<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 MARCH 31, 1999
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 May 12, 1999
----- ---------------------------
39,880,252 shares
Common Stock, par value $.005
<PAGE>
-2-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Form 10-Q
For the quarterly period ended March 31, 1999
INDEX
-----
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Statements of Operations - (Unaudited)
Three Months Ended March 31, 1999 and 1998 3
Consolidated Condensed Balance Sheets -
March 31, 1999 (Unaudited) and December 31, 1998 4
Consolidated Condensed Statements of Cash Flows - (Unaudited)
Three Months Ended March 31, 1999 and 1998 5
Supplemental Notes to Consolidated Condensed
Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
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
<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)
Three Months Ended March 31,
----------------------------
1999 1998
--------- ---------
Net sales $ 782,757 $ 741,988
Cost of goods sold 617,176 584,956
--------- ---------
Gross profit 165,581 157,032
Selling, general and
administrative expenses 129,094 122,436
--------- ---------
Income from operations 36,487 34,596
Interest expense, net 9,717 11,071
Equity in (earnings) / losses of affiliates (504) 1,307
--------- ---------
Income before income taxes 27,274 22,218
Provision for income taxes 9,000 7,554
--------- ---------
Income before cumulative effect
of accounting change 18,274 14,664
--------- ---------
Cumulative effect of accounting change:
Write-off of start-up activities (net of
$442 income tax benefit) 897 --
--------- ---------
Net income $ 17,377 $ 14,664
========= =========
Basic earnings per share:
Income before cumulative effect of
accounting change $ 0.46 $ 0.36
Accounting change (0.02) --
--------- ---------
Net income $ 0.44 $ 0.36
========= =========
Diluted earnings per share:
Income before cumulative effect of
accounting change $ 0.46 $ 0.36
Accounting change (0.02) --
--------- ---------
Net income $ 0.44 $ 0.36
========= =========
Cash dividends per share $ 0.15 $ 0.12
========= =========
Weighted average common shares and common
equivalents outstanding:
Basic 39,795 40,469
Diluted 39,944 40,726
See accompanying supplemental notes to consolidated condensed financial
statements.
<PAGE>
-4-
PART I - FINANCIAL INFORMATION
------------------------------
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
- -------------------------------------
(thousands of dollars)
March 31, 1999 December 31,
(Unaudited) 1998
-------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 11,737 $ 22,746
Receivables 618,476 632,768
Inventories:
Raw materials 185,470 177,960
Work in process 111,319 92,712
Finished goods 289,304 266,182
---------- ----------
Total inventories 586,093 536,854
Prepayments and other current assets 115,904 118,165
---------- ----------
Total current assets 1,332,210 1,310,533
Deferred income taxes 33,129 30,805
Unallocated excess of cost
over net assets acquired 337,055 337,353
Investments in affiliates 19,811 20,092
Property, plant and equipment, net 380,051 374,731
Deferred charges and other assets 33,693 33,024
---------- ----------
Total assets $2,135,949 $2,106,538
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion
of long-term debt $ 49,736 $ 52,583
Accounts payable and accrued expenses 614,448 670,797
Income taxes 44,044 66,099
---------- ----------
Total current liabilities 708,228 789,479
Warranties 39,128 36,488
Long-term debt 474,367 362,724
Postretirement benefit liabilities 142,503 140,152
Other long-term liabilities 43,230 46,896
---------- ----------
Total liabilities 1,407,456 1,375,739
Stockholders' equity 728,493 730,799
---------- ----------
Total liabilities and stockholders' equity $2,135,949 $2,106,538
========== ==========
See accompanying supplemental notes to consolidated condensed financial
statements.
