10-Q 1 w62242e10vq.txt FORM 10-Q YORK INTERNATIONAL CORPORATION 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, 2002 COMMISSION FILE NUMBER 1-10863 YORK INTERNATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3473472 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 631 SOUTH RICHLAND AVENUE, YORK, PA 17403 (717) 771-7890 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at August 13, 2002 ----- ----------------------------- Common Stock, par value $.005 39,445,405 shares
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 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, 2002 and 2001 3 Consolidated Condensed Balance Sheets - June 30, 2002 (unaudited) and December 31, 2001 4 Consolidated Condensed Statements of Cash Flows - (unaudited) Six Months Ended June 30, 2002 and 2001 5 Supplemental Notes to Consolidated Condensed Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities 20 Item 3. Defaults Upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item 5. Other Information 21 Item 6. Exhibits and Reports on Form 8-K 21
2 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES ITEM 1 FINANCIAL STATEMENTS Consolidated Condensed Statements of Operations (unaudited) (in thousands, except per share data)
Three Months Ended June 30, Six Months Ended June 30, 2002 2001 2002 2001 ---------------- ---------------- ---------------- ---------------- Net sales $ 1,047,094 $ 1,077,472 $ 1,891,476 $ 2,019,577 Cost of goods sold 831,242 867,914 1,522,777 1,628,695 ---------------- ---------------- ---------------- ---------------- Gross profit 215,852 209,558 368,699 390,882 Selling, general and administrative expenses 143,236 142,339 286,668 290,603 Restructuring charges, net -- 35,224 2,730 57,175 ---------------- ---------------- ---------------- ---------------- Income from operations 72,616 31,995 79,301 43,104 Interest expense, net 12,436 18,282 25,149 38,231 Loss on divestiture -- -- 10,683 -- Equity in earnings of affiliates (2,038) (1,847) (2,608) (1,949) ---------------- ---------------- ---------------- ---------------- Income before income taxes and cumulative effect of a change in accounting principle 62,218 15,560 46,077 6,822 Provision (benefit) for income taxes 13,999 (17,256) 12,603 (17,000) ---------------- ---------------- ---------------- ---------------- Income before cumulative effect of a change in accounting principle 48,219 32,816 33,474 23,822 Cumulative effect of a change in accounting principle -- -- (179,436) -- ---------------- ---------------- ---------------- ---------------- Net income (loss) $ 48,219 $ 32,816 $ (145,962) $ 23,822 ================ ================ ================ ================ Basic earnings (loss) per share: Income before cumulative effect of a change in accounting principle $ 1.23 $ 0.85 $ 0.85 $ 0.62 Cumulative effect of a change in accounting principle -- -- (4.56) -- ---------------- ---------------- ---------------- ---------------- Net income (loss) $ 1.23 $ 0.85 $ (3.71) $ 0.62 ================ ================ ================ ================ Diluted earnings (loss) per share: Income before cumulative effect of a change in accounting principle $ 1.21 $ 0.84 $ 0.84 $ 0.61 Cumulative effect of a change in accounting principle -- -- (4.49) -- ---------------- ---------------- ---------------- ---------------- Net income (loss) $ 1.21 $ 0.84 $ (3.65) $ 0.61 ================ ================ ================ ================ Cash dividends per share $ 0.15 $ 0.15 $ 0.30 $ 0.30 ================ ================ ================ ================ Weighted average common shares and common equivalents outstanding: Basic 39,362 38,472 39,309 38,430 Diluted 39,998 39,006 39,955 38,922
See accompanying supplemental notes to consolidated condensed financial statements. 3 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES Consolidated Condensed Balance Sheets (in thousands)
June 30, 2002 December 31, (unaudited) 2001 ------------------- ------------------- ASSETS Current assets: Cash and cash equivalents $ 40,804 $ 39,434 Receivables, net 691,952 613,892 Inventories Raw material 141,471 143,148 Work in process 122,455 101,575 Finished goods 235,130 270,537 ------------------- ------------------- Total inventories 499,056 515,260 Prepayments and other current assets 104,226 81,883 ------------------- ------------------- Total current assets 1,336,038 1,250,469 Deferred income taxes 42,951 56,149 Investments in affiliates 26,918 24,957 Property, plant and equipment, net 493,143 480,999 Goodwill 492,268 651,673 Intangibles, net 30,764 28,415 Deferred charges and other assets 79,299 79,847 ------------------- ------------------- Total assets $ 2,501,381 $ 2,572,509 =================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ 38,337 $ 36,604 Accounts payable and accrued expenses 778,467 735,962 Income taxes 28,767 5,073 ------------------- ------------------- Total current liabilities 845,571 777,639 Long-term warranties 44,970 43,751 Long-term debt 681,515 724,378 Postretirement and postemployment benefits 208,743 208,195 Other long-term liabilities 74,430 79,112 ------------------- ------------------- Total liabilities 1,855,229 1,833,075 Stockholders' equity 646,152 739,434 ------------------- ------------------- Total liabilities and stockholders' equity $ 2,501,381 $ 2,572,509 =================== ===================
See accompanying supplemental notes to consolidated condensed financial statements. 4 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows (unaudited) (in thousands)
Six Months Ended June 30, 2002 2001 --------------- ---------------- Cash flows from operating activities: Net (loss) income $ (145,962) $ 23,822 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Cumulative effect of a change in accounting principle 179,436 -- Depreciation and amortization of property, plant and equipment 30,217 33,313 Amortization of deferred charges, intangibles and goodwill 1,358 13,883 Provision for doubtful receivables 8,849 4,411 Effect of non-cash charges 1,631 26,690 Loss on divestiture 10,683 -- Deferred income taxes 13,233 4,047 Loss on sale of fixed assets 1,201 1,829 Other (179) 1,427 Change in assets and liabilities net of effects from acquisitions and divestitures: Receivables (92,871) (80,833) Inventories 13,855 33,715 Prepayments and other current assets (23,893) 14,711 Accounts payable and accrued expenses 49,358 (66,512) Income taxes 23,758 (4,680) Other long-term assets and liabilities 2,361 8,490 --------------- ---------------- Net cash provided by operating activities 73,035 14,313 --------------- ---------------- Cash flows from investing activities: Purchases of other companies, net of cash acquired (2,248) -- Proceeds from divestiture, net 12,071 -- Capital expenditures (35,915) (35,301) Proceeds from sale of fixed assets 4,699 450 --------------- ---------------- Net cash used by investing activities (21,393) (34,851) --------------- ---------------- Cash flows from financing activities: Net proceeds on short-term debt 1,729 68,746 Net (payments) proceeds of commercial paper borrowings (29,305) 22,841 Net payments on other long-term debt (16,732) (66,044) Common stock issued 6,163 3,875 Treasury stock purchases (30) (38) Dividends paid (11,809) (11,544) --------------- ---------------- Net cash (used) provided by financing activities (49,984) 17,836 --------------- ---------------- Effect of exchange rate changes on cash and cash equivalents (288) 123 --------------- ---------------- Net increase (decrease) in cash and cash equivalents 1,370 (2,579) Cash and cash equivalents at beginning of period 39,434 26,425 --------------- ---------------- Cash and cash equivalents at end of period $ 40,804 $ 23,846 =============== ================
