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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 October 31, 2003
----- -------------------------------
Common Stock, par value $.005 40,071,957 shares
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - (unaudited)
Three Months and Nine Months Ended September 30, 2003 and 2002 3
Consolidated Condensed Balance Sheets -
September 30, 2003 (unaudited) and December 31, 2002 4
Consolidated Condensed Statements of Cash Flows - (unaudited)
Nine Months Ended September 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 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 27
Exhibit Index 28
2
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Statements of Operations (unaudited)
(in thousands, except per share data)
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2003 2002 2003 2002
----------- ----------- ------------ ------------
Net sales $ 1,008,958 $ 946,774 $ 2,961,732 $ 2,832,399
Cost of goods sold (817,896) (767,373) (2,384,206) (2,290,150)
----------- ---------- ------------ ------------
Gross profit 191,062 179,401 577,526 542,249
Selling, general, and administrative expenses (163,032) (135,267) (468,860) (416,084)
Restructuring and other charges, net (12,140) -- (61,294) (2,730)
----------- ---------- ------------ ------------
Income from operations 15,890 44,134 47,372 123,435
Interest expense, net (12,331) (11,746) (36,462) (36,895)
Loss on divestiture -- -- -- (10,683)
Equity in earnings of affiliates 2,160 1,206 5,725 3,814
----------- ---------- ------------ ------------
Income before income taxes and
cumulative effect of changes
in accounting principles 5,719 33,594 16,635 79,671
Benefit (provision) for income taxes 4,264 (7,559) (1,082) (20,162)
----------- ---------- ------------ ------------
Income before cumulative effect of
changes in accounting principles 9,983 26,035 15,553 59,509
Cumulative effect of changes in accounting
principles (15,413) -- (15,413) (179,436)
----------- ---------- ------------ ------------
Net (loss) income $ (5,430) $ 26,035 $ 140 $ (119,927)
=========== ========== ============ ============
Basic (loss) earnings per share:
Income before cumulative effect of
changes in accounting principles $ 0.25 $ 0.66 $ 0.39 $ 1.51
Cumulative effect of changes in
accounting principles (0.39) -- (0.39) (4.56)
----------- ---------- ------------ ------------
Net (loss) income $ (0.14) $ 0.66 $ -- $ (3.05)
=========== ========== ============ ============
Diluted (loss) earnings per share:
Income before cumulative effect of
changes in accounting principles $ 0.25 $ 0.65 $ 0.39 $ 1.49
Cumulative effect of changes in
accounting principles (0.38) -- (0.39) (4.50)
----------- ---------- ------------ ------------
Net (loss) income $ (0.13) $ 0.65 $ -- $ (3.01)
=========== ========== ============ ============
Cash dividends per share $ 0.15 $ 0.15 $ 0.45 $ 0.45
=========== ========== ============ ============
Weighted average common shares and
common equivalents outstanding:
Basic 39,653 39,445 39,556 39,355
Diluted 40,304 39,786 39,908 39,852
See accompanying notes to consolidated condensed financial statements.
3
PART I - FINANCIAL INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(in thousands)
SEPT. 30, 2003 DECEMBER 31,
(UNAUDITED) 2002
-------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 46,973 $ 92,940
Receivables, net 636,055 627,067
Inventories 524,375 473,779
Prepayments and other current assets 124,110 81,461
---------- ----------
Total current assets 1,331,513 1,275,247
Deferred income taxes 74,522 69,696
Investments in affiliates 28,175 29,389
Property, plant, and equipment, net 521,282 500,318
Goodwill 517,207 504,963
Intangibles, net 34,477 32,000
Deferred charges and other assets 105,266 94,509
---------- ----------
Total assets $2,612,442 $2,506,122
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 29,169 $ 32,709
Accounts payable and accrued expenses 844,850 768,748
Income taxes 37,619 37,202
---------- ----------
Total current liabilities 911,638 838,659
Long-term warranties 50,516 44,748
Long-term debt 610,632 618,224
Postretirement and postemployment benefits 269,043 244,522
Other long-term liabilities 47,194 77,155
---------- ----------
Total liabilities 1,889,023 1,823,308
Stockholders' equity 723,419 682,814
---------- ----------
Total liabilities and stockholders' equity $2,612,442 $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)
NINE MONTHS ENDED SEPT. 30,
2003 2002
---------- -----------
Cash flows from operating activities:
Net income (loss) $ 140 $ (119,927)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of changes in accounting principles 15,413 179,436
Depreciation and amortization of property, plant, and equipment 50,718 45,363
Amortization of deferred charges and intangibles 2,828 2,039
Provision for doubtful receivables 10,295 12,097
Effect of non-cash charges 47,171 1,631
Loss on divestiture -- 10,683
Deferred income taxes 5,900 12,176
Loss on sale of fixed assets 1,703 982
Other (3,032) (1,359)
Change in assets and liabilities net of effects from
acquisitions and divestitures:
Receivables, net 10,759 (11,199)
Inventories (37,101) 20,269
Prepayments and other current assets (42,370) (2,390)
Accounts payable and accrued expenses 53,866 19,576
Income taxes 420 13,173
Other long-term assets and liabilities 3,752 4,360
---------- ----------
Net cash provided by operating activities 120,462 186,910
---------- ----------
