ 2,506,122
=========== ===========
(13) CHARGES TO OPERATIONS
In July 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities."
The statement addresses financial accounting and reporting for costs
associated with exit or disposal activities initiated after December 31,
2002 and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Under the statement, we recognize liabilities at fair value for costs
associated with exit or disposal activities only when the liability is
incurred.
2003 Initiatives
In 2003, we initiated actions to further reduce our overall cost structure
and support the implementation of our new geographic organization. In
addition to cost reductions associated with the consolidation of our
former Engineered Systems Group and York Refrigeration Group segments,
additional actions include the further reduction of manufacturing
capacity, the elimination of certain product lines, and the exiting of
several small, non-core businesses. We expect all actions to be completed
by December 31, 2003.
In the three months ended March 31, 2003, we incurred costs by segment as
follows (in thousands):
Global Applied:
Americas $ 3,571
EMEA 12,345
Asia 2,070
-------
Total charges to operations, net 17,986
Charges reflected in cost of goods sold 1,892
-------
Restructuring and other charges, net $16,094
=======
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. Severance and other accruals included planned reductions in
workforce throughout the company.
2000 and 2001 Initiatives
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 costs.
In 2001, we expanded the scope of the cost reduction process to include
additional plant closings and staff reductions. In the three months ended
March 31, 2002, we recorded restructuring charges of $2.8 million,
including $0.1 million charged to cost of goods sold, relating to the cost
reduction process. As of December 31, 2002, all of the 2000 and 2001
actions were substantially complete. In the three months ended March 31,
2003, we incurred no restructuring charges related to the 2000 and 2001
initiatives.
14
Detail of activity relating to the 2003 initiatives and the 2000 and 2001
initiatives in the three months ended March 31, 2003 is as follows:
NON-CASH ACCRUALS
WRITE-DOWNS ESTABLISHED UTILIZED
IN THREE IN THREE IN THREE
MONTHS MONTHS MONTHS REMAINING
ENDED ACCRUALS AT ENDED ENDED ACCRUALS AT
MARCH 31, DEC. 31, MARCH 31, MARCH 31, MARCH 31,
(in thousands) 2003 2002 2003 2003 2003
------- ------- ------- ------- -------
Fixed asset write-downs $13,330 $ -- $-- $-- $--
Inventory write-downs 1,892 -- -- -- --
Other asset write-downs 12 -- -- -- --
Severance -- 1,469 2,737 2,083 2,123
Contractual obligations -- 1,654 15 41 1,628
Other -- 823 -- 28 795
------- ------- ------- ------- -------
$15,234 $ 3,946 $ 2,752 $ 2,152 $ 4,546
======= ======= ======= ======= =======
(14) ACQUISITIONS AND DIVESTITURES
In January 2002, we sold our air conditioning operations in Australia for
$12.1 million. The sale resulted in a loss of $10.7 million.
(15) NEW ACCOUNTING STANDARDS
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." The
consensus requires an approach to determine whether we should divide an
arrangement with multiple deliverables into separate units of accounting.
The consensus is effective for revenue arrangements entered into in fiscal
periods beginning after June 15, 2003, with earlier application permitted.
The transition provisions of the consensus allow us to apply the consensus
prospectively or as a cumulative effect of a change in accounting
principle. The impact the consensus will have on our consolidated
condensed financial statements has not been determined.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities," an
interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements." The interpretation addresses consolidation of
variable interest entities which have one or both of the following
characteristics: (1) the equity investment at risk is not sufficient to
permit the entity to finance its activities without additional
subordinated financial support from other parties, which is provided
through other interests that will absorb some or all of the expected
losses of the entity, or (2) the equity investors lack the essential
characteristics of a controlling financial interest. The interpretation
applies to variable interest entities created after January 31, 2003, and
to variable interest entities in which we obtain an interest after that
date. Beginning on July 1, 2003, it applies to variable interest entities
in which we hold a variable interest that we acquired prior to February 1,
2003. We may apply the interpretation by restating previously issued
financial statement for one or more years with a cumulative-effect
adjustment as of the beginning of the first year restated. The impact the
interpretation will have on our consolidated condensed financial
statements has not been determined.
