10-Q 1 w51849e10-q.txt 10-Q FOR YORK INTERNATIONAL FOR 7/30/2001 1 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, 2001 COMMISSION FILE NUMBER 1-10863 YORK INTERNATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3473472 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
631 SOUTH RICHLAND AVENUE, YORK, PA 17403 (717) 771-7890 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at July 30, 2001 ----- ---------------------------- Common Stock, par value $.005 38,556,699 shares
2 YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 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, 2001 and 2000 3 Consolidated Condensed Balance Sheets - June 30, 2001 (Unaudited) and December 31, 2000 4 Consolidated Condensed Statements of Cash Flows - (Unaudited) Six Months Ended June 30, 2001 and 2000 5 Supplemental Notes to Consolidated Condensed Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18
2 3 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, --------------------------- ------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net sales $1,077,472 $1,066,397 $2,019,577 $1,963,401 Cost of goods sold 867,914 827,567 1,628,695 1,538,567 -------- -------- --------- --------- Gross profit 209,558 238,830 390,882 424,834 Selling, general and administrative expenses 142,339 154,428 290,603 310,885 Restructuring, integration and other charges, net 35,224 (321) 57,175 1,219 -------- ---------- ---------- ---------- Income from operations 31,995 84,723 43,104 112,730 Interest expense, net 18,282 20,357 38,231 40,231 Loss (gain) on divestitures - 988 - (26,902) Equity in earnings of affiliates (1,847) (2,645) (1,949) (4,071) --------- --------- ----------- ---------- Income before income taxes 15,560 66,023 6,822 103,472 (Benefit) provision for income taxes (17,256) 20,336 (17,000) 34,690 -------- -------- ---------- --------- Net income $ 32,816 $ 45,687 $ 23,822 $ 68,782 ======== ======== ========= ========= Basic earnings per share $ 0.85 $ 1.20 $ 0.62 $ 1.81 ========= ========== =========== =========== Diluted earnings per share $ 0.84 $ 1.20 $ 0.61 $ 1.80 ========= ========== =========== =========== Cash dividends per share $ 0.15 $ 0.15 $ 0.30 $ 0.30 ========= ========== =========== =========== Weighted average common shares and common equivalents outstanding: Basic 38,472 38,030 38,430 38,086 Diluted 39,006 38,181 38,922 38,190
See accompanying supplemental notes to consolidated condensed financial statements. 3 4 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES Consolidated Condensed Balance Sheets (in thousands)
June 30, 2001 December 31, (unaudited) 2000 --------------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 23,846 $ 26,425 Receivables 756,110 680,467 Inventories: Raw material 165,070 187,136 Work in process 121,022 122,232 Finished goods 310,659 331,729 ----------- ----------- Total inventories 596,751 641,097 Prepayments and other current assets 94,653 109,820 ----------- ----------- Total current assets 1,471,360 1,457,809 Deferred income taxes 52,027 56,114 Investments in affiliates 22,704 24,913 Property, plant and equipment, net 449,193 484,297 Unallocated excess of cost over net assets acquired 654,045 693,668 Deferred charges and other assets 59,072 57,410 ----------- ----------- Total assets $ 2,708,401 $ 2,774,211 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable and current portion of long-term debt $ 194,243 $ 64,268 Accounts payable and accrued expenses 778,181 838,623 Income taxes 10,482 15,117 ----------- ----------- Total current liabilities 982,906 918,008 Long-term warranties 44,084 40,728 Long-term debt 726,922 831,354 Postretirement benefit liabilities 166,777 165,850 Other long-term liabilities 77,562 69,295 ----------- ----------- Total liabilities 1,998,251 2,025,235 Stockholders' equity 710,150 748,976 ----------- ----------- Total liabilities and stockholders' equity $ 2,708,401 $ 2,774,211 =========== ===========
See accompanying supplemental notes to consolidated condensed financial statements. 4 5 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows (unaudited) (in thousands)
Six Months Ended June 30, ------------------------- 2001 2000 ---- ---- Cash flows from operating activities: Net income $ 23,822 $ 68,782 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization of property, plant and equipment 33,313 31,186 Amortization of deferred charges and unallocated excess of cost over net assets acquired 13,883 16,491 Provision for doubtful accounts receivable 4,411 4,097 Effect of non-cash charges 26,690 - Gain on divestitures - (26,902) Deferred income taxes 4,047 (279) Loss (gain) on sale of fixed assets and other 3,256 (76) Change in assets and liabilities net of effects from purchase of other companies and sale of businesses: Receivables (80,833) (83,068) Inventories 33,715 (38,027) Prepayments and other current assets 14,711 16,375 Accounts payable and accrued expenses (66,512) (30,331) Income taxes (4,680) 4,330 Other long-term assets and liabilities 8,490 (730) ----------- ---------- Net cash provided (used) by operating activities 14,313 (38,152) ----------- ---------- Cash flows from investing activities: Proceeds from sale of businesses, net - 41,829 Capital expenditures (35,301) (46,193) Proceeds from sale of fixed assets and other 450 5,414 ----------- ---------- Net cash (used) provided by investing activities (34,851) 1,050 ----------- ---------- Cash flows from financing activities: Net borrowings on short-term debt 68,746 20,834 Net proceeds (payments) of commercial paper borrowings 22,841 (2,827) Net (payments) proceeds of other long-term debt (66,044) 57,913 Common stock issued 3,875 9 Treasury stock purchases (38) (7,534) Dividends paid (11,544) (11,401) ----------- ---------- Net cash provided by financing activities 17,836 56,994 ----------- ---------- Effect of exchange rate changes on cash 123 205 ----------- ----------- Net (decrease) increase in cash and cash equivalents (2,579) 20,097 ----------- ---------- Cash and cash equivalents at beginning of period 26,425 39,514 ----------- ---------- Cash and cash equivalents at end of period $ 23,846 $ 59,611 =========== ==========