Cash flows from investing activities:
Capital expenditures (53,961) (49,321)
Proceeds from divestiture, net -- 12,071
Purchases of other companies, net of cash acquired (3,343) (2,248)
Proceeds from sale of fixed assets 3,030 5,658
---------- ----------
Net cash used by investing activities (54,274) (33,840)
---------- ----------
Cash flows from financing activities:
Net reduction in sale of receivables (5,000) --
Net payments of short-term debt (3,312) (4,507)
Net payments of commercial paper borrowings -- (127,769)
Net proceeds from credit agreement 70,000 --
Payment of senior notes (100,000) --
Net proceeds (payments) on other long-term debt 23,961 (1,300)
Payment of sale-leaseback obligation (82,397) --
Common stock issued 3,033 6,246
Treasury stock purchases (7) (32)
Dividends paid (17,899) (17,727)
---------- ----------
Net cash used by financing activities (111,621) (145,089)
---------- ----------
Effect of exchange rate changes on cash and cash equivalents (534) (244)
---------- ----------
Net (decrease) increase in cash and cash equivalents (45,967) 7,737
Cash and cash equivalents at beginning of period 92,940 39,434
---------- ----------
Cash and cash equivalents at end of period $ 46,973 $ 47,171
========== ==========
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 September 30,
2003 and December 31, 2002, our results of operations for the three and
nine months ended September 30, 2003 and 2002, and our cash flows for
the nine months ended September 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) INVENTORIES
Inventories consist of (in thousands):
SEPT. 30, DECEMBER 31,
2003 2002
--------- ------------
Raw material $ 141,819 $ 126,227
Work in progress 150,127 116,784
Finished goods 232,429 230,768
--------- ---------
Total $ 524,375 $ 473,779
========= =========
(3) RECEIVABLES, NET
Pursuant to the terms of an annually renewable revolving facility, we
sell certain of our trade receivables to a wholly-owned, consolidated
subsidiary, York Receivables Funding LLC (YRFLLC). In turn, YRFLLC
sells, on a revolving basis, 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 September
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 1.07% and 1.40% as of
September 30, 2003 and December 31, 2002, respectively. The program fee
on trade receivables sold was 0.50% and 0.338% as of September 30, 2003
and December 31, 2002, respectively.
6
(4) 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.
The changes in the carrying amount of goodwill for the nine months
ended September 30, 2003, by segment, are as follows (in thousands):
NET FOREIGN
BALANCE AS OF GOODWILL CURRENCY BALANCE AS OF
DEC. 31, 2002 ACQUIRED FLUCTUATION SEPT. 30, 2003
------------- -------- ----------- --------------
Global Applied:
Americas $ 92,464 $ -- $ 457 $ 92,921
EMEA 107,873 49 10,537 118,459
Asia 107,873 1,027 174 109,074
--------- ------- -------- ---------
308,210 1,076 11,168 320,454
Unitary Products Group 140,440 -- -- 140,440
Bristol Compressors 56,313 -- -- 56,313
--------- ------- -------- ---------
$ 504,963 $ 1,076 $ 11,168 $ 517,207
========= ======= ======== =========
(5) INTANGIBLES, NET
The following table summarizes the major intangible asset classes
subject to amortization included in our consolidated condensed balance
sheets as of September 30, 2003 and December 31, 2002 (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
September 30, 2003
Trade names and trademarks $ 39,088 $ 5,883 $ 33,205
Other 2,268 996 1,272
-------- ------- --------
$ 41,356 $ 6,879 $ 34,477
======== ======= ========
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 nine months ended September 30,
2003 was $0.3 million and $1.3 million, respectively. For the three and
nine months ended September 30, 2002, amortization expense for trade
names and trademarks and other intangible assets was $0.3 million and
$0.9 million, respectively.
7
The following table estimates the amount of amortization expense for
trade names and trademarks and other intangible assets for the
remainder of 2003 and each of the fiscal years indicated (in
thousands):
2003 (October 1 - December 31) $ 348
2004 1,357
2005 1,332
2006 1,331
2007 1,231
Thereafter 28,878
----------
$ 34,477
==========
(6) NOTES PAYABLE AND LONG-TERM DEBT
As of September 30, 2003 and December 31, 2002, our indebtedness
consisted of senior notes, borrowings under our credit agreements, 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 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 the $400 million Five Year
Credit Agreement and a $300 million 364-Day Credit Agreement. As of
September 30, 2003, $70 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 September 30, 2003 and December 31, 2002,
the three-month LIBOR rate was 1.14% 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 September
30, 2003 and December 31, 2002.
We have annually renewable domestic bank lines that provide for total
borrowings of up to $75 million and $50 million as of September 30,
2003 and December 31, 2002, respectively. As of September 30, 2003, $25
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 $380.3 million and $384.5 million as of September 30,
2003 and December 31, 2002, respectively. As of September 30, 2003 and
December 31, 2002, $26.0 million and $28.4 million, respectively, were
outstanding under the non-U.S. facilities, with remaining availability
of $280.6 million and $282.5 million, respectively, after bank
guarantees and letters of credit usage.
