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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 July 31, 2003
----- ----------------------------
Common Stock, par value $.005 39,736,065 shares
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - (unaudited)
Three Months and Six Months Ended June 30, 2003 and 2002 3
Consolidated Condensed Balance Sheets -
June 30, 2003 (unaudited) and December 31, 2002 4
Consolidated Condensed Statements of Cash Flows - (unaudited)
Six Months Ended June 30, 2003 and 2002 5
Notes to Consolidated Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
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 24
Signatures 25
Exhibit Index 26
2
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Statements of Operations (unaudited)
(in thousands, except per share data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 1,084,417 $ 1,044,093 $ 1,952,774 $ 1,885,625
Cost of goods sold (858,053) (831,242) (1,566,310) (1,522,777)
----------- ----------- ----------- -----------
Gross profit 226,364 212,851 386,464 362,848
Selling, general, and administrative expenses (156,796) (140,235) (305,828) (280,817)
Restructuring and other charges, net (33,060) -- (49,154) (2,730)
----------- ----------- ----------- -----------
Income from operations 36,508 72,616 31,482 79,301
Interest expense, net (12,115) (12,436) (24,131) (25,149)
Loss on divestiture -- -- -- (10,683)
Equity in earnings of affiliates 2,477 2,038 3,565 2,608
----------- ----------- ----------- -----------
Income before income taxes and
cumulative effect of a change
in accounting principle 26,870 62,218 10,916 46,077
Provision for income taxes (7,664) (13,999) (5,346) (12,603)
----------- ----------- ----------- -----------
Income before cumulative effect of
a change in accounting principle 19,206 48,219 5,570 33,474
Cumulative effect of a change in accounting
principle -- -- -- (179,436)
----------- ----------- ----------- -----------
Net income (loss) $ 19,206 $ 48,219 $ 5,570 $ (145,962)
=========== =========== =========== ===========
Basic earnings (loss) per share:
Income before cumulative effect of
a change in accounting principle $ 0.48 $ 1.23 $ 0.14 $ 0.85
Cumulative effect of a change in
accounting principle -- -- -- (4.56)
----------- ----------- ----------- -----------
Net income (loss) $ 0.48 $ 1.23 $ 0.14 $ (3.71)
=========== =========== =========== ===========
Diluted earnings (loss) per share:
Income before cumulative effect of
a change in accounting principle $ 0.48 $ 1.21 $ 0.14 $ 0.84
Cumulative effect of a change in
accounting principle -- -- -- (4.49)
----------- ----------- ----------- -----------
Net income (loss) $ 0.48 $ 1.21 $ 0.14 $ (3.65)
=========== =========== =========== ===========
Cash dividends per share $ 0.15 $ 0.15 $ 0.30 $ 0.30
=========== =========== =========== ===========
Weighted average common shares and common equivalents outstanding:
Basic 39,631 39,362 39,594 39,309
Diluted 39,861 39,998 39,748 39,955
See accompanying notes to consolidated condensed financial statements.
3
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(in thousands)
JUNE 30, 2003 DECEMBER 31,
(UNAUDITED) 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 41,192 $ 92,940
Receivables, net 696,524 627,067
Inventories
Raw material 147,271 126,227
Work in process 145,410 116,784
Finished goods 229,900 230,768
---------- ----------
Total inventories 522,581 473,779
Prepayments and other current assets 114,282 81,461
---------- ----------
Total current assets 1,374,579 1,275,247
Deferred income taxes 60,380 69,696
Investments in affiliates 28,391 29,389
Property, plant, and equipment, net 502,090 500,318
Goodwill 527,012 504,963
Intangibles, net 33,595 32,000
Deferred charges and other assets 101,397 94,509
---------- ----------
Total assets $2,627,444 $2,506,122
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 32,240 $ 32,709
Accounts payable and accrued expenses 855,836 768,748
Income taxes 36,082 37,202
---------- ----------
Total current liabilities 924,158 838,659
Long-term warranties 47,497 44,748
Long-term debt 588,976 618,224
Postretirement and postemployment benefits 256,084 244,522
Other long-term liabilities 74,564 77,155
---------- ----------
Total liabilities 1,891,279 1,823,308
Stockholders' equity 736,165 682,814
---------- ----------
Total liabilities and stockholders' equity $2,627,444 $2,506,122
========== ==========
See accompanying notes to consolidated condensed financial statements.