<PAGE>
-5-
PART I - FINANCIAL INFORMATION
------------------------------
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (Unaudited)
- -----------------------------------------------------------
(thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 17,377 $ 14,664
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization of property,
plant & equipment 14,368 14,960
Amortization of goodwill and deferred charges 3,705 3,834
Provision for doubtful accounts receivable 1,502 3,254
Cumulative effect of accounting change 897 --
Other 798 2,175
Change in assets and liabilities net of
effects from purchase of other companies:
Receivables 13,029 (17,462)
Inventories (50,394) (33,658)
Prepayments and other current assets 2,231 3,361
Deferred income taxes (2,407) 226
Other assets (2,461) (1,629)
Accounts payable and accrued expenses (58,897) 14,875
Income taxes (22,939) 3,233
Long-term warranties 2,546 4,171
Postretirement benefit liabilities 2,351 1,784
Other long-term liabilities (3,432) (972)
-------- --------
Net cash provided/(used) by operating activities (81,726) 12,816
-------- --------
Cash flows from investing activities:
Net purchases of and investments in other
companies (net of cash acquired) (3,744) (5,000)
Capital expenditures (23,356) (13,737)
Other 22 (342)
-------- --------
Net cash used by investing activities (27,078) (19,079)
-------- --------
Cash flows from financing activities:
Common stock issued 1,684 425
Treasury stock purchases (6,766) (101)
Long term debt payments (9,990) (61,192)
Net proceeds from issuance of bank loans 56,673 --
Net borrowings/(payments) on short term debt (2,847) 15,652
Net proceeds from issuance of commercial paper 64,960 53,573
Dividends paid (5,973) (4,869)
-------- --------
Net cash provided by financing activities 97,741 3,488
-------- --------
Effect of exchange rate changes on cash 54 19
-------- --------
Net decrease in cash and cash equivalents (11,009) (2,756)
-------- --------
Cash and cash equivalents at beginning of period 22,746 12,228
-------- --------
Cash and cash equivalents at end of period $ 11,737 $ 9,472
======== ========
</TABLE>
See accompanying supplemental notes to consolidated condensed financial
statements.
<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
Company, the accompanying consolidated condensed financial statements
contain all adjustments necessary to present fairly the financial position
as of March 31, 1999 and December 31, 1998, the results of operations for
the three months ended March 31, 1999 and 1998, and cash flows for the
three months ended March 31, 1999 and 1998.
(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 March
31, 1999 and at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
--------------------- ----------------------
Current Long Term Current Long Term
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Indebtedness:
Bank loans $48,685 $ -- $51,011 $ --
Commercial paper, 5.01% interest -- 64,960 -- --
Bank lines at an average rate of 5.00%
in 1999 and 5.61% in 1998 -- 97,676 -- 41,003
Senior notes, 6.70% interest, due June 2008 -- 200,000 -- 200,000
Senior notes, 6.75% interest, due March 2003 -- 100,000 -- 100,000
Other, primarily foreign bank loans 1,051 11,731 1,572 21,721
------- -------- ------- --------
Total notes payable and long-term debt $49,736 $474,367 $52,583 $362,724
======= ======== ======= ========
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
Stockholders' equity:
Common Stock $.005 par value;
200,000 shares authorized;
issued 44,672 shares at March 31, 1999
and 44,616 shares at December 31, 1998 223 $ 223
Additional paid in capital 702,643 700,959
Retained earnings 301,869 290,465
Accumulated other comprehensive losses (67,662) (58,209)
Treasury stock, 4,807 shares at March 31, 1999
and 4,621 shares at December 31, 1998, at cost (205,803) (199,037)
Unearned compensation (2,777) (3,602)
-------- --------
Total stockholders' equity $728,493 $730,799
======== ========
</TABLE>
(cont'd)
<PAGE>
-7-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Supplemental Notes To Consolidated Condensed Financial Statements (Unaudited)
- -----------------------------------------------------------------------------
(Cont'd)
- --------
The Company maintains a $500 million revolving credit facility pursuant to
an Amended Credit Agreement (the Agreement) expiring on July 31, 2002. The
Agreement was amended on May 28, 1997. The Agreement provides for
borrowings under the facility at LIBOR plus .16% or at specified bid rates
and requires a fee of .09%. At March 31, 1999 and December 31, 1998, the
LIBOR rate was 4.98% and 5.06%, respectively. 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. At March 31, 1999 and December 31, 1998,
no amounts were outstanding under the Agreement.
The Company's non-U.S. subsidiaries maintain bank credit facilities in
various currencies that provided for available borrowings of $257.2
million and $269.6 million at March 31, 1999 and December 31, 1998,
respectively, of which $198.1 million and $202.9 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.
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 $295 million which are expected to be reborrowed
in the ordinary course of business. At March 31, 1999 and December 31,
1998, the Company had $97.7 million and $41.0 million, respectively,
outstanding under these bank lines.
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 1999 and 1998. 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 March 31, 1999 and December 31, 1998 was approximately
4.92% and 5.30%, respectively.
During February 1999, the Board of Directors approved an amendment to the
1992 Omnibus Stock Plan. The Amended and Restated 1992 Omnibus Stock Plan
authorizes the issuance of up to 7,880,000 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, 1999, key employees were awarded options to
purchase approximately 1.7 million shares at an exercise price of $34.625
per share.