See accompanying supplemental notes to consolidated condensed financial statements. 5 6 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES Supplemental Notes To Consolidated Condensed Financial Statements (unaudited) (1) The consolidated condensed financial statements included herein have been prepared by the registrant pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to applicable rules and regulations, although the registrant believes that the disclosures herein are adequate to make the information presented not misleading. In the opinion of the Company, the accompanying consolidated condensed financial statements contain all adjustments necessary to present fairly the financial position as of June 30, 2001 and December 31, 2000, the results of operations for the three and six month periods ended June 30, 2001 and 2000, and cash flows for the six months ended June 30, 2001 and 2000. The results of operations for interim periods are not necessarily indicative of the results expected for the full year. (2) The following table summarizes the indebtedness of the Company at June 30, 2001 and at December 31, 2000 (in thousands):
June 30, 2001 December 31, 2000 ------------- ----------------- Notes payable and current portion of long-term debt: Bank loans (primarily foreign currency) $ 41,006 $ 47,260 Domestic bank line at an average rate of 4.38% in 2001 75,000 - Commercial paper, 4.25% interest in 2001 75,741 - Current portion of long-term debt 2,496 17,008 --------- -------- Total $ 194,243 $ 64,268 ========= ======== Long-term debt: Domestic bank lines at an average rate of 7.40% in 2000 $ - $ 6,200 Commercial paper, 4.25% interest in 2001 and 6.96% in 2000 400,000 452,900 Senior notes, 6.75% interest, due March 2003 100,000 100,000 Senior notes, 6.70% interest, due June 2008 200,000 200,000 Term loans (foreign currency) at an average rate of 4.11%, due July 2004 - 52,770 Other (primarily foreign bank loans) at an average rate of 6.44% in 2001 and 6.33% in 2000 29,418 36,492 --------- -------- Total 729,418 848,362 Less current portion (2,496) (17,008) --------- -------- Noncurrent portion $ 726,922 $ 831,354 ========= ========
As of June 30, 2001 and December 31, 2000, the Company's borrowings consisted of senior notes, commercial paper issuances and various other bank and term loans. The commercial paper issuances and certain bank loans are expected to be reborrowed in the ordinary course of business, depending on the Company's financing needs. The Company renegotiated its $900 million credit facilities in May 2001. Three new credit agreements: a $400 million Five Year Credit Agreement expiring May 29, 2006, a $300 million 364-Day Credit Agreement expiring May 28, 2002, and a $200 million 120-Day Credit Agreement expiring September 26, 2001 (collectively, the Agreements), replaced a $500 million agreement expiring July 31, 2002 and a $400 million Agreement expiring May 31, 2001. At June 30, 2001 and December 31, 2000, no amounts were outstanding under any of the Agreements. The $400 million Five Year Credit Agreement and the $300 million 364-Day Credit Agreement provide for borrowings at LIBOR plus 0.75% or 0.775%, and LIBOR plus 0.875% or 0.90%, respectively, based on the amount of facility utilization. The $200 million 120-Day Credit Agreement provides for borrowings at LIBOR (continued) 6 7 plus 1.00%. The Company pays an annual fee of 0.125% on the $400 million facility, and 0.10% on the $300 million and $200 million facilities. All three Credit Agreements allow for borrowings at specified bid rates. At June 30, 2001 and December 31, 2000, the three-month LIBOR rate was 3.85% and 6.36%, respectively. The Agreements contain financial covenants requiring the Company to maintain certain financial ratios and standard provisions limiting leverage and liens. The Company was in compliance with these financial covenants at June 30, 2001 and December 31, 2000. The Company has an additional domestic bank line that provides for total borrowings of $100 million at June 30, 2001 and December 31, 2000, of which $25.0 million and $93.8 million, respectively, were unused. The Company's non-U.S. subsidiaries maintain bank credit facilities in various currencies that provided for available borrowings of $331.0 million and $349.3 million at June 30, 2001 and December 31, 2000, respectively, of which $293.6 million and $301.0 million, respectively, were unused. In some instances, borrowings against these credit facilities have been guaranteed by the Company to assure availability of funds at favorable rates. In April 2001, the Company filed a registration statement with the SEC. The registration statement became effective July 19, 2001. The Company may offer for sale up to $300 million of debt securities, the specific terms of which will be determined at the time of sale pursuant to the registration statement and market conditions. (3) The following table summarizes the stockholders' equity of the Company at June 30, 2001 and at December 31, 2000 (in thousands):
June 30, 2001 December 31, 2000 ------------- ----------------- Common Stock $.005 par value; 200,000 shares authorized; issued 45,378 shares at June 30, 2001 and 45,377 shares at December 31, 2000 $ 227 $ 227 Additional paid in capital 719,760 720,685 Retained earnings 438,600 426,322 Accumulated other comprehensive losses (194,935) (138,544) Treasury stock, 6,838 shares at June 30, 2001 and 7,005 shares at December 31, 2000, at cost (253,419) (259,601) Unearned compensation (83) (113) ----------- ----------- Total stockholders' equity $ 710,150 $ 748,976 =========== ===========
