10-Q 1 w88818e10vq.txt 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, 2003 COMMISSION FILE NUMBER 1-10863 YORK INTERNATIONAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3473472 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 631 SOUTH RICHLAND AVENUE, YORK, PA 17403 (717) 771-7890 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at July 31, 2003 ----- ---------------------------- Common Stock, par value $.005 39,736,065 shares
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 INDEX
Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Condensed Statements of Operations - (unaudited) Three Months and Six Months Ended June 30, 2003 and 2002 3 Consolidated Condensed Balance Sheets - June 30, 2003 (unaudited) and December 31, 2002 4 Consolidated Condensed Statements of Cash Flows - (unaudited) Six Months Ended June 30, 2003 and 2002 5 Notes to Consolidated Condensed Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Changes in Securities 23 Item 3. Defaults Upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25 Exhibit Index 26
2 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES ITEM 1. FINANCIAL STATEMENTS Consolidated Condensed Statements of Operations (unaudited) (in thousands, except per share data)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net sales $ 1,084,417 $ 1,044,093 $ 1,952,774 $ 1,885,625 Cost of goods sold (858,053) (831,242) (1,566,310) (1,522,777) ----------- ----------- ----------- ----------- Gross profit 226,364 212,851 386,464 362,848 Selling, general, and administrative expenses (156,796) (140,235) (305,828) (280,817) Restructuring and other charges, net (33,060) -- (49,154) (2,730) ----------- ----------- ----------- ----------- Income from operations 36,508 72,616 31,482 79,301 Interest expense, net (12,115) (12,436) (24,131) (25,149) Loss on divestiture -- -- -- (10,683) Equity in earnings of affiliates 2,477 2,038 3,565 2,608 ----------- ----------- ----------- ----------- Income before income taxes and cumulative effect of a change in accounting principle 26,870 62,218 10,916 46,077 Provision for income taxes (7,664) (13,999) (5,346) (12,603) ----------- ----------- ----------- ----------- Income before cumulative effect of a change in accounting principle 19,206 48,219 5,570 33,474 Cumulative effect of a change in accounting principle -- -- -- (179,436) ----------- ----------- ----------- ----------- Net income (loss) $ 19,206 $ 48,219 $ 5,570 $ (145,962) =========== =========== =========== =========== Basic earnings (loss) per share: Income before cumulative effect of a change in accounting principle $ 0.48 $ 1.23 $ 0.14 $ 0.85 Cumulative effect of a change in accounting principle -- -- -- (4.56) ----------- ----------- ----------- ----------- Net income (loss) $ 0.48 $ 1.23 $ 0.14 $ (3.71) =========== =========== =========== =========== Diluted earnings (loss) per share: Income before cumulative effect of a change in accounting principle $ 0.48 $ 1.21 $ 0.14 $ 0.84 Cumulative effect of a change in accounting principle -- -- -- (4.49) ----------- ----------- ----------- ----------- Net income (loss) $ 0.48 $ 1.21 $ 0.14 $ (3.65) =========== =========== =========== =========== Cash dividends per share $ 0.15 $ 0.15 $ 0.30 $ 0.30 =========== =========== =========== =========== Weighted average common shares and common equivalents outstanding: Basic 39,631 39,362 39,594 39,309 Diluted 39,861 39,998 39,748 39,955
See accompanying notes to consolidated condensed financial statements. 3 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES Consolidated Condensed Balance Sheets (in thousands)
JUNE 30, 2003 DECEMBER 31, (UNAUDITED) 2002 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 41,192 $ 92,940 Receivables, net 696,524 627,067 Inventories Raw material 147,271 126,227 Work in process 145,410 116,784 Finished goods 229,900 230,768 ---------- ---------- Total inventories 522,581 473,779 Prepayments and other current assets 114,282 81,461 ---------- ---------- Total current assets 1,374,579 1,275,247 Deferred income taxes 60,380 69,696 Investments in affiliates 28,391 29,389 Property, plant, and equipment, net 502,090 500,318 Goodwill 527,012 504,963 Intangibles, net 33,595 32,000 Deferred charges and other assets 101,397 94,509 ---------- ---------- Total assets $2,627,444 $2,506,122 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ 32,240 $ 32,709 Accounts payable and accrued expenses 855,836 768,748 Income taxes 36,082 37,202 ---------- ---------- Total current liabilities 924,158 838,659 Long-term warranties 47,497 44,748 Long-term debt 588,976 618,224 Postretirement and postemployment benefits 256,084 244,522 Other long-term liabilities 74,564 77,155 ---------- ---------- Total liabilities 1,891,279 1,823,308 Stockholders' equity 736,165 682,814 ---------- ---------- Total liabilities and stockholders' equity $2,627,444 $2,506,122 ========== ==========
See accompanying notes to consolidated condensed financial statements. 4 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES Consolidated Condensed Statements of Cash Flows (unaudited) (in thousands)
SIX MONTHS ENDED JUNE 30, 2003 2002 --------- --------- Cash flows from operating activities: Net income (loss) $ 5,570 $(145,962) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of a change in accounting principle -- 179,436 Depreciation and amortization of property, plant, and equipment 33,288 30,217 Amortization of deferred charges and intangibles 1,764 1,358 Provision for doubtful receivables 7,038 8,849 Effect of non-cash charges 31,185 1,631 Loss on divestiture -- 10,683 Deferred income taxes 9,699 13,233 Loss on sale of fixed assets 1,094 1,201 Other (1,709) (179) Change in assets and liabilities net of effects from acquisitions and divestitures: Receivables, net (68,380) (92,871) Inventories (49,730) 13,855 Prepayments and other current assets (31,478) (23,893) Accounts payable and accrued expenses 92,939 49,358 Income taxes (1,074) 23,758 Other long-term assets and liabilities 4,917 2,361 --------- --------- Net cash provided by operating activities 35,123 73,035 --------- --------- Cash flows from investing activities: Purchases of other companies, net of cash acquired (3,160) (2,248) Proceeds from divestiture, net -- 12,071 Capital expenditures (35,916) (35,915) (Payments) proceeds from sale of fixed assets (163) 4,699 --------- --------- Net cash used by investing activities (39,239) (21,393) --------- --------- Cash flows from financing activities: Net (payments) proceeds from short-term debt (245) 1,729 Net payments of commercial paper borrowings -- (29,305) Net proceeds from credit agreement 20,000 -- Payment of senior notes (100,000) -- Net proceeds (payments) on other long-term debt 49,621 (16,732) Net reduction in sale of receivables (5,000) -- Common stock issued 322 6,163 Treasury stock purchases (5) (30) Dividends paid (11,904) (11,809) --------- --------- Net cash used by financing activities (47,211) (49,984) --------- --------- Effect of exchange rate changes on cash and cash equivalents (421) (288) --------- --------- Net (decrease) increase in cash and cash equivalents (51,748) 1,370 Cash and cash equivalents at beginning of period 92,940 39,434 --------- --------- Cash and cash equivalents at end of period $ 41,192 $ 40,804 ========= =========
See accompanying notes to consolidated condensed financial statements. 