See accompanying supplemental notes to consolidated condensed financial statements. 5 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES Supplemental Notes To Consolidated Condensed Financial Statements (unaudited) (1) The consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. We believe that the information presented is not misleading and the disclosures are adequate. In our opinion, the accompanying consolidated condensed financial statements contain all adjustments necessary to present fairly the financial position as of June 30, 2002 and December 31, 2001, the results of operations for the three and six months ended June 30, 2002 and 2001, and cash flows for the six months ended June 30, 2002 and 2001. The results of operations for interim periods are not necessarily indicative of the results expected for the full year. Certain reclassifications have been made to the 2001 consolidated condensed financial statements to conform to the 2002 presentation. (2) The following table summarizes our indebtedness as of June 30, 2002 and December 31, 2001 (in thousands):
June 30, December 31, 2002 2001 ---------------- ---------------- Notes payable and current portion of long-term debt: Bank loans (primarily foreign currency) $ 34,692 $ 32,963 Current portion of long-term debt 3,645 3,641 ---------------- ---------------- Total $ 38,337 $ 36,604 ================ ================ Long-term debt: Commercial paper, 2.05% interest in 2002 and 2.38% interest in 2001 $ 168,397 $ 197,702 Senior notes, 6.75% interest, due March 2003 100,000 100,000 Senior notes, 6.625% interest, due August 2006 200,000 200,000 Senior notes, 6.70% interest, due June 2008 200,000 200,000 Other (primarily foreign bank loans) at an average rate of 6.57% in 2002 and 6.38% in 2001 16,763 30,317 ---------------- ---------------- Total 685,160 728,019 Less current portion (3,645) (3,641) ---------------- ---------------- Noncurrent portion $ 681,515 $ 724,378 ================ ================
As of June 30, 2002 and December 31, 2001, our borrowings consisted of senior notes, commercial paper issuances and various other bank and term loans. The commercial paper issuances and certain bank loans are expected to be reborrowed in the ordinary course of business, depending on our financing needs. As of June 30, 2002, it is expected that commercial paper will be issued to redeem the $100 million senior notes due March 2003. In May 2002, we amended our Five Year Credit Agreement and renewed our 364-Day Credit Agreement. We have available a $400 million Five Year Credit Agreement, which expires on May 29, 2006, and a $300 million 364-Day Credit Agreement, which expires on May 28, 2003 (collectively, the Agreements). As of December 31, 2001, we had available the $400 million Five Year Credit Agreement, and a $300 million 364-Day Credit Agreement, which expired on May 28, 2002. As of June 30, 2002 and December 31, 2001, no amounts were outstanding under the Agreements. 6 (continued) The $400 million Five Year Credit Agreement provides for borrowings at the London Interbank Offering Rate (LIBOR) plus 0.75% or 0.875%, and the $300 million 364-Day Credit Agreement provides for borrowings at LIBOR plus 0.775% or 0.90%, based on the amount of facility utilization. We pay annual fees of 0.125% on the $400 million facility and 0.10% on the $300 million facility. The Agreements allow for borrowings at specified bid rates. As of June 30, 2002 and December 31, 2001, the three-month LIBOR rate was 1.87% and 1.86%, respectively. The Agreements contain financial covenants requiring us to maintain certain financial ratios and standard provisions limiting leverage and liens. We were in compliance with these financial covenants as of June 30, 2002 and December 31, 2001. We have additional unused domestic bank lines that provide for total borrowings of $100 million as of June 30, 2002 and December 31, 2001. Our non-U.S. subsidiaries maintain bank credit facilities in various currencies that provided for available borrowings of $383.9 million and $386.3 million as of June 30, 2002 and December 31, 2001, respectively, of which $293.0 million and $276.1 million, respectively, were unused. See note 6 for discussion regarding revolving trade receivable purchase facility. (3) The following table summarizes our stockholders' equity as of June 30, 2002 and December 31, 2001 (in thousands, except per share data):
June 30, December 31, 2002 2001 ---------------- ---------------- Common stock $.005 par value; 200,000 shares authorized; issued 45,616 shares at June 30, 2002 and December 31, 2001 $ 228 $ 228 Additional paid-in capital 722,558 723,980 Retained earnings 291,318 449,089 Accumulated other comprehensive losses (139,221) (196,870) Treasury stock, at cost; 6,172 shares at June 30, 2002 and 6,394 shares at December 31, 2001 (228,706) (236,938) Unearned compensation (25) (55) --------- --------- Total stockholders' equity $ 646,152 $ 739,434 ========= =========
(4) Derivative Instruments and Hedging Activities We are exposed to market risk associated with changes in interest rates, foreign currency exchange rates, and certain commodity prices. To enhance our ability to manage these market risks, we enter into derivative instruments for periods consistent with the related underlying exposures. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in fair value or cash flows of the underlying exposures being hedged. 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. Recognized gains or losses for the six months ended June 30, 2002 as a result of the discontinuance of cash flow hedges were not significant. Currency Rate Hedging We manufacture and sell our products in a number of countries throughout the world, and therefore, are exposed to movements in various currencies against the United States Dollar and against the currencies in which we manufacture. Through our currency hedging activities, we seek to minimize the risk that cash flows resulting from the sale of products, manufactured in a currency different from the currency used by the selling subsidiary, will be affected by changes in foreign currency exchange rates. Foreign currency derivative instruments (forward contracts and purchased option contracts) are matched to the underlying foreign currency exposures and are executed to minimize foreign exchange transaction costs. 