<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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 November 9, 1998
----- -------------------------------
Common Stock, par value $.005 40,056,235 shares
<PAGE>
-2-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
INDEX
-----
<TABLE>
<CAPTION>
Page No.
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Condensed Statements of Operations (Unaudited) -
Nine Months and Three Months Ended September 30, 1998 and 1997 3
Consolidated Condensed Balance Sheets -
September 30, 1998 (Unaudited) and December 31, 1997 4
Consolidated Condensed Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 1998 and 1997 5
Supplemental Notes to Consolidated Condensed
Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
<PAGE>
-3-
PART I - FINANCIAL INFORMATION
------------------------------
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 1
FINANCIAL STATEMENTS
Consolidated Condensed Statements of Operations (Unaudited)
- ----------------------------------------------------------
(thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------ -----------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $810,355 $749,780 $2,440,824 $2,434,944
Cost of goods sold 626,574 589,985 1,905,172 1,922,016
-------- -------- ---------- ----------
Gross profit 183,781 159,795 535,652 512,928
Selling, general and
administrative expenses 121,864 121,629 364,885 370,678
-------- -------- ---------- ----------
Income from operations 61,917 38,166 170,767 142,250
Interest expense, net 10,069 9,880 31,768 30,296
Equity in earnings of affiliates (974) (6,951) (143) (7,820)
-------- -------- ---------- ----------
Income before income taxes 52,822 35,237 139,142 119,774
Provision for income taxes 5,568 11,452 34,917 38,927
-------- -------- ---------- ----------
Net income $ 47,254 $ 23,785 $ 104,225 $ 80,847
======== ======== ========== ==========
Basic earnings per share $ 1.17 $ 0.56 $ 2.57 $ 1.88
Diluted earnings per share $ 1.16 $ 0.55 $ 2.55 $ 1.86
======== ======== ========== ==========
Cash dividends per share $ 0.12 $ 0.12 $ 0.36 $ 0.36
======== ======== ========== ==========
Weighted average common shares
and common equivalents outstanding:
Basic 40,548 42,475 40,534 42,989
Diluted 40,738 42,868 40,801 43,557
See accompanying supplemental notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
-4-
PART I - FINANCIAL INFORMATION
------------------------------
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
- -------------------------------------
(thousands of dollars)
<TABLE>
<CAPTION>
ASSETS
Sept. 30, 1998 December 31,
Current Assets: (Unaudited) 1997
--------------- ------------
<S> <C> <C>
Cash and cash equivalents $ 12,412 $ 12,228
Receivables 624,036 555,830
Inventories:
Raw materials 190,025 163,336
Work in process 121,207 110,882
Finished goods 259,532 266,896
---------- ----------
Total inventories 570,764 541,114
---------- ----------
Prepayments and other current assets 89,528 112,448
---------- ----------
Total current assets 1,296,740 1,221,620
Deferred income taxes 22,746 21,869
Unallocated excess of cost
over net assets acquired 335,231 343,854
Investments in affiliates 20,397 17,660
Property, plant and equipment, net 360,213 368,642
Deferred charges and other assets 28,971 22,653
---------- ----------
Total assets $2,064,298 $1,996,298
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion
of long-term debt $ 59,887 $ 69,438
Accounts payable and accrued expenses 668,291 601,573
Income taxes 52,464 15,486
---------- ----------
Total current liabilities 780,642 686,497
Warranties 44,220 36,280
Long-term debt 360,262 452,344
Postretirement benefit liabilities 136,616 133,294
Other long-term liabilities 32,367 41,598
---------- ----------
Total liabilities 1,354,107 1,350,013
Stockholders' equity 710,191 646,285
---------- ----------
Total liabilities and stockholders' equity $2,064,298 $1,996,298
========== ==========
See accompanying supplemental notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
-5-
PART I - FINANCIAL INFORMATION
------------------------------
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Condensed Statements of Cash Flows (Unaudited)
- -----------------------------------------------------------
(thousands of dollars)
Nine Months Ended Sept. 30,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 104,225 $ 80,847
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 43,588 39,453
Amortization of deferred charges 12,010 10,690
Provision for doubtful accounts receivable 5,364 6,038
Other 3,518 (4,280)
Change in assets and liabilities net of
effects from purchase of other companies:
Receivables (77,749) 12,266
Inventories (31,334) 28,974
Prepayments and other current assets 21,618 13,569