5 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES Notes To Consolidated Condensed Financial Statements (unaudited) (1) FINANCIAL STATEMENTS The consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. We believe that the information presented is not misleading and the disclosures are adequate. In our opinion, our consolidated condensed financial statements contain all adjustments necessary to present fairly our financial position as of June 30, 2003 and December 31, 2002, our results of operations for the three and six months ended June 30, 2003 and 2002, and our cash flows for the six months ended June 30, 2003 and 2002. The results of operations for interim periods are not necessarily indicative of the results expected for the full year. Effective January 1, 2003, we consolidated our former York Refrigeration Group and Engineered Systems Group segments and reorganized management of the combined business. Our new organization is being reported in three groups, consisting of: Global Applied, Unitary Products Group, and Bristol Compressors. The Global Applied business is comprised of three geographic regions: the Americas; Europe, Middle East, and Africa (EMEA); and Asia. (2) RECEIVABLES, NET Pursuant to the terms of an annually renewable revolving facility, we sell certain of our trade receivables to a wholly-owned, consolidated subsidiary, York Receivables Funding LLC (YRFLLC). In turn, YRFLLC sells, on a revolving basis, undivided ownership interest in the purchased trade receivables to bank administered asset-backed commercial paper vehicles. In April 2003, we amended the facility, reducing it from $175 million to $150 million. We continue to service sold trade receivables. No servicing asset or liability has been recognized as our cost to service sold trade receivables approximates the servicing income. In accordance with the facility, YRFLLC has sold $150 million and $155 million of an undivided interest in trade receivables as of June 30, 2003 and December 31, 2002, respectively, resulting in a reduction of receivables reflected in our consolidated condensed balance sheets. The discount rate on trade receivables sold was 1.02% and 1.40% as of June 30, 2003 and December 31, 2002, respectively. The program fee on trade receivables sold was 0.50% and 0.338% as of June 30, 2003 and December 31, 2002, respectively. (3) GOODWILL On January 1, 2002 we adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." Upon adoption, we were required to perform a transitional goodwill impairment test as of January 1, 2002. We completed the transitional goodwill impairment test during the second quarter of 2002. The transitional impairment analysis indicated an impairment existed in one of our reporting units. The projected financial performance of the former York Refrigeration Group, which included the entities acquired in the Sabroe acquisition, was insufficient to support the related goodwill. We employed a third-party appraisal firm to determine the fair value of the reporting unit as well as the reporting unit's property, plant, and equipment and intangibles. As a result, we recognized a non-cash transitional goodwill impairment charge of $179.4 million. As required, the transitional goodwill impairment charge was recorded as a cumulative effect of a change in accounting principle in our consolidated condensed statement of operations as of January 1, 2002. 6 The changes in the carrying amount of goodwill for the six months ended June 30, 2003 by segment, are as follows (in thousands):
NET FOREIGN BALANCE AS OF GOODWILL CURRENCY BALANCE AS OF DEC. 31, 2002 ACQUIRED FLUCTUATION JUNE 30, 2003 ------------- -------- ----------- ------------- Global Applied: Americas $ 92,464 $ -- $ 4,622 $ 97,086 EMEA 107,873 49 12,585 120,507 Asia 107,873 1,027 3,766 112,666 ---------- -------- --------- ---------- 308,210 1,076 20,973 330,259 Unitary Products Group 140,440 -- -- 140,440 Bristol Compressors 56,313 -- -- 56,313 ---------- -------- --------- ---------- $ 504,963 $ 1,076 $ 20,973 $ 527,012 ========== ======== ========= ==========
(4) INTANGIBLES, NET The following table summarizes the major intangible asset classes subject to amortization included in our consolidated condensed balance sheets as of June 30, 2003 and December 31, 2002 (in thousands):
GROSS CARRYING ACCUMULATED NET CARRYING AMOUNT AMORTIZATION AMOUNT -------------- ------------ ------------ June 30, 2003 Trade names and trademarks $ 37,602 $ 5,304 $ 32,298 Other 2,252 955 1,297 --------- --------- --------- $ 39,854 $ 6,259 $ 33,595 ========= ========= ========= December 31, 2002 Trade names and trademarks $ 35,693 $ 4,375 $ 31,318 Other 1,448 766 682 --------- --------- --------- $ 37,141 $ 5,141 $ 32,000 ========= ========= =========
Amortization expense for trade names and trademarks and other intangible assets for the three and six months ended June 30, 2003 was $0.5 million and $0.9 million, respectively. For the three and six months ended June 30, 2002, amortization expense for trade names and trademarks and other intangible assets was $0.3 million and $0.6 million, respectively. The following table estimates the amount of amortization expense for trade names and trademarks and other intangible assets for the remainder of 2003 and each of the fiscal years indicated (in thousands): 2003 (July 1 - December 31) $ 777 2004 1,532 2005 1,507 2006 1,505 2007 1,405 Thereafter 26,869 --------- $ 33,595 =========
7 (5) NOTES PAYABLE AND LONG-TERM DEBT As of June 30, 2003 and December 31, 2002, our borrowings consisted of senior notes and various other bank and term loans. In March 2003, we amended our Five Year Credit Agreement and renewed our 364-Day Credit Agreement at a $200 million level. We have available a $400 million Five Year Credit Agreement, which expires on May 29, 2006, and a $200 million 364-Day Credit Agreement, which expires on March 13, 2004 (collectively, the Agreements). As of December 31, 2002, we had available the $400 million Five Year Credit Agreement and a $300 million 364-Day Credit Agreement. As of June 30, 2003, $20 million was outstanding under the Agreements. No amounts were outstanding under the Agreements as of December 31, 2002. The $400 million Five Year Credit Agreement provides for borrowings at the London InterBank Offering Rate (LIBOR) plus 1.175%, and the $200 million 364-Day Credit Agreement provides for borrowings at LIBOR plus 1.225%. We pay annual fees of 0.20% on the $400 million facility and 0.15% on the $200 million facility. The Agreements allow for borrowings at specified bid rates. As of June 30, 2003 and December 31, 2002, the three-month LIBOR rate was 1.13% and 1.38%, respectively. The Agreements contain financial covenants requiring us to maintain certain financial ratios and standard provisions limiting leverage and liens. We were in compliance with these financial covenants as of June 30, 2003 and December 31, 2002. We have additional annually renewable domestic bank lines that provide for total borrowings of up to $75 million and $50 million as of June 30, 2003 and December 31, 2002, respectively. As of June 30, 2003, $50.2 million was outstanding under the domestic bank lines. No amounts were outstanding as of December 31, 2002. Our non-U.S. subsidiaries maintain bank credit facilities in various currencies that provide for total borrowings of $370.3 million and $384.5 million as of June 30, 2003 and December 31, 2002, respectively. As of June 30, 2003 and December 31, 2002, $29.1 million and $28.4 million, respectively, were outstanding under the non-U.S. facilities, with remaining availability of $275.6 million and $282.5 million, respectively, after bank guarantees and letters of credit usage. Notes payable and long-term debt consist of (in thousands):
JUNE 30, DECEMBER 31, 2003 2002 --------- ------------ Notes payable and current portion of long-term debt: Bank loans (primarily foreign currency) $ 29,116 $ 29,361 Current portion of long-term debt 3,124 3,348 --------- --------- Total $ 32,240 $ 32,709 ========= ========= Long-term debt: Domestic bank lines at an average rate of 1.90% in 2003 $ 50,200 $ -- Five Year Credit Agreement at an average rate of 2.54% in 2003 20,000 -- Senior notes, 6.75% interest, due March 2003 -- 100,000 Senior notes, 6.625% interest, due August 2006 200,000 200,000 Senior notes, 6.70% interest, due June 2008 200,000 200,000 Senior notes, 5.80% interest, due November 2012 100,000 100,000 Other (primarily foreign bank loans) at an average rate of 6.67% in 2003 and 6.64% in 2002 21,900 21,572 --------- --------- Total 592,100 621,572 Less current portion (3,124) (3,348) --------- --------- Noncurrent portion $ 588,976 $ 618,224 ========= =========
8 (6) GUARANTEES AND WARRANTIES In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The interpretation elaborates on the disclosures to be made in our interim and annual financial statements about obligations under certain guarantees. Effective January 1, 2003, it requires us to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The interpretation did not have a material impact on our consolidated condensed financial statements. We issue various types of guarantees in the normal course of business. As of June 30, 2003, we have the following guarantees outstanding (in thousands): Standby letters of credit and surety bonds $ 96,940 Performance guarantees 150,566 Commercial letters of credit 5,334 Guarantee of affiliate debt 30,000
Changes in our warranty liabilities for the six months ended June 30, 2003 are as follows (in thousands):
BALANCE PAYMENTS ACCRUALS FOR BALANCE AS OF MADE UNDER WARRANTIES AS OF DEC. 31, 2002 WARRANTIES ISSUED JUNE 30, 2003 ------------ ---------- ------------ ------------- $ 87,940 $ 29,131 $ 34,002 $ 92,811