7 (continued) As of June 30, 2002, we forecasted that $1.2 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 June 30, 2002, we forecasted that $0.7 million of net losses in accumulated other comprehensive losses will be reclassified into earnings within the next twelve months. Interest Rate Hedging We manage our interest rate risk by entering into both fixed and variable rate debt at the lowest possible costs. In addition, we enter into interest rate swap contracts in order to achieve a cost effective mix of fixed and variable rate indebtedness. As of June 30, 2002, we had interest rate swap contracts to pay variable interest, based on the six-month LIBOR rate, and received a fixed rate of interest of 6.625% on a notional amount of $100 million. As of June 30, 2002, the fair value of these swap contracts was an unrealized gain of $5.3 million. We have designated our outstanding interest rate swap contracts as fair value hedges of an underlying fixed rate debt obligation. The fair value of these contracts is recorded in other long-term assets or liabilities with a corresponding increase or decrease in the fixed rate debt obligation. The change in fair values of both the fair value hedge instruments and the underlying debt obligations are recorded as equal and offsetting unrealized gains and losses in the interest expense component of the consolidated condensed statements of operations. All existing fair value hedges are 100% effective under Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." As a result, there is no impact on current earnings resulting from hedge ineffectiveness. (5) Comprehensive income (loss) is determined as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30, 2002 2001 2002 2001 ------------- ------------ ------------- ------------- Net income (loss) $ 48,219 $ 32,816 $ (145,962) $ 23,822 Other comprehensive income (loss): Foreign currency translation adjustment 43,196 (20,700) 51,159 (51,706) Cash flow hedges: Transition adjustment, net of tax -- -- -- (976) Reclassification adjustment, net of tax 2,181 667 3,413 1,219 Net derivative (losses) gains, net of tax (635) (2,153) 3,077 (4,928) ------------- ------------ ------------- ------------- Comprehensive income (loss) $ 92,961 $ 10,630 $ (88,313) $ (32,569) ============= ============ ============= =============
(6) Pursuant to the terms of a revolving facility which expires in December 2004, we sell our trade receivables to a wholly-owned, consolidated subsidiary, York Receivables Funding LLC (YRFLLC). In turn, YRFLLC sells, on a revolving basis, up to a $175.0 million undivided ownership interest in the purchased trade receivables to bank conduits. We continue to service the receivables. No servicing asset or liability has been recognized as our cost to service the receivables approximates the servicing income. In accordance with the facility, YRFLLC has sold $175.0 million of an undivided interest in trade receivables as of June 30, 2002 and December 31, 2001. The proceeds from the sale were reflected as a 8 (continued) reduction of receivables in the accompanying consolidated condensed balance sheets as of June 30, 2002 and December 31, 2001. The discount rate on the trade receivables sold was 1.82% and 2.00% as of June 30, 2002 and December 31, 2001, respectively. (7) Effective January 1, 2002 we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, we no longer amortize goodwill, but instead we test reporting unit goodwill for impairment at least annually. Commencing in the fourth quarter of 2002, we will perform an annual goodwill impairment test for each of our reporting units. The Engineered Systems Group, York Refrigeration Group, Unitary Products Group and Bristol Compressors segments were identified as our reporting units, as defined under the standard. We will identify potential goodwill impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its fair value, the amount of goodwill impairment loss, if any, must be measured. We measure the amount of goodwill impairment loss by comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized as an operating expense. Upon adoption of SFAS No. 142, we were required to perform a transitional goodwill impairment test. We completed the transitional goodwill impairment test during the second quarter of 2002. We tested our reporting units by comparing carrying value to fair value as of January 1, 2002. We determined fair value using a discounted cash flow and market-multiple approach. The transitional impairment analysis indicated an impairment existed in our York Refrigeration Group reporting unit. No indication of impairment existed in our other reporting units. The historic and projected financial performance of the York Refrigeration Group, which includes the entities acquired in the Sabroe acquisition, were insufficient to support the related goodwill. We employed a third-party appraisal firm to determine the fair value of the York Refrigeration Group reporting unit as well as York Refrigeration Group's property, plant and equipment and intangibles. As a result, we recognized a non-cash transitional goodwill impairment charge of $179 million in our York Refrigeration Group reporting unit. As required by SFAS No. 142, the transitional goodwill impairment charge was recorded as a cumulative effect of a change in accounting principle in the accompanying consolidated condensed statement of operations as of January 1, 2002. The changes in the carrying amount of goodwill for the six months ended June 30, 2002 by segment, are as follows (in thousands):
Net Transitional Foreign Balance as of Goodwill Impairment Currency Balance as of Dec. 31, 2001 Acquired Adjustment Fluctuation June 30, 2002 ----------------- ------------- ----------------- -------------- ----------------- Engineered Systems Group $ 83,872 $ 801 $ -- $ 560 $ 85,233 York Refrigeration Group 371,048 704 (179,436) 17,966 210,282 Unitary Products Group 140,440 -- -- -- 140,440 Bristol Compressors 56,313 -- -- -- 56,313 --------------- ----------- -------------- ------------ --------------- $ 651,673 $ 1,505 $ (179,436) $ 18,526 $ 492,268 =============== =========== ============== ============ ===============
9 (continued) The following table presents net income and basic and diluted earnings per share excluding goodwill amortization for the periods indicated (in thousands, except per share data):
Three Months Six Months Ended Ended June 30, 2001 June 30, 2001 ----------------- ----------------- Reported net income $ 32,816 $ 23,822 Add back: goodwill amortization 5,986 12,328 ----------------- ----------------- Adjusted net income $ 38,802 $ 36,150 ================= ================= Basic earnings per share: Reported net income $ 0.85 $ 0.62 Add back: goodwill amortization 0.16 0.32 ----------------- ----------------- Adjusted net income $ 1.01 $ 0.94 ================= ================= Diluted earnings per share: Reported net income $ 0.84 $ 0.61 Add back: goodwill amortization 0.15 0.32 ----------------- ----------------- Adjusted net income $ 0.99 $ 0.93 ================= =================
The following table presents net income and basic and diluted earnings per share excluding goodwill amortization for the twelve months ended December 31, 2001, 2000 and 1999 (in thousands, except per share data):
Twelve Months Ended December 31, 2001 2000 1999 ------------------ ----------------- ----------------- Reported net income $ 45,989 $ 106,607 $ 75,882 Add back: goodwill amortization 24,447 25,634 20,330 ------------------ ----------------- ----------------- Adjusted net income $ 70,436 $ 132,241 $ 96,212 ================== ================= ================= Basic earnings per share: Reported net income $ 1.19 $ 2.80 $ 1.91 Add back: goodwill amortization 0.63 0.67 0.52 ------------------ ----------------- ----------------- Adjusted net income $ 1.82 $ 3.47 $ 2.43 ================== ================= ================= Diluted earnings per share: Reported net income $ 1.17 $ 2.78 $ 1.91 Add back: goodwill amortization 0.63 0.67 0.51 ------------------ ----------------- ----------------- Adjusted net income $ 1.80 $ 3.45 $ 2.42 ================== ================= =================