(4) Derivative Instruments and Hedging Activities The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain hedging Activities", an amendment to SFAS No. 133, on January 1, 2001. These statements require that all derivative instruments be reported on the balance sheet at fair value and establish criteria for designation of hedges and determining effectiveness of hedging relationships. SFAS No.133 requires the transition adjustment, resulting from the adoption of these statements, to be reported in net income or accumulated other comprehensive income as the cumulative effect of a change in accounting principle. The amount of transition adjustment recorded in accumulated other comprehensive income as a result of recognizing the fair value of derivatives, designated as cash flow hedges, was a net unrealized loss of $1.5 million. There were no transition adjustments relating to hedges of net investments in foreign operations or fair value hedges. Upon adoption, the Company also forecasted to reclassify to earnings over the next twelve months a net loss of $0.8 million from the transition adjustment recorded in accumulated other comprehensive income. The amount of transition adjustment recorded in cost of goods sold as a result of recognizing the fair value of derivatives, not qualifying as hedges, was a net gain of $0.6 million. The Company is exposed to market risk associated with changes in interest rates, foreign currency exchange rates, and certain commodity prices. To enhance its ability to manage these market risks, the Company enters into derivative instruments pursuant to the Company's policies on hedging practices. (continued) 7 8 Derivative instruments are entered into for periods consistent with the related underlying exposures and are designated, if applicable, as fair value hedges, cash flow hedges, net investment hedges, or non-qualifying hedges at inception of the hedge. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in fair value or cash flows of the underlying exposures being hedged. The Company mitigates the risk that the counter-party to these derivative instruments will fail to perform by only entering into derivative instruments with major financial institutions. The Company does not typically hedge its market risk exposures beyond three years and does not hold or issue derivative instruments for trading purposes. There were no gains or losses recognized in the first six months as a result of the discontinuance of cash flow hedges or due to hedge ineffectiveness. As of January 1, 2001 and during the first six months ended June 30, 2001, the Company has no outstanding derivative instruments relating to interest rates, no instruments designated as fair value hedges, and no hedges of net investments in foreign operations. Certain derivative instruments are not designated as hedging instruments as they hedge immaterial exposures. Currency Rate Hedging The Company manufactures and sells its products in a number of countries throughout the world, and therefore, is exposed to movements in various currencies against the United States Dollar and against the currencies in which it manufactures. Through its foreign currency hedging activities, the Company seeks 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. The Company does not, however, hedge foreign exposures that are considered immaterial or in highly correlated currencies. The Company manages its foreign currency risks by hedging its foreign currency exposures with foreign currency derivative instruments (forward contracts and purchased option contracts). Foreign currency derivative instruments are matched to the underlying foreign currency exposures and are executed to minimize foreign exchange transaction costs. Changes in the fair value of foreign currency derivative instruments, qualifying as cash flow hedges, are reported in accumulated other comprehensive income. The gains or losses on these hedges are reclassified in earnings as the underlying hedged items affect earnings. As of June 30, 2001, the Company forecasted that $0.4 million of net losses in accumulated other comprehensive income will be reclassified into earnings within the next twelve months. Commodity Price Hedging The Company purchases raw material commodities and is at risk for fluctuations in the market price of those commodities. In connection with the purchase of major commodities, principally copper for manufacturing requirements, the Company enters into commodity forward contracts to effectively fix the cost of the commodity to the Company. These contracts require each settlement between the Company and its counter-party to coincide with cash market purchases of the actual commodity. Changes in the fair value of commodity derivative instruments qualifying as cash flow hedges are reported in accumulated other comprehensive income. The gains or losses are reclassified in earnings as the underlying hedged items affect earnings. As of June 30, 2001, it was forecasted that $5.3 million of net losses in accumulated other comprehensive income will be reclassified into earnings within the next twelve months. (continued) 8 9 (5) Comprehensive income is determined as follows: Comprehensive Income (in thousands)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income $ 32,816 $ 45,687 $ 23,822 $ 68,782 Other comprehensive loss: Foreign currency translation adjustment (20,700) (11,811) (51,706) (10,131) Cash flow hedges: Transition adjustment, net of tax - - (976) - Reclassification adjustment, net of tax 667 - 1,219 - Net derivative losses, net of tax (2,153) - (4,928) - --------- -------- -------- -------- Comprehensive income (loss) $ 10,630 $ 33,876 $ (32,569) $ 58,651 ========= ======== ======== ========
(6) Pursuant to a receivable sales agreement, $175 million of receivables were sold and excluded from the accompanying consolidated balance sheets at June 30, 2001 and December 31, 2000. The agreement provides for receivable sales up to $175 million, but is subject to decreases based on the level of eligible accounts receivable and restrictions relating to concentration of receivables. The discount rate on the receivables sold was 3.93% and 6.66% at June 30, 2001 and December 31, 2000, respectively. (7) In the first half of 2000, the employment of several senior executives, including the Company's former chief executive officer and chief financial officer, was terminated. The Company negotiated agreements with these executives, resulting in severance costs of $6.7 million, of which $3.5 million and $3.2 million were charged to earnings in the first and second quarters of 2000, respectively. (8) The Company's basic earnings per share are based upon the weighted average common shares outstanding during the period. The Company's diluted earnings per share are based upon the weighted average outstanding common shares and common share equivalents. (9) Net income as set forth in the statements of operations is used in the computation of basic and diluted earnings per share information. Reconciliations of shares used in the computations of earnings per share are as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Weighted average common shares outstanding used in the computation of basic earnings per share 38,472 38,030 38,430 38,086 Effect of dilutive securities: Non-vested restricted shares 3 22 3 22 Stock options 531 129 489 82 -------- -------- -------- -------- Weighted average common shares and equivalents used in the computation of diluted earnings per share 39,006 38,181 38,922 38,190 ======== ======== ======== ========