(7) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We are exposed to market risk associated with changes in interest rates, foreign currency exchange rates, and certain commodity prices. To enhance our ability to manage these market risks, we enter into derivative instruments for periods consistent with the related underlying exposures. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in fair value or cash flows of the underlying hedged exposures. We mitigate the risk that the counter-party to these derivative instruments will fail to perform by only entering into derivative instruments with major financial institutions. We do not typically hedge our market risk exposures beyond three years and do not hold or issue derivative instruments for trading purposes. During the six months ended June 30, 2003, certain commodity hedges were discontinued to better match the hedge and the underlying commodity. The discontinuance of these cash flow hedges did not result in any significant gains or losses. Recognized gains or losses for the six months ended June 30, 2003 and 2002 as a result of the discontinuance of currency cash flow hedges were immaterial. Currency Rate Hedging We manufacture and sell our products in a number of countries throughout the world, and therefore, are exposed to movements in various currencies against the U.S. dollar and against the currencies in which we manufacture. Through our currency hedging activities, we seek to minimize the risk that cash flows resulting from the sale of products, manufactured in a currency different from the currency used by the selling subsidiary, will be affected by changes in foreign currency exchange rates. Foreign currency derivative instruments (forward contracts and purchased option contracts) are matched to the underlying foreign currency exposures and are executed to minimize foreign exchange transaction costs. As of June 30, 2003, we forecasted that $0.4 million of net losses in accumulated other comprehensive losses will be reclassified into earnings within the next twelve months. Commodity Price Hedging We purchase raw material commodities and are at risk for fluctuations in the market price of those commodities. In connection with the purchase of major commodities, principally copper for manufacturing requirements, we enter into commodity forward contracts to effectively fix our cost of the commodity. These contracts require each settlement between our counterparty and us to coincide with cash market purchases of the actual commodity. 9 As of June 30, 2003, we forecasted that $0.5 million of net gains in accumulated other comprehensive losses will be reclassified into earnings within the next twelve months. Interest Rate Hedging We manage our interest rate risk by entering into both fixed and variable rate debt. In addition, we enter into interest rate swap contracts in order to achieve a balanced mix of fixed and variable rate indebtedness. As of June 30, 2003, we had interest rate swap contracts to pay variable interest, based on the six-month LIBOR rate, and receive a fixed rate of interest of 6.625% on a notional amount of $100 million. As of June 30, 2003, the fair value of these swap contracts was an unrealized gain of $11.6 million. We have designated our outstanding interest rate swap contracts as fair value hedges of an underlying fixed rate debt obligation. The fair value of these contracts is recorded in other long-term assets or liabilities with a corresponding increase or decrease in the fixed rate debt obligation. The change in fair values of both the fair value hedge instruments and the underlying debt obligations are recorded as equal and offsetting unrealized gains and losses in the interest expense component of the consolidated condensed statements of operations. All existing fair value hedges are determined to be 100% effective under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." As a result, there is no impact on current earnings resulting from hedge ineffectiveness. (8) COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is determined as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2003 2002 2003 2002 --------- --------- --------- --------- Net income (loss) $ 19,206 $ 48,219 $ 5,570 $(145,962) Other comprehensive income (loss): Foreign currency translation adjustment 50,194 43,196 57,925 51,159 Cash flow hedges: Reclassification adjustment, net of tax (674) 2,181 (1,285) 3,413 Net derivative income (loss), net of tax 1,457 (635) 2,305 3,077 Available for sale securities, net of tax (21) -- (21) -- --------- --------- --------- --------- Comprehensive income (loss) $ 70,162 $ 92,961 $ 64,494 $ (88,313) ========= ========= ========= =========
(9) STOCKHOLDERS' EQUITY The following table summarizes our stockholders' equity as of June 30, 2003 and December 31, 2002 (in thousands, except per share data):
JUNE 30, DECEMBER 31, 2003 2002 --------- --------- Common stock $.005 par value; 200,000 shares authorized; issued 45,887 shares at June 30 and 45,820 shares at December 31, 2002 $ 229 $ 229 Additional paid-in capital 728,220 727,031 Retained earnings 320,842 327,176 Accumulated other comprehensive losses (83,420) (142,344) Treasury stock, at cost; 6,155 shares at June 30, 2003 and 6,169 shares at December 31, 2002 (228,074) (228,591) Unearned compensation (1,632) (687) --------- --------- Total stockholders' equity $ 736,165 $ 682,814 ========= =========
10 (10) STOCK-BASED COMPENSATION We apply the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our stock-based compensation plans. Accordingly, no compensation expense has been recognized for stock-based compensation plan awards other than restricted stock and performance-based awards. Had compensation expense for all awards, including our employee stock purchase plans, been determined based upon the fair value at the grant date consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation," as amended, our net income (loss) and earnings (loss) per share would have been adjusted to the pro forma amounts as follows (in thousands, except per share data):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2003 2002 2003 2002 ------------ ------------ ----------- ----------- Net income (loss) - as reported $ 19,206 $ 48,219 $ 5,570 $ (145,962) Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects 256 12 279 25 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (977) (2,058) (3,166) (4,115) ----------- ----------- ----------- ----------- Pro forma net income (loss) $ 18,485 $ 46,173 $ 2,683 $ (150,052) =========== =========== =========== =========== Earnings (loss) per share: Basic - as reported $ 0.48 $ 1.23 $ 0.14 $ (3.71) Basic - pro forma 0.47 1.17 0.07 (3.82) Diluted - as reported 0.48 1.21 0.14 (3.65) Diluted - pro forma 0.46 1.15 0.07 (3.76)
Pro forma net income (loss) and earnings (loss) per share reflect only stock options granted after 1994. Therefore, the full impact of calculating compensation expense under SFAS No. 123 for stock options is not reflected in the pro forma net income (loss) and earnings (loss) per share amounts presented above because compensation expense for stock options granted prior to January 1, 1995 is not considered. Since the determination of fair value of all stock options granted includes variable factors, including volatility, and additional stock option grants are expected to be made each year, the above pro forma disclosures are not representative of pro forma effects on reported net income and earnings per share for future years. (11) INCOME (LOSS) PER SHARE Net income (loss) as set forth in our consolidated condensed statements of operations is used in the computation of basic and diluted earnings (loss) per share information. Reconciliations of shares used in the computations of earnings (loss) per share are as follows (in thousands): 11
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Weighted average common shares outstanding used in the computation of basic earnings (loss) per share 39,631 39,362 39,594 39,309 Effect of dilutive securities: Non-vested restricted shares 96 2 96 2 Stock options 134 634 58 644 ----------- ----------- ----------- ----------- Weighted average common shares and equivalents used in the computation of diluted earnings (loss) per share 39,861 39,998 39,748 39,955 =========== =========== =========== =========== Stock options not included in the earnings (loss) per share computation as their effect would have been anti- dilutive 4,072 1,968 4,072 1,930 =========== =========== =========== ===========