15
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
CONSOLIDATED OPERATIONS
Net sales for the three months ended March 31, 2003 increased 3.2% to $868.4
million from $841.5 million for the same period in 2002. The favorable impact of
the strengthening Euro and increased sales in Asia and Unitary Products Group
were partially offset by lower shipment levels at Bristol Compressors. (See
further discussion below under Segment Analysis.) For the three months ended
March 31, 2003, net sales in the United States decreased 3.2% to $410.9 million
and international net sales increased 9.6% to $457.5 million. Order backlog as
of March 31, 2003 was $1,015.1 million compared to $961.5 million as of March
31, 2002 and $876.0 million as of December 31, 2002.
Gross profit increased 6.7% to $160.1 million (18.4% of net sales) in the three
months ended March 31, 2003 as compared to $150.0 million (17.8% of net sales)
in the same period of 2002. Gross profit increased due to improvements in
production efficiency at the Unitary Products Group Wichita facility, reductions
in operating expenses relating to the Wichita and Sparta relocations, and the
impact of the strengthening Euro. These increases were partially offset by
margin reductions as a result of reduced volumes and increased production costs
at Bristol Compressors, and reduced equipment sales in the Americas.
Selling, general, and administrative (SG&A) expense increased 6.0% to $149.0
million (17.2% of net sales) in the three months ended March 31, 2003 from
$140.6 million (16.7% of net sales) in the three months ended March 31, 2002.
Increases resulted from the effect of strengthening European currencies and
higher pension, medical, and insurance costs. SG&A expense for the three months
ended March 31, 2002 included a write-off of a $5.9 million receivable related
to a Unitary Products Group distributor that became insolvent.
In 2003, we initiated actions to further reduce our overall cost structure and
support the implementation of our new geographic organization. In addition to
cost reductions associated with the consolidation of our former Engineered
Systems Group and York Refrigeration Group segments, additional actions include
the further reduction of manufacturing capacity, the elimination of certain
product lines, and the exiting of several small, non-core businesses. In the
three months ended March 31, 2003, we recorded restructuring charges of $18.0
million relating to these actions, including $1.9 million charged to cost of
goods sold. The charges in the three months ended March 31, 2003 included $15.2
million in write-downs of various assets and $2.8 million in accruals for
severance and other costs.
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 costs. In 2001, we expanded the scope of the cost
reduction process to include additional plant closings and staff reductions. In
the three months ended March 31, 2002, we recorded charges to operations of $2.8
million related to these cost reduction actions, including $0.1 million charged
to cost of goods sold. The charges in the three months ended March 31, 2002
included $1.6 million in write-downs of various assets and $1.2 million in
accruals for severance and other costs. As of December 31, 2002, all of the 2000
and 2001 actions were substantially complete.
During the three months ended March 31, 2003, (loss) income from operations
decreased to a loss of $5.0 million (-0.6% of net sales) from income of $6.7
million (0.8% of net sales) during the three months ended March 31, 2002. (See
further discussion below under Segment Analysis.)
Net interest expense in the three months ended March 31, 2003 was $12.0 million
compared to $12.7 million in the same period of 2002. The decreases resulted
from lower average debt levels offset by slightly higher interest rates
resulting from a larger percentage of fixed rate debt.
In January 2002, we sold our air conditioning operations in Australia for $12.1
million. The sale resulted in a loss of $10.7 million.
16
Equity in earnings of affiliates was $1.1 million during the three months ended
March 31, 2003 as compared to $0.6 million during the three months ended March
31, 2002. The increase was primarily the result of improved performance of
Scroll Technologies.
The income tax benefit of $2.3 million for the three months ended March 31, 2003
and $1.4 million for the three months ended March 31, 2002 relates to both U.S.
and non-U.S. operations. The effective tax rate was a benefit of 14.5% in the
three months ended March 31, 2003 as compared to 8.6% in the three months ended
March 31, 2002. The increased benefit resulted from the tax effect of the
divestiture in 2002, partially offset by tax benefits associated with specific
restructuring actions.