(8) The following table summarizes the major intangible asset classes subject to amortization included in the accompanying consolidated condensed balance sheets as of June 30, 2002 and December 31, 2001 (in thousands): 10 (continued)
Gross Carrying Accumulated Net Carrying June 30, 2002 Amount Amortization Amount ------------- ------------- ------------- ----------------- Trade names and trademarks $ 33,593 $ 3,574 $ 30,019 Other 1,425 680 745 ------------- ------------- ----------------- $ 35,018 $ 4,254 $ 30,764 ============= ============= ================= December 31, 2001 Trade names and trademarks $ 30,439 $ 2,734 $ 27,705 Other 1,237 527 710 ------------- ------------- ----------------- $ 31,676 $ 3,261 $ 28,415 ============= ============= =================
Amortization expense for trade names and trademarks and other intangible assets for the three and six months ended June 30, 2002 was $0.3 million and $0.6 million, respectively. For the three and six months ended June 30, 2001, amortization expense for trade names and trademarks and other intangible assets was $0.3 million and $0.6 million, respectively. The following table estimates the amount of amortization expense for trade names and trademarks and other intangible assets for the remainder of 2002 and each of the fiscal years indicated (in thousands): 2002 (July 1 - December 31) $ 626 2003 1,252 2004 1,252 2005 1,252 2006 1,252 Thereafter 25,130
(9) Net income (loss) as set forth in the consolidated condensed statements of operations is used in the computation of basic and diluted earnings (loss) per share information. Reconciliations of shares used in the computations of earnings (loss) per share are as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30, 2002 2001 2002 2001 ------------- -------------- -------------- ------------- Weighted average common shares outstanding used in the computation of basic earnings (loss) per share 39,362 38,472 39,309 38,430 Effect of dilutive securities: Non-vested restricted shares 2 3 2 3 Stock options 634 531 644 489 ------------ -------------- -------------- ------------- Weighted average common shares and equivalents used in the computation of diluted earnings (loss) per share 39,998 39,006 39,955 38,922 ============= ============== ============== ============= Stock options not included in the earnings (loss) per share computation as their effect would have been anti-dilutive 1,968 3,436 1,930 3,436 ============= ============== ============== =============
(10) In 2002, we reorganized certain portions of our operating segments. Prior year amounts were reclassified to conform to the current presentation. Also in 2002, we allocated certain goodwill, which was previously reflected as a non-allocated asset, to our operating segments in accordance with SFAS No. 142. Prior year total assets were reclassified to conform to the current presentation. The table below represents our operating results by segment (in thousands): 11 (continued)
Three Months Ended June 30, Six Months Ended June 30, 2002 2001 2002 2001 --------------- ----------------- ----------------- ---------------- Net sales: Engineered Systems Group $ 489,346 $ 516,468 $ 877,998 $ 958,290 York Refrigeration Group 231,252 233,783 420,381 446,028 Unitary Products Group 217,809 227,508 378,994 401,451 Bristol Compressors 163,698 162,773 319,654 330,823 Eliminations(1) (55,011) (63,060) (105,551) (117,015) --------------- ----------------- ----------------- ---------------- 1,047,094 1,077,472 1,891,476 2,019,577 =============== ================= ================= ================ (1)Eliminations include the following intersegment sales: Engineered Systems Group 3,758 7,262 5,899 15,824 York Refrigeration Group 7,828 4,938 14,913 10,371 Unitary Products Group 10,487 16,572 24,547 29,075 Bristol Compressors 32,938 34,288 60,192 61,745 --------------- ----------------- ----------------- ---------------- Eliminations 55,011 63,060 105,551 117,015 =============== ================= ================= ================ Income from operations: Engineered Systems Group 35,219 44,026 39,086 62,021 York Refrigeration Group 17,967 18,205 26,662 28,442 Unitary Products Group 18,282 24,770 15,842 37,522 Bristol Compressors 12,788 17,303 29,123 34,066 General corporate expenses, eliminations, and other non-allocated items (11,640) (14,264) (20,936) (30,420) Charges and operating expenses -- (58,045) (10,476) (88,527) --------------- ----------------- ----------------- ---------------- 72,616 31,995 79,301 43,104 =============== ================= ================= ================ Equity in earnings of affiliates: Engineered Systems Group (720) (1,090) (854) (1,114) York Refrigeration Group (349) (103) (761) (259) Bristol Compressors (969) (654) (993) (576) --------------- ----------------- ----------------- ---------------- (2,038) (1,847) (2,608) (1,949) =============== ================= ================= ================ Earnings before interest and taxes: Engineered Systems Group 35,939 45,116 39,940 63,135 York Refrigeration Group 18,316 18,308 27,423 28,701 Unitary Products Group 18,282 24,770 15,842 37,522 Bristol Compressors 13,757 17,957 30,116 34,642 General corporate expenses, eliminations, and other non-allocated items (11,640) (14,264) (20,936) (30,420) Charges and operating expenses -- (58,045) (10,476) (88,527) Loss on divestiture -- -- (10,683) -- --------------- ----------------- ----------------- ---------------- 74,654 33,842 71,226 45,053 Interest expense, net 12,436 18,282 25,149 38,231 --------------- ----------------- ----------------- ---------------- Income before income taxes and cumulative effect of a change in accounting principle 62,218 15,560 46,077 6,822 Provision (benefit) for income taxes 13,999 (17,256) 12,603 (17,000) --------------- ----------------- ----------------- ---------------- Income before cumulative effect of a change in accounting principle $ 48,219 $ 32,816 $ 33,474 $ 23,822 =============== ================= ================= ================
12 (continued)
June 30, 2002 Dec. 31, 2001 ------------------ ----------------- Total assets: Engineered Systems Group $ 1,025,076 $ 1,049,536 York Refrigeration Group 792,670 917,541 Unitary Products Group 484,981 447,359 Bristol Compressors 316,600 270,943 Eliminations and other non-allocated assets (117,946) (112,870) ------------------ ----------------- $ 2,501,381 $ 2,572,509 ================== =================