Deferred income taxes (927) (1,303)
Other assets (10,611) 3,546
Accounts payable and accrued expenses 62,929 (76,681)
Income taxes 34,878 (6,423)
Warranties 7,489 7,592
Post-retirement benefit liabilities 3,322 2,904
Other long-term liabilities (7,890) (5,403)
--------- ---------
Net cash provided by operating activities 170,430 111,789
--------- ---------
Cash flows from investing activities:
Payment for purchases of and investments in
other companies (net of cash acquired) (6,550) (8,978)
Capital expenditures (34,721) (46,498)
Other 150 4,447
--------- ---------
Net cash used by investing activities (41,121) (51,029)
--------- ---------
Cash flows from financing activities:
Common stock issued 10,045 3,159
Treasury stock purchased (23,007) (85,777)
Proceeds from issuance of bank loans - 82,248
Long-term debt payments (122,610) (105,420)
Net payments on short term debt (9,551) (58,902)
Proceeds from issuance of senior notes 198,310 -
Net (payments on)/proceeds from issuance of commercial paper (167,782) 115,644
Dividends paid (14,627) (15,455)
--------- ---------
Net cash used by financing activities (129,222) (64,503)
--------- ---------
Effect of exchange rate changes on cash 97 61
--------- ---------
Net increase/(decrease) in cash and cash equivalents 184 (3,682)
Cash and cash equivalents at beginning of period 12,228 11,470
--------- ---------
Cash and cash equivalents at end of period $ 12,412 $ 7,788
========= =========
See accompanying supplemental notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
-6-
PART I - FINANCIAL INFORMATION
------------------------------
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Supplemental Notes To Consolidated Condensed Financial Statements (Unaudited)
- -----------------------------------------------------------------------------
(1) The consolidated condensed financial statements included herein have been
prepared by the Registrant pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to applicable rules and regulations, although
the Registrant believes that the disclosures herein are adequate to make
the information presented not misleading. In the opinion of the York
International Corporation (the Company), the accompanying consolidated
condensed financial statements contain all adjustments (consisting of only
normally recurring accruals) necessary to present fairly the financial
position as of September 30, 1998 and December 31, 1997, the results of
operations for the three and nine month periods ended September 30, 1998
and 1997, and cash flows for the nine months ended September 30, 1998 and
1997.
(2) The results of operations for interim periods are not necessarily
indicative of the results expected for the full year.
(3) The following tables summarize the capitalization of the Company at
September 30, 1998 and at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
Sept. 30, 1998 December 31, 1997
--------------------- -----------------------
Current Long Term Current Long Term
-------- ----------- -------- -------------
<S> <C> <C> <C> <C>
Indebtedness:
Bank loans $49,451 $ - $60,235 $ -
Commercial paper - 400 - 168,182
Bank lines - 46,883 - 169,780
Senior notes - 300,000 - 100,000
Other 10,436 12,979 9,203 14,382
------- --------- -------- ------------
Total notes payable and long-term debt $59,887 $ 360,262 $69,438 $ 452,344
======= ========= ======== ============
Sept. 30, December 31,
Stockholders' equity: 1998 1997
--------- ------------
Common Stock $.005 par value;
200,000 shares authorized;
issued 44,336 shares at September 30, 1998
and 44,057 shares at December 31, 1997 $ 222 $ 220
Additional paid in capital 690,416 679,180
Retained earnings 262,973 173,375
Currency translation adjustment (63,246) (47,100)
Treasury stock, 4,062 shares at September 30, 1998
and 3,429 shares at December 31, 1997, at cost (176,432) (153,425)
Unearned compensation (3,742) (5,965)
--------- ------------
Total stockholders' equity $ 710,191 $ 646,285
========= ============
</TABLE>
The Company maintains a $500 million revolving credit facility pursuant to
an Amended and Restated Credit Agreement (the Agreement) expiring on July
31, 2002. The Agreement was amended and restated on May 1, 1997. At
September 30, 1998, the Company could borrow $500 million. The Agreement
provides for borrowings under the facility at LIBOR plus .16% or at
specified bid rates. At September 30, 1998 and December 31, 1997, the LIBOR
rate was 5.25% and 5.75%, respectively. A fee of .09% is paid on the
facility. The Agreement, as amended, contains financial and operating
covenants requiring the Company to maintain certain financial ratios and
standard provisions limiting leverage, investments and liens.