Loss before cumulative effect of a change in accounting principle, as a result
of the above factors, was $13.6 million during the three months ended March 31,
2003 as compared to $14.7 million during the three months ended March 31, 2002.
Upon adoption of Statement of Financial Accounting Standards 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
$179.4 million. 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 following table sets forth net sales and (loss) income from operations by
segment (in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------------
2003 2002
--------- ---------
Net sales:
Global Applied:
Americas $ 297,413 $ 303,614
Europe, Middle East, and Africa 262,052 218,017
Asia 90,119 80,701
Intragroup sales (40,366) (33,854)
--------- ---------
609,218 568,478
Unitary Products Group 163,542 158,335
Bristol Compressors 137,562 155,956
Eliminations (41,965) (41,237)
--------- ---------
Net sales $ 868,357 $ 841,532
========= =========
(Loss) income from operations:
Global Applied:
Americas $ (2,756) $ 3,326
Europe, Middle East, and Africa 589 2,253
Asia 9,693 6,983
--------- ---------
7,526 12,562
Unitary Products Group 8,220 (2,440)
Bristol Compressors 11,329 16,335
General corporate expenses, eliminations, and
other non-allocated items (14,115) (9,296)
Charges and other expenses (17,986) (10,476)
--------- ---------
(Loss) income from operations $ (5,026) $ 6,685
========= =========
Global Applied
Global Applied net sales for the three months ended March 31, 2003 increased
7.2% to $609.2 million from $568.5 million for the same period in 2002. Europe,
Middle East, and Africa (EMEA) revenue increased due to the strengthening Euro,
and Asian equipment sales increased due to continued growth in China. These
increases were partially offset by the weak commercial market in the Americas.
Global Applied service revenue increased 15.2% to $225.6 million in the three
months ended March 31, 2003 from $195.9 million in the three months ended March
31, 2002.
17
Global Applied income from operations for the three months ended March 31, 2003
decreased 40.1% to $7.5 million (1.2% of net sales) from $12.6 million (2.2% of
net sales) for the same period in 2002. Reduced margins resulting from lower
equipment volume in the Americas and significant pricing pressure in the large
equipment market were partially offset by improved operating costs and higher
volume in Asia. Expenses also increased as a result of the strengthening Euro,
increased pension, medical, and insurance costs, and continued investments in
service infrastructure, information technology capabilities, and product
development.
Unitary Products Group (UPG)
UPG net sales for the three months ended March 31, 2003 increased 3.3% to $163.5
million from $158.3 million for the same period in 2002. Pricing increases and
increased shipments of residential products were partially offset by lower
commercial and manufactured housing product shipments.
UPG income (loss) from operations for the three months ended March 31, 2003
increased to income of $8.2 million (5.0% of net sales) from a loss of $2.4
million (-1.5% of net sales) for the same period in 2002. The loss in the three
months ended March 31, 2002 included a write-off of a $5.9 million receivable
related to a distributor that became insolvent. In addition, better results in
the three months ended March 31, 2003 resulted from improvements in production
efficiency and shipping costs, partially offset by increasing steel costs.
Bristol Compressors (Bristol)
Bristol net sales for the three months ended March 31, 2003 decreased 11.8% to
$137.6 million from $156.0 million for the same period in 2002. The volume
decline relates primarily to the timing of original equipment manufacturer (OEM)
orders and the impact of OEM's continuing to drive further inventory reductions,
both internationally and with North American unitary market customers.
Bristol income from operations for the three months ended March 31, 2003
decreased 30.6% to $11.3 million (8.2% of net sales) from $16.3 million (10.5%
of net sales) for the same period in 2002. Reduced volume and lower productivity
levels resulting from the integration of products from the Sparta facility
negatively impacted results. Although productivity has improved from the second
half of 2002, costs in the three months ended March 31, 2003 were higher than in
the three months ended March 31, 2002.
Other
General corporate expenses, eliminations, and other non-allocated items
increased $4.8 million to $14.1 million for the three months ended March 31,
2003 as compared to $9.3 million for the same period in 2002. The increase was
primarily due to increases in pension expense and insurance and medical costs.