(11) In October 2000, we announced the initiation of a cost reduction process, which included plant closures and divestitures, product line and facility rationalizations, selling, general and administrative expense reductions and other one-time costs. In the second quarter of 2001, we expanded the scope of the cost reduction process to include additional plant closings and staff reductions. In the six months ended June 30, 2002, the six months ended June 30, 2001, and the three months ended June 30, 2001, we recorded restructuring charges of $2.8 million, $67.5 million and $42.6 million, respectively, including $0.1 million, $10.3 million, and $7.4 million, respectively, charged to cost of goods sold, relating to the cost reduction process. We incurred no similar charges in the three months ended June 30, 2002. The charges included write-downs for the impairment of fixed assets and other assets relating to facilities to be closed or divested and other impaired assets. These actions included the plant closure of the Unitary Products Group factory in Elyria, Ohio, the Engineered Systems Group Airside factory in Portland, Oregon, the York Refrigeration Group facility in San Antonio, Texas, the Bristol Compressor plant in Sparta, North Carolina and factories in Asquith, Australia; Montevideo, Uruguay; and Barlassina, Italy. Severance and other accruals included planned reductions in workforce throughout the company. Of the approximately 2,350 salary and wage employee reductions planned, approximately 200 remained at June 30, 2002. Detail of the activity in the six months ended June 30, 2002 is as follows:
Additional Non-cash Accrual Accrual Write-downs Established Utilized Reduction in Six in Six in Six in Six Remaining Months Months Months Months Remaining Accruals at Ended Ended Ended Ended Accruals at Dec. 31 June 30, June 30, June 30, June 30, June 30, (in thousands) 2001 2002 2002 2002 2002 2002 ------------ ------------ ------------ ------------ ------------ ------------ Fixed asset write-downs $ -- $ 1,500 $ -- $ -- $ -- $ -- Inventory write-downs -- 44 -- -- -- -- Other asset write-downs -- 87 -- -- -- -- Severance 10,728 -- 994 7,618 464 3,640 Contractual obligations 3,011 -- 5 737 6 2,273 Other 2,580 -- 658 985 -- 2,253 ------------ ------------ ------------ ------------ ------------ ------------ $ 16,319 $ 1,631 $ 1,657 $ 9,340 $ 470 $ 8,166 ============ ============ ============ ============ ============ ============
(12) In January 2002, we sold our Engineered Systems Group air conditioning operations in Australia for $12.1 million. The sale resulted in a loss of $10.7 million. 13 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth net sales and earnings before interest and taxes (EBIT) by segment (in thousands:)
Three Months Ended June 30, Six Months Ended June 30, 2002 2001 2002 2001 --------------- ---------------- ---------------- ---------------- Net sales: Engineered Systems Group $ 489,346 $ 516,468 $ 877,998 $ 958,290 York Refrigeration Group 231,252 233,783 420,381 446,028 Unitary Products Group 217,809 227,508 378,994 401,451 Bristol Compressors 163,698 162,773 319,654 330,823 Eliminations (55,011) (63,060) (105,551) (117,015) --------------- ---------------- ---------------- ---------------- Net sales $ 1,047,094 $ 1,077,472 $ 1,891,476 $ 2,019,577 =============== ================ ================ ================ EBIT: Engineered Systems Group $ 35,939 $ 45,116 $ 39,940 $ 63,135 York Refrigeration Group 18,316 18,308 27,423 28,701 Unitary Products Group 18,282 24,770 15,842 37,522 Bristol Compressors 13,757 17,957 30,116 34,642 General corporate expenses, eliminations, and other non-allocated items (11,640) (14,264) (20,936) (30,420) Charges and operating expenses -- (58,045) (10,476) (88,527) Loss on divestiture -- -- (10,683) -- --------------- ---------------- ---------------- ---------------- EBIT $ 74,654 $ 33,842 $ 71,226 $ 45,053 =============== ================ ================ ================
Consolidated Operations Net sales for the three months ended June 30, 2002 decreased 2.8% to $1,047.1 million from $1,077.5 million for the same period in 2001. Net sales for the six months ended June 30, 2002 decreased 6.3% to $1,891.5 million as compared to $2,019.6 million for the six months ended June 30, 2001. Reduced shipments of chillers and lower sales of unitary light commercial products were partially offset by service growth. (See further discussion below under Segment Analysis.). For the three months ended June 30, 2002, net sales in the United States decreased 2.7% to $525.6 million and international net sales decreased 2.9% to $521.5 million. Order backlog as of June 30, 2002 was $971.5 million compared to $1,052.7 million as of June 30, 2001 and $852.0 million as of December 31, 2001. Gross profit increased 3.0% to $215.9 million (20.6% of net sales) in the three months ended June 30, 2002 as compared to $209.6 million (19.4% of net sales) in the same period of 2001. During the six months ended June 30, 2002, gross profit decreased 5.7% to $368.7 million (19.5% of net sales) from $390.9 million (19.4% of net sales) for the six months ended June 30, 2001. Included in cost of goods sold for the six months ended June 30, 2002, the six months ended June 30, 2001, and the three months ended June 30, 2001, were $0.1 million, $10.3 million, and $7.4 million, respectively, of restructuring charges, $6.8 million, $13.5 million, and $9.6 million, respectively, of one-time costs related to cost reduction actions, and $0.8 million, $7.6 million, and $5.9 million, respectively, related to a discontinued product line. We incurred no similar charges in the three months ended June 30, 2002. 14 (continued) Excluding the charges discussed above, gross profit decreased 7.1% to $215.9 million (20.6% of net sales) in the three months ended June 30, 2002 from $232.4 million (21.6% of net sales) in the same period of 2001. For the six months ended June 30, 2002, gross profit, excluding the charges discussed above, decreased 10.8% to $376.4 million (19.9% of net sales) from $422.2 million (20.9% of net sales) for the six months ended June 30, 2001. The decreases were primarily due to reduced volume, the impact of competitive margin pressures, manufacturing inefficiencies, changes in product mix, and increased investments relating to our service activities. Selling, general and administrative (SG&A) expense increased 0.6% to $143.2 million (13.7% of net sales) in the three months ended June 30, 2002 from $142.3 million (13.2% of net sales) in the three months ended June 30, 2001. Increases resulting from higher medical and information technology costs and the effect of strengthening European currencies were partially offset by staff reductions and other cost reduction efforts and the elimination of goodwill amortization in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." For the six months ended June 30, 2002, SG&A expense decreased 1.4% to $286.7 million (15.2% of net sales) from $290.6 million (14.4% of net sales) for the same period of 2001. In addition to the items which affected second quarter expense, SG&A expense for the six months increased as a percent of sales due to a first quarter write-off of a $5.9 million receivable related to a Unitary Products Group distributor that became insolvent. In October 2000, we announced the initiation of a cost reduction process, which included plant closures and divestitures, product line and facility rationalizations, SG&A expense reductions and other one-time costs. In the second quarter of 2001, we expanded the scope of the cost reduction process to include additional plant closings and staff reductions. In the six months ended June 30, 2002, the six months ended June 30, 2001, and the three months ended June 30, 2001, we recorded charges to operations of $9.6 million, $81.0 million, and $52.2 million, respectively, related to these cost reduction actions, including the $6.9 million, $23.8 million, and $17.0 million, respectively, charged to cost of