(12) SEGMENT INFORMATION Effective January 1, 2003, we consolidated our former York Refrigeration Group and Engineered Systems Group segments and reorganized management of the combined business. Our new organization is being reported in three groups, consisting of Global Applied, Unitary Products Group, and Bristol Compressors. Prior year amounts were reclassified to conform to the current presentation. Global Applied produces and markets heating, ventilating, air conditioning, and refrigeration equipment and provides maintenance and service of equipment manufactured by us and by others. Types of equipment include air cooled and water-cooled chillers, central air handling units, variable air volume units, screw and reciprocating compressors, condensers, evaporators, heat exchangers, process refrigeration systems, hygienic air distribution systems, gas compression systems, and control equipment to monitor and control the entire system. Heating and air conditioning solutions are provided for buildings ranging from small office buildings and fast food restaurants to large commercial and industrial complexes. Refrigeration systems are provided for industrial applications in the food, beverage, chemical, and petroleum industries. Cooling and refrigeration systems are also supplied for use on naval commercial, and passenger vessels. The Global Applied business is comprised of three geographic regions: the Americas, Europe, Middle East, and Africa, and Asia. Unitary Products Group (UPG) produces heating and air condiditoning solutions for buildings ranging from private homes and apartments to small commercial buildings. UPG products include ducted central air conditioning and heating systems (air conditioners, heat pumps, and furnaces), ductless mini-splits, and light commercial heating and cooling equipment. Bristol Compressors (Bristol) manufactures reciprocating and scroll compressors for our use and for sale to original equipment manufacturers and wholesale distributors. General corporate expenses and charges and other expenses are not allocated to the individual segments for management reporting. General corporate expenses include certain pension, medical, and insurance costs, corporate administrative costs, and other corporate costs. Charges and other expenses include restructuring and other charges, operating expenses related to cost reduction actions, and costs related to a previously discontinued product line. 12 The table below represents our operating results and assets by segment (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net sales: Global Applied: Americas $ 362,839 $ 352,694 $ 660,252 $ 656,308 EMEA 335,702 285,893 597,754 503,910 Asia 131,987 112,088 222,106 192,789 Intragroup sales (54,252) (41,436) (94,618) (75,290) ----------- ----------- ----------- ----------- 776,276 709,239 1,385,494 1,277,717 Unitary Products Group 222,949 214,808 386,491 373,143 Bristol Compressors 138,837 163,698 276,399 319,654 Eliminations(1) (53,645) (43,652) (95,610) (84,889) ----------- ----------- ----------- ----------- 1,084,417 1,044,093 1,952,774 1,885,625 =========== =========== =========== =========== (1)Eliminations include the following intersegment sales: Global Applied 595 427 1,181 1,185 Unitary Products Group 17,787 10,439 30,476 23,838 Bristol Compressors 35,263 32,786 63,953 59,866 ----------- ----------- ----------- ----------- Eliminations 53,645 43,652 95,610 84,889 =========== =========== =========== =========== Income from operations: Global Applied: Americas 16,815 18,341 14,059 21,667 EMEA 12,451 17,871 13,040 20,124 Asia 22,423 16,974 32,116 23,957 ----------- ----------- ----------- ----------- 51,689 53,186 59,215 65,748 Unitary Products Group 24,049 18,282 32,269 15,842 Bristol Compressors 11,930 12,788 23,259 29,123 General corporate expenses, eliminations, and other non-allocated items (16,130) (11,640) (30,245) (20,936) Charges and other expenses (35,030) -- (53,016) (10,476) ----------- ----------- ----------- ----------- 36,508 72,616 31,482 79,301 ----------- ----------- ----------- ----------- Equity in earnings of affiliates: Global Applied: EMEA 972 792 1,387 1,178 Asia 332 277 528 437 ----------- ----------- ----------- ----------- 1,304 1,069 1,915 1,615 Bristol Compressors 1,173 969 1,650 993 ----------- ----------- ----------- ----------- 2,477 2,038 3,565 2,608 ----------- ----------- ----------- ----------- Interest expense, net (12,115) (12,436) (24,131) (25,149) ----------- ----------- ----------- ----------- Loss on divestiture -- -- -- (10,683) ----------- ----------- ----------- ----------- Income before income taxes and cumulative effect of a change in accounting principle 26,870 62,218 10,916 46,077 Provision for income taxes (7,664) (13,999) (5,346) (12,603) ----------- ----------- ----------- ----------- Income before cumulative effect of a change in accounting principle $ 19,206 $ 48,219 $ 5,570 $ 33,474 =========== =========== =========== ===========
13
JUNE 30, 2003 DEC. 31, 2002 ------------- ------------- Total assets: Global Applied: Americas $ 713,563 $ 683,138 EMEA 865,901 831,662 Asia 378,468 337,303 Eliminations and other non-allocated assets (105,877) (51,570) ----------- ----------- 1,852,055 1,800,533 Unitary Products Group 465,277 419,540 Bristol Compressors 279,784 264,111 Eliminations and other non-allocated assets 30,328 21,938 ----------- ----------- $ 2,627,444 $ 2,506,122 =========== ===========
(13) CHARGES TO OPERATIONS 2003 Initiatives In 2003, we initiated actions to further reduce our overall cost structure and support the implementation of our new geographic organization. In addition to cost reductions associated with the consolidation of our former Engineered Systems Group and York Refrigeration Group segments, additional actions include the further reduction of manufacturing capacity, the elimination of certain product lines, and the exiting of several small, non-core businesses. We expect all actions to be substantially completed by December 31, 2003. In the three and six months ended June 30, 2003, we incurred costs by segment as follows (in thousands):
THREE MONTHS SIX MONTHS ENDED JUNE 30, 2003 ENDED JUNE 30, 2003 ------------------- -------------------- Global Applied: Americas $ 3,144 $ 6,715 EMEA 22,910 35,255 Asia 696 2,766 ----------- ----------- 26,750 44,736 Unitary Products Group 7,500 7,500 Bristol Compressors 28 28 ----------- ----------- Total charges to operations, net 34,278 52,264 Charges reflected in cost of goods sold (1,218) (3,110) ----------- ----------- Restructuring and other charges, net $ 33,060 $ 49,154 =========== ===========
Charges included write-downs for the impairment of assets relating to businesses or facilities to be closed or divested, severance and other accruals relating to planned reductions in workforce throughout the Company, and estimated costs related to the elimination of certain product lines. 2000 and 2001 Initiatives In 2000, we initiated a cost reduction process, which included plant closures and divestitures, product line and facility rationalizations, selling, general, and administrative expense reductions, and other actions. In 2001, we expanded the scope of the cost reduction process to include additional plant closings and staff reductions. In the three months ended March 31, 2002, we recorded restructuring charges of $2.8 million, including $0.1 million charged to cost of goods sold, relating to the cost reduction process. We incurred no similar charges in the three months ended June 30, 2002. As of December 31, 2002, all of the 2000 and 2001 actions were substantially complete. In the six months ended June 30, 2003, we incurred no restructuring and other charges related to the 2000 and 2001 initiatives. 14 Detail of activity relating to the 2003 initiatives and the 2000 and 2001 initiatives in the six months ended June 30, 2003 is as follows:
NON-CASH ACCRUALS WRITE-DOWNS ESTABLISHED UTILIZED IN SIX IN SIX IN SIX MONTHS MONTHS MONTHS REMAINING ENDED ACCRUALS AT ENDED ENDED ACCRUALS AT JUNE 30, DEC. 31, JUNE 30, JUNE 30, JUNE 30, (in thousands) 2003 2002 2003 2003 2003 ------------ ------------ ------------ --------- ------------ Fixed asset write-downs $13,958 $ -- $ -- $ -- $ -- Inventory write-downs 3,110 -- -- -- -- Other asset write-downs 14,117 -- -- -- -- Severance -- 1,469 11,941 4,992 8,418 Contractual and other obligations -- 1,654 7,754 58 9,350 Other -- 823 1,384 370 1,837 ------- ------- ------- ------- ------- $31,185 $ 3,946 $21,079 $ 5,420 $19,605 ======= ======= ======= ======= =======