(continued)
<PAGE>
-7-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Supplemental Notes To Consolidated Condensed Financial Statements (Unaudited)
- -----------------------------------------------------------------------------
The Company's non-U.S. subsidiaries maintain bank credit facilities in
various currencies that provided for available borrowings of $256.7 million
and $245.2 million at September 30, 1998 and December 31, 1997,
respectively, of which $200.4 million and $175.5 million, respectively,
were unused. In some instances, borrowings against these credit facilities
have been guaranteed by the Company to assure availability of funds at
favorable rates.
The Company established a commercial paper facility in November 1995.
Commercial paper borrowings are expected to be reborrowed in the ordinary
course of business. The interest rate on the commercial paper was 5.65% at
September 30, 1998 and 5.84% at December 31, 1997.
During the second quarter of 1997, the Company arranged four separate
unsecured bank lines similar to commercial paper. These bank lines provide
for total borrowings of up to $295 million which are expected to be
reborrowed in the ordinary course of business. At September 30, 1998 and
December 31, 1997, the Company had $46.9 million and $169.8 million,
respectively, outstanding under the bank lines. The average rate under the
bank lines was 5.60% and 5.92% at September 30, 1998 and December 31, 1997,
respectively.
At September 30, 1998 and December 31, 1997 the Company had $300 million
and $100 million of Senior Notes outstanding, respectively. On June 1,
1998, the Company issued $200 million of 6.70% fixed rate Senior Notes
having a maturity of ten years from the date of issue (June 2008). The
proceeds from the sale of the notes were used to pay down the Company's
commercial paper borrowings and bank lines. The $100 million of Senior
Notes issued in March 1993 bear interest at a 6.75% fixed rate and are due
March 2003.
During 1995, the Company arranged a term loan denominated in a foreign
currency. The Company borrowed $26.2 million with a final maturity on
November 15, 1998 with an interest rate of 3.98%. The loan is repayable in
four annual installments. The term loan agreement contains financial and
operating covenants that are equivalent to the covenants of the Company's
Amended and Restated Credit Agreement.
Under a receivables sales agreement entered into in 1992, the Company sold
a fractional ownership interest in a defined pool of trade accounts
receivable for $100 million in 1998 and 1997. The sold accounts receivable
are reflected as a reduction of receivables in the accompanying
consolidated balance sheets. Under an Amended and Restated Receivables
Sales Agreement entered into on March 26, 1997, the maximum amount of the
purchasers' investment is currently $120 million and is subject to decrease
based on the level of eligible accounts receivable and restrictions on
concentrations of receivables. The discount rate on the receivables sold at
September 30, 1998 and December 31, 1997 was approximately 5.52% and 5.78%,
respectively.
During May 1997, the Stockholders approved an amendment to the 1992 Omnibus
Stock Plan. The Amended and Restated 1992 Omnibus Stock Plan authorizes the
issuance of up to 4,380,000 shares of the Company's common stock as stock
options or restricted share awards, of which up to 3% of the total
outstanding shares are available for restricted share awards. The exercise
price of stock options granted under the Plan is not less than the fair
market value of the shares on the date the option is granted. The
restricted shares are granted at a price determined by the Board of
Directors. In March, 1998, key employees were awarded options to purchase
714,815 shares at an exercise price of $43.6875 per share.
In 1997, the Board of Directors authorized the Company to purchase up to
6.0 million shares of its Common Stock over the subsequent four years which
may be used to fund the Company's Employee Stock Purchase Plan and the
Amended and Restated 1992 Omnibus Stock Plan. The stock purchases are made
from time to time on the open market. Under the program, 0.6 million shares
were repurchased on the open market during the nine months ended September
30, 1998 and 3.4 million shares were repurchased in 1997.
(continued)
<PAGE>
-8-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Supplemental Notes To Consolidated Condensed Financial Statements (Unaudited)
- -----------------------------------------------------------------------------
On June 1, 1998, the Company filed a registration statement on Form S-8
with the Securities and Exchange Commission for the purpose of registering
an additional 1,380,000 shares of Common Stock in connection with its
Amended and Restated 1992 Omnibus Stock Plan.
(4) On February 2, 1998, the Company incurred damage to its Grantley
manufacturing facility in York, PA when tanks used for testing ruptured.