goods sold as discussed above. We incurred no similar charges in the three months ended June 30, 2002. The charges in the six months ended June 30, 2002, the six months ended June 30, 2001, and the three months ended June 30, 2001 included $1.6 million, $26.7 million, and $20.3 million, respectively, in write-downs of various assets and $1.2 million, $40.8 million, and $22.3 million, respectively, in accruals for severance and other costs. As of June 30, 2002, the closing of one facility was still in process. We do not anticipate significant additional costs to be incurred during the remainder of 2002 relating to the announced actions. Equity in earnings of affiliates was $2.0 million during the three months ended June 30, 2002 as compared to $1.8 million during the three months ended June 30, 2001. For the six months ended June 30, 2002, equity in earnings of affiliates was $2.6 million as compared to $1.9 million for the same period of 2001. The increase was primarily the result of improved performance of Scroll Technologies and our joint venture in Korea. In January 2002, we sold our Engineered Systems Group air conditioning operations in Australia for $12.1 million. The sale resulted in a loss of $10.7 million. During the three months ended June 30, 2002, earnings before interest and taxes (EBIT) increased 120.6% to $74.7 million (7.1% of net sales) from $33.8 million (3.1% of net sales) during the three months ended June 30, 2001. During the six months ended June 30, 2002, EBIT increased 58.1% to $71.2 million (3.8% of net sales) from $45.1 million (2.2% of net sales) during the same period of 2001. Excluding the charges discussed above, EBIT decreased 18.8% to $74.7 million (7.1% of net sales) in the three months ended June 30, 2002 compared to $91.9 million (8.5% of net sales) in the same period of 2001. EBIT, excluding the charges discussed above and the loss on divestiture, decreased 30.8% to $92.4 million (4.9% of net sales) in the six months ended June 30, 2002 as compared to $133.6 million (6.6% of net sales) in the same period of 2001. (See further discussion below under Segment Analysis.) Net interest expense in the three months ended June 30, 2002 was $12.4 million compared to $18.3 million in the same period of 2001. Net interest expense in the six months ended June 30, 2002 was $25.1 million compared to $38.2 million in the six months ended June 30, 2001. The decrease resulted from lower average debt levels and lower interest rates. The income tax provision of $14.0 million for the three months ended June 30, 2002 and $12.6 million for the six months ended June 30, 2002 relates to both U.S. and non-U.S. operations. The tax rate for ongoing operations was 22.5% for the first six months of 2002 compared to 30.0% for the first six months of 2001. The tax rate improvement for ongoing operations was the result of effective tax planning strategies, tax holidays and the impact of the adoption of SFAS No. 142. 15 (continued) Upon adoption of SFAS No. 142 we were required to perform a transitional goodwill impairment test. The transitional goodwill impairment test was completed during the second quarter of 2002. As a result, we recognized a non-cash transitional goodwill impairment charge of $179 million in our York Refrigeration Group reporting unit. The historic and projected financial performance of the York Refrigeration Group, which includes the entities acquired in the Sabroe acquisition, were insufficient to support the related goodwill. As required, the transitional goodwill impairment charge was recorded as a cumulative effect of a change in accounting principle as of January 1, 2002. Net income, as a result of the above factors, was $48.2 million during the three months ended June 30, 2002 as compared to $32.8 million during the three months ended June 30, 2001. For the six months ended June 30, 2002, net income, excluding the cumulative effect of a change in accounting principle, was $33.5 million compared to $23.8 million for the same period of 2001. Segment Analysis The discussion below of each segment's EBIT relates to ongoing operations and excludes the charges and loss on divestiture discussed above. Engineered Systems Group (ESG) ESG net sales for the three months ended June 30, 2002 decreased 5.3% to $489.3 million from $516.5 million for the same period in 2001. Net sales for the six months ended June 30, 2002 decreased 8.4% to $878.0 million as compared to $958.3 million for the same period in 2001. Strength in global service businesses was more than offset by a decline in chiller shipments, particularly in North America and Europe. EBIT for the three months ended June 30, 2002 decreased 20.3% to $35.9 million (7.3% of net sales) from $45.1 million (8.7% of net sales) for the same period in 2001. For the six months ended June 30, 2002, EBIT decreased 36.7% to $39.9 million (4.5% of net sales) as compared to $63.1 million (6.6% of net sales) for the same period in 2001. The decline resulted from lower volumes and the related absorption effects of fixed costs, pricing pressure, higher medical costs, and continued investment in service infrastructure. York Refrigeration Group (YRG) YRG net sales for the three months ended June 30, 2002 decreased 1.1% to $231.3 million from $233.8 million for the same period in 2001. Reduced shipments for petrochemical and cruise ship applications were offset by positive foreign currency effects. Net sales for the six months ended June 30, 2002 decreased 5.8% to $420.4 million as compared to $446.0 million for the same period in 2001. In addition to the items which affected second quarter revenue, net sales for the six months were decreased by soft first quarter European equipment orders and contracting. EBIT for the three months ended June 30, 2002 remained flat at $18.3 million (7.9% of net sales) as compared to $18.3 million (7.8% of net sales) for the same period in 2001. Improved gross margin as a result of aftermarket growth and better contracting performance was offset by higher production costs and higher medical costs in the U.S. For the six months ended June 30, 2002, EBIT decreased 4.5% to $27.4 million (6.5% of net sales) as compared to $28.7 million (6.4% of net sales) for the same period in 2001. The decrease was due to lower volume and pricing pressures in certain markets. Unitary Products Group (UPG) UPG net sales for the three months ended June 30, 2002 decreased 4.3% to $217.8 million from $227.5 million for the same period in 2001. Net sales for the six months ended June 30, 2002 decreased 5.6% to $379.0 million as compared to $401.5 million for the same period in 2001. The decreases resulted from declines in the North American commercial and manufactured housing markets and reduced export volume. EBIT for the three months ended June 30, 2002 decreased 26.2% to $18.3 million (8.4% of net sales) from $24.8 million (10.9% of net sales) for the same period in 2001. For the six months ended June 30, 2002, EBIT decreased 57.8% to $15.8 million (4.2% of net sales) as compared to $37.5 million (9.3% of net sales) for the same period in 2001. In addition to the impact of lower sales volume, EBIT decreased due to an unfavorable product mix, manufacturing inefficiencies and the first quarter write-off of a $5.9 million receivable related to a distributor that 16 (continued) became