In February 1999, the Board of Directors authorized the Company to
purchase an additional 2.5 million shares of its Common Stock over the
next four years 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, 150 thousand
shares and 1.1 million shares were repurchased on the open market during
the first quarter of 1999 and in the full year of 1998, respectively.
(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 caused substantial damage to facilities used in steel cutting
and rolling operations and heat exchanger production. The Company has
taken a number of measures to limit the disruptions and costs resulting
from the accident, including moving production to other Company
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's rebuilding operations are
expected to continue into the second quarter of 1999.
(cont'd)
<PAGE>
-8-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Supplemental Notes To Consolidated Condensed Financial Statements (Unaudited)
- -----------------------------------------------------------------------------
(Cont'd)
- --------
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.
Pursuant to generally accepted accounting principles, the costs of
reconstructing and replacing property damaged or destroyed in the accident
are recorded in the applicable property accounts, and the difference
between the net book value of the assets damaged or destroyed and the
related insurance recovery will be included in profit and loss upon
settlement. During the first quarter of 1999 and the full year of 1998,
the Company recorded credits to cost of goods sold of $4 million and $25.5
million, respectively, reflecting insurance coverage for certain
incremental expenses and losses included in cost of goods sold as a result
of the accident. These amounts represent only a portion of the Company's
estimate of the total costs and expenses resulting from the accident which
will be included in the Company's claim under business interruption
coverage.
During the first quarter of 1999 and the full year of 1998, the Company
received advanced payments of $3.0 million and $19.4 million,
respectively, from the insurance company representing partial payments
under the property damage coverage. During the first quarter of 1999 and
the full year of 1998, the Company received advanced payments of $7.0
million and $10.0 million, respectively, from the insurance company
representing partial payments under the business interruption coverage.
The Company and the insurance company have not agreed on any settlement or
partial settlement under the property damage or business interruption
coverage.
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:
Comprehensive Income (in thousands)
-----------------------------------
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Net income $ 17,377 $ 14,664
Other comprehensive loss:
Foreign currency translation adjustment 9,453 3,997
-------- --------
Comprehensive income $ 7,924 $ 10,667
======== ========
(6) 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) Net income as set forth in the statements of operations is used in the
computation of basic and diluted earnings per share information.
Reconciliations of shares used in the computations of earnings per share
are as follows (in thousands):
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Weighted average common shares outstanding
used in the computation of basic earnings
per share 39,795 40,469
Effect of dilutive securities:
Non-vested restricted shares 135 166
Stock options 14 91
------ ------
Weighted average common shares and equivalents
used in the computation of diluted earnings
per share 39,944 40,726
====== ======
(cont'd)
<PAGE>
-9-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
Supplemental Notes To Consolidated Condensed Financial Statements (Unaudited)
- -----------------------------------------------------------------------------
(Cont'd)
- --------
(8) The Company adopted Statement of Financial Accounting Standards No.131
"Disclosure about Segments of an Enterprise and Related Information" in
the fourth quarter of 1998. The table below represents the Company's
operating results by segment:
<TABLE>
<CAPTION>
(in thousands) Three Months Ended March 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
Sales:
Engineered Systems Group $ 324,334 $ 303,089
Unitary Products Group 371,111 360,684
Refrigeration Products Group 98,831 89,097
Eliminations (11,519) (10,882)
--------- ---------
$ 782,757 $ 741,988
========= =========
Eliminations include the following intersegment sales:
Engineered Systems Group $ 1,833 $ 1,643
Unitary Products Group 3,037 2,713
Refrigeration Products Group 6,649 6,526
--------- ---------
Eliminations $ 11,519 $ 10,882
========= =========
Income from operations:
Engineered Systems Group $ 16,522 $ 21,193
Unitary Products Group 36,738 30,899
Refrigeration Products Group 820 2,358
Eliminations, general corporate expenses
and other non-allocated items (17,593) (19,854)
--------- ---------
36,487 34,596
Equity in (earnings) / losses of affiliates:
Engineered Systems Group (335) (40)
Unitary Products Group (169) 1,347
--------- ---------
(504) 1,307
Interest expense, net 9,717 11,071
--------- ---------
Income before income taxes 27,274 22,218
Provision for income taxes 9,000 7,554
--------- ---------
Net income before cumulative effect
of accounting change $ 18,274 $ 14,664
========= =========
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Total assets:
Engineered Systems Group $ 665,173 $ 713,943
Unitary Products Group 832,192 705,068
Refrigeration Products Group 251,984 272,039
Eliminations and other non-allocated assets 386,600 415,488
---------- ----------
$2,135,949 $2,106,538
========== ==========
</TABLE>
(9) In January 1999, the Company recorded a charge of $897 thousand, net of
$442 thousand in related income taxes, to write-off start-up activities in
accordance with AICPA Statement of Position 98-5, "Reporting on the Costs
of Start-Up Activities."