(14) ACQUISITIONS AND DIVESTITURES In January 2002, we sold our air conditioning operations in Australia for $12.1 million. The sale resulted in a loss of $10.7 million. (15) CONTINGENCIES We are involved in various unresolved legal actions, administrative proceedings, and claims, including two claims relating to a previously discontinued product line. While we believe these proceedings will not have a material adverse effect on our financial position or future earnings, litigation is subject to uncertainties. If there were an unfavorable result in excess of amounts provided for in the financial statements, it could have a material adverse impact on net income in the period in which it occurs. (16) NEW ACCOUNTING STANDARDS In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus requires an approach to determine whether we should divide an arrangement with multiple deliverables into separate units of accounting. We will adopt the consensus on a prospective basis effective July 1, 2003. We do not expect the consensus to have a material impact on our consolidated condensed financial statements. In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." The interpretation addresses consolidation of variable interest entities which have one or both of the following characteristics: (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or (2) the equity investors lack the essential characteristics of a controlling financial interest. The interpretation applies to variable interest entities created after January 31, 2003, and to variable interest entities in which we obtain an interest after that date. Beginning on July 1, 2003, it applies to variable interest entities in which we hold a variable interest that we acquired prior to February 1, 2003. Effective July 1, 2003, we will consolidate the variable interest entity used to transact our December 1999 synthetic lease. As a result, our financial statements will reflect approximately $82 million of incremental debt, $23 million of incremental net machinery and equipment, $11 million of incremental deferred tax assets, a $16 million reduction to stockholders' equity, and a $32 million reduction to other long-term liabilities. We may apply the interpretation by restating previously issued financial statement for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated or as a cumulative-effect adjustment as of July 1, 2003. 15 PART I - FINANCIAL INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS CONSOLIDATED OPERATIONS Net sales for the three months ended June 30, 2003 increased 3.9% to $1,084.4 million from $1,044.1 million for the same period in 2002. Net sales for the six months ended June 30, 2003 increased 3.6% to $1,952.8 million as compared to $1,885.6 million for the six months ended June 30, 2002. The favorable impact of the strengthening Euro and increased sales in Asia and Unitary Products Group were partially offset by reduced shipments of Bristol compressors and weakness in the large commercial equipment market. (See further discussion below under Segment Analysis.) For the three months ended June 30, 2003, net sales in the United States decreased 2.7% to $508.4 million and international net sales increased 10.4% to $576.0 million. As a result of the strengthening Euro, order backlog increased to $1,007.9 million as of June 30, 2003 as compared to $971.5 million as of June 30, 2002. As of December 31, 2002, order backlog was $876.0 million. Gross profit increased 6.3% to $226.4 million (20.9% of net sales) in the three months ended June 30, 2003 as compared to $212.9 million (20.4% of net sales) in the same period of 2002. During the six months ended June 30, 2003, gross profit increased 6.5% to $386.5 million (19.8% of net sales) from $362.8 million (19.2% of gross sales) for the six months ended June 30, 2002. Gross profit increased due to higher Asia and UPG sales, improvements in production efficiency and reductions in operating expenses at the Unitary Products Group Wichita facility, and the impact of the strengthening Euro. These increases were partially offset by margin reductions as a result of reduced volumes and increased unit production costs at Bristol Compressors and significant pricing pressure for large equipment sales. Selling, general, and administrative (SG&A) expense increased 11.8% to $156.8 million (14.5% of net sales) in the three months ended June 30, 2003 from $140.2 million (13.4% of net sales) in the three months ended June 30, 2002. For the six months ended June 30, 2003, SG&A increased 8.9% to $305.8 million (15.7% of net sales) from $280.8 million (14.9% of net sales) for the same period of 2002. Increases resulted from the effect of the strengthening Euro and higher pension, medical, and insurance costs. A write-off of a $5.9 million receivable related to a Unitary Products Group distributor that became insolvent was included in SG&A expense for the six months ended June 30, 2002. In 2003, we initiated actions to further reduce our overall cost structure and support the implementation of our new geographic organization. In addition to cost reductions associated with the consolidation of our former Engineered Systems Group and York Refrigeration Group segments, additional actions include the further reduction of manufacturing capacity, the elimination of certain product lines, and the exiting of several small, non-core businesses. In the three and six months ended June 30, 2003, we recorded restructuring and other charges of $34.3 million and $52.3 million, respectively, related to these actions, including $1.2 million and $3.1 million, respectively, charged to cost of goods sold. The charges in the three and six months ended June 30, 2003 included $16.0 million and $31.2 million, respectively, in write-downs of various assets and $18.3 million and $21.1 million, respectively, in accruals for severance and other costs. In 2000, we initiated a cost reduction process, which included plant closures and divestitures, product line and facility rationalizations, SG&A expense reductions, and other costs. In 2001, we expanded the scope of the cost reduction process to include additional plant closings and staff reductions. In the three months ended March 31, 2002, we recorded charges to operations of $2.8 million related to these cost reduction actions, including $0.1 million charged to cost of goods sold. We incurred no similar charges in the three months ended June 30, 2002. The charges in the three months ended March 31, 2002 included $1.6 million in write-downs of various assets and $1.2 million in accruals for severance and other costs. As of December 31, 2002, all of the 2000 and 2001 actions were substantially complete. During the three months ended June 30, 2003, income from operations decreased 49.7% to $36.5 million (3.4% of net sales) from $72.6 million (7.0% of net sales) during the three months ended June 30, 2002. For the six months ended June 30, 2003, income from operations decreased 60.3% to $31.5 million (1.6% of net sales) from $79.3 million (4.2% of net sales) in the six months ended June 30, 2002. (See further discussion below under Segment Analysis.) 16 Net interest expense in the three months ended June 30, 2003 was $12.1 million compared to $12.4 million in the same period of 2002. In the six months ended June 30, 2003, net interest expense was $24.1 million compared to $25.1 million in the six months ended June 30, 2002. The decreases resulted from lower average debt levels offset by slightly higher interest rates resulting from a larger percentage of non-U.S. debt. In January 2002, we sold our air conditioning operations in Australia for $12.1 million. The sale resulted in a loss of $10.7 million. Equity in earnings of affiliates was $2.5 million during the three months ended June 30, 2003 as compared to $2.0 million during the three months ended June 30, 2002. For the six months ended June 30, 2003, equity in earnings of affiliates was $3.6 million as compared to $2.6 million for the same period of 2002. The increase was primarily the result of improved performance of Scroll Technologies and other affiliates. The income tax provision of $7.7 million and $5.3 million for the three and six months ended June 30, 2003, respectively, and $14.0 million and $12.6 million for the three and six months ended June 30, 2002, respectively, relates to both U.S. and non-U.S. operations. The effective tax rate was 28.5% and 22.5% for the three months ended June 30, 2003 and 2002, respectively. The effective tax rate was 49.0% in the six months ended June 30, 2003 as compared to 27.4% in the six months ended June 30, 2002. The increase in the effective rate for the three and six month periods resulted from limited tax benefits associated with certain restructuring related actions recorded in 2003. Income before cumulative effect of a change in accounting principle, as a result of the above factors, was $19.2 million during the three months ended June 30, 2003 as compared to $48.2 million during the three months ended June 30, 2002. For the six months ended June 30, 2003, income before cumulative effect of a change in accounting principle was $5.6 million compared to $33.5 million for the same period of 2002. Upon adoption of Statement of Financial Accounting Standards No. 142 we were required to perform a transitional goodwill impairment test. The transitional goodwill impairment test was completed during the second quarter of 2002. As a result, we recognized a non-cash transitional goodwill impairment charge of $179.4 million. As required, the transitional goodwill impairment charge was recorded as a cumulative effect of a change in accounting principle as of January 1, 2002. SEGMENT ANALYSIS The following table sets forth net sales and income from operations by segment (in thousands): 17