The accident occurred on the third shift and facilities used in steel
cutting and rolling operations and heat exchanger production sustained
substantial damage. The Company has taken a number of measures to limit the
disruptions and costs resulting from the accident, including moving
production to other York facilities, outsourcing or subcontracting
production of certain components, and establishing temporary production
elsewhere at the Grantley location. The Company is rebuilding the facility
and fully restoring its production capacity.
The Company maintains insurance for both property damage and business
interruption applicable to its production facilities including Grantley.
The applicable coverage provides for deductibles of $25,000 for property
damage and $25,000 for business interruption. During the first, second and
third quarters of 1998, the Company recorded credits of $12.5 million, $5.0
million, and $3.0 million respectively, to cost of goods sold reflecting
insurance coverage for estimated incremental expenses and losses included
in cost of goods sold as a result of the accident. This amount does not
represent the total business interruption claim or anticipated insurance
recovery for the first three quarters, nor has the Company recorded any
amount for the property damage impact (including any insurance recoveries).
The Company is continuing to accumulate information required to determine
the total amount for property damage and business interruption related to
the accident for which it will pursue recovery.
(5) The Company adopted Statement of Financial Accounting Standards No.130
"Reporting Comprehensive Income" in the first quarter of 1998.
Comprehensive income is determined as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net income $47,254 $23,785 $104,225 $80,847
Other comprehensive loss, net of tax:
Foreign currency translation adjustment
(net of tax of $856, $2,635, $5,328,
and $4,736, respectively) $ 2,136 $ 5,472 $ 10,818 $ 9,835
------- ------- -------- -------
Comprehensive income $45,118 $18,313 $ 93,407 $71,012
======= ======= ======== =======
</TABLE>
(6) The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS 128) "Earnings per Share" in 1997, which establishes standards for
computing and presenting earnings per share. All prior earnings per share
amounts have been restated to conform to the provisions of SFAS 128.
The Company's basic earnings per share are based upon the weighted average
common shares outstanding during the period. The Company's diluted earnings
per share are based upon the weighted average outstanding common shares and
common share equivalents.
(7) Reference is made to Registrant's 1997 Annual Report on Form 10-K for more
detailed financial statements and footnotes.
<PAGE>
-9-
PART I - FINANCIAL INFORMATION
------------------------------
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
- ---------------------
Net sales for the three months ended September 30, 1998 increased 8.1% to $810.4
million as compared to $749.8 million for the three months ended September 30,
1997. Net sales for the nine months ended September 30, 1998 increased .2% to
$2,440.8 million as compared to $2,434.9 million for the nine months ended
September 30, 1997. Third quarter sales increased in all business groups.
Engineered products group third quarter sales increased 5.6% to $337.0 million
versus $319.0 million in 1997. The increase was due to strong performance of
the service business and increased equipment volume. This increase was offset
by a decrease of approximately 10% in Asian sales from the third quarter of
1997. Year-to-date sales were down 2.5% as a result of disruptions related to
the accident at the Company's Grantley facility and economic downturns in Asia.
Unitary products group sales increased 9.5% to $360.7 million from $329.5
million in the third quarter of 1997 and year-to-date sales increased 4.2%. The
U.S. Unitary market was up significantly in 1998, primarily due to the favorable
weather. Overall, non-U.S. Unitary sales volumes increased in all regions
except Asia. The Refrigeration products group sales increased 11.3% to $112.7
million from $101.3 million in the third quarter of 1997. The third quarter
Refrigeration growth was the result of improved markets in Europe coupled with
an improvement in the Refrigeration business performance in Europe. Year-to-date
Refrigeration products group sales are slightly up excluding the impact of the
sale of the German Commercial Refrigeration Business in the second quarter of
1997.
For the third quarter of 1998, domestic sales increased 11.1% to $475.5 million.
The increase in domestic sales was primarily a result of the strong domestic
Unitary market. Aggregate non-U.S. sales increased 4.0% from the third quarter
of 1997 to $334.9 million primarily as a result of strong performance in Latin
America partially offset by weakness in the Asian economy.