8
Notes payable and long-term debt consist of (in thousands):
SEPT. 30, DECEMBER 31,
2003 2002
--------- -----------
Notes payable and current portion of long-term debt:
Bank loans (primarily foreign currency) $ 26,049 $ 29,361
Current portion of long-term debt 3,120 3,348
--------- ---------
Total $ 29,169 $ 32,709
========= =========
Long-term debt:
Domestic bank lines at an average rate of 1.71% in 2003 $ 25,000 $ --
Five Year Credit Agreement at an average rate of 2.30% in 2003 70,000 --
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 6.68% in 2003 and 6.64% in 2002 18,752 21,572
--------- ---------
Total 613,752 621,572
Less current portion (3,120) (3,348)
--------- ---------
Noncurrent portion $ 610,632 $ 618,224
========= =========
(7) 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 September 30, 2003, we have the following guarantees outstanding
(in thousands):
Standby letters of credit and surety bonds $ 103,839
Performance guarantees 158,496
Commercial letters of credit 32,653
Guarantee of affiliate debt 30,000
Changes in our warranty liabilities for the nine months ended September
30, 2003 are as follows (in thousands):
BALANCE PAYMENTS ACCRUALS FOR BALANCE
AS OF MADE UNDER WARRANTIES AS OF
DEC. 31, 2002 WARRANTIES ISSUED SEPT. 30, 2003
- ------------- ---------- -------------- --------------
$ 87,940 $ 46,925 $ 54,498 $ 95,513
9
(8) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We are exposed to market risk associated with changes in interest
rates, foreign currency exchange rates, and certain commodity prices.
To enhance our ability to manage these market risks, we enter into
derivative instruments for periods consistent with the related
underlying exposures. The changes in fair value of these hedging
instruments are offset in part or in whole by corresponding changes in
fair value or cash flows of the underlying hedged exposures. We
mitigate the risk that the counter-party to these derivative
instruments will fail to perform by only entering into derivative
instruments with major financial institutions. We do not typically
hedge our market risk exposures beyond three years and do not hold or
issue derivative instruments for trading purposes.
During the nine months ended September 30, 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
nine months ended September 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 September 30, 2003, we forecasted that $0.7 million of net losses
in accumulated other comprehensive losses will be reclassified into
earnings within the next twelve months.
Commodity Price Hedging
We purchase raw material commodities and are at risk for fluctuations
in the market price of those commodities. In connection with the
purchase of major commodities, principally copper for manufacturing
requirements, we enter into commodity forward contracts to effectively
fix our cost of the commodity. These contracts require each settlement
between our counterparty and us to coincide with cash market purchases
of the actual commodity.
As of September 30, 2003, we forecasted that $2.2 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 September 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 September 30, 2003, the fair value of these swap contracts was an
unrealized gain of $8.9 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 amended. As a
result, there is no impact on current earnings resulting from hedge
ineffectiveness.
10
(9) COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income is determined as follows (in thousands):
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net (loss) income $ (5,430) $ 26,035 $ 140 $(119,927)
Other comprehensive (loss) income:
Foreign currency translation adjustment (5,934) (3,875) 51,991 47,284
Cash flow hedges:
Reclassification adjustment, net of tax (107) 351 (1,392) 3,764
Net derivative income (loss), net of tax 1,352 (5,049) 3,657 (1,972)
Available for sale securities, net of tax 118 -- 97 --
--------- --------- --------- ---------
Comprehensive (loss) income $ (10,001) $ 17,462 $ 54,493 $ (70,851)
========= ========= ========= =========
(10) STOCKHOLDERS' EQUITY
The following table summarizes our stockholders' equity as of September
30, 2003 and December 31, 2002 (in thousands, except per share data):
SEPT. 30, DECEMBER 31,
2003 2002
--------- ---------
Common stock $.005 par value; 200,000 shares authorized; issued 45,956 shares at
September 30, 2003 and
45,820 shares at December 31, 2002 $ 230 $ 229
Additional paid-in capital 729,150 727,031
Retained earnings 309,417 327,176
Accumulated other comprehensive losses (87,991) (142,344)
Treasury stock, at cost; 6,051 shares at September 30, 2003
and 6,169 shares at December 31, 2002 (224,215) (228,591)
Unearned compensation (3,172) (687)
--------- ---------
Total stockholders' equity $ 723,419 $ 682,814
========= =========
(11) 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 (loss) income and (loss)
earnings per share would have been adjusted to the pro forma amounts as
follows (in thousands, except per share data):
11
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2003 2002 2003 2002
--------- ---------- ------- -----------
Net (loss) income - as reported $ (5,430) $ 26,035 $ 140 $ (119,927)
Add: Stock-based employee compensation
expense included in reported net (loss)
income, net of related tax effects 166 12 445 37
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (892) (2,058) (4,058) (6,173)
--------- ---------- ------- -----------
Pro forma net (loss) income $ (6,156) $ 23,989 $(3,473) $ (126,063)
========= ========== ======= ===========
(Loss) earnings per share:
Basic - as reported $ (0.14) $ 0.66 $ -- $ (3.05)
Basic - pro forma (0.16) 0.61 (0.09) (3.20)
Diluted - as reported (0.13) 0.65 -- (3.01)
Diluted - pro forma (0.15) 0.60 (0.09) (3.16)
Pro forma net (loss) income and (loss) earnings 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) income and (loss) earnings
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.