Charges and other expenses for the three months ended March 31, 2003 were $18.0
million as compared to $10.5 million for the same period in 2002. In the three
months ended March 31, 2003, we recorded restructuring charges of $18.0 million
relating to the 2003 restructuring initiatives, including $1.9 million charged
to cost of goods sold. We recorded restructuring charges of $2.8 million,
including $0.1 million charged to cost of goods sold, in the three months ended
March 31, 2002. Also, included in cost of goods sold for the three months ended
March 31, 2002, were $3.8 million and $3.0 million of costs relating to the UPG
and Bristol plant consolidations, respectively, and $0.8 million relating to a
UPG discontinued product line.
18
Charges and other expenses by segment are as follows (in thousands):
THREE MONTHS ENDED MARCH 31,
-------------------------------
2003 2002
-------- --------
Global Applied:
Americas $ 3,571 $ 262
EMEA 12,345 (205)
Asia 2,070 445
Unitary Products Group -- 7,035
Bristol Compressors -- 2,939
-------- --------
$ 17,986 $ 10,476
======== ========
LIQUIDITY AND CAPITAL RESOURCES
Working capital requirements are generally met through a combination of
internally generated funds, bank lines of credit, 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 $5.3 million to $441.9 million as of March 31, 2003 as
compared to $436.6 million as of December 31, 2002. The increase resulted from
higher inventory levels and increases in prepayments and other current assets,
partially offset by a decrease in cash and cash equivalents. The current ratio
was 1.52 as of March 31, 2003 and December 31, 2002.
Capital expenditures were $15.2 million in the three months ended March 31, 2003
as compared to $16.3 million in the three months ended March 31, 2002. Capital
expenditures currently anticipated for information system improvements, cost
reductions, and the introduction of new products during 2003 are expected to be
slightly in excess of depreciation and amortization.
Cash dividends of $0.15 per share were paid on common stock in the three months
ended March 31, 2003. 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 $649.3 million as of March 31, 2003, primarily consisting
of $500 million of senior notes and $95 million under our Five Year Credit
Agreement. The senior notes mature at dates ranging from 2006 to 2012 and carry
fixed rates ranging from 5.80% to 6.70%.
We have available a $400 million Five Year Credit Agreement, which expires on
May 29, 2006, and a $200 million 364-Day Credit Agreement, which expires on
March 13, 2004 (collectively, the Agreements). As of December 31, 2002, we had
available the $400 million Five Year Credit Agreement and a $300 million 364-Day
Credit Agreement. As of March 31, 2003, $95 million was outstanding under the
Agreements. No amounts were outstanding under the Agreements as of December 31,
2002.
The $400 million Five Year Credit Agreement provides for borrowings at the
London InterBank Offering Rate (LIBOR) plus 1.175% or 1.375%, and the $200
million 364-Day Credit Agreement provides for borrowings at LIBOR plus 1.225% or
1.375%, based on the amount of facility utilization. We pay annual fees of 0.20%
on the $400 million facility and 0.15% on the $200 million facility. The
Agreements allow for borrowings at specified bid rates. As of March 31, 2003 and
December 31, 2002, the three-month LIBOR rate was 1.29% and 1.38%, 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 March 31, 2003 and December 31,
2002.
We have additional unused annually renewable domestic bank lines that provide
for total borrowings of up to $75 million and $50 million as of March 31, 2003
and December 31, 2002, respectively. Our non-U.S. subsidiaries maintain bank
credit facilities in various currencies that provide for total borrowings of
$347.3 million and $384.5 million as of March 31, 2003 and December 31, 2002,
respectively. As of March 31, 2003 and December 31, 2002, $30.1 million and
$28.4 million, respectively, were outstanding under the non-U.S. facilities,
with remaining availability of $256.6 million and $282.5 million, respectively,
after bank guarantee and letters of credit usage.
19
Pursuant to the terms of an annually renewable revolving facility, we sell
certain of our trade receivables to a wholly-owned, consolidated subsidiary,
York Receivables Funding LLC (YRFLLC). In turn, YRFLLC sells, on a revolving
basis, undivided ownership interest in the purchased trade receivables to bank
administered asset-backed commercial paper vehicles. In April 2003, we amended
the facility, reducing it from $175 million to $150 million. We continue to
service sold trade receivables. No servicing asset or liability has been
recognized as our cost to service sold trade receivables approximates the
servicing income.