The following table sets forth third quarter and nine months to date sales by
product and geographic market (in thousands):
<TABLE>
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
------------------------------ -----------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Engineered products $337,018 $319,003 $ 981,635 $1,006,795
Unitary products 360,663 329,462 1,149,990 1,103,611
Refrigeration products 112,674 101,315 309,199 324,538
-------- -------- ---------- ----------
Net sales $810,355 $749,780 $2,440,824 $2,434,944
======== ======== ========== ==========
U.S. Domestic 59% 57% 59% 57%
Non-U.S. 41% 43% 41% 43%
-------- -------- ---------- ----------
Total 100% 100% 100% 100%
======== ======== ========== ==========
</TABLE>
Order backlog at September 30, 1998 was $952.8 million which is 22.6% greater
than at September 30, 1997. Domestic backlog increased 26.1% to $559.2 million.
All three business groups experienced increases in backlog compared to September
1997. International backlog increased 18.0% to $393.6 million. International
backlog improved despite the negative effect from the Asian economy.
Gross profit for the quarter was $183.8 million or 22.7% of sales as compared to
$159.8 million or 21.3% of sales for the third quarter of 1997. The 1998 third
quarter gross profit includes a credit of $3.0 million to record a portion of
the anticipated insurance recovery from the Grantley accident. This represents a
partial claim for business interruption
(continued)
<PAGE>
-10-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
and excludes any impact for property damage and property insurance. Gross profit
for the nine months ended September 30, 1998, was $535.7 million or 21.9% of
sales as compared to $512.9 million or 21.1% of sales for the nine months ended
September 30, 1997. Improved performance in manufacturing facilities and cost
reduction initiatives resulted in a favorable impact on gross profit.
Engineered products group third quarter and the first nine months of 1998 gross
margin as a percent of sales was flat with 1997. Gross margin benefited from the
impact of service growth, improved operating performance and improved sales
margins driven by product mix, particularly in the third quarter. Lower Asian
volumes and the Grantley accident offset the margin improvements. The Unitary
products group gross margins improved by 32.8% in the third quarter and 11.7% in
the first nine months of 1998 versus 1997. The increase was due to improved
operating performance, cost reductions and a favorable product mix.
Refrigeration products group gross margin decreased over 200 basis points as a
percent of sales in the third quarter 1998 versus the third quarter of 1997.
This margin effect is due to product mix. Specifically, airside refrigeration
products were strong in the quarter while food and beverage refrigeration
shipments were lower than the prior year. Overall, Refrigeration margins
continue to be down in the first nine months of 1998.
Selling, General and Administration (SG&A) expenses in the third quarter of 1998
were flat at $121.9 million or 15.0% of sales compared to $121.6 million or
16.2% of sales for the same quarter of 1997. For the nine months ended September
30, 1998, SG&A expenses decreased 1.6% to $364.9 million or 14.9% of sales
compared to $370.7 million or 15.2% of sales for the nine months ended September
30, 1997. SG&A spending levels have been controlled effectively, particularly
in Asia where the reduction of spending was in response to the significant
revenue downturn in the region. All business groups effectively controlled SG&A
spending in the first nine months of 1998.
As a result of the above factors, income from operations for the third quarter
of 1998 was $61.9 million compared to $38.2 million for the third quarter of
1997. Income from operations for the nine months ended September 30, 1998
increased 20.0% to $170.8 million as compared to $142.3 million for the nine
months ended September 30, 1997.
Interest expense increased to $10.1 million in the third quarter 1998 from $9.9
million in the same quarter of 1997. The expense includes the impact of higher
borrowing rates offset by the benefit of reduced working capital needs resulting
in lower average borrowings.
Equity in earnings of affiliates for the third quarter of 1998 was $6.0 million
lower than 1997. This is attributed to a one-time gain recorded in 1997 from
the sale of the Company's minority interest in an Egyptian air conditioning
company.
Provision for income taxes of $5.6 million in the third quarter of 1998 relates
both to U.S. and non-U.S. operations. The tax rate includes a one-time tax
benefit related to export incentives, foreign tax credit planning and other
activities outside the U.S., including closures and consolidations. In addition,
the continued tax planning efforts led to a reduction in the effective rate from
34% to 33%. The effective tax rate for the nine month period, excluding the one-
time benefit, is 33% compared to 32.5% in 1997.
Net income, as a result of the above factors, was $47.3 million ($1.16 per
share) in the third quarter of 1998 as compared to net income of $23.8 million
($0.55 per share) in the third quarter of 1997. For the nine months ended
September 30, 1998 net income increased to $104.2 million ($2.55 per share)
compared to $80.8 million ($1.86 per share) in the first nine months of 1997.