(10) In 2001, the Company reorganized its operating segments. The primary change was that all air conditioning businesses in Europe, Asia, the Middle East and Latin America, portions of which were previously reported in Unitary Products Group, were combined and reported as part of overall Engineered Systems Group operations. Prior year amounts have been reclassified to conform to the current presentation. The table below represents the Company's operating results by segment (in thousands): (continued) 9 10
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2001 2000 2001 2000 Net sales: Engineered Systems Group $ 517,329 $ 483,892 $ 958,843 $ 889,075 York Refrigeration Group 232,676 259,814 444,206 480,972 Unitary Products Group 227,508 233,978 401,451 403,026 Bristol Compressors 162,773 162,424 330,823 325,002 Eliminations (62,814) (73,711) (115,746) (134,674) ----------- ----------- ----------- ---------- $ 1,077,472 $ 1,066,397 $ 2,019,577 $ 1,963,401 =========== =========== ========== ========== Eliminations include the following intersegment sales: Engineered Systems Group $ 7,176 $ 13,314 $ 14,797 $ 21,906 York Refrigeration Group 4,778 6,342 10,129 12,293 Unitary Products Group 16,572 18,052 29,075 30,041 Bristol Compressors 34,288 36,003 61,745 70,434 ----------- ----------- ----------- ---------- Eliminations $ 62,814 $ 73,711 $ 115,746 $ 134,674 =========== =========== ========== ========== Income from operations: Engineered Systems Group $ 43,910 $ 40,880 $ 61,998 $ 54,689 York Refrigeration Group 18,321 19,356 28,465 25,587 Unitary Products Group 24,770 23,005 37,522 32,287 Bristol Compressors 17,303 19,773 34,066 41,166 Eliminations, general corporate expenses and other non-allocated items (72,309) (18,291) (118,947) (40,999) ----------- ----------- ----------- ---------- $ 31,995 $ 84,723 $ 43,104 $ 112,730 Equity in earnings of affiliates: Engineered Systems Group $ (1,090) $ (1,361) $ (1,114) $ (2,630) York Refrigeration Group (103) (501) (259) (501) Unitary Products Group - - - - Bristol Compressors (654) (783) (576) (940) ----------- ----------- ----------- ---------- $ (1,847) $ (2,645) $ (1,949) $ (4,071) Earnings before interest and taxes (EBIT): Engineered Systems Group $ 45,000 $ 42,241 $ 63,112 $ 57,319 York Refrigeration Group 18,424 19,857 28,724 26,088 Unitary Products Group 24,770 23,005 37,522 32,287 Bristol Compressors 17,957 20,556 34,642 42,106 Eliminations, general corporate expenses and other non-allocated items (72,309) (18,291) (118,947) (40,999) (Loss) gain on divestitures - (988) - 26,902 ----------- ----------- ----------- ---------- $ 33,842 $ 86,380 $ 45,053 $ 143,703 Interest expense, net 18,282 20,357 38,231 40,231 ----------- ----------- ----------- ---------- Income before income taxes $ 15,560 $ 66,023 $ 6,822 $ 103,472 (Benefit) provision for income taxes (17,256) 20,336 (17,000) 34,690 ----------- ----------- ----------- ---------- Net income $ 32,816 $ 45,687 $ 23,822 $ 68,782 =========== =========== ========== ==========
(continued) 10 11
June 30, 2001 December 31, 2000 ------------- ----------------- Total assets: Engineered Systems Group $1,035,406 $1,088,779 York Refrigeration Group 577,416 611,053 Unitary Products Group 375,414 323,045 Bristol Compressors 267,548 222,934 Eliminations and other non-allocated assets 452,617 528,400 ---------- ---------- $2,708,401 $2,774,211 ========= =========
(11) In June 1999, the Company acquired all of the outstanding capital stock of Sabroe A/S (Sabroe), a Danish company, for $407.1 million in cash and assumed debt of $216.0 million. Sabroe was a world leader in supplying refrigeration systems and products. In connection with the acquisition, the Company developed a plan to restructure Sabroe operations and integrate Sabroe with the Company's pre-existing refrigeration business. The Company has substantially completed executing the plan for integrating Sabroe into the York Refrigeration Group. The Sabroe portion of the plan included the Retech and Norrkoping manufacturing plant closures in Denmark and Sweden, respectively, certain duplicate sales and service office closures in Europe and Asia, product rationalizations, workforce reductions and other costs. The following table details the activity in the first half of 2001:
Remaining Utilized in Remaining Accruals at Six Months Ended Accruals at (in thousands) December 31, 2000 June 30, 2001 June 30, 2001 ------------ ----------------- ------------- ------------- Severance costs $1,000 $ 749 $ 251 Contractual obligations 1,149 1,049 100 Other 479 218 261 ------ ------ ------- $2,628 $2,016 $ 612 ===== ===== ======
(12) In 1999 and 2000, the Company recorded charges to operations relating to the acquisition of Sabroe and the related restructuring and integration of the York Refrigeration business. In the second quarter of 2000, the Company recorded a net credit of $0.3 million for integration activities. The credit was a result of the excess of proceeds received for the sale of the building and other assets at the prior Gram facility in Denmark over the related net book value and other integration costs for office integration, product training, and relocation. For the first six months of 2000, the Company recorded net expenses of $1.2 million for integration activities. (13) In the second quarter of 2001, the first quarter of 2001, and the last two quarters of 2000, the Company recorded charges of $42.6 million, $24.9 million, and $52.6 million respectively, including $7.4 million, $2.9 million, and $4.5 million, respectively, charged to cost of goods sold, relating to plant closings and divestitures, product line and facility rationalizations, selling, general and administrative expense reductions and other one time costs. The 2000 and 2001 charges included write-downs for the impairment of fixed assets and other assets relating to facilities to be closed or divested and other impaired assets. These actions included the plant closure of the Unitary Products Group factory in Elyria, Ohio, the Engineered Systems Group Airside factory in Portland, Oregon, the York Refrigeration Group facility in San Antonio, Texas and factories in Asquith, Australia, Montevideo, Uruguay, and Barlassina, Italy. Severance and other accruals included planned reductions in workforce throughout the Company. Of the approximately 1,950 salary and wage employee reductions planned, approximately 250 remained at June 30, 2001. Detail of the activity in the first half of 2001 is as follows: (continued) 11 12