(12) (LOSS) INCOME PER SHARE
Net (loss) income as set forth in our consolidated condensed statements
of operations is used in the computation of basic and diluted (loss)
earnings per share information. Reconciliations of shares used in the
computations of (loss) earnings per share are as follows (in
thousands):
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2003 2002 2003 2002
------ ------ ------ ------
Weighted average common shares
outstanding used in the computation
of basic (loss) earnings per share 39,653 39,445 39,556 39,355
Effect of dilutive securities:
Non-vested restricted shares 166 1 166 1
Stock options 485 340 186 496
------ ------ ------ ------
Weighted average common shares and
equivalents used in the computation
of diluted (loss) earnings per share 40,304 39,786 39,908 39,852
====== ====== ====== ======
Stock options not included in the (loss)
earnings per share computation as their
effect would have been anti-dilutive 3,148 3,849 3,975 3,849
====== ====== ====== ======
12
(13) 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, ductless
mini-splits, process refrigeration systems, hygienic air distribution
systems, gas compression systems, and control equipment to monitor and
control the entire system. Heating and air conditioning solutions are
provided for buildings ranging from small office buildings and fast
food restaurants to large commercial and industrial complexes.
Refrigeration systems are provided for industrial applications in the
food, 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), 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, a curtailment
loss related to the decision to replace our current defined benefit
pension plans for U.S. salaried non-bargaining employees with a new
defined contribution plan, effective January 1, 2004, and costs related
to a previously discontinued product line.
13
The table below represents our operating results and assets by segment
(in thousands):
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales:
Global Applied:
Americas $ 339,041 $ 331,300 $ 999,293 $ 987,608
EMEA 321,888 279,272 919,642 783,182
Asia 129,927 113,144 352,033 305,933
Intragroup sales (48,495) (41,622) (143,113) (116,912)
----------- ----------- ----------- -----------
742,361 682,094 2,127,855 1,959,811
Unitary Products Group 207,471 207,578 593,962 580,721
Bristol Compressors 99,455 97,509 375,854 417,163
Eliminations(1) (40,329) (40,407) (135,939) (125,296)
----------- ----------- ----------- -----------
1,008,958 946,774 2,961,732 2,832,399
=========== =========== =========== ===========
(1)Eliminations include the
following intersegment
sales:
Global Applied 1,113 627 2,294 1,812
Unitary Products Group 11,867 13,304 42,343 37,142
Bristol Compressors 27,349 26,476 91,302 86,342
----------- ----------- ----------- -----------
Eliminations 40,329 40,407 135,939 125,296
=========== =========== =========== ===========
Income from operations:
Global Applied:
Americas 15,663 9,842 29,722 31,509
EMEA 11,710 9,741 24,750 29,865
Asia 20,381 18,378 52,497 42,335
----------- ----------- ----------- -----------
47,754 37,961 106,969 103,709
Unitary Products Group 18,807 18,724 51,076 34,566
Bristol Compressors 2,204 (1,033) 25,463 28,090
General corporate expenses,
eliminations, and other
non-allocated items (23,808) (11,518) (54,053) (32,454)
Charges and other expenses (29,067) -- (82,083) (10,476)
----------- ----------- ----------- -----------
15,890 44,134 47,372 123,435
----------- ----------- ----------- -----------
Equity in earnings of affiliates:
Global Applied:
EMEA 453 405 1,840 1,583
Asia 278 278 806 715
----------- ----------- ----------- -----------
731 683 2,646 2,298
Bristol Compressors 1,429 523 3,079 1,516
----------- ----------- ----------- -----------
2,160 1,206 5,725 3,814
----------- ----------- ----------- -----------
Interest expense, net (12,331) (11,746) (36,462) (36,895)
----------- ----------- ----------- -----------
Loss on divestiture -- -- -- (10,683)
----------- ----------- ----------- -----------
Income before income taxes and
cumulative effect of changes
in accounting principles 5,719 33,594 16,635 79,671
Benefit (provision) for income
taxes 4,264 (7,559) (1,082) (20,162)
----------- ----------- ----------- -----------
Income before cumulative
effect of changes in
accounting principles $ 9,983 $ 26,035 $ 15,553 $ 59,509
=========== =========== =========== ===========
14
SEPT. 30, 2003 DEC. 31, 2002
-------------- -------------
Total assets:
Global Applied:
Americas $ 709,698 $ 683,138
EMEA 876,359 831,662
Asia 379,971 337,303
Eliminations and other non-allocated assets (100,576) (51,570)
----------- -----------
1,865,452 1,800,533
Unitary Products Group 427,273 419,540
Bristol Compressors 254,545 264,111
Eliminations and other non-allocated assets 65,172 21,938
----------- -----------
$ 2,612,442 $ 2,506,122
=========== ===========
(14) CHARGES TO OPERATIONS
In the three and nine months ended September 30, 2003, we incurred
costs by segment as follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED SEPT. 30, 2003 ENDED SEPT. 30, 2003
-------------------- --------------------
2003 Initiatives:
Global Applied:
Americas $ 5,490 $ 12,205
EMEA 5,639 40,894
Asia 195 2,961
-------- --------
11,324 56,060
Unitary Products Group 1,100 8,600
Bristol Compressors 107 135
Corporate 698 698
-------- --------
13,229 65,493
-------- --------
2000 AND 2001 INITIATIVES:
Global Applied
EMEA (39) (39)
Asia (418) (418)
-------- --------
(457) (457)
-------- --------
Total charges to operations, net 12,772 65,036
Charges reflected in cost of goods sold (632) (3,742)
-------- --------
Restructuring and other charges, net $ 12,140 $ 61,294
======== ========
2003 Initiatives
In 2003, we initiated actions to further reduce our overall cost
structure and support the implementation of our new geographic
organization. These actions include the further reduction of
manufacturing capacity, the elimination of certain product lines, and
the exiting of several small, non-core businesses as well as cost
reductions associated with the consolidation of our former Engineered
Systems Group and York Refrigeration Group segments. We expect all
actions to be substantially completed by December 31, 2003.