Liquidity and Capital Resources
- -------------------------------
Working capital requirements are generally met through a combination of
internally generated funds, bank lines of credit, commercial paper issuances,
financing of trade receivables and credit terms from suppliers which approximate
receivable terms to the Company's customers. The Company believes that these
sources, including its
(continued)
<PAGE>
-11-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
bank lines of credit under the Amended and Restated Credit Agreement, will be
sufficient to meet working capital needs during 1998. Additional sources of
working capital include customer deposits and progress payments.
The Company had working capital of $516.1 million and $535.1 million as of
September 30, 1998 and December 31, 1997, respectively. The current ratio was
1.66 at September 30, 1998, as compared to 1.78 for December 31, 1997.
Long-term indebtedness was $360.3 million at September 30, 1998, primarily
consisting of borrowings of the $300 million senior notes, commercial paper and
bank lines. As of September 30, 1998, there were no borrowings under the
revolving credit facility.
At September 30, 1998, the Company maintained a $500 million Amended and
Restated Credit Agreement (the Agreement) expiring on July 31, 2002. The
Agreement was amended and restated May 1, 1997. The Agreement provides for
borrowings under the facility at LIBOR plus .16% or at specified bid rates and a
fee of .09% is paid on the facility. At September 30, 1998, the LIBOR rate was
5.25%. The Agreement, as amended, contains financial and operating covenants
requiring the Company to maintain certain financial ratios and standard
provisions limiting leverage, investments and liens.
The Company's non-U.S. subsidiaries maintain bank credit facilities in various
currencies that provide for available borrowings of $256.7 million and $245.2
million at September 30, 1998 and December 31, 1997, respectively, of which
$200.4 million and $175.5 million, respectively, were unused. In some instances,
borrowings against these credit facilities have been guaranteed by the Company
to assure availability of funds at favorable rates.
Commercial paper borrowings are expected to be reborrowed in the ordinary course
of business. The interest rate on the commercial paper was 5.65% and 5.84% as of
September 30, 1998 and December 31, 1997, respectively.
During the second quarter of 1997, the Company arranged four separate unsecured
bank lines similar to commercial paper. These bank lines provide for total
borrowings of up to $295 million which are expected to be reborrowed in the
ordinary course of business. At September 30, 1998 and December 31, 1997, the
Company had $46.9 million and $169.8 million, respectively outstanding under
these bank lines. The average rate on the bank lines was 5.60% and 5.92%, at
September 30, 1998 and December 31, 1997, respectively.
At September 30, 1998 and December 31, 1997 the Company had $300 million and
$100 million of Senior Notes outstanding, respectively. On June 1, 1998 the
Company issued $200 million of 6.70% fixed rate Senior Notes having a maturity
of ten years from the date of issue, June 2008. The proceeds from the sale of
the notes were used to pay down the Company's commercial paper borrowings and
bank lines. The $100 million of Senior Notes issued in March 1993 bear interest
at a 6.75% fixed rate and are due March 2003.
During 1995, the Company arranged a term loan denominated in a foreign currency.
The Company borrowed $26.2 million with a final maturity on November 15, 1998
and an interest rate of 3.98%. The loan is repayable in four annual
installments. The term loan agreement contains financial and operating covenants
that are equivalent to the covenants of the Company's Amended and Restated
Credit Agreement.
The Company has sold a fractional ownership interest in a defined pool of trade
accounts receivable for $100 million. At September 30, 1998 and December 31,
1997, the discount rate on the accounts receivable sold was approximately 5.52%
and 5.78%, respectively.
Because the Company's obligations under the Amended and Restated Credit
Agreement and Receivables Sales Agreement bear interest at floating rates, the
Company's interest costs are sensitive to changes in prevailing interest rates.
(continued)
<PAGE>
-12-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Based on historical cash flows, the Company believes that it will be able to
satisfy its principal and interest payment obligations and its working capital
and capital expenditure requirements from operating cash flows together with the
availability under the revolving credit facility and commercial paper
borrowings.
In the ordinary course of business, the Company enters into various types of
transactions that involve contracts and financial instruments with off-balance-
sheet risk. The Company enters into these financial instruments to manage
financial market risk, including foreign exchange, commodity price and interest
rate risk. The Company enters into these financial instruments utilizing over-
the-counter as opposed to exchange traded instruments. The Company mitigates the
risk that counterparties to these over-the-counter agreements will fail to
perform by only entering into agreements with major international financial
institutions.