4
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (unaudited)
(in thousands)
SIX MONTHS ENDED JUNE 30,
2003 2002
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 5,570 $(145,962)
Adjustments to reconcile net income (loss) 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 33,288 30,217
Amortization of deferred charges and intangibles 1,764 1,358
Provision for doubtful receivables 7,038 8,849
Effect of non-cash charges 31,185 1,631
Loss on divestiture -- 10,683
Deferred income taxes 9,699 13,233
Loss on sale of fixed assets 1,094 1,201
Other (1,709) (179)
Change in assets and liabilities net of effects from
acquisitions and divestitures:
Receivables, net (68,380) (92,871)
Inventories (49,730) 13,855
Prepayments and other current assets (31,478) (23,893)
Accounts payable and accrued expenses 92,939 49,358
Income taxes (1,074) 23,758
Other long-term assets and liabilities 4,917 2,361
--------- ---------
Net cash provided by operating activities 35,123 73,035
--------- ---------
Cash flows from investing activities:
Purchases of other companies, net of cash acquired (3,160) (2,248)
Proceeds from divestiture, net -- 12,071
Capital expenditures (35,916) (35,915)
(Payments) proceeds from sale of fixed assets (163) 4,699
--------- ---------
Net cash used by investing activities (39,239) (21,393)
--------- ---------
Cash flows from financing activities:
Net (payments) proceeds from short-term debt (245) 1,729
Net payments of commercial paper borrowings -- (29,305)
Net proceeds from credit agreement 20,000 --
Payment of senior notes (100,000) --
Net proceeds (payments) on other long-term debt 49,621 (16,732)
Net reduction in sale of receivables (5,000) --
Common stock issued 322 6,163
Treasury stock purchases (5) (30)
Dividends paid (11,904) (11,809)
--------- ---------
Net cash used by financing activities (47,211) (49,984)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (421) (288)
--------- ---------
Net (decrease) increase in cash and cash equivalents (51,748) 1,370
Cash and cash equivalents at beginning of period 92,940 39,434
--------- ---------
Cash and cash equivalents at end of period $ 41,192 $ 40,804
========= =========
See accompanying notes to consolidated condensed financial statements.
5
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
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 our financial position as of June 30, 2003
and December 31, 2002, our results of operations for the three and six
months ended June 30, 2003 and 2002, and our cash flows for the six
months ended June 30, 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 $150 million and $155
million of an undivided interest in trade receivables as of June 30,
2003 and December 31, 2002, respectively, resulting in a reduction of
receivables reflected in our consolidated condensed balance sheets. The
discount rate on trade receivables sold was 1.02% and 1.40% as of June
30, 2003 and December 31, 2002, respectively. The program fee on trade
receivables sold was 0.50% and 0.338% as of June 30, 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 six months ended
June 30, 2003 by segment, are as follows (in thousands):
NET FOREIGN
BALANCE AS OF GOODWILL CURRENCY BALANCE AS OF
DEC. 31, 2002 ACQUIRED FLUCTUATION JUNE 30, 2003
------------- -------- ----------- -------------
Global Applied:
Americas $ 92,464 $ -- $ 4,622 $ 97,086
EMEA 107,873 49 12,585 120,507
Asia 107,873 1,027 3,766 112,666
---------- -------- --------- ----------
308,210 1,076 20,973 330,259
Unitary Products Group 140,440 -- -- 140,440
Bristol Compressors 56,313 -- -- 56,313
---------- -------- --------- ----------
$ 504,963 $ 1,076 $ 20,973 $ 527,012
========== ======== ========= ==========
(4) INTANGIBLES, NET
The following table summarizes the major intangible asset classes
subject to amortization included in our consolidated condensed balance
sheets as of June 30, 2003 and December 31, 2002 (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
June 30, 2003
Trade names and trademarks $ 37,602 $ 5,304 $ 32,298
Other 2,252 955 1,297
--------- --------- ---------
$ 39,854 $ 6,259 $ 33,595
========= ========= =========
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 and six months ended June 30, 2003 was
$0.5 million and $0.9 million, respectively. For the three and six
months ended June 30, 2002, amortization expense for trade names and
trademarks and other intangible assets was $0.3 million and $0.6
million, respectively.
The following table estimates the amount of amortization expense for
trade names and trademarks and other intangible assets for the
remainder of 2003 and each of the fiscal years indicated (in
thousands):
2003 (July 1 - December 31) $ 777
2004 1,532
2005 1,507
2006 1,505
2007 1,405
Thereafter 26,869
---------
$ 33,595
=========
7
(5) NOTES PAYABLE AND LONG-TERM DEBT
As of June 30, 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 June 30, 2003, $20 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%, and the $200
million 364-Day Credit Agreement provides for borrowings at LIBOR plus
1.225%. 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 June 30, 2003 and December 31, 2002, the
three-month LIBOR rate was 1.13% 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 June 30,
2003 and December 31, 2002.
We have additional annually renewable domestic bank lines that provide
for total borrowings of up to $75 million and $50 million as of June
30, 2003 and December 31, 2002, respectively. As of June 30, 2003,
$50.2 million was outstanding under the domestic bank lines. No amounts
were outstanding as of December 31, 2002. Our non-U.S. subsidiaries
maintain bank credit facilities in various currencies that provide for
total borrowings of $370.3 million and $384.5 million as of June 30,
2003 and December 31, 2002, respectively. As of June 30, 2003 and
December 31, 2002, $29.1 million and $28.4 million, respectively, were
outstanding under the non-U.S. facilities, with remaining availability
of $275.6 million and $282.5 million, respectively, after bank
guarantees and letters of credit usage.