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Net sales: Global Applied: Americas $ 362,839 $ 352,694 $ 660,252 $ 656,308 Europe, Middle East, and Africa 335,702 285,893 597,754 503,910 Asia 131,987 112,088 222,106 192,789 Intragroup sales (54,252) (41,436) (94,618) (75,290) ----------- ----------- ----------- ----------- 776,276 709,239 1,385,494 1,277,717 Unitary Products Group 222,949 214,808 386,491 373,143 Bristol Compressors 138,837 163,698 276,399 319,654 Eliminations (53,645) (43,652) (95,610) (84,889) ----------- ----------- ----------- ----------- Net sales $ 1,084,417 $ 1,044,093 $ 1,952,774 $ 1,885,625 =========== =========== =========== =========== Income from operations: Global Applied: Americas $ 16,815 $ 18,341 $ 14,059 $ 21,667 Europe, Middle East, and Africa 12,451 17,871 13,040 20,124 Asia 22,423 16,974 32,116 23,957 ----------- ----------- ----------- ----------- 51,689 53,186 59,215 65,748 Unitary Products Group 24,049 18,282 32,269 15,842 Bristol Compressors 11,930 12,788 23,259 29,123 General corporate expenses, eliminations, and other non-allocated items (16,130) (11,640) (30,245) (20,936) Charges and other expenses (35,030) -- (53,016) (10,476) ----------- ----------- ----------- ----------- Income from operations $ 36,508 $ 72,616 $ 31,482 $ 79,301 =========== =========== =========== ===========
Global Applied Global Applied net sales for the three months ended June 30, 2003 increased 9.5% to $776.3 million from $709.2 million for the same period in 2002. Net sales for the six months ended June 30, 2003 increased 8.4% to $1,385.5 million as compared to $1,277.7 million for the same period of 2002. Europe, Middle East, and Africa (EMEA) revenue increased due to the strengthening Euro, and Asian equipment sales increased due to continued growth in China. Revenue increases in the Americas were hindered by the weak commercial market. Global Applied service revenue increased 12.1% to $274.3 million in the three months ended June 30, 2003 from $244.7 million in the three months ended June 30, 2002. Global Applied income from operations for the three months ended June 30, 2003 decreased 2.8% to $51.7 million (6.7% of net sales) from $53.2 million (7.5% of net sales) for the same period in 2002. Income from operations for the six months ended June 30, 2003 decreased 9.9% to $59.2 million (4.3% of net sales) as compared to $65.7 million (5.1% of net sales) for the six months ended June 30, 2002. Reduced margins resulting from lower equipment volume in the Americas and significant pricing pressure in the large equipment market were partially offset by improved operating costs and higher volume in Asia. Expenses increased as a result of increased pension, medical, and insurance costs and continued investments in service infrastructure, information technology capabilities, and product development. Unitary Products Group (UPG) UPG net sales for the three months ended June 30, 2003 increased 3.8% to $222.9 million from $214.8 million for the same period in 2002. Net sales for the six months ended June 30, 2003 increased 3.6% to $386.5 million as compared to $373.1 million for the same period of 2002. Pricing increases and increased shipments of residential and commercial products were partially offset by lower manufactured housing product shipments. UPG income from operations for the three months ended June 30, 2003 increased 31.5% to $24.0 million (10.8% of net sales) from $18.3 million (8.5% of net sales) for the same period in 2002. Income from operations for the six months ended June 30, 2003 increased 103.7% to $32.3 million (8.3% of net sales) as compared to $15.8 million (4.2% of net sales for the six months ended June 30, 2002. In the six months ended June 30, 2002, we recorded a write-off of a $5.9 million receivable 18 related to a distributor that became insolvent. In addition, better results in the three and six months ended June 30, 2003 resulted from improvements in production efficiency and shipping costs, partially offset by increasing steel costs. Bristol Compressors (Bristol) Bristol net sales for the three months ended June 30, 2003 decreased 15.2% to $138.8 million from $163.7 million for the same period in 2002. Net sales for the six months ended June 30, 2003 decreased 13.5% to $276.4 million as compared to $319.7 million for the same period of 2002. The volume declines relate primarily to a decline in the North America unitary market, the impact of original equipment manufacturer's continuing to drive further component reductions, and reductions in international sales of compressors for room air conditioners. Bristol income from operations for the three months ended June 30, 2003 decreased 6.7% to $11.9 million (8.6 % of net sales) from $12.8 million (7.8% of net sales) for the same period in 2002. Income from operations for the six months ended June 30, 2003 decreased 20.1% to $23.3 million (8.4% of net sales) as compared to $29.1 million (9.1% of net sales) for the six months ended June 30, 2002. Reduced volume and lower productivity levels resulting from the integration of products from the Sparta facility negatively impacted results. Although productivity has improved from the second half of 2002, unit costs in the three and six months ended June 30, 2003 were higher than in the three and six months ended June 30, 2002. Other General corporate expenses, eliminations, and other non-allocated items increased 38.6% to $16.1 million for the three months ended June 30, 2003 as compared to $11.6 million for the same period in 2002. For the six months ended June 30, 2003, general corporate expenses, eliminations, and other non-allocated items increased 44.5% to $30.2 million from $20.9 million for the same period of 2002. The increase was primarily due to increases in pension, insurance, and medical costs and increased investments in information technology. Charges and other expenses are as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2003 2002 2003 2002 -------- -------- -------- --------- By segment: ----------- Global Applied: Americas $ 3,896 $ -- $ 7,467 $ 262 EMEA 22,910 -- 35,255 (205) Asia 696 -- 2,766 445 -------- -------- -------- -------- 27,502 -- 45,488 502 Unitary Products Group 7,500 -- 7,500 7,035 Bristol Compressors 28 -- 28 2,939 -------- -------- -------- -------- $ 35,030 $ -- $ 53,016 $ 10,476 ======== ======== ======== ======== By type: -------- -------- Charges to operations, net $ 34,278 $ -- $ 52,264 $ 2,818 Related operating expenses included in cost of goods sold 752 -- 752 7,658 -------- -------- -------- -------- $ 35,030 $ -- $ 53,016 $ 10,476 ======== ======== ======== ========