In accordance with the facility, YRFLLC has sold $124 million and $155 million
of an undivided interest in trade receivables as of March 31, 2003 and December
31, 2002, respectively. The proceeds from the sale were reflected as a reduction
of receivables in our consolidated condensed balance sheets as of March 31, 2003
and December 31, 2002. The discount rate on trade receivables sold was 1.28% and
1.40% as of March 31, 2003 and December 31, 2002, 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 additional bank lines support seasonal working capital needs and
are available for general corporate purposes.
We have access to bank lines of credit and have the ability to borrow under the
Agreements as long as we continue to meet the financial covenants or until
expiration of the Agreements. The primary financial covenants are the earnings
before interest, taxes, and depreciation and amortization (EBITDA) interest
coverage and the debt to capital ratio, as defined under the Agreements. As of
March 31, 2003, our EBITDA interest coverage was 4.9, exceeding the minimum
requirement of 3.5. As of March 31, 2003, our debt to capital ratio was 45%,
below the maximum allowed of 52%.
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
Given the current economic and political environments, we expect weak commercial
equipment markets to continue to affect results for the remainder of 2003, with
pricing and margin levels remaining consistent with 2002. We anticipate that the
U.S. unitary market will be at volume levels similar to 2002. We expect to
realize further benefits from prior year cost reduction actions and continued
growth in our service businesses. Externally driven cost increases in pension
expense and insurance and medical costs and escalating steel prices will
substantially offset the benefits expected to be realized from service growth
and cost reductions. Furthermore, we are in the process of implementing
additional actions to improve long-term performance, which will result in
significant implementation costs and impairment charges. In addition to cost
reductions associated with the announced organizational changes, actions include
further reduction of manufacturing capacity, elimination of certain product
lines, and closure of several small, non-core businesses. We expect these
actions to result in total costs of approximately $110 million. We expect
continued debt reduction in 2003, although further working capital reductions
will be limited.
NEW ACCOUNTING STANDARDS
In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." The statement addresses financial accounting and
reporting for costs associated with exit or disposal activities initiated after
December 31, 2002 and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Under the statement, we will recognize liabilities at fair value for costs
associated with exit or disposal activities only when the liability is incurred.
In November 2002, the Financial Accounting Standards Board issued Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." The interpretation
elaborates on the disclosures to be made in our interim and annual financial
statements about obligations under certain guarantees. Effective January 1,
2003, it requires us to recognize, at the inception of a guarantee, a liability
for the fair value
20
of the obligation undertaken in issuing the guarantee. The interpretation did
not have a material impact on our consolidated condensed financial statements.
In November 2002, the Emerging Issues Task Force reached a consensus on Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus
requires an approach to determine whether we should divide an arrangement with
multiple deliverables into separate units of accounting. The consensus is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003, with earlier application permitted. The transition
provisions of the consensus allow us to apply the consensus prospectively or as
a cumulative effect of a change in accounting principle. The impact the
consensus will have on our consolidated condensed financial statements has not
been determined.
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities," an interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." The
interpretation addresses consolidation of variable interest entities which have
one or both of the following characteristics: (1) the equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated financial support from other parties, which is provided
through other interests that will absorb some or all of the expected losses of
the entity, or (2) the equity investors lack the essential characteristics of a
controlling financial interest. The interpretation applies to variable interest
entities created after January 31, 2003, and to variable interest entities in
which we obtain an interest after that date. Beginning on July 1, 2003, it
applies to variable interest entities in which we hold a variable interest that
we acquired prior to February 1, 2003. We may apply the interpretation by
restating previously issued financial statement for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated. The
impact the interpretation will have on our consolidated condensed financial
statements has not been determined.
FORWARD-LOOKING INFORMATION - RISK FACTORS
This document contains statements which, to the extent they are not statements
of historical or present fact, constitute "forward-looking statements" under the
securities laws. From time to time, oral or written forward-looking statements
may also be included in other materials released to the public. These
forward-looking statements are intended to provide our current expectations or
plans for future operating and financial performance based on assumptions
currently believed to be valid.