Notes payable and long-term debt consist of (in thousands):
JUNE 30, DECEMBER 31,
2003 2002
--------- ------------
Notes payable and current portion of long-term debt:
Bank loans (primarily foreign currency) $ 29,116 $ 29,361
Current portion of long-term debt 3,124 3,348
--------- ---------
Total $ 32,240 $ 32,709
========= =========
Long-term debt:
Domestic bank lines at an average rate of 1.90% in 2003 $ 50,200 $ --
Five Year Credit Agreement at an average rate of 2.54% in 2003 20,000 --
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 6.67% in 2003 and 6.64% in 2002 21,900 21,572
--------- ---------
Total 592,100 621,572
Less current portion (3,124) (3,348)
--------- ---------
Noncurrent portion $ 588,976 $ 618,224
========= =========
8
(6) GUARANTEES AND WARRANTIES
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 on our
consolidated condensed financial statements.
We issue various types of guarantees in the normal course of business.
As of June 30, 2003, we have the following guarantees outstanding (in
thousands):
Standby letters of credit and surety bonds $ 96,940
Performance guarantees 150,566
Commercial letters of credit 5,334
Guarantee of affiliate debt 30,000
Changes in our warranty liabilities for the six months ended June 30,
2003 are as follows (in thousands):
BALANCE PAYMENTS ACCRUALS FOR BALANCE
AS OF MADE UNDER WARRANTIES AS OF
DEC. 31, 2002 WARRANTIES ISSUED JUNE 30, 2003
- ------------ ---------- ------------ -------------
$ 87,940 $ 29,131 $ 34,002 $ 92,811
(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 six months ended June 30, 2003, certain commodity hedges
were discontinued to better match the hedge and the underlying
commodity. The discontinuance of these cash flow hedges did not result
in any significant gains or losses. Recognized gains or losses for the
six months ended June 30, 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 June 30, 2003, we forecasted that $0.4 million of net losses in
accumulated other comprehensive losses will be reclassified into
earnings within the next twelve months.
Commodity Price Hedging
We purchase raw material commodities and are at risk for fluctuations
in the market price of those commodities. In connection with the
purchase of major commodities, principally copper for manufacturing
requirements, we enter into commodity forward contracts to effectively
fix our cost of the commodity. These contracts require each settlement
between our counterparty and us to coincide with cash market purchases
of the actual commodity.
9
As of June 30, 2003, we forecasted that $0.5 million of net gains in
accumulated other comprehensive losses will be reclassified into
earnings within the next twelve months.
Interest Rate Hedging
We manage our interest rate risk by entering into both fixed and
variable rate debt. In addition, we enter into interest rate swap
contracts in order to achieve a balanced mix of fixed and variable rate
indebtedness.
As of June 30, 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 June 30, 2003, the fair value of these swap contracts was an
unrealized gain of $11.6 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 INCOME (LOSS)
Comprehensive income (loss) is determined as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss) $ 19,206 $ 48,219 $ 5,570 $(145,962)
Other comprehensive income (loss):
Foreign currency translation adjustment 50,194 43,196 57,925 51,159
Cash flow hedges:
Reclassification adjustment, net of tax (674) 2,181 (1,285) 3,413
Net derivative income (loss), net of tax 1,457 (635) 2,305 3,077
Available for sale securities, net of tax (21) -- (21) --
--------- --------- --------- ---------
Comprehensive income (loss) $ 70,162 $ 92,961 $ 64,494 $ (88,313)
========= ========= ========= =========
(9) STOCKHOLDERS' EQUITY
The following table summarizes our stockholders' equity as of June 30,
2003 and December 31, 2002 (in thousands, except per share data):
JUNE 30, DECEMBER 31,
2003 2002
--------- ---------
Common stock $.005 par value; 200,000 shares authorized; issued 45,887 shares at
June 30 and 45,820 shares at
December 31, 2002 $ 229 $ 229
Additional paid-in capital 728,220 727,031
Retained earnings 320,842 327,176
Accumulated other comprehensive losses (83,420) (142,344)
Treasury stock, at cost; 6,155 shares at June 30, 2003
and 6,169 shares at December 31, 2002 (228,074) (228,591)
Unearned compensation (1,632) (687)
--------- ---------
Total stockholders' equity $ 736,165 $ 682,814
========= =========
10
(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 stock-based compensation plan awards other than
restricted stock and performance-based awards. Had compensation expense
for all awards, including our employee stock purchase plans, been
determined based upon the fair value at the grant date consistent with
the methodology prescribed under SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended, our net income (loss) and
earnings (loss) per share would have been adjusted to the pro forma
amounts as follows (in thousands, except per share data):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
------------ ------------ ----------- -----------
Net income (loss) - as reported $ 19,206 $ 48,219 $ 5,570 $ (145,962)
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects 256 12 279 25
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (977) (2,058) (3,166) (4,115)
----------- ----------- ----------- -----------
Pro forma net income (loss) $ 18,485 $ 46,173 $ 2,683 $ (150,052)
=========== =========== =========== ===========
Earnings (loss) per share:
Basic - as reported $ 0.48 $ 1.23 $ 0.14 $ (3.71)
Basic - pro forma 0.47 1.17 0.07 (3.82)
Diluted - as reported 0.48 1.21 0.14 (3.65)
Diluted - pro forma 0.46 1.15 0.07 (3.76)
Pro forma net income (loss) and earnings (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 income (loss) and earnings (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) INCOME (LOSS) PER SHARE
Net income (loss) as set forth in our 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):
11
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Weighted average common shares
outstanding used in the computation
of basic earnings (loss) per share 39,631 39,362 39,594 39,309
Effect of dilutive securities:
Non-vested restricted shares 96 2 96 2
Stock options 134 634 58 644
----------- ----------- ----------- -----------
Weighted average common shares and
equivalents used in the computation
of diluted earnings (loss) per share 39,861 39,998 39,748 39,955
=========== =========== =========== ===========
Stock options not included in the
earnings (loss) per share computation
as their effect would have been anti-
dilutive 4,072 1,968 4,072 1,930
=========== =========== =========== ===========
(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 condiditoning
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,
operating expenses related to cost reduction actions, and costs related
to a previously discontinued product line.