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.
15
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. As of December 31, 2002, all of the 2000
and 2001 actions were substantially complete. In the three months ended
September 30, 2003, we recorded a credit of $0.5 million related to the
2000 and 2001 initiatives.
Detail of activity relating to the 2003 initiatives and the 2000 and
2001 initiatives in the nine months ended September 30, 2003 is as
follows:
NON-CASH ACCRUALS ACCRUAL
WRITE-DOWNS ESTABLISHED UTILIZED REDUCTION
IN NINE IN NINE IN NINE IN NINE
MONTHS MONTHS MONTHS MONTHS REMAINING
ENDED ACCRUALS AT ENDED ENDED ENDED ACCRUALS AT
SEPT. 30, DEC. 31, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
(in thousands) 2003 2002 2003 2003 2003 2003
--------- ----------- ----------- --------- --------- -----------
Fixed asset write-downs $14,454 $ -- $ -- $ -- $ -- $ --
Inventory write-downs 3,742 -- -- -- -- --
Other asset write-downs 16,561 -- -- -- -- --
Severance -- 1,469 17,411 8,132 467 10,281
Contractual and other
obligations -- 1,654 10,388 709 443 10,890
Other -- 823 3,390 3,571 -- 642
------- -------- --------- --------- ------- ---------
$34,757 $ 3,946 $ 31,189 $ 12,412 $ 910 $ 21,813
======= ======== ========= ========= ======= =========
(15) 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.
(16) 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.
(17) CHANGE IN ACCOUNTING PRINCIPLE FOR VARIABLE INTEREST ENTITIES
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. We adopted the
interpretation as of July 1, 2003. Upon adoption we consolidated the
variable interest entity used to transact our December 1999
sale-leaseback. As a result, we recorded approximately $82.4 million of
incremental debt, $23.9 million of incremental net machinery and
equipment, $10.7 million of incremental deferred tax assets, a $15.4
million reduction to stockholders' equity, and a $32.4 million
reduction to other long-term liabilities. The reduction in
stockholders' equity was recorded as a cumulative-effect adjustment as
of July 1, 2003. The obligation relating to the sale-leaseback was
repaid in full during the third quarter.
16
(18) 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 adopted the consensus on a prospective basis effective
July 1, 2003. The consensus did not have a material impact on our
consolidated condensed financial statements.
17
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 September 30, 2003 increased 6.6% to
$1,009.0 million from $946.8 million for the same period in 2002. Sales
increased due to the strengthening Euro, increased sales in Asia, and growth in
the global service businesses. Net sales for the nine months ended September 30,
2003 increased 4.6% to $2,961.7 million as compared to $2,832.4 million for the
nine months ended September 30, 2002. The favorable impact of the strengthening
Euro, increased sales in Asia, and growth in the global service businesses 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 nine months ended September 30, 2003, net sales in the United
States decreased 2.3% to $1,384.5 million and international net sales increased
11.5% to $1,577.2 million.
Gross profit increased 6.5% to $191.1 million (18.9% of net sales) in the three
months ended September 30, 2003 as compared to $179.4 million (18.9% of net
sales) in the same period of 2002. Gross profit for the quarter increased due to
higher sales. Growth in the service business and efficiency improvements were
offset by continued pricing pressure on large equipment. During the nine months
ended September 30, 2003, gross profit increased 6.5% to $577.5 million (19.5%
of net sales) from $542.2 million (19.1% of gross sales) for the nine months
ended September 30, 2002. Gross profit increased due to higher 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
significant pricing pressure for large equipment sales.
Selling, general, and administrative (SG&A) expenses increased 20.5% to
$163.0 million (16.2% of net sales) in the three months ended September 30,
2003 from $135.3 million (14.3% of net sales) in the three months ended
September 30, 2002. For the nine months ended September 30, 2003, SG&A
increased 12.7% to $468.9 million (15.8% of net sales) from $416.1 million
(14.7% of net sales) for the same period of 2002. Increases resulted from the
effect of the strengthening Euro and higher pension, medical, insurance,
incentive compensation, and technology related costs, as compared to prior
year. In addition, SG&A expenses in the third quarter of 2003 include a
non-cash curtailment loss of $12.4 million related to the decision to replace
our current defined benefit pension plans for U.S. salaried non-bargaining
employees with a new defined contribution plan, effective January 1, 2004.