Additional Non-cash Accrual Accrual Write-downs Established Utilized Reduction in Six in Six in Six in Six Months Remaining Months Months Months Remaining Ended Accruals at Ended Ended Ended Accruals at June 30, Dec. 31, June 30, June 30, June 30, June 30, (in thousands) 2001 2000 2001 2001 2001 2001 ------------ ---- ---- ---- ---- ---- ---- Fixed asset write-downs $ 15,912 $ - $ - $ - $ - $ - Inventory write-downs 10,301 - - - - - Other asset write-downs 477 - - - - - Severance - 5,526 18,158 13,397 692 9,595 Contractual obligations - 738 4,308 2,637 515 1,894 Other - 600 19,939 14,527 412 5,600 --------- -------- -------- -------- -------- -------- $ 26,690 $ 6,864 $ 42,405 $ 30,561 $ 1,619 $ 17,089 ========= ======== ======== ======== ======== ========
(14) In February 2000, the Company sold Northfield Freezing Systems, a supplier to the food processing industry, to FMC Corporation for $39.4 million. In April 2000, the Company sold another small business for $2.4 million. The sale of the two businesses resulted in a net pretax gain of $26.9 million in the first half of 2000. (15) The benefit for income taxes of $17.3 million for the second quarter of 2001 and $17.0 million for year-to-date 2001 arose primarily from significant one-time tax benefits relating to certain foreign restructuring activities for which the Company will deduct the related costs for income tax purposes in 2001. The tax rate for normal operations was 30% for the first six months of 2001 compared to 31% for the same period of 2000. The tax rate improvement was the result of more effective foreign tax planning strategies and the commencement of new tax holidays in certain areas. (16) Reference is made to Registrant's 2000 Annual Report on Form 10-K for more detailed financial statements and footnotes. 12 13 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations
Net Sales (in thousands) Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Engineered Systems Group $ 517,329 $ 483,892 $ 958,843 $ 889,075 York Refrigeration Group 232,676 259,814 444,206 480,972 Unitary Products Group 227,508 233,978 401,451 403,026 Bristol Compressors 162,773 162,424 330,823 325,002 Eliminations (62,814) (73,711) (115,746) (134,674) --------- --------- --------- --------- Net Sales $1,077,472 $1,066,397 $2,019,577 $1,963,401 ========= ========= ========= ========= U.S. 50% 49% 50% 50% Non-U.S. 50% 51% 50% 50% --- --- --- --- Total 100% 100% 100% 100% ==== ==== ==== ====
Net sales for the three months ended June 30, 2001 increased 1.0% to $1,077.5 million from $1,066.4 million for the same period in 2000. Net sales for the six months ended June 30, 2001 increased 2.9% to $2,019.6 million as compared to $1,963.4 million for the six months ended June 30, 2000. From a geographic perspective, for the three months ended June 30, 2001, U.S. sales increased 2.3% to $540.4 million and non-U.S sales decreased 0.2% to $537.1 million. Order backlog at June 30, 2001 was $1,052.7 million compared to $1,083.4 million as of June 30, 2000 and $1,018.5 million as of December 31, 2000. Engineered Systems Group (ESG) sales for the three months ended June 30, 2001 increased 6.9% to $517.3 million from $483.9 million for the same period in 2000. Year-to-date sales increased 7.8% to $958.8 million. The increase in sales was primarily due to strength in the North American equipment and service businesses. York Refrigeration Group (YRG) sales for the three months ended June 30, 2001 decreased 10.4% to $232.7 million from $259.8 million for the same period in 2000. Year-to-date sales decreased 7.6% to $444.2 million. YRG's continued focus on improving the quality of its contracting business in Europe resulted in a planned reduction in contracting revenue. Equipment sales in Europe and the U.S. also declined from 2000. Unitary Products Group (UPG) sales for the three months ended June 30, 2001 decreased 2.8% to $227.5 million from $234.0 million for the same period in 2000. Year-to-date sales decreased 0.4% to $401.5 million. The sales decrease resulted from declines in the North American unitary market and the manufactured housing market, partially offset by the development of new distribution activities in the first two quarters of 2001. Bristol Compressors sales for the three months ended June 30, 2001 increased 0.2% to $162.8 million from $162.4 million for the same period in 2000. Year-to-date sales increased 1.8% to $330.8 million. Increased international sales offset the impact of the decline in the North American unitary market. During the second quarter ended June 30, 2001, gross profit, excluding $7.4 million of restructuring charges, $9.6 million of one-time costs related to cost reduction actions, and $5.9 million related to a discontinued product line, decreased 2.7% to $232.4 million (21.6% of sales) from $238.8 million (22.4% of sales) during the second quarter (continued) 13 14 ended June 30, 2000. During the six months ended June 30, 2001, gross profit, excluding $10.3 million of restructuring charges, $13.5 million of one-time costs related to cost reduction actions, and $7.6 million related to a discontinued product line, decreased 0.6% to $422.2 million (20.9% of sales) from $424.8 million (21.6% of sales) during the same period of 2000. The decrease is primarily due to the impact of competitive margin pressures, changes