(10) Reference is made to Registrant's 1998 Annual Report on Form 10-K for more
detailed financial statements and footnotes.
(11) On March 27, 1999 the Company announced that it has entered into a
definitive agreement to acquire Sabroe A/S, a Danish company, for $590
million ($415 million in cash and $175 million in assumed debt) subject to
adjustments for changes in net equity value. Sabroe is among the largest
suppliers of refrigeration systems and products in Europe, Latin America
and Asia. The transaction is expected to close in the second quarter of
1999 and is subject to regulatory and other approvals.
<PAGE>
-10-
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
- ---------------------
(in thousands) Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Engineered Systems Group $ 324,334 $ 303,089
Unitary Products Group 371,111 360,684
Refrigeration Products Group 98,831 89,097
Eliminations (11,519) (10,882)
--------- ---------
Sales $ 782,757 $ 741,988
========= =========
U.S. 60% 58%
Non-U.S 40% 42%
--------- ---------
Total 100% 100%
========= =========
Sales for the first quarter ended March 31, 1999 increased 5.5% to $782.8
million from $742.0 million for the same period in 1998. Sales levels increased
for all business groups. From a geographic perspective, U.S. sales increased
10.2% to $471.5 million and international sales decreased 0.9% to $311.3
million. All three business groups experienced sales growth in the U.S. In
Non-U.S. sales, the Middle East region experienced strong growth offset by
declines in Europe and Asia.
Order backlog at March 31, 1999 was $924.1 million compared to $984.6 million as
of March 31, 1998 and $879.5 million as of December 31, 1998.
Engineered Systems Group (ESG) sales increased 7.0% to $324.3 million from
- ------------------------
$303.1 million for the same period in 1998 primarily due to increased volume in
the domestic service and equipment business and in the Middle East region.
Unitary Products Group (UPG) sales increased 2.9% to $371.1 million from $360.7
- ----------------------
million for the same period in 1998 primarily due to improved volume in the OEM
compressor business, unitary equipment markets in North America and significant
year-over-year growth in the Middle East. These increases were somewhat offset
by slightly lower sales in Latin America.
Refrigeration Products Group (RPG) sales increased 10.9% to $98.8 million from
- ----------------------------
$89.1 million for the same period in 1998 primarily due to stronger volumes in
North America somewhat offset by lower sales in Europe.
Gross profit during the first quarter ended March 31, 1999 increased 5.5% to
$165.6 million (21.2% of sales) from $157.0 million (21.2% of sales) during the
first quarter ended March 31, 1998. Gross margins improved approximately 100
basis points over the first quarter of 1998, after adjusting the first quarter
1998 for estimated lost sales as a result of the Grantley accident. This gross
profit improvement was primarily due to improved factory performance and cost
reductions in UPG and slight improvements in ESG, partially offset by lower
margins in RPG as a result of product mix, poor factory performance and lower
volumes in Europe.
Selling, General and Administrative expense (SG&A) were flat as a percent of
sales at 16.5% as compared to the first quarter of 1998. The absolute dollar
increase of 5.5% to $129.1 million during the first quarter ended March 31, 1999
from $122.4 million in 1998 is a result of continued investment in
infrastructure and profit improvement initiatives.
Income from operations during the first quarter ended March 31, 1999 increased
to $36.5 million (4.7% of sales) from $34.6 million (4.7% of sales) in 1998.
(cont'd)
<PAGE>
-11-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)
ESG income from operations was $16.5 million (5.1% of sales) compared to $21.2
- ---
million (7.0% of sales) for the same period in 1998. Excluding lost sales,
variances and the insurance receivables recorded resulting from the Grantley
accident, operating margins improved slightly due to more service growth versus
an equipment decline and margin improvement in Asia driven by local
manufacturing. Inefficiencies relating to the Grantley accident are expected to
continue into the second quarter of 1999 and begin to diminish thereafter.