Capital expenditures currently anticipated for expanded capacity, cost
reductions and the introduction of new products during the next twelve months
will be in excess of depreciation and amortization. These expenditures will be
funded from a combination of operating cash flows and availability under the
revolving credit facility and commercial paper borrowings.
Cash dividends of $0.12 per share were paid on common stock in the third quarter
of 1998. The declaration and payment of future dividends will be at the sole
discretion of the Board of Directors and will depend upon such factors as the
Company's profitability, financial condition, cash requirements and future
prospects.
Year 2000 Update
- ----------------
General information and state of readiness:
The Company's enterprise-wide Year 2000 (Y2K) Compliance Program (the Program)
was initiated in February, 1997. The Company divided the Program into four
dimensions: information systems; York International products and services;
production equipment and facilities; and supplier capabilities.
As of the end of the third quarter 1998, the Company is testing, validating, and
implementing internal information systems and external information systems
interfaces that are Y2K compliant. These activities include, but are not limited
to, evaluating existing and new hardware and software and where necessary
replacing or modifying these system components to be Y2K compliant. In 1996, the
Company determined that MAPICS would be the enterprise-wide manufacturing
system. Likewise, the Company decided in 1995 to use the Lawson Financial
Systems package at all US locations. During the risk assessment phase of the Y2K
Program, it was determined that by accelerating the deployment of these two
systems components, the Company would remediate a significant percentage of the
Y2K systems issues. Other systems components as well as non-manufacturing
systems internationally are being modified or replaced to achieve Y2K
compliance. Testing and validation is expected to continue into the second
quarter of 1999.
The Company's products verification dimension is complete. The Company has
determined that its residential products are Y2K compliant and will transition
correctly to the year 2000 without manual intervention. In addition, the company
has verified that the vast majority of its commercial and industrial products
utilizing YORK-manufactured or YORK-designed microprocessor control panels or
PLC-based equipment are Y2K compliant.
The Company has conducted an evaluation of its production equipment and process
control capabilities in all manufacturing locations and is remediating those few
components that are not currently Y2K compliant. Similarly, the Company has
evaluated its facilities controls (e.g. elevators, telephone systems, security
systems, etc.) to determine Y2K compliance. In most cases those systems were
found to be Y2K compliant. In isolated situations where the facilities systems
were found to be non-compliant, plans are in place for remediation by the second
quarter of 1999.
The Company has communicated with major and critical suppliers requiring them to
certify Y2K compliance. Further, the Company is establishing plans to conduct
detailed evaluations with critical suppliers to verify compliance. The Company
will be evaluating the necessary "Millennium Stock Levels" to be established for
parts and materials that
(continued)
<PAGE>
-13-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
are critical to the manufacturing process. The company will also be developing
plans and necessary stock levels for single source items. The Company will
continue to develop further contingency plans throughout 1999 as necessary.
Cost:
The Company expects to incur internal staff costs as well as consulting and
other expenses related to infrastructure and facilities enhancements necessary
to prepare systems and applications for the year 2000. The cost of testing and
conversion of systems and applications will not have a material affect on the
Company's results of operations or financial position. A significant proportion
of these costs are not likely to be incremental costs to the Company, but rather
will represent the redeployment of existing information technology resources or
be a component of planned system improvements.
Risks:
The Company's failure to correct or develop an adequate contingency plan to
mitigate a material Y2K problem, including problems experienced by suppliers,
could result in an interruption in normal business activities or operations.
However, the Company is confident in the success of its Compliance Program and
that its Compliance Program will allow the Company to complete a successful
transition to the Year 2000.
Euro Conversion
- ---------------
Management has initiated an internal analysis of and planning for the effect the
Euro will have on the operating and financial condition of the Company. The
effect of the Euro is not expected to be material to the Company's operating
results and the Company's competitive exposure is minimal. The Company's
financial systems are Euro compliant and opportunities will continue to be
investigated for European wide system infrastructures.