in product mix, and increased investments relating to the Company's service business and distribution activities. Selling, general and administrative expense (SG&A) decreased 7.8% to $142.3 million (13.2% of sales) in the second quarter ended June 30, 2001 from $154.4 million (14.5% of sales) in the second quarter ended June 30, 2000. For the six months ended June 30, 2001, SG&A expense decreased to $290.6 million (14.4% of sales) compared to $310.9 million (15.8% of sales) for the six months ended June 30, 2000. The decrease in dollars and percentage is primarily due to staff reductions and other cost reduction efforts. Also, included in SG&A for the first two quarters ended June 30, 2000 was $6.7 million of executive severance costs. In October 2000, the Company announced initiation of a cost reduction process designed to result in savings of $25 million to $30 million in 2001, and continuing annual savings of $50 million to $60 million thereafter. These actions include plant closures and divestitures, product line and facility rationalizations, selling, general and administrative expense reductions and other one time costs. In the second quarter of 2001, the Company expanded the scope of the cost reduction process to include additional plant closings and staff reductions. These actions are expected to result in additional annual savings of $8 million in 2002 and thereafter. Total pre-tax charges to implement the cost reduction program are estimated to approximate $155 million, of which $85 million require cash payments. During the second quarter and first quarter of 2001, the Company recorded charges to operations of $52.2 million and $28.8 million, respectively, related to these cost reduction actions, including $17.0 million and $6.8 million, respectively, charged to cost of goods sold as discussed above. In 2000, the Company recorded charges to operations of $52.6 million, including $4.5 million charged to cost of goods sold. The charges included $20.3 million, $6.4 million, and $36.0 million in write-downs of various assets in the second quarter ended June 30, 2001, the first quarter ended March 31, 2001, and the year ended December 31, 2000, respectively. In the second quarter of 2000, the Company recorded a net credit of $0.3 million for integration activities. The credit was a result of the excess of proceeds received for the sale of the building and other assets at the prior Gram facility in Denmark over the related net book value and other integration costs for office integration, product training, and relocation. For the first six months of 2000, the Company recorded net expenses of $1.2 million for integration activities. Equity in earnings of affiliates was $1.8 million during the second quarter of 2001 as compared to $2.6 million during the second quarter of 2000. Year-to-date equity in earnings of affiliates was $1.9 million in 2001 compared to $4.1 million in 2000. The decline was due to a reduction in earnings at the Company's joint ventures in Malaysia and Spain. In February 2000, the Company sold Northfield Freezing Systems, a supplier to the food processing industry, to FMC Corporation for $39.4 million. In April 2000, the Company sold another small business for $2.4 million. The sale of the two businesses resulted in a net pretax gain of $26.9 million in the first half of 2000. During the second quarter ended June 30, 2001, earnings before interest and taxes (EBIT) decreased to $33.8 million (3.1% of sales) from $86.4 (8.1% of sales) for the same period in 2000. Excluding the charges discussed above and the loss on divestitures, EBIT for the second quarter ended June 30, 2001 increased to $91.9 million (8.5% of sales) from $90.3 million (8.5% of sales) for the second quarter ended June 30, 2000. EBIT, excluding the charges discussed above and the gain on divestitures, increased 7.1% to $133.6 million (6.6% of sales) for the six months ended June 30, 2001 from $124.7 million (6.4% of sales) for the same six months of 2000. The discussion below of each business unit's EBIT excludes the gain (loss) on divestitures and all charges discussed above. ESG EBIT for the three months ended June 30, 2001 increased 6.5% to $45.0 million (8.7% of sales) from $42.2 million (8.7% of sales) for the same period in 2000. EBIT for the six months ended June 30, 2001 was $63.1 million compared to $57.3 million in 2000. The improvement resulted from increased sales, and manufacturing and SG&A cost reductions. (continued) 14 15 YRG EBIT for the three months ended June 30, 2001 decreased to $18.4 million (7.9% of sales) from $19.9 million (7.6% of sales) for the same period in 2000. EBIT for the six months ended June 30, 2001 was $28.7 million compared to $26.1 million in 2000. While the quarter was negatively impacted by pricing pressures and reduced volume in process refrigeration systems, year to date results improved as a result of the cost reduction actions and improved margins in the contracting business. UPG EBIT for the three months ended June 30, 2001 increased 7.7% to $24.8 million (10.9% of sales) from $23.0 million (9.8% of sales) for the same period in 2000. EBIT for the six months ended June 30, 2001 was $37.5 million compared to $32.3 million in 2000. The improvement reflected the benefits of the cost reduction process. Bristol Compressors EBIT for the three months ended June 30, 2001 decreased 12.6% to $18.0 million (11.0% of sales) from $20.6 million (12.7% of sales) for the same period in 2000. EBIT for the six months ended June 30, 2001 was $34.6 million compared to $42.1 million in 2000. The decline was due to a higher ratio of lower-margin product sales resulting from increased non-U.S. sales and increased production costs relating to employee benefits and higher energy prices. Net interest expense decreased to $18.3 million for the second quarter of 2001. Year-to-date interest expense was $38.2 million compared to $40.2 million for the same six months in 2000. The decrease was due to lower average debt and moderately lower interest rates. The benefit for income taxes of $17.3 million for the second quarter of 2001 and $17.0 million for year-to-date 2001 arose primarily from significant one-time tax benefits relating to certain foreign