UPG income from operations increased 18.8% to $36.7 million (9.9% of sales) from
- ---
$30.9 million (8.6% of sales) for the same period in 1998. The increase is
primarily due to improved plant performance, effective implementation of cost
reduction programs and increased volume in the unitary markets in North America.
RPG income from operations was $0.8 million (0.8% of sales) compared to $2.4
- ---
million (2.7% of sales) for the same period in 1998. Income from operations
decreased primarily due to the lower volume of sales in Europe, unfavorable
product mix and poor factory performance.
Net interest expense decreased during the first quarter of 1999 12.6% to $9.7
million due to lower average debt levels and favorable average interest rates
for foreign and variable debt.
Equity in earnings of affiliates was $0.5 million during the first quarter of
1999 as compared to a $1.3 million loss during the first quarter of 1998. The
increase was primarily the result of improved performance in the UPG Scroll
Technologies operation.
Provision for income taxes of $9.0 million during the first quarter of 1999
relates to both U.S. and non-U.S. operations. The effective rate is 33% for the
first quarter of 1999 compared to 34% for the first quarter of 1998.
Net income, before cumulative effect of accounting change, as a result of the
above factors, was $18.3 million during the first quarter of 1999 as compared to
$14.7 million during the first quarter of 1998. In January of 1999, the Company
recorded a $0.9 million charge, net of a $0.4 million tax benefit, to write-off
start-up activities in accordance with AICPA Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities."
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 bank lines of credit under the Amended Credit Agreement,
will be sufficient to meet working capital needs during 1999. Additional sources
of working capital include customer deposits and progress payments.
Working capital was $624.0 million and $521.1 million as of March 31, 1999 and
December 31, 1998, respectively. Accounts receivable decreased during the first
quarter of 1999 due to lower first quarter sales volume compared to the fourth
quarter of 1998. Inventory levels were higher at March 31, 1999 as compared to
December 31, 1998 due to first quarter inventory build-up in preparation of the
North American cooling season. The current ratio was 1.88 at March 31, 1999 as
compared to 1.66 at December 31, 1998.
Long-term indebtedness was $474.4 million at March 31, 1999, primarily
consisting of borrowings of $300 million senior notes and bank lines. As of
March 31, 1999, there were no borrowings under the revolving credit facility.
At March 31, 1999, the Company maintained a $500 million Amended Credit
Agreement (the Agreement) expiring on July 31, 2002. The Agreement provides for
borrowings under the facility at LIBOR plus .16% or at specified bid rates and
requires a fee of .09%. At March 31, 1999, the LIBOR rate was 4.98%. 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 is in compliance with these
agreements.
(cont'd)
<PAGE>
-12-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)
The Company's non-U.S. subsidiaries maintain bank credit facilities in various
currencies that provide for borrowings of $257.2 million and $269.6 million at
March 31, 1999 and December 31, 1998, respectively, of which $198.1 million and
$202.9 million, respectively, were unused at March 31, 1999 and December 31,
1998. 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 5.01% as of March 31,
1999.
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 $295 million which are expected to be reborrowed in the ordinary
course of business. At March 31, 1999 and December 31, 1998, the Company had
$97.7 million and $41.0 million, respectively, outstanding under these bank
lines. The average rate on the bank lines was 5.00% and 5.61% at March 31, 1999
and December 31, 1998, respectively.
At March 31, 1999 and December 31, 1998, the Company had $300 million of Senior
Notes outstanding. On June 1, 1998, the Company issued $200 million of 6.70%
fixed rate Senior Notes having a maturity of ten years from the date of issue.
The 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.
The Company sold a fractional ownership interest in a defined pool of trade
accounts receivable for $100 million in 1999 and 1998. At March 31, 1999 and
December 31, 1998, the discount rate on the accounts receivable sold was
approximately 4.92% and 5.30%, 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.
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, commercial paper borrowings, availability under the
revolving credit facility and advance payments received from the insurance
company for accident claims submitted.
In the ordinary course of business, the Company enters into various types of
transactions that involve contracts and financial instruments with
off-balance-sheet risk. The Company enters into these financial instruments to
manage financial market risk, including foreign exchange, commodity price and
interest rate risk. The Company enters into these financial instruments
utilizing over-the-counter as opposed to exchange traded instruments. The
Company mitigates the risk that counterparties to these over-the-counter
agreements will fail to perform by only entering into agreements with major
international financial institutions.
Capital expenditures were $23.4 million for the first quarter of 1999 compared
to $13.7 million for the same period of 1998. The increase was the result of the
Grantley rebuild and planned projects to improve factory performance. 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, availability under the revolving credit
facility, commercial paper borrowings and advance payments received from the
insurance company for accident claims submitted.
