<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
- --------------------------------------------------
Commission file number 1-9375
--------
SunSource L.P.
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(Exact name of registrant as specified in its charter)
Delaware 23-2439550
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 One Logan Square
Philadelphia, Pennsylvania 19103
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(215) 665-3650
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed from last report)
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
---------- -----------
<PAGE>
SUNSOURCE L.P.
INDEX
PART I. FINANCIAL INFORMATION PAGE(S)
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1996,
(Unaudited) December 31, 1995, and September 30, 1995 3
(Unaudited)
Consolidated Statements of Income for
the Three Months ended September 30, 1996 and 1995
(Unaudited) 4
Consolidated Statements of Income for
the Nine Months ended September 30, 1996 and 1995
(Unaudited) 5
Consolidated Statements of Cash Flows
for the Three Months ended September 30, 1996 and 1995
(Unaudited) 6
Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 1996 and 1995
(Unaudited) 7
Notes to Consolidated Financial Statements
(Unaudited) 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
PART II. OTHER INFORMATION 17
SIGNATURES 18
2
Page 2 of 18
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995*
(Unaudited) DECEMBER 31, 1995* (Unaudited)
------------------ ------------------ -------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,729 $ 5,900 $ 9,249
Accounts and notes receivable, net 86,693 75,824 83,255
Inventories 97,088 96,022 91,064
Other current assets 4,630 4,742 3,586
-------- -------- --------
Total current assets 190,140 182,488 187,154
Property and equipment, net 20,267 20,181 21,605
Goodwill 44,589 44,250 43,912
Other intangibles 821 1,312 1,489
Deferred income taxes 3,747 2,844 2,709
Cash surrender value of life insurance policies 3,163 3,009 --
Other assets 576 507 698
-------- -------- --------
Total assets $263,303 $254,591 $257,567
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable, trade $ 52,837 $ 42,437 $ 45,955
Notes payable 2,021 2,753 2,145
Current portion of senior notes 6,395 6,395 4,795
Distributions payable to partners 1,934 7,819 1,638
Accrued expenses:
Salaries and wages 5,546 5,109 5,263
Interest on senior notes 2,081 520 2,223
Management fee due the general partner 2,491 3,330 2,491
Income and other taxes 2,864 3,398 3,182
Other accrued expenses 12,495 14,886 13,331
-------- -------- --------
Total current liabilities 88,664 86,647 81,023
Senior notes 63,934 63,934 70,330
Deferred compensation 8,300 7,829 7,547
Other liabilities 1,245 1,238 485
-------- -------- --------
Total liabilities 162,143 159,648 159,385
-------- -------- --------
Commitments and contingencies
Partners' capital:
General partner 1,024 963 980
Limited partners:
Class A interests 67,642 67,642 67,642
Class B interests 35,296 29,252 31,074
Class B interests held in treasury (1,514) (1,514) (1,514)
Cumulative foreign currency translation adjustment (1,288) (1,400) --
-------- -------- --------
Total partners' capital 101,160 94,943 98,182
-------- -------- --------
Total liabilities and partners' capital $263,303 $254,591 $257,567
======== ======== ========
*Reclassified for comparative purposes.
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
FOR THE THREE MONTHS ENDED
(dollars in thousands, except for partnership interest amounts)
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995*
------------------ -------------------
<S> <C> <C>
Net sales $ 167,125 $ 154,117
Cost of sales 99,096 90,516
------------ ------------
Gross profit 68,029 63,601
------------ ------------
Operating expenses:
Selling, general and administrative expenses 55,592 51,975
Management fee to general partner 840 840
Depreciation 915 862
Amortization 499 488
------------ ------------
Total operating expenses 57,846 54,165
------------ ------------
Net results of operations from divisions sold (note 3) -- 323
------------ ------------
Income from operations 10,183 9,759
Interest income 16 41
Interest expense 1,779 1,754
Other expense, net (37) (30)
------------ ------------
Income before provision for income taxes 8,383 8,016
Provision for income taxes 97 188
------------ ------------
Net income $ 8,286 $ 7,828
============ ============
Net income allocated to partners:
General partner $ 83 $ 78
------------ ------------
Class A limited partners $ 3,052 $ 3,052
------------ ------------
Class B limited partners $ 5,151 $ 4,698
------------ ------------
Earnings per Limited partnership interest:
- Class A interest $ 0.27 $ 0.27
- Class B interest $ 0.24 $ 0.22
Weighted average number of outstanding
limited partnership interests:
- Class A interests 11,099,573 11,099,573
- Class B interests 21,675,746 21,675,746
*Restated for comparative purposes.
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
FOR THE NINE MONTHS ENDED
(dollars in thousands, except for partnership interest amounts)
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995*
------------------ ---------------------
<S> <C> <C>
Net Sales $ 489,517 $ 455,501
Cost of sales 291,920 269,623
------------ ------------
Gross profit 197,597 185,878
------------ ------------
Operating expenses:
Selling, general and administrative expenses 166,059 154,148
Management fee to general partner 2,491 2,491
Depreciation 2,684 2,531
Amortization 1,449 1,481
------------ ------------
Total operating expenses 172,683 160,651
------------ ------------
Net results of operations from divisions sold (note 3) -- 396
------------ ------------
Income from operations 24,914 25,623
Interest income 60 342
Interest expense 5,207 5,623
Other income (expense), net 470 (413)
Gain on sale of divisions (note 3) -- 16,500
------------ ------------
Income before provision for income taxes 20,237 36,429
Provision (benefit) for income taxes (372) 362
------------ ------------
Income before extraordinary loss 20,609 36,067
Extraordinary loss from early extinguishment
of