restructuring activities for which the Company will deduct the related costs for income tax purposes in 2001. The tax rate for normal operations was 30% for the first six months of 2001 compared to 31% for the same period of 2000. The tax rate improvement was the result of more effective foreign tax planning strategies and the commencement of new tax holidays in certain areas. Net income, as a result of the above factors, was $32.8 million during the second quarter of 2001 as compared to $45.7 million during the second quarter of 2000. For the six months ended June 30, 2001, net income was $23.8 million compared to $68.8 million in the first six months of 2000. Liquidity and Capital Resources Working capital requirements are generally met through a combination of internally generated funds, bank lines of credit, commercial paper issuances, financing of trade receivables and credit terms from suppliers which approximate receivable terms to the Company's customers. The Company believes that these sources, including its $400 million Five Year Credit Agreement and its $300 million 364-Day Credit Agreement described below, will be sufficient to meet working capital needs during 2001. Additional sources of working capital include customer deposits and progress payments. Working capital was $488.5 million and $539.8 million as of June 30, 2001 and December 31, 2000, respectively. The decrease was primarily the result of a decrease in inventory and an increase in short-term debt, partially offset by an increase in receivables and a reduction in accounts payable and accrued expenses. The improvement reflected the Company's increased emphasis on asset utilization. The current ratio was 1.50 at June 30, 2001, as compared to 1.59 for December 31, 2000. Total indebtedness was $921.2 million at June 30, 2001, primarily consisting of borrowings of $475.7 million in commercial paper, $300.0 million of senior notes, and $75.0 million in bank lines. At June 30, 2001, the Company had available a $400 million Five Year Credit Agreement expiring May 29, 2006, a $300 million 364-Day Credit Agreement expiring May 28, 2002, and a $200 million 120-Day Credit Agreement expiring September 26, 2001 (collectively, the Agreements). The $400 million Five Year Credit Agreement and the $300 million 364-Day Credit Agreement provide for borrowings at LIBOR plus 0.75% or 0.775%, and LIBOR plus 0.875% or 0.90%, respectively, based on the amount of facility utilization. The $200 million 120-Day Credit Agreement provides for borrowings at LIBOR plus 1.00%. The Company pays an annual fee of 0.125% on the $400 million facility, and 0.10% on the $300 million and $200 million facilities. All three Credit Agreements allow for (continued) 15 16 borrowings at specified bid rates. At June 30, 2001, the three-month LIBOR rate was 3.85%. The Agreements contain financial covenants requiring the Company to maintain certain financial ratios and standard provisions limiting leverage and liens. The Company was in compliance with these financial covenants at June 30, 2001. Commercial paper borrowings are expected to be reborrowed in the ordinary course of business. The interest rate on the commercial paper was 4.25% as of June 30, 2001. At June 30, 2001 and December 31, 2000, the Company had $300 million of senior notes outstanding. On June 1, 1998, the Company issued $200 million of 6.70% fixed rate senior notes having a maturity of ten years from the date of issue. The remaining $100 million ten-year senior notes bear interest at a 6.75% fixed rate and are due March 2003. The Company has additional domestic bank lines that provide for total borrowings of $100 million at June 30, 2001 and December 31, 2000, of which $25.0 million and $93.8 million, respectively, were unused. The Company's non-U.S. subsidiaries maintain bank credit facilities in various currencies that provided for available borrowings of $331.0 million and $349.3 million at June 30, 2001 and December 31, 2000, respectively, of which $293.6 million and $301.0 million, respectively, were unused. In some instances, borrowings against these credit facilities have been guaranteed by the Company to assure availability of funds at favorable rates. In April 2001, the Company filed a registration statement with the SEC. The registration statement became effective July 19, 2001. The Company may offer for sale up to $300 million of debt securities, the specific terms of which will be determined at the time of sale pursuant to the registration statement and market conditions. Pursuant to a receivable sales agreement, $175 million of receivables were sold and excluded from the accompanying consolidated balance sheets at June 30, 2001 and December 31, 2000. The agreement provides for receivable sales up to $175 million, but is subject to decreases based on the level of eligible accounts receivable and restrictions relating to concentrations of receivables. The discount rate on the receivables sold was 3.93% and 6.66% at June 30, 2001 and December 31, 2000, respectively. Because the Company's obligations under the credit and receivables sales agreements bear interest at floating rates, the Company's interest costs are sensitive to changes in prevailing interest rates. Based on historical cash flows, the Company believes that it will be able to satisfy its principal and interest payment obligations and its working capital and capital expenditure requirements from operating cash flows together with the available financing. In the ordinary course of business, the Company enters into various types of transactions that involve contracts and financial instruments with off-balance-sheet risk. The Company enters into these financial instruments to manage financial market risk, including foreign exchange, commodity price and interest rate risk. The Company enters into these financial instruments utilizing over-the-counter as opposed to exchange traded instruments. The Company mitigates the risk that counterparties to these over-the-counter agreements will fail to perform by only entering into agreements with major international financial institutions. Capital expenditures were $35.3 million for the six months ended June 30, 2001 as compared to $46.2 million for the same period of 2000. Capital expenditures currently anticipated for expanded capacity, cost reductions and the introduction of new products during the next twelve months are expected to be in excess of depreciation and amortization. These expenditures will be funded from a combination of operating cash flows and available financing. Cash dividends of $0.15 per share were paid on common stock in the second quarter of 2001. 