12
The table below represents our operating results and assets by segment (in
thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales:
Global Applied:
Americas $ 362,839 $ 352,694 $ 660,252 $ 656,308
EMEA 335,702 285,893 597,754 503,910
Asia 131,987 112,088 222,106 192,789
Intragroup sales (54,252) (41,436) (94,618) (75,290)
----------- ----------- ----------- -----------
776,276 709,239 1,385,494 1,277,717
Unitary Products Group 222,949 214,808 386,491 373,143
Bristol Compressors 138,837 163,698 276,399 319,654
Eliminations(1) (53,645) (43,652) (95,610) (84,889)
----------- ----------- ----------- -----------
1,084,417 1,044,093 1,952,774 1,885,625
=========== =========== =========== ===========
(1)Eliminations include the
following intersegment
sales:
Global Applied 595 427 1,181 1,185
Unitary Products Group 17,787 10,439 30,476 23,838
Bristol Compressors 35,263 32,786 63,953 59,866
----------- ----------- ----------- -----------
Eliminations 53,645 43,652 95,610 84,889
=========== =========== =========== ===========
Income from operations:
Global Applied:
Americas 16,815 18,341 14,059 21,667
EMEA 12,451 17,871 13,040 20,124
Asia 22,423 16,974 32,116 23,957
----------- ----------- ----------- -----------
51,689 53,186 59,215 65,748
Unitary Products Group 24,049 18,282 32,269 15,842
Bristol Compressors 11,930 12,788 23,259 29,123
General corporate expenses,
eliminations, and other
non-allocated items (16,130) (11,640) (30,245) (20,936)
Charges and other expenses (35,030) -- (53,016) (10,476)
----------- ----------- ----------- -----------
36,508 72,616 31,482 79,301
----------- ----------- ----------- -----------
Equity in earnings of affiliates:
Global Applied:
EMEA 972 792 1,387 1,178
Asia 332 277 528 437
----------- ----------- ----------- -----------
1,304 1,069 1,915 1,615
Bristol Compressors 1,173 969 1,650 993
----------- ----------- ----------- -----------
2,477 2,038 3,565 2,608
----------- ----------- ----------- -----------
Interest expense, net (12,115) (12,436) (24,131) (25,149)
----------- ----------- ----------- -----------
Loss on divestiture -- -- -- (10,683)
----------- ----------- ----------- -----------
Income before income taxes and
cumulative effect of a change
in accounting principle 26,870 62,218 10,916 46,077
Provision for income taxes (7,664) (13,999) (5,346) (12,603)
----------- ----------- ----------- -----------
Income before cumulative
effect of a change in
accounting principle $ 19,206 $ 48,219 $ 5,570 $ 33,474
=========== =========== =========== ===========
13
JUNE 30, 2003 DEC. 31, 2002
------------- -------------
Total assets:
Global Applied:
Americas $ 713,563 $ 683,138
EMEA 865,901 831,662
Asia 378,468 337,303
Eliminations and other non-allocated assets (105,877) (51,570)
----------- -----------
1,852,055 1,800,533
Unitary Products Group 465,277 419,540
Bristol Compressors 279,784 264,111
Eliminations and other non-allocated assets 30,328 21,938
----------- -----------
$ 2,627,444 $ 2,506,122
=========== ===========
(13) CHARGES TO OPERATIONS
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 substantially completed by December 31, 2003.
In the three and six months ended June 30, 2003, we incurred costs by
segment as follows (in thousands):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, 2003 ENDED JUNE 30, 2003
------------------- --------------------
Global Applied:
Americas $ 3,144 $ 6,715
EMEA 22,910 35,255
Asia 696 2,766
----------- -----------
26,750 44,736
Unitary Products Group 7,500 7,500
Bristol Compressors 28 28
----------- -----------
Total charges to operations, net 34,278 52,264
Charges reflected in cost of goods sold (1,218) (3,110)
----------- -----------
Restructuring and other charges, net $ 33,060 $ 49,154
=========== ===========
Charges included write-downs for the impairment of assets relating to
businesses or facilities to be closed or divested, severance and other
accruals relating to planned reductions in workforce throughout the
Company, and estimated costs related to the elimination of certain
product lines.