To the extent we have made "forward-looking statements," certain risk factors
could cause actual results to differ materially from those anticipated in such
forward-looking statements including, but not limited to competition, government
regulation, litigation, work stoppages, environmental considerations, and the
successful implementation of our cost reduction initiatives. Unseasonably cool
weather in various parts of the world could adversely affect our UPG and Global
Applied air conditioning businesses and, similarly, the Bristol Compressor
business. Bristol is also dependent on the successful development and
introduction of new products. The Global Applied air conditioning business could
also be affected by a further slowdown in the large chiller market and by the
acceptance of new product introductions. Global Applied could be negatively
impacted by reductions in commercial construction. Our ability to effectively
implement price increases to offset higher costs is dependent on market
conditions and the competitive environment. The financial position and financial
results of our foreign locations could be negatively impacted by the translation
effect of currency fluctuations and by political changes including
nationalization or expropriation of assets. In addition, our overall performance
could be affected by declining worldwide economic conditions or slowdowns
resulting from world events, including the potential impact of Severe Acute
Respiratory Syndrome (SARS).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information responsive to this item as of December 31, 2002 appears under the
captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations, Market Risk," on pages 9 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, 2002. There was no material change in
such information as of March 31, 2003.
21
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.
22
PART II - OTHER INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
As discussed in our Form 10-K filed March 7, 2003, 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 filed a post-trial motion asking the judge to
overturn the jury's finding of invalidity with respect to one of the
patents. On December 18, 2002, the judge denied American Standard's
motion. The judge also awarded us costs in the amount of $0.1 million and
reasonable attorneys' fees for defending the matter, which were not
quantified at that time. On April 1, 2003, the judge awarded us $1.3
million as reimbursement for legal fees and amended the original judgment
to hold additional claims of both patents invalid. Although American
Standard can appeal the judge's rulings, we do not believe that any
subsequent activities in this case will have a significant negative effect
on 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 4.1 - 364-DAY CREDIT agreement, dated as of March 14, 2003,
among YORK INTERNARIONAL CORPORATION, as borrower, the initial
lenders named therein, as initial lenders, CITIBANK, N.A., as
administrative agent, JPMORGAN CHASE BANK, as syndication agent,
BANK OF TOKYO-MITSUBISHI TRUST COMPANY, FLEET NATIONAL BANK, and
NORDEA BANK FINLAND PLC, as documentation agents, and SALOMON SMITH
BARNEY INC. and J.P. MORGAN SECURITIES, INC., as joint lead
arrangers and joint bookrunners
Exhibit 4.2 - AMENDMENT NO. 2 TO THE FIVE YEAR CREDIT AGREEMENT,
dated as of March 14, 2003, among York International Corporation,
the lenders named therein, as lenders, and Citibank, N.A., as
administrative agent for the lenders
23
Exhibit 4.3 - AMENDMENT NO. 1 TO RECEIVABLES PURCHASE AGREEMENT,
dated as of April 21, 2003, among YORK RECEIVABLES FUNDING LLC, YORK
INTERNATIONAL CORPORATION, as servicer, THE MEMBERS OF VARIOUS
PURCHASE GROUPS FROM TIME TO TIME PARTY THERETO, and PNC BANK,
NATIONAL ASSOCIATION, as administrator
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 April 23, 2003, we furnished a Current Report on Form 8-K dated
April 17, 2003, containing a press release, dated April 17, 2003,
providing new segment information that corresponds to the January 1,
2003 realignment of our operations and a press release, dated April
23, 2003, setting forth our first quarter 2003 results.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned unto duly authorized.
YORK INTERNATIONAL CORPORATION
------------------------------
Registrant
Date May 13, 2003 /S/ C. David Myers
----------------------------- -----------------------------------
C. David Myers
Executive Vice President and
Chief Financial Officer
25
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: May 13, 2003
/S/ Michael R. Young
---------------------------------------
Michael R. Young
President and Chief Executive Officer
26
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: May 13, 2003
/S/ C. David Myers
---------------------------------------
C. David Myers
Executive Vice President and
Chief Financial Officer
27