Cash dividends of $0.15 per share were paid on common stock in the first quarter
of 1999. 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.
(cont'd)
<PAGE>
-13-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)
In March 1999, the Company announced that it has entered into a definitive
agreement to acquire Sabroe A/S, a Danish company, for $590 million ($415
million in cash and $175 million in assumed debt) subject to adjustments for
changes in net equity value. The transaction is expected to close in the second
quarter of 1999. The Company expects to finance the acquisition through issuance
of commercial paper, supported by the $500 million revolving credit facility
described above and additional bank revolving credit facilities.
Year 2000
- ---------
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 quarter ended March 31, 1999, the Company was 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 U.S. locations. During the risk assessment phase of the
Program, it was determined that by accelerating the deployment of these two
system components the Company would remediate a significant percentage of the
Y2K systems issues. Other system 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 third 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 required critical suppliers to certify Y2K compliance.
Furthermore, 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 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 effect 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.
(cont'd)
<PAGE>
-14-
YORK INTERNATIONAL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)
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 that the Compliance Program will allow it to
complete a successful transition to the Year 2000. This statement constitutes a
Year 2000 readiness disclosure by York International Corporation, under the Year
2000 Information and Readiness Disclosure Act.
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 June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.133, "Accounting for Derivative Instruments
and Hedging Activities" (the Standard). The Standard establishes comprehensive
accounting and reporting standards for derivative instruments and hedging
activities that require a Company to record the derivative instrument at fair
value in the balance sheet. Furthermore, the derivative instrument must meet
specific criteria or the change in its fair value is to be recognized in
earnings in the period of change. To achieve hedge accounting treatment the
derivative instrument needs to be part of a well-documented hedging strategy
that describes the exposure to be hedged, the objective of the hedge and a
measurable definition of its effectiveness in hedging the exposure. The Standard
is effective as of the beginning of the first quarter of the fiscal year
beginning after June 15, 1999. Adoption of this statement is not expected to
have a material effect on the Company's financial statements.
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, the Year 2000 Compliance
Program and the successful integration of Sabroe into the RPG. Unseasonably cool
spring or summer weather in the United States or in Europe could adversely
affect the Registrant's UPG residential air conditioning business. The ESG air
conditioning business could be affected by a slowdown in the large chiller
market and by the level of chlorofluorocarbon (CFC) retrofits. The resolution of
the Grantley insurance claim for an amount greater than or less than amounts
recorded could affect the Company's results. Overall performance of the
Registrant continues to be affected by the economic conditions in Asia, and
future anticipated performance could be affected by any serious economic
downturns in other worldwide markets.
<PAGE>
-15-
PART II - OTHER INFORMATION
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) Exhibit 27 Financial Data Schedule (EDGAR only)
(b) Reports on Form 8-K
On April 14, 1999, the Registrant filed Report on Form 8-K
(Items 5 and 7) regarding the Registrant entering into an
agreement to acquire Sabroe A/S from EQT Scandinavia and J.
Lauritzen Holding Co. A press release announcing the
transaction was attached to this Form 8-K filing.
<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 May 12, 1999 /S/ Charles F. Cargile
---------------------- --------------------------------
Principal Accounting Officer and
Principal Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Condensed Statements of Operations for the Quarter Ended March 31,
1999 (Unaudited), the Consolidated Condensed Balance Sheets at March 31, 1999
(Unaudited), and the Consolidated Condensed Statements of Cash Flows for the
Quarter Ended March 31, 1999 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,737
<SECURITIES> 0
<RECEIVABLES> 562,976
<ALLOWANCES> 18,961
<INVENTORY> 586,093
<CURRENT-ASSETS> 1,332,210
<PP&E> 745,505
<DEPRECIATION> 365,454
<TOTAL-ASSETS> 2,135,949
<CURRENT-LIABILITIES> 708,228
<BONDS> 474,367
223
0
<COMMON> 0
<OTHER-SE> 728,270
<TOTAL-LIABILITY-AND-EQUITY> 2,135,949
<SALES> 782,757
<TOTAL-REVENUES> 782,757
<CGS> 617,176
<TOTAL-COSTS> 617,176
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,502
<INTEREST-EXPENSE> 9,717
<INCOME-PRETAX> 27,274
<INCOME-TAX> 9,000
<INCOME-CONTINUING> 18,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 897
<NET-INCOME> 17,377
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