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
actions. 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. We incurred no similar charges in the
three months ended June 30, 2002. As of December 31, 2002, all of the
2000 and 2001 actions were substantially complete. In the six months
ended June 30, 2003, we incurred no restructuring and other 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 six months ended June 30, 2003 is as follows:
NON-CASH ACCRUALS
WRITE-DOWNS ESTABLISHED UTILIZED
IN SIX IN SIX IN SIX
MONTHS MONTHS MONTHS REMAINING
ENDED ACCRUALS AT ENDED ENDED ACCRUALS AT
JUNE 30, DEC. 31, JUNE 30, JUNE 30, JUNE 30,
(in thousands) 2003 2002 2003 2003 2003
------------ ------------ ------------ --------- ------------
Fixed asset write-downs $13,958 $ -- $ -- $ -- $ --
Inventory write-downs 3,110 -- -- -- --
Other asset write-downs 14,117 -- -- -- --
Severance -- 1,469 11,941 4,992 8,418
Contractual and other obligations -- 1,654 7,754 58 9,350
Other -- 823 1,384 370 1,837
------- ------- ------- ------- -------
$31,185 $ 3,946 $21,079 $ 5,420 $19,605
======= ======= ======= ======= =======
(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) CONTINGENCIES
We are involved in various unresolved legal actions, administrative
proceedings, and claims, including two claims relating to a previously
discontinued product line. While we believe these proceedings will not
have a material adverse effect on our financial position or future
earnings, litigation is subject to uncertainties. If there were an
unfavorable result in excess of amounts provided for in the financial
statements, it could have a material adverse impact on net income in
the period in which it occurs.
(16) 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. We will adopt the consensus on a prospective basis
effective July 1, 2003. We do not expect the consensus to have a
material impact on our consolidated condensed financial statements.
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. Effective July 1, 2003, we will consolidate the
variable interest entity used to transact our December 1999 synthetic
lease. As a result, our financial statements will reflect approximately
$82 million of incremental debt, $23 million of incremental net
machinery and equipment, $11 million of incremental deferred tax
assets, a $16 million reduction to stockholders' equity, and a $32
million reduction to other long-term liabilities. 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 or as a cumulative-effect
adjustment as of July 1, 2003.
15
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
CONSOLIDATED OPERATIONS
Net sales for the three months ended June 30, 2003 increased 3.9% to $1,084.4
million from $1,044.1 million for the same period in 2002. Net sales for the six
months ended June 30, 2003 increased 3.6% to $1,952.8 million as compared to
$1,885.6 million for the six months ended June 30, 2002. The favorable impact of
the strengthening Euro and increased sales in Asia and Unitary Products Group
were partially offset by reduced shipments of Bristol compressors and weakness
in the large commercial equipment market. (See further discussion below under
Segment Analysis.) For the three months ended June 30, 2003, net sales in the
United States decreased 2.7% to $508.4 million and international net sales
increased 10.4% to $576.0 million. As a result of the strengthening Euro, order
backlog increased to $1,007.9 million as of June 30, 2003 as compared to $971.5
million as of June 30, 2002. As of December 31, 2002, order backlog was $876.0
million.
Gross profit increased 6.3% to $226.4 million (20.9% of net sales) in the three
months ended June 30, 2003 as compared to $212.9 million (20.4% of net sales) in
the same period of 2002. During the six months ended June 30, 2003, gross profit
increased 6.5% to $386.5 million (19.8% of net sales) from $362.8 million (19.2%
of gross sales) for the six months ended June 30, 2002. Gross profit increased
due to higher Asia and UPG sales, improvements in production efficiency and
reductions in operating expenses at the Unitary Products Group Wichita facility,
and the impact of the strengthening Euro. These increases were partially offset
by margin reductions as a result of reduced volumes and increased unit
production costs at Bristol Compressors and significant pricing pressure for
large equipment sales.
Selling, general, and administrative (SG&A) expense increased 11.8% to $156.8
million (14.5% of net sales) in the three months ended June 30, 2003 from $140.2
million (13.4% of net sales) in the three months ended June 30, 2002. For the
six months ended June 30, 2003, SG&A increased 8.9% to $305.8 million (15.7% of
net sales) from $280.8 million (14.9% of net sales) for the same period of 2002.
Increases resulted from the effect of the strengthening Euro and higher pension,
medical, and insurance costs. A write-off of a $5.9 million receivable related
to a Unitary Products Group distributor that became insolvent was included in
SG&A expense for the six months ended June 30, 2002.