In 2003, we initiated actions to further reduce our overall cost structure and
support the implementation of our new geographic organization. These actions
include the further reduction of manufacturing capacity, the elimination of
certain product lines, and the exiting of several small, non-core businesses as
well as cost reductions associated with the consolidation of our former
Engineered Systems Group and York Refrigeration Group segments. In the three and
nine months ended September 30, 2003, we recorded restructuring and other
charges of $13.2 million and $65.5 million, respectively, related to these
actions, including $0.6 million and $3.7 million, respectively, charged to cost
of goods sold. The charges in the three and nine months ended September 30, 2003
included $3.6 million and $34.8 million, respectively, in write-downs of various
assets and $9.6 million and $30.7 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. These charges 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.
In the three months ended September 30, 2003, we recorded a credit of $0.5
million related to the 2000 and 2001 initiatives.
During the three months ended September 30, 2003, income from operations
decreased 64.0% to $15.9 million (1.6% of net sales) from $44.1 million (4.7% of
net sales) during the three months ended September 30, 2002. For the nine months
ended
18
September 30, 2003, income from operations decreased 61.6% to $47.4 million
(1.6% of net sales) from $123.4 million (4.4% of net sales) in the nine months
ended September 30, 2002. (See further discussion below under Segment Analysis.)
Net interest expense in the three months ended September 30, 2003 was $12.3
million compared to $11.7 million in the same period of 2002. In the nine months
ended September 30, 2003, net interest expense was $36.5 million compared to
$36.9 million in the nine months ended September 30, 2002. Interest expense in
the three and nine months ended September 30, 2003 included $0.9 million of fees
associated with the termination of the December 1999 sale-leaseback obligation.
Excluding the fees, the change in interest expense was due to lower average debt
levels, partially 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 $2.2 million during the three months ended
September 30, 2003 as compared to $1.2 million during the three months ended
September 30, 2002. For the nine months ended September 30, 2003, equity in
earnings of affiliates was $5.7 million as compared to $3.8 million for the same
period of 2002. The increase was primarily the result of improved performance of
Scroll Technologies.
The effective tax rate was a benefit of 74.6% and a provision of 22.5%
in the three months ended September 30, 2003 and 2002, respectively. The
effective tax rate was a provision of 6.5% in the nine months ended September
30, 2003 as compared to 25.3% in the nine months ended September 30, 2002. The
effective tax rates for the three and nine month periods include a third
quarter 2003 tax benefit of $2.5 million, associated primarily with higher than
previously anticipated export incentives, and tax benefits associated with
certain restructuring related actions recorded in 2003.
Income before cumulative effect of changes in accounting principles, as a result
of the above factors, was $10.0 million during the three months ended September
30, 2003 as compared to $26.0 million during the three months ended September
30, 2002. For the nine months ended September 30, 2003, income before cumulative
effect of changes in accounting principles was $15.6 million compared to $59.5
million for the same period of 2002.
On July 1, 2003, we adopted Financial Accounting Standards Board Interpretation
No. 46. Upon adoption, we consolidated the variable interest entity used to
transact our December 1999 sale-leaseback. As a result, we recorded
approximately $82.4 million of incremental debt, $23.9 million of incremental
net machinery and equipment, $10.7 million of incremental deferred tax assets, a
$15.4 million reduction to stockholders' equity, and a $32.4 million reduction
to other long-term liabilities. The reduction in stockholders' equity was
recorded as a cumulative-effect adjustment as of July 1, 2003. The obligation
relating to the sale-leaseback was repaid in full during the third quarter.
On January 1, 2002, we adopted Statement of Financial Accounting Standards No.
142. Upon adoption, 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.
19
SEGMENT ANALYSIS
The following table sets forth net sales and income from operations by segment
(in thousands):
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales:
Global Applied:
Americas $ 339,041 $ 331,300 $ 999,293 $ 987,608
Europe, Middle East, and Africa 321,888 279,272 919,642 783,182
Asia 129,927 113,144 352,033 305,933
Intragroup sales (48,495) (41,622) (143,113) (116,912)
----------- ----------- ----------- -----------
742,361 682,094 2,127,855 1,959,811
Unitary Products Group 207,471 207,578 593,962 580,721
Bristol Compressors 99,455 97,509 375,854 417,163
Eliminations (40,329) (40,407) (135,939) (125,296)
----------- ----------- ----------- -----------
Net sales $ 1,008,958 $ 946,774 $ 2,961,732 $ 2,832,399
=========== =========== =========== ===========
Income from operations:
Global Applied:
Americas $ 15,663 $ 9,842 $ 29,722 $ 31,509
Europe, Middle East, and Africa 11,710 9,741 24,750 29,865
Asia 20,381 18,378 52,497 42,335
----------- ----------- ----------- -----------
47,754 37,961 106,969 103,709
Unitary Products Group 18,807 18,724 51,076 34,566
Bristol Compressors 2,204 (1,033) 25,463 28,090
General corporate expenses, eliminations,
and other non-allocated items (23,808) (11,518) (54,053) (32,454)
Charges and other expenses (29,067) -- (82,083) (10,476)
----------- ----------- ----------- -----------
Income from operations $ 15,890 $ 44,134 $ 47,372 $ 123,435
=========== =========== =========== ===========
Global Applied
Global Applied net sales for the three months ended September 30, 2003 increased
8.8% to $742.4 million from $682.1 million for the same period in 2002. Net
sales for the nine months ended September 30, 2003 increased 8.6% to $2,127.9
million as compared to $1,959.8 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. Increases
in the service business in the Americas were partially offset by reduced
equipment sales. Global Applied service revenue increased 14.5% to $271.2
million in the three months ended September 30, 2003 from $236.8 million in the
three months ended September 30, 2002. As a result of the strengthening Euro and
increased orders in China and North America, particularly in our Navy business,
Global Applied backlog increased to $976.5 million as of September 30, 2003 as
compared to $884.7 million as of September 30, 2002. As of December 31, 2002,
Global Applied backlog was $803.4 million.