New Accounting Standards
- ------------------------
In January 1997, the Securities and Exchange Commission amended regulations and
forms, including Regulation S-X and S-K, to clarify and expand existing
disclosure requirements about accounting policies for certain derivative
instruments, and to add new disclosure requirements about the risk of loss from
changes in market rates or prices which are inherent in derivatives. The
Company's disclosures in its annual report on Form 10-K conform to the
disclosure requirements set forth in the amended regulations. Adoption by the
Company of the disclosure relating to risk of loss, for which requirements are
effective for fiscal years ending after June 15, 1998, are not expected to have
a material effect on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No.131, "Disclosures about Segments of an
Enterprise and Related Information." In January 1998, the FASB issued Statement
of Financial Accounting Standards No.132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits". These statements establish standards for
reporting information about business segments and products in financial
statements and establish new disclosure requirements relating to pension and
other postretirement benefits. These pronouncements are effective for fiscal
years beginning after December 15, 1997.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No.133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999.
Adoption of these statements is not expected to have a material effect on the
Company's financial statements.
(continued)
<PAGE>
-14-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking Information -- Risk Factors
- -----------------------------------------
To the extent the Registrant has made "forward-looking statements," certain risk
factors could cause actual results to differ materially from those anticipated
in such forward-looking statements including, but not limited to competition,
government regulation, environmental considerations and the Year 2000 Compliance
Program. Unseasonably cool spring or summer weather in the United States or in
Europe could adversely affect the Registrant's residential air conditioning
business. The Engineered air conditioning business could be affected by a
slowdown in the large chiller market, by the level of CFC retrofits, the
rebuilding of the Grantley Manufacturing facility and resolution of the
insurance recovery. Overall performance of the Registrant was affected by the
economic conditions in Asia and future anticipated performance could be affected
by any serious economic downturns in the United States, Europe, Latin America,
or further issues in Asia.
<PAGE>
-15-
PART II OTHER INFORMATION
--------------------------
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Item 1 Legal Proceedings
Not Applicable
Item 2 Changes in Securities
Not Applicable
Item 3 Defaults Upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 Other Information
Not Applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 11 Statement RE: Computation of Per Share Earnings (filed
herewith)
Exhibit 27 Financial Data Schedule (EDGAR only)
(b) Reports on Form 8-K.
None
<PAGE>
-16-
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 November 9, 1998 /S/ Benson K. Woo
-------------------- ------------------------------------------
Vice President and Chief Financial Officer
<PAGE>
-17-
EXHIBIT INDEX
- -------------
Exhibit No. Description
- ----------- ------------------------------------------------------------------
11 Statement re: Computation of Per Share Earnings (filed herewith)
27 Financial Data Schedule (EDGAR only)
<PAGE>
EXHIBIT 11
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
In thousands of dollars (except per share data):
Net income for calculation of
basic and diluted earnings per share $47,254 $23,785 $104,225 $80,847
======= ======= ======== =======
Shares used in computation of
per share earnings:
Basic shares outstanding 40,548 42,475 40,534 42,989
Effect of dilutive securities:
Non-vested restricted shares 164 145 164 145
Stock options 26 248 103 423
------- ------- -------- -------
Diluted shares outstanding 40,738 42,868 40,801 43,557
======= ======= ======== =======
Basic earnings per share $ 1.17 $ 0.56 $ 2.57 $ 1.88
Diluted earnings per share $ 1.16 $ 0.55 $ 2.55 $ 1.86
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 (UNAUDITED), THE CONSOLIDATED CONDENSED BALANCE SHEETS AT
SEPTEMBER 30, 1998 (UNAUDITED), AND THE CONSOLIDATED CONDENSED STATEMENTS OF
CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,412
<SECURITIES> 0
<RECEIVABLES> 547,617
<ALLOWANCES> 18,431
<INVENTORY> 570,764
<CURRENT-ASSETS> 1,296,740
<PP&E> 711,077
<DEPRECIATION> 350,864
<TOTAL-ASSETS> 2,064,298
<CURRENT-LIABILITIES> 780,642
<BONDS> 360,262
222
0
<COMMON> 0
<OTHER-SE> 709,969
<TOTAL-LIABILITY-AND-EQUITY> 2,064,298
<SALES> 2,440,824
<TOTAL-REVENUES> 2,440,824
<CGS> 1,905,172
<TOTAL-COSTS> 1,905,172
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,364
<INTEREST-EXPENSE> 31,768
<INCOME-PRETAX> 139,142
<INCOME-TAX> 34,917
<INCOME-CONTINUING> 104,225
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104,225
<EPS-PRIMARY> 2.57
<EPS-DILUTED> 2.55
</TABLE>