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 and six months ended June 30, 2003, we recorded restructuring and other
charges of $34.3 million and $52.3 million, respectively, related to these
actions, including $1.2 million and $3.1 million, respectively, charged to cost
of goods sold. The charges in the three and six months ended June 30, 2003
included $16.0 million and $31.2 million, respectively, in write-downs of
various assets and $18.3 million and $21.1 million, respectively, in accruals
for severance and other costs.
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. We incurred no similar charges in the three months ended
June 30, 2002. 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 June 30, 2003, income from operations decreased
49.7% to $36.5 million (3.4% of net sales) from $72.6 million (7.0% of net
sales) during the three months ended June 30, 2002. For the six months ended
June 30, 2003, income from operations decreased 60.3% to $31.5 million (1.6% of
net sales) from $79.3 million (4.2% of net sales) in the six months ended June
30, 2002. (See further discussion below under Segment Analysis.)
16
Net interest expense in the three months ended June 30, 2003 was $12.1 million
compared to $12.4 million in the same period of 2002. In the six months ended
June 30, 2003, net interest expense was $24.1 million compared to $25.1 million
in the six months ended June 30, 2002. The decreases resulted from lower average
debt levels offset by slightly higher interest rates resulting from a larger
percentage of non-U.S. 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.
Equity in earnings of affiliates was $2.5 million during the three months ended
June 30, 2003 as compared to $2.0 million during the three months ended June 30,
2002. For the six months ended June 30, 2003, equity in earnings of affiliates
was $3.6 million as compared to $2.6 million for the same period of 2002. The
increase was primarily the result of improved performance of Scroll Technologies
and other affiliates.
The income tax provision of $7.7 million and $5.3 million for the three and six
months ended June 30, 2003, respectively, and $14.0 million and $12.6 million
for the three and six months ended June 30, 2002, respectively, relates to both
U.S. and non-U.S. operations. The effective tax rate was 28.5% and 22.5% for the
three months ended June 30, 2003 and 2002, respectively. The effective tax rate
was 49.0% in the six months ended June 30, 2003 as compared to 27.4% in the six
months ended June 30, 2002. The increase in the effective rate for the three and
six month periods resulted from limited tax benefits associated with certain
restructuring related actions recorded in 2003.
Income before cumulative effect of a change in accounting principle, as a result
of the above factors, was $19.2 million during the three months ended June 30,
2003 as compared to $48.2 million during the three months ended June 30, 2002.
For the six months ended June 30, 2003, income before cumulative effect of a
change in accounting principle was $5.6 million compared to $33.5 million for
the same period of 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 income from operations by segment
(in thousands):
17
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net sales:
Global Applied:
Americas $ 362,839 $ 352,694 $ 660,252 $ 656,308
Europe, Middle East, and Africa 335,702 285,893 597,754 503,910
Asia 131,987 112,088 222,106 192,789
Intragroup sales (54,252) (41,436) (94,618) (75,290)
----------- ----------- ----------- -----------
776,276 709,239 1,385,494 1,277,717
Unitary Products Group 222,949 214,808 386,491 373,143
Bristol Compressors 138,837 163,698 276,399 319,654
Eliminations (53,645) (43,652) (95,610) (84,889)
----------- ----------- ----------- -----------
Net sales $ 1,084,417 $ 1,044,093 $ 1,952,774 $ 1,885,625
=========== =========== =========== ===========
Income from operations:
Global Applied:
Americas $ 16,815 $ 18,341 $ 14,059 $ 21,667
Europe, Middle East, and Africa 12,451 17,871 13,040 20,124
Asia 22,423 16,974 32,116 23,957
----------- ----------- ----------- -----------
51,689 53,186 59,215 65,748
Unitary Products Group 24,049 18,282 32,269 15,842
Bristol Compressors 11,930 12,788 23,259 29,123
General corporate expenses, eliminations,
and other non-allocated items (16,130) (11,640) (30,245) (20,936)
Charges and other expenses (35,030) -- (53,016) (10,476)
----------- ----------- ----------- -----------
Income from operations $ 36,508 $ 72,616 $ 31,482 $ 79,301
=========== =========== =========== ===========
Global Applied
Global Applied net sales for the three months ended June 30, 2003 increased 9.5%
to $776.3 million from $709.2 million for the same period in 2002. Net sales for
the six months ended June 30, 2003 increased 8.4% to $1,385.5 million as
compared to $1,277.7 million for the same period of 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. Revenue increases in
the Americas were hindered by the weak commercial market. Global Applied service
revenue increased 12.1% to $274.3 million in the three months ended June 30,
2003 from $244.7 million in the three months ended June 30, 2002.
Global Applied income from operations for the three months ended June 30, 2003
decreased 2.8% to $51.7 million (6.7% of net sales) from $53.2 million (7.5% of
net sales) for the same period in 2002. Income from operations for the six
months ended June 30, 2003 decreased 9.9% to $59.2 million (4.3% of net sales)
as compared to $65.7 million (5.1% of net sales) for the six months ended June
30, 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 increased
as a result of 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 June 30, 2003 increased 3.8% to $222.9
million from $214.8 million for the same period in 2002. Net sales for the six
months ended June 30, 2003 increased 3.6% to $386.5 million as compared to
$373.1 million for the same period of 2002. Pricing increases and increased
shipments of residential and commercial products were partially offset by lower
manufactured housing product shipments.