insolvent during March 2002. The unfavorable product mix resulted from a shift to lower margin products as light commercial products declined more than residential. While beneficial in the long-term, the UPG residential factory consolidation was more costly and slower than originally anticipated. Although plant efficiency levels and shipping improved steadily, UPG experienced manufacturing inefficiencies and higher logistics and warehousing costs at the Wichita facility during the first half of 2002. Bristol Compressors Bristol Compressors net sales for the three months ended June 30, 2002 increased 0.6% to $163.7 million from $162.8 million for the same period in 2001. Net sales for the six months ended June 30, 2002 decreased 3.4% to $319.7 million as compared to $330.8 million for the same period in 2001. Bristol experienced decreases in international shipments and increased sales to North American unitary manufacturers. EBIT for the three months ended June 30, 2002 decreased 23.4% to $13.8 million (8.4% of net sales) from $18.0 million (11.0% of net sales) for the same period in 2001. For the six months ended June 30, 2002, EBIT decreased 13.1% to $30.1 million (9.4% of net sales) as compared to $34.6 million (10.5% of net sales) for the same period in 2001. Although Bristol benefited from improved product designs with lower costs, margins were down due to continued decreases in larger applications and pricing pressure in the market place. Bristol is experiencing a negative impact of order mix as high-margin large compressors used in light commercial applications are down significantly, while the volume of smaller units has grown. Liquidity and Capital Resources Working capital requirements are generally met through a combination of internally generated funds, bank lines of credit, commercial paper borrowings, financing of trade receivables and credit terms from suppliers which approximate receivable terms to our customers. Additional sources of working capital include customer deposits and progress payments. Working capital increased $17.6 million to $490.5 million as of June 30, 2002 as compared to $472.8 million as of December 31, 2001. The increase resulted from higher receivables levels due to normal seasonal trends and increases in prepayments and other current assets, partially offset by increases in accounts payable and accrued expenses and income taxes. The current ratio was 1.58 as of June 30, 2002 as compared to 1.61 as of December 31, 2001. Capital expenditures were $35.9 million for the six months ended June 30, 2002 as compared to $35.3 million for the six months ended June 30, 2001. Capital expenditures currently anticipated for expanded capacity, cost reductions and the introduction of new products during 2002 are expected to be in excess of depreciation and amortization. These expenditures will be funded from a combination of operating cash flows, availability under credit agreements and commercial paper borrowings. Cash dividends of $0.15 per share were paid on common stock in the three months ended June 30, 2002 and in the three months ended March 31, 2002. The declaration and payment of future dividends will be at the sole discretion of the Board of Directors and will depend upon such factors as our profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. Total indebtedness was $719.9 million as of June 30, 2002, primarily consisting of $500.0 million of senior notes and $168.4 million of commercial paper. On June 1, 1998, we issued $200 million of 6.70% fixed rate senior notes having a maturity of ten years from the date of issue. On August 6, 2001, we issued $200 million of 6.625% fixed rate senior notes due August 2006. The remaining $100 million ten-year senior notes bear interest at a 6.75% fixed rate and are due March 2003. As of June 30, 2002, it is expected that commercial paper will be issued to redeem the $100 million senior notes due March 2003. Commercial paper borrowings are expected to be reborrowed in the ordinary course of business. The interest rate on the commercial paper was 2.05% as of June 30, 2002. As of June 30, 2002, we had available a $400 million Five Year Credit Agreement, which expires on May 29, 2006, and a $300 million 364-Day Credit Agreement, which expires on May 28, 2003 (collectively, the Agreements). As of June 30, 2002, no amounts were outstanding under the Agreements. 17 (continued) The $400 million Five Year Credit Agreement provides for borrowings at the London Interbank Offering Rate (LIBOR) plus 0.75% or 0.875%, and the $300 million 364-Day Credit Agreement provides for borrowings at LIBOR plus 0.775% or 0.90%, based on the amount of facility utilization. We pay annual fees of 0.125% on the $400 million facility and 0.10% on the $300 million facility. The Agreements allow for borrowings at specified bid rates. As of June 30, 2002, the three-month LIBOR rate was 1.87%. The Agreements contain financial covenants requiring us to maintain certain financial ratios and standard provisions limiting leverage and liens. We were in compliance with these financial covenants as of June 30, 2002. We have additional unused domestic bank lines that provide for total borrowings of $100 million as of June 30, 2002 and December 31, 2001. Our non-U.S. subsidiaries maintain bank credit facilities in various currencies that provided for available borrowings of $383.9 million and $386.3 million as of June 30, 2002 and December 31, 2001, respectively, of which $293.0 million and $276.1 million, respectively, were unused. Pursuant to the terms of a revolving facility, we sell our trade receivables to a wholly-owned, consolidated subsidiary, York Receivables Funding LLC (YRFLLC). In turn, YRFLLC sells, on a revolving basis up to a $175.0 million undivided ownership interest in the purchased trade receivables to bank conduits. We continue to service the receivables. No servicing asset or liability has been recognized as our cost to service the receivables approximates the servicing income. In accordance with the facility, YRFLLC has sold $175.0 million of an undivided interest in trade receivables as of June 30, 2002 and December 31, 2001. The proceeds from the sale were reflected as a reduction of receivables in the accompanying consolidated condensed balance sheets as of June 30, 2002 and December 31, 2001. The discount rate on the trade receivables sold was 1.82% and 2.00% as of June 30, 2002 and December 31, 2001, respectively. We believe that we will be able to satisfy our principal and interest payment obligations and our working capital and capital expenditure requirements from operating cash flows together with the availability under the Agreements. The Agreements and commercial paper borrowings support seasonal working capital needs and are available for general corporate purposes. Our ability to finance operations in the commercial paper market is dependent upon maintaining satisfactory credit ratings. If our credit ratings would be lowered by the rating agencies, we have the ability to borrow under the Agreements as long as we continue to meet the financial covenants or until expiration of the Agreements. The primary financial covenants are the earnings before interest, taxes and depreciation and amortization (EBITDA) interest coverage and the debt to capital ratio, as defined under the Agreements. As