Operating expenses in 2003 related to the Americas' cost reduction actions. Operating expenses in 2002 related to the UPG and Bristol plant consolidations and a previously discontinued UPG product line. LIQUIDITY AND CAPITAL RESOURCES Working capital requirements are generally met through a combination of internally generated funds, bank lines of credit, financing of trade receivables, and credit terms from suppliers which approximate receivable terms to our customers. Additional sources of working capital include customer deposits and progress payments. 19 Working capital increased $13.8 million to $450.4 million as of June 30, 2003 as compared to $436.6 million as of December 31, 2002. The increase resulted from increases in receivables due to normal seasonal trends and higher inventory levels, partially offset by increases in accounts payable and accrued expenses and decreases in cash and cash equivalents. The current ratio was 1.49 as of June 30, 2003 as compared to 1.52 as of December 31, 2002. Capital expenditures were $35.9 million in the six months ended June 30, 2003 and June 30, 2002. Capital expenditures, which relate to information system improvements, the introduction of new products, and equipment replacement, are currently expected to approximate depreciation and amortization during 2003. Cash dividends of $0.15 per share and $0.30 per share were paid on common stock in the three and six months ended June 30, 2003, respectively. The declaration and payment of future dividends will be at the sole discretion of the Board of Directors and will depend upon such factors as our profitability, financial condition, cash requirements, future prospects, and other factors deemed relevant by the Board of Directors. Total indebtedness was $621.2 million as of June 30, 2003, primarily consisting of $500 million of senior notes, $50.2 million outstanding under domestic bank lines, and $20 million outstanding under the Five Year Credit Agreement. The senior notes mature at dates ranging from 2006 to 2012 and carry fixed rates ranging from 5.80% to 6.70%. We have available a $400 million Five Year Credit Agreement, which expires on May 29, 2006, and a $200 million 364-Day Credit Agreement, which expires on March 13, 2004 (collectively, the Agreements). As of December 31, 2002, we had available the $400 million Five Year Credit Agreement and a $300 million 364-Day Credit Agreement. As of June 30, 2003, $20 million was outstanding under the Agreements. No amounts were outstanding under the Agreements as of December 31, 2002. The $400 million Five Year Credit Agreement provides for borrowings at the London InterBank Offering Rate (LIBOR) plus 1.175%, and the $200 million 364-Day Credit Agreement provides for borrowings at LIBOR plus 1.225%. We pay annual fees of 0.20% on the $400 million facility and 0.15% on the $200 million facility. The Agreements allow for borrowings at specified bid rates. As of June 30, 2003 and December 31, 2002, the three-month LIBOR rate was 1.13% and 1.38%, respectively. The Agreements contain financial covenants requiring us to maintain certain financial ratios and standard provisions limiting leverage and liens. We were in compliance with these financial covenants as of June 30, 2003 and December 31, 2002. We have additional annually renewable domestic bank lines that provide for total borrowings of up to $75 million and $50 million as of June 30, 2003 and December 31, 2002, respectively. As of June 30, 2003, $50.2 million was outstanding under the domestic bank lines. No amounts were outstanding as of December 31, 2002. Our non-U.S. subsidiaries maintain bank credit facilities in various currencies that provide for total borrowings of $370.3 million and $384.5 million as of June 30, 2003 and December 31, 2002, respectively. As of June 30, 2003 and December 31, 2002, $29.1 million and $28.4 million, respectively, were outstanding under the non-U.S. facilities, with remaining availability of $275.6 million and $282.5 million, respectively, after bank guarantees and letters of credit usage. Pursuant to the terms of an annually renewable revolving facility, we sell certain of our trade receivables to a wholly-owned, consolidated subsidiary, York Receivables Funding LLC (YRFLLC). In turn, YRFLLC sells, on a revolving basis, undivided ownership interest in the purchased trade receivables to bank administered asset-backed commercial paper vehicles. In April 2003, we amended the facility, reducing it from $175 million to $150 million. We continue to service sold trade receivables. No servicing asset or liability has been recognized as our cost to service sold trade receivables approximates the servicing income. In accordance with the facility, YRFLLC has sold $150 million and $155 million of an undivided interest in trade receivables as of June 30, 2003 and December 31, 2002, respectively, resulting in a reduction of receivables reflected in our consolidated condensed balance sheets. The discount rate on trade receivables sold was 1.02% and 1.40% as of June 30, 2003 and December 31, 2002, respectively. The program fee on trade receivables sold was 0.50% and 0.338% as of June 30, 2003 and December 31, 2002, respectively. We believe that we will be able to satisfy our principal and interest payment obligations and our working capital and capital expenditure requirements from operating cash flows together with the availability under the Agreements. The Agreements and additional bank lines support seasonal working capital needs and are available for general corporate purposes. 20 We have access to bank lines of credit and have the ability to borrow under the Agreements as long as we continue to meet the financial covenants or until expiration of the Agreements. The primary financial covenants are the earnings before interest, taxes, depreciation, and amortization (EBITDA) interest coverage and the debt to capital ratio, as defined under the Agreements. As of June 30, 2003, our EBITDA interest coverage was 5.0, exceeding the minimum requirement of 3.5. As of June 30, 2003, our debt to capital ratio was 44%, below the maximum allowed of 52%. Because our obligations under the Agreements and revolving trade receivables purchase facility bear interest at floating rates, our interest costs are sensitive to changes in prevailing interest rates. In the ordinary course of business, we enter into various types of transactions that involve contracts and financial instruments. We enter into these financial instruments to manage financial market risk, including foreign exchange, commodity price, and interest rate risk. OUTLOOK Given the current economic and political environments, we expect weak commercial equipment markets to continue to affect results for the remainder of 2003, with pricing and margin levels remaining consistent with 2002. We anticipate that the U.S. unitary market will be at volume levels slightly lower than 2002. We expect to realize further benefits from prior year cost reduction actions and continued growth in our service businesses. Externally driven cost increases in pension, insurance, and medical costs and escalating steel prices will substantially offset the benefits expected to be realized from service growth and cost reductions. Furthermore, we are in the process of implementing additional actions to improve long-term performance, which will result in significant implementation costs and impairment charges. In addition to cost reductions associated with the announced organizational changes, actions include further reduction of manufacturing capacity, elimination of certain product lines, and closure of several small, non-core businesses. We expect these actions to result in additional costs of approximately $57 million during the second half of 2003. We expect continued debt reduction during the second half of 2003. NEW ACCOUNTING STANDARDS In July 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The statement addresses financial accounting and reporting for costs associated with exit or disposal activities initiated after December 31, 2002 and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Under the statement, we recognize liabilities at fair value for costs associated with exit or disposal activities only when the liability is incurred. In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The interpretation elaborates on the disclosures to be made in our interim and annual financial statements about obligations under certain guarantees. Effective January 1, 2003, it requires us to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The interpretation did not have a material impact on our consolidated condensed financial statements. In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus requires an approach to determine whether we should divide an arrangement with multiple deliverables into separate units of accounting. We will adopt the consensus on a prospective basis effective July 1, 2003. We do not expect the consensus to have a material impact on our consolidated condensed financial statements. In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." The interpretation addresses consolidation of variable interest entities which have one or both of the following characteristics: (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or (2) the equity investors lack the essential characteristics of a controlling financial interest. The interpretation applies to variable interest entities created after January 31, 2003, and to variable interest entities in which we obtain an interest after that date. Beginning on July 1, 2003, it applies to variable interest entities in which we hold a variable interest that we acquired prior to February 1, 2003. Effective July 1, 2003, we will consolidate the variable interest entity used to transact our December 1999 synthetic lease. As a result, our financial statements will reflect approximately $82 million of incremental 21 debt, $23 million of incremental net machinery and equipment, $11 million of incremental deferred tax assets, a $16 million reduction to stockholders' equity, and a $32 million reduction to other long-term liabilities. We may apply the interpretation by restating previously issued financial statement for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated or as a cumulative-effect adjustment as of July 1, 2003. FORWARD-LOOKING INFORMATION - RISK FACTORS This document contains statements which, to the extent they are not statements of historical or present fact, constitute "forward-looking statements" under the securities laws. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These forward-looking statements are intended to provide our current expectations or plans for future operating and financial performance based on assumptions currently believed to be valid. To the extent we have made "forward-looking statements," certain risk factors could cause actual results to differ materially from those anticipated in such forward-looking statements including, but not limited to competition, government regulation, litigation, work stoppages, environmental considerations, and the successful implementation of our cost reduction initiatives. Unseasonably cool weather in various parts of the world could adversely affect our UPG and Global Applied air conditioning businesses and, similarly, the Bristol Compressors business. Bristol is also dependent on the successful development and introduction of new products. The Global Applied air conditioning business could also be affected by a further slowdown in the large chiller market and by the acceptance of new product introductions. Global Applied could be negatively impacted by reductions in commercial construction. Our ability to effectively implement price increases to offset higher costs is dependent on market conditions and the competitive environment. The financial position and financial results of our foreign locations could be negatively impacted by the translation effect of currency fluctuations and by political changes including nationalization or expropriation of assets. In addition, our overall performance could be affected by declining worldwide economic conditions or slowdowns resulting from world events. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information responsive to this item as of December 31, 2002 appears under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations, Market Risk," on pages 9 to 11 of the Annual Financial Statements and Review of Operations filed as Exhibit 13 to our Annual Report on Form 10-K for the year ended December 31, 2002. There was no material change in such information as of June 30, 2003. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures As of June 30, 2003, we carried out an evaluation, under the supervision and with the participation of company management, including the Chief Executive Officer, President, and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer, President, and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. (b) Changes in Internal Controls There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 22 PART II - OTHER INFORMATION YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES ITEM 1. LEGAL PROCEEDINGS As discussed in our Form 10-K filed March 7, 2003 and Form 10-Q filed May 13, 2003, a case captioned American Standard, Inc. and American Standard International Inc. v. York International Corporation and York International, S.A. de C.V. was filed in the Federal District for the Western District of Wisconsin. American Standard, a competitor of ours, alleged that two component parts of three models of chillers manufactured by us infringe two patents held by American Standard. In September 2002, a jury found that both patents were invalid, resulting in a finding that we had no liability to American Standard. American Standard filed a post-trial motion asking the judge to overturn the jury's finding of invalidity with respect to one of the patents. On December 18, 2002, the judge denied American Standard's motion. The judge also awarded us costs in the amount of $0.1 million and reasonable attorneys' fees for defending the matter, which were not quantified at that time. On April 1, 2003, the judge awarded us $1.3 million as reimbursement for legal fees and amended the original judgment to hold additional claims of both patents invalid. American Standard filed a notice of appeal from the judge's rulings. Subsequent discussions between the parties resulted in an agreement to settle the matter with a payment from American Standard to us. ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Registrant's annual meeting of Stockholders was held on May 22, 2003 (b) Proxies were solicited for the meeting. All nominees for Director were elected and item (c) 2 (see below) was approved. (c) The following votes were cast at the Annual Meeting for the matters indicated below:
1. Election of Directors Votes For Votes Withheld --------------------- --------- -------------- Gerald C. McDonough 33,372,232 642,713 Michael R. Young 33,440,196 574,749 W. Michael Clevy 33,374,339 640,606 J. Roderick Heller, III 33,444,738 570,207 Robert F. B. Logan 32,991,618 1,023,327 Paul J. Powers 33,374,650 640,295 Donald M. Roberts 32,921,798 1,093,147 James A. Urry 32,991,665 1,023,280
Votes For Votes Against Abstentions --------- ------------- ----------- 2. The appointment of KPMG LLP 32,626,599 1,373,064 15,282 as independent auditors
ITEM 5. OTHER INFORMATION Not Applicable 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10.1 - First Amendment to the York International Corporation Executive Deferred Compensation Plan* Exhibit 10.2 - Amendment No. 2 to the York International Corporation Supplemental Executive Retirement Plan* Exhibit 31.1 - Certification of the Chief Executive Officer of York International Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* Exhibit 31.2 - Certification of the President of York International Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* Exhibit 31.3 - Certification of the Chief Financial Officer of York International Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* Exhibit 32.1 - Certification of the Chief Executive Officer and Chief Financial Officer of York International Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* * Submitted electronically herewith (b) Reports on Form 8-K Current Report on Form 8-K dated July 23, 2003, containing a press release, dated July 23, 2003, setting forth our second quarter 2003 results (Such press release is not incorporated by reference herein or deemed "filed" within the meaning of Section 18 of the Securities Act of 1933.) Current Report on Form 8-K dated June 24, 2003, containing a press release, dated June 24, 2003, announcing the election of a new President and a new Vice President and Chief Financial Officer Current Report on Form 8-K dated June 13, 2003, containing a press release, dated June 13, 2003, announcing the election of a new Vice President, Human Resources 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned unto duly authorized. YORK INTERNATIONAL CORPORATION ------------------------------ Registrant Date July 31, 2003 /S/ M. David Kornblatt ----------------------------------------- M. David Kornblatt, Vice President and Chief Financial Officer 25 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 10.1 First Amendment to the York International Corporation Executive Deferred Compensation Plan* 10.2 Amendment No. 2 to the York International Corporation Supplemental Executive Retirement Plan* 31.1 Certification of the Chief Executive Officer of York International Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 31.2 Certification of the President of York International Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 31.3 Certification of the Chief Financial Officer of York International Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* 32.1 Certification of the Chief Executive Officer and Chief Financial Officer of York International Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* * Submitted electronically herewith 26