UPG income from operations for the three months ended June 30, 2003 increased
31.5% to $24.0 million (10.8% of net sales) from $18.3 million (8.5% of net
sales) for the same period in 2002. Income from operations for the six months
ended June 30, 2003 increased 103.7% to $32.3 million (8.3% of net sales) as
compared to $15.8 million (4.2% of net sales for the six months ended June 30,
2002. In the six months ended June 30, 2002, we recorded a write-off of a $5.9
million receivable
18
related to a distributor that became insolvent. In addition, better results in
the three and six months ended June 30, 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 June 30, 2003 decreased 15.2% to
$138.8 million from $163.7 million for the same period in 2002. Net sales for
the six months ended June 30, 2003 decreased 13.5% to $276.4 million as compared
to $319.7 million for the same period of 2002. The volume declines relate
primarily to a decline in the North America unitary market, the impact of
original equipment manufacturer's continuing to drive further component
reductions, and reductions in international sales of compressors for room air
conditioners.
Bristol income from operations for the three months ended June 30, 2003
decreased 6.7% to $11.9 million (8.6 % of net sales) from $12.8 million (7.8% of
net sales) for the same period in 2002. Income from operations for the six
months ended June 30, 2003 decreased 20.1% to $23.3 million (8.4% of net sales)
as compared to $29.1 million (9.1% of net sales) for the six months ended June
30, 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, unit costs in
the three and six months ended June 30, 2003 were higher than in the three and
six months ended June 30, 2002.
Other
General corporate expenses, eliminations, and other non-allocated items
increased 38.6% to $16.1 million for the three months ended June 30, 2003 as
compared to $11.6 million for the same period in 2002. For the six months ended
June 30, 2003, general corporate expenses, eliminations, and other non-allocated
items increased 44.5% to $30.2 million from $20.9 million for the same period of
2002. The increase was primarily due to increases in pension, insurance, and
medical costs and increased investments in information technology.
Charges and other expenses are as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 2003 2002
-------- -------- -------- ---------
By segment:
- -----------
Global Applied:
Americas $ 3,896 $ -- $ 7,467 $ 262
EMEA 22,910 -- 35,255 (205)
Asia 696 -- 2,766 445
-------- -------- -------- --------
27,502 -- 45,488 502
Unitary Products Group 7,500 -- 7,500 7,035
Bristol Compressors 28 -- 28 2,939
-------- -------- -------- --------
$ 35,030 $ -- $ 53,016 $ 10,476
======== ======== ======== ========
By type:
- -------- --------
Charges to operations, net $ 34,278 $ -- $ 52,264 $ 2,818
Related operating
expenses included in
cost of goods sold 752 -- 752 7,658
-------- -------- -------- --------
$ 35,030 $ -- $ 53,016 $ 10,476
======== ======== ======== ========
Operating expenses in 2003 related to the Americas' cost reduction actions.
Operating expenses in 2002 related to the UPG and Bristol plant consolidations
and a previously discontinued UPG product line.
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.
19
Working capital increased $13.8 million to $450.4 million as of June 30, 2003 as
compared to $436.6 million as of December 31, 2002. The increase resulted from
increases in receivables due to normal seasonal trends and higher inventory
levels, partially offset by increases in accounts payable and accrued expenses
and decreases in cash and cash equivalents. The current ratio was 1.49 as of
June 30, 2003 as compared to 1.52 as of December 31, 2002.
Capital expenditures were $35.9 million in the six months ended June 30, 2003
and June 30, 2002. Capital expenditures, which relate to information system
improvements, the introduction of new products, and equipment replacement, are
currently expected to approximate depreciation and amortization during 2003.
Cash dividends of $0.15 per share and $0.30 per share were paid on common stock
in the three and six months ended June 30, 2003, 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 $621.2 million as of June 30, 2003, primarily consisting
of $500 million of senior notes, $50.2 million outstanding under domestic bank
lines, and $20 million outstanding under the 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 June 30, 2003, $20 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%, and the $200 million 364-Day
Credit Agreement provides for borrowings at LIBOR plus 1.225%. 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 June
30, 2003 and December 31, 2002, the three-month LIBOR rate was 1.13% 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 June 30, 2003
and December 31, 2002.
We have additional annually renewable domestic bank lines that provide for total
borrowings of up to $75 million and $50 million as of June 30, 2003 and December
31, 2002, respectively. As of June 30, 2003, $50.2 million was outstanding under
the domestic bank lines. No amounts were outstanding as of December 31, 2002.
Our non-U.S. subsidiaries maintain bank credit facilities in various currencies
that provide for total borrowings of $370.3 million and $384.5 million as of
June 30, 2003 and December 31, 2002, respectively. As of June 30, 2003 and
December 31, 2002, $29.1 million and $28.4 million, respectively, were
outstanding under the non-U.S. facilities, with remaining availability of $275.6
million and $282.5 million, respectively, after bank guarantees and letters of
credit usage.