Global Applied income from operations for the three months ended September 30,
2003 increased 25.8% to $47.8 million (6.4% of net sales) from $38.0 million
(5.6% of net sales) for the same period in 2002. Income from operations for the
nine months ended September 30, 2003 increased 3.1% to $107.0 million (5.0% of
net sales) as compared to $103.7 million (5.3% of net sales) for the nine months
ended September 30, 2002. Improved operating costs and higher volume in Asia
were partially offset by reduced margins resulting from lower equipment volume
in the Americas and significant pricing pressure in the large equipment market.
In addition, a $3.8 million charge relating to differences in a plant's
inventory records was recorded in the three months ended September 30, 2002.
20
Unitary Products Group (UPG)
UPG net sales for the three months ended September 30, 2003 were $207.5 million
as compared to $207.6 million for the same period in 2002. Net sales for the
nine months ended September 30, 2003 were $594.0 million as compared to $580.7
million for the same period of 2002. Increased shipments of residential air
conditioning equipment and pricing increases were offset by lower manufactured
housing product shipments.
UPG income from operations for the three months ended September 30, 2003
increased 0.4% to $18.8 million (9.1% of net sales) from $18.7 million (9.0% of
net sales) for the same period in 2002. Income from operations for the nine
months ended September 30, 2003 increased 47.8% to $51.1 million (8.6% of net
sales) as compared to $34.6 million (6.0% of net sales) for the nine months
ended September 30, 2002. In the nine months ended September 30, 2002, we
recorded a write-off of a $5.9 million receivable related to a distributor that
became insolvent. In addition, better results in the three and nine months ended
September 30, 2003 resulted from improvements in production efficiency and
shipping costs, partially offset by higher steel costs.
Bristol Compressors (Bristol)
Bristol net sales for the three months ended September 30, 2003 increased 2.0%
to $99.5 million from $97.5 million for the same period in 2002. The increase
resulted from higher sales to domestic customers, partially offset by lower
shipments to international customers for room air conditioner applications. Net
sales for the nine months ended September 30, 2003 decreased 9.9% to $375.9
million as compared to $417.2 million for the same period of 2002. The volume
declines relate primarily to 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 (loss) from operations for the three months ended September 30,
2003 increased $3.2 million to income of $2.2 million (2.2% of net sales) from a
loss of $1.0 million (-1.1% of net sales) for the same period in 2002 due to
better margins and higher productivity. Income from operations for the nine
months ended September 30, 2003 decreased 9.4% to $25.5 million (6.8% of net
sales) as compared to $28.1 million (6.7% of net sales) for the nine months
ended September 30, 2002. Volume reductions were the primary reason for the
decline in income from operations for the nine month period.
Other
General corporate expenses, eliminations, and other non-allocated items
increased $12.3 million to $23.8 million for the three months ended September
30, 2003 as compared to $11.5 million for the same period in 2002. For the nine
months ended September 30, 2003, general corporate expenses, eliminations, and
other non-allocated items increased 66.6% to $54.1 million from $32.5 million
for the same period of 2002. The increase was primarily due to increases in
pension, insurance, and medical costs, incentives, and investments in
information technology.
21
Charges and other expenses are as follows (in thousands):
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2003 2002 2003 2002
-------- -------- -------- --------
By segment:
Global Applied:
Americas $ 9,371 $ -- $ 16,838 $ 262
EMEA 5,600 -- 40,855 (205)
Asia (223) -- 2,543 445
-------- -------- -------- --------
14,748 -- 60,236 502
Unitary Products Group 1,100 -- 8,600 7,035
Bristol Compressors 107 -- 135 2,939
Corporate 13,112 -- 13,112 --
-------- -------- -------- --------
$ 29,067 $ -- $ 82,083 $ 10,476
======== ======== ======== ========
By type:
Restructuring and other
charges, net $ 12,140 $ -- $ 61,294 $ 2,730
Restructuring and other
charges reflected in
cost of goods sold 632 -- 3,742 88
Related operating
expenses included in
cost of goods sold 3,881 -- 4,633 7,658
Selling, general, and
administrative expenses 12,414 -- 12,414 --
-------- -------- -------- --------
$ 29,067 $ -- $ 82,083 $ 10,476
======== ======== ======== ========
Restructuring and other charges related to the 2003 initiatives and the 2001 and
2000 initiatives are discussed in the Consolidated Operations section above.