of June 30, 2002, our EBITDA interest coverage was 4.9, exceeding the minimum requirement of 3.5. As of June 30, 2002, our debt to capital ratio was 49%, below the maximum allowed of 57%. In the event we repurchased over 20% of our shares in a twelve month period and our credit ratings were lowered by one full ratings letter, our senior notes due in 2003 could be accelerated for payout. Because our obligations under the Agreements and revolving trade receivables purchase facility bear interest at floating rates, our interest costs are sensitive to changes in prevailing interest rates. In the ordinary course of business, we enter into various types of transactions that involve contracts and financial instruments. We enter into these financial instruments to manage financial market risk, including foreign exchange, commodity price and interest rate risk. Outlook During the second half of 2002, we expect continued service and parts revenue growth, reduced costs and improved plant efficiencies as a result of our cost reduction efforts, and lower interest and tax expenses than in the second half of 2001. In addition, we may experience favorable effects in the second half as a result of strengthening European currencies. 18 (continued) However, we expect these improvements to be partially offset by the impact of market conditions and certain cost increases. We expect the negative economic impact in the commercial air conditioning market to continue during the second half of 2002. These conditions are evidenced by lower backlogs at both ESG and YRG at June 30, 2002 versus June 30, 2001. We anticipate that these market conditions will continue to negatively impact the volume and pricing of commercial equipment sales. We also expect higher costs in the second half of the year due to steel price increases and higher legal costs. Forward-Looking Information - Risk Factors To the extent we have made "forward-looking statements," certain risk factors could cause actual results to differ materially from those anticipated in such forward-looking statements including, but not limited to competition, government regulation, environmental considerations and the successful implementation of our cost reduction actions. Unseasonably cool weather in various parts of the world could adversely affect our UPG and ESG air conditioning businesses and, similarly, the Bristol compressor business. Bristol is also dependent on the successful development and introduction of new products. The ESG air conditioning business could also be affected by a slowdown in the large chiller market and by the acceptance of new product introductions. YRG could be adversely affected by a decline in the value of European currencies. Both YRG and ESG could be negatively impacted by reductions in commercial construction. In addition, our overall performance could be affected by declining worldwide economic conditions or slowdowns resulting from world events. 19 PART II - OTHER INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES Item 1 Legal Proceedings On November 7, 2001, a case captioned American Standard, Inc. and American Standard International Inc. v. York International Corporation and York International, S.A. de C.V. was filed in the Federal District for the Western District of Wisconsin. American Standard, a competitor of ours, alleges that two component parts of three models of chillers manufactured by us infringe two patents held by American Standard. American Standard has recently alleged that its damages are in the amount of either $88.7 million or $65 million, depending on the method of calculation. We believe that we do not infringe the American Standard patents and that the patents may be invalid, and we are vigorously defending the action. We were granted summary judgment with respect to certain claims of one of the patents. Even if we were found to infringe the patents, we believe any award of damages would not approach the alleged amounts and would not significantly affect our financial position. However, any award could be material to the period it is recorded. We have also been named among numerous other defendants in 307 asbestos-related lawsuits in various jurisdictions. These primarily relate to the former use by our Engineered Systems and York Refrigeration Groups of gaskets made of an asbestos-containing material. We have been dismissed from eleven of these cases and de minimis settlements have occurred in eight others. Some insurance coverage and/or indemnities from parties from whom we purchased businesses are available. We do not believe that this litigation is likely to have a significant effect on our financial position. 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 25, 2002 (b) Proxies were solicited for the meeting. All nominees for Director were elected and item (c) 2, 3 and 4 (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 34,068,785 1,147,239 Michael R. Young 34,254,073 961,951 W. Michael Clevy 34,262,075 953,949 Malcolm W. Gambill 34,253,897 962,127 J. Roderick Heller, III 34,261,695 954,329 Robert F. B. Logan 33,861,551 1,354,473 Donald M. Roberts 33,862,706 1,353,318 James A. Urry 33,859,062 1,356,962 Paul J. Powers 34,261,871 954,153
20 (continued) 2. Proposal to approve the 2002 Votes For Votes Against Abstentions Omnibus Stock Plan 25,534,027 5,687,722 46,092 3. Proposal to approve the 2002 Votes For Votes Against Abstentions Incentive Compensation Plan 29,736,913 1,493,127 37,802 4. The appointment of KPMG LLP Votes For Votes Against Abstentions as independent auditors 33,702,789 1,497,708 20,528
Item 5 Other Information Not Applicable Item 6 Exhibits and Reports on Form 8-K (a) Exhibit 4.1 - 364-DAY CREDIT AGREEMENT, dated as of May 29, 2002, among YORK INTERNATIONAL CORPORATION, as borrower, the initial lenders named therein, as initial lenders, CITIBANK, N.A., as administrative agent for the lenders, JPMORGAN CHASE BANK, as syndication agent, BANK OF TOKYO-MITSUBISHI TRUST COMPANY, FLEET NATIONAL BANK and NORDEA BANK FINLAND PLC, as documentation agents, and JP MORGAN SECURITIES, INC. and SALOMON SMITH BARNEY INC., as joint lead arrangers and joint book managers Exhibit 4.2 - AMENDMENT NO.1 TO THE FIVE YEAR CREDIT AGREEMENT, dated as of May 29, 2002, among York International Corporation, the lenders named therein, as lenders, and Citibank, N.A., as administrative agent for the lenders Exhibit 10.1 - York International Corporation Amended and Restated 2002 Omnibus Stock Plan, effective as of May 23, 2002, as amended and restated May 31, 2002 Exhibit 10.2 - York International Corporation 2002 Incentive Compensation Plan, effective as of January 1, 2002 Exhibit 10.3 - Form of Amendment No. 1 to Severance Agreement between the registrant and certain of its key executives Exhibit 10.4 - Form of Amendment No. 1 to Employment Agreement between the registrant and certain of its key executives Exhibit 99.1 - Certification of the Chief Executive Officer of York International Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2 - Certification of the Chief Financial Officer of York International Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) None 21 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 August 13, 2002 /S/ C. David Myers --------------------------------- C. David Myers Corporate Vice President and Chief Financial Officer 22