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 $150 million and $155 million
of an undivided interest in trade receivables as of June 30, 2003 and December
31, 2002, respectively, resulting in a reduction of receivables reflected in our
consolidated condensed balance sheets. The discount rate on trade receivables
sold was 1.02% and 1.40% as of June 30, 2003 and December 31, 2002,
respectively. The program fee on trade receivables sold was 0.50% and 0.338% as
of June 30, 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.
20
We have access to bank lines of credit and have the ability to borrow under the
Agreements as long as we continue to meet the financial covenants or until
expiration of the Agreements. The primary financial covenants are the earnings
before interest, taxes, depreciation, and amortization (EBITDA) interest
coverage and the debt to capital ratio, as defined under the Agreements. As of
June 30, 2003, our EBITDA interest coverage was 5.0, exceeding the minimum
requirement of 3.5. As of June 30, 2003, our debt to capital ratio was 44%,
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 slightly lower than 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,
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 additional costs of approximately $57 million during the second half of 2003.
We expect continued debt reduction during the second half of 2003.
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 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 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. We will adopt the
consensus on a prospective basis effective July 1, 2003. We do not expect the
consensus to have a material impact on our consolidated condensed financial
statements.
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. Effective July 1, 2003, we will
consolidate the variable interest entity used to transact our December 1999
synthetic lease. As a result, our financial statements will reflect
approximately $82 million of incremental
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debt, $23 million of incremental net machinery and equipment, $11 million of
incremental deferred tax assets, a $16 million reduction to stockholders'
equity, and a $32 million reduction to other long-term liabilities. 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 or as a cumulative-effect adjustment as of July 1, 2003.
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 Compressors
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.
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 June 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of June 30, 2003, we carried out an evaluation, under the
supervision and with the participation of company management, including
the Chief Executive Officer, President, 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, President, 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.
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PART II - OTHER INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
As discussed in our Form 10-K filed March 7, 2003 and Form 10-Q filed
May 13, 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. American
Standard filed a notice of appeal from the judge's rulings. Subsequent
discussions between the parties resulted in an agreement to settle the
matter with a payment from American Standard to us.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant's annual meeting of Stockholders was held on May 22,
2003
(b) Proxies were solicited for the meeting. All nominees for Director
were elected and item (c) 2 (see below) was approved.
(c) The following votes were cast at the Annual Meeting for the matters
indicated below:
1. Election of Directors Votes For Votes Withheld
--------------------- --------- --------------
Gerald C. McDonough 33,372,232 642,713
Michael R. Young 33,440,196 574,749
W. Michael Clevy 33,374,339 640,606
J. Roderick Heller, III 33,444,738 570,207
Robert F. B. Logan 32,991,618 1,023,327
Paul J. Powers 33,374,650 640,295
Donald M. Roberts 32,921,798 1,093,147
James A. Urry 32,991,665 1,023,280
Votes For Votes Against Abstentions
--------- ------------- -----------
2. The appointment of KPMG LLP 32,626,599 1,373,064 15,282
as independent auditors
ITEM 5. OTHER INFORMATION
Not Applicable
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1 - First Amendment to the York International
Corporation Executive Deferred Compensation Plan*
Exhibit 10.2 - Amendment No. 2 to the York International
Corporation Supplemental Executive Retirement Plan*
Exhibit 31.1 - Certification of the Chief Executive Officer of
York International Corporation pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
Exhibit 31.2 - Certification of the President of York
International Corporation pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
Exhibit 31.3 - Certification of the Chief Financial Officer of
York International Corporation pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002*
Exhibit 32.1 - Certification of the Chief Executive Officer
and Chief Financial Officer of York International Corporation
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
* Submitted electronically herewith
(b) Reports on Form 8-K
Current Report on Form 8-K dated July 23, 2003, containing a
press release, dated July 23, 2003, setting forth our second
quarter 2003 results (Such press release is not incorporated
by reference herein or deemed "filed" within the meaning of
Section 18 of the Securities Act of 1933.)
Current Report on Form 8-K dated June 24, 2003, containing a
press release, dated June 24, 2003, announcing the election of
a new President and a new Vice President and Chief Financial
Officer
Current Report on Form 8-K dated June 13, 2003, containing a
press release, dated June 13, 2003, announcing the election of
a new Vice President, Human Resources
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned unto duly authorized.
YORK INTERNATIONAL CORPORATION
------------------------------
Registrant
Date July 31, 2003 /S/ M. David Kornblatt
-----------------------------------------
M. David Kornblatt,
Vice President and Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.1 First Amendment to the York International Corporation Executive
Deferred Compensation Plan*
10.2 Amendment No. 2 to the York International Corporation Supplemental
Executive Retirement Plan*
31.1 Certification of the Chief Executive Officer of York International
Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of
2002*
31.2 Certification of the President of York International Corporation
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.3 Certification of the Chief Financial Officer of York International
Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of
2002*
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer of York International Corporation pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002*
* Submitted electronically herewith
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