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 the Company's profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. (continued) 16 17 New Accounting Standards In September 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No.140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The standard replaces SFAS No.125 and revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. The standard is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. This statement is not expected to materially impact the Company's financial statements. In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the purchase method of accounting be used for all business combinations completed after June 30, 2001, and specifies criteria for the recognition and reporting of intangible assets apart from goodwill. Under Statement 142, beginning January 1, 2002 the Company will no longer amortize goodwill and intangible assets with indefinite lives, but instead will test those assets for impairment at least annually. Intangible assets with definite useful lives will be amortized over such lives to their estimated residual values. The Company is required to adopt Statement 142 on January 1, 2002, and within six months of that date, to assess in accordance with the provisions of the Statement whether there is an indication that any goodwill or other intangible assets with indefinite lives are impaired as of that date. As soon as possible after a determination that any goodwill or other intangible assets may be impaired, but not later than December 31, 2002, the Company must re-compute the amount of such goodwill or other intangible asset with an indefinite life in accordance with the provisions of Statement 142. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle. Because of the extensive effort needed to accumulate the information required to comply with Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's financial statements. Forward-Looking Information - Risk Factors To the extent the Company has made "forward-looking statements," certain risk factors could cause actual results to differ materially from those anticipated in such forward-looking statements including, but not limited to, competition, government regulation, environmental considerations and the successful implementation of the Company's cost reduction initiatives. Unseasonably cool spring or summer weather could adversely affect the Company's UPG residential air conditioning business and, similarly, the Bristol compressor business. The ESG air conditioning business could be affected by a slowdown in the large chiller market and by the acceptance of new product introductions. YRG could be adversely affected by the effects of declining European currencies. In addition, overall performance of the Company could be affected by any serious economic downturns in various world markets. 17 18 PART II - OTHER INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES Item 1 Legal Proceedings Not Applicable 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 24, 2001. (b) Proxies were solicited for the meeting. All nominees for Director were elected and item (c) 2 and 3 (see below) were approved. (c) The following votes were cast at the Annual Meeting for the matters indicated below:
1. Election of Directors Votes For Votes Withheld --------------------- --------- -------------- Gerald C. McDonough 33,744,148 545,315 Michael R. Young 33,978,850 310,613 W. Michael Clevy 33,987,413 302,050 Malcolm W. Gambill 33,980,548 308,915 Robert F. B. Logan 33,983,154 306,309 Paul J. Powers 33,984,678 304,785 Donald M. Roberts 33,984,568 304,895 James A. Urry 33,983,646 305,817 2. Proposal of the Amendment to the Votes For Votes Against Employee Stock Option Purchase Plan --------- ------------- 33,678,270 580,241 3. The appointment of KPMG Votes For Votes Against LLP as independent auditors --------- ------------- 34,162,906 109,926 4. Shareholder proposal relating to Votes For Votes Against maximizing value --------- ------------- 4,277,780 26,463,238
Item 5 Other Information Not Applicable Item 6 Exhibits and Reports on Form 8-K (a) Exhibit 4.1 - 120-day CREDIT AGREEMENT, dated as of May 29, 2001, among YORK INTERNATIONAL CORPORATION, as borrower, the initial lenders named therein, as initial lenders, CITIBANK, N.A., as administrative agent, THE CHASE MANHATTAN BANK, as syndication agent, BANK OF TOKYO-MITSUBISHI and FIRST UNION NATIONAL BANK, as (continued) 18 19 documentation agents, and JP MORGAN SECURITIES, INC. and SALOMON SMITH BARNEY INC., as joint lead arrangers and joint bookrunners. Exhibit 4.2 - 364-Day CREDIT AGREEMENT, dated as of May 29, 2001, among YORK INTERNATIONAL CORPORATION, as borrower, the initial lenders named therein, as initial lenders, CITIBANK, N.A., as administrative agent, THE CHASE MANHATTAN BANK, as syndication agent, BANK OF TOKYO-MITSUBISHI, FIRST UNION NATIONAL BANK, and FLEET NATIONAL BANK, as documentation agents, and JP MORGAN SECURITIES, INC. and SALOMON SMITH BARNEY INC., as joint lead arrangers and joint bookrunners. Exhibit 4.3 - FIVE YEAR CREDIT AGREEMENT, dated as of May 29, 2001, among YORK INTERNATIONAL CORPORATION, as borrower, the initial lenders and initial issuing bank named therein, as initial lenders and initial issuing bank, CITIBANK, N.A., as administrative agent, THE CHASE MANHATTAN BANK, as syndication agent, BANK OF TOKYO-MITSUBISHI, FIRST UNION NATIONAL BANK, and FLEET NATIONAL BANK, as documentation agents, and JP MORGAN SECURITIES, INC. and SALOMON SMITH BARNEY INC., as joint lead arrangers and joint bookrunners. (b) None 19 20 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 30, 2001 /S/ C. David Myers --------------------------------- ----------------------------------- C. David Myers Corporate Vice President and Chief Financial Officer 20