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. SG&A expenses in the third
quarter of 2003 included a non-cash curtailment loss of $12.4 million related to
the decision to replace our current defined benefit pension plans for U.S.
salaried non-bargaining employees with a new defined contribution plan,
effective January 1, 2004.
LIQUIDITY AND CAPITAL RESOURCES
Working capital requirements are generally met through a combination of
internally generated funds, borrowings under our credit agreements and 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 decreased $16.7 million to $419.9 million as of September 30,
2003 as compared to $436.6 million as of December 31, 2002. The decrease
resulted from increases in accounts payable and accrued expenses and decreases
in cash and cash equivalents, partially offset by increases in inventories and
prepayments and other current assets. The current ratio was 1.46 as of September
30, 2003 as compared to 1.52 as of December 31, 2002.
Capital expenditures were $54.0 million in the nine months ended September 30,
2003 as compared to $49.3 million for the nine months ended September 30, 2002.
Capital expenditures, which relate to information system improvements, the
introduction of new products, and equipment replacement, are currently expected
to slightly exceed depreciation and amortization during 2003.
Cash dividends of $0.15 per share and $0.45 per share were paid on common stock
in the three and nine months ended September 30, 2003 and 2002, respectively.
The declaration and payment of future dividends will be at the sole discretion
of the Board of Directors and will depend upon such factors as our
profitability, financial condition, cash requirements, future prospects, and
other factors deemed relevant by the Board of Directors.
22
Total indebtedness was $639.8 million as of September 30, 2003, primarily
consisting of $500 million of senior notes, $70 million outstanding under the
Five Year Credit Agreement, and $25 million outstanding under domestic bank
lines. The senior notes mature at dates ranging from 2006 to 2012 and carry
fixed rates ranging from 5.80% to 6.70%.
We have 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 the $400
million Five Year Credit Agreement and a $300 million 364-Day Credit Agreement.
As of September 30, 2003, $70 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
September 30, 2003 and December 31, 2002, the three-month LIBOR rate was 1.14%
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 September
30, 2003 and December 31, 2002.
We have annually renewable domestic bank lines that provide for total borrowings
of up to $75 million and $50 million as of September 30, 2003 and December 31,
2002, respectively. As of September 30, 2003, $25 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 $380.3 million and $384.5 million as of
September 30, 2003 and December 31, 2002, respectively. As of September 30, 2003
and December 31, 2002, $26.0 million and $28.4 million, respectively, were
outstanding under the non-U.S. facilities, with remaining availability of $280.6
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 September 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 1.07% and 1.40% as of September 30, 2003 and December
31, 2002, respectively. The program fee on trade receivables sold was 0.50% and
0.338% as of September 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.
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 September 30, 2003, our EBITDA interest coverage was 5.0
times, exceeding the minimum requirement of 3.5 times. As of September 30,
2003, our debt to capital ratio was 44%, below the maximum allowed of 52%.
Because certain of our long term debt obligations and our revolving trade
receivables purchase facility bear interest at floating rates, our interest
costs are sensitive to changes in prevailing interest rates.
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.
23
OUTLOOK
For the remainder of 2003, we expect continued strength in our service
and Asian businesses and continued pricing pressure in our large equipment
business, particularly in the Americas and Europe. Improved production
efficiencies as a result of plant improvements and consolidations will continue
to be offset by higher pension, medical, insurance, and incentive compensation
costs than the prior year. During the fourth quarter, we anticipate completing
the actions to further reduce our cost structure and improve long-term
performance, which will continue to result in significant implementation costs.
These actions include further reduction of manufacturing capacity, elimination
of certain product lines, and closure of several small, non-core businesses as
well as cost reductions associated with the announced organizational changes.
During 2004, we expect the trend of service growth to continue. We currently
expect cost reductions from the current year actions to be offset by higher
pension, medical, insurance, and information technology costs in 2004. For our
large equipment businesses, we do not currently anticipate an overall market
recovery in 2004, and we expect pricing to be at similar levels as during 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 September 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of September 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.
24
PART II - OTHER INFORMATION
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
On September 11, 2003, the City of Elyria, Ohio, the Lorain County
Board of Commissioners, the Lorain County Auditor, the Lorain County
Treasurer and two school districts filed suit against us in the Court
of Common Pleas for Lorain County, Ohio. The plaintiffs allege that we
breached two incentive agreements entered into with the City of Elyria
in 1991 and 1993, respectively, by closing our plant in Elyria in 2001.
The plaintiffs assert that they would have collected additional taxes
had the plant remained open and are seeking approximately $3 million in
allegedly lost taxes and $200 million in punitive damages. We have
removed the suit to the United States District Court for the District
of Ohio and intend to defend it vigorously. We believe the suit is
without merit.
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 10.1 - York International Corporation Management Stock
Purchase 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
25
(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.)
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned unto duly authorized.
YORK INTERNATIONAL CORPORATION
------------------------------
Registrant
Date October 31, 2003 /S/ M. David Kornblatt
----------------------------------------------
M. David Kornblatt,
Vice President and Chief Financial Officer
27
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 York International Corporation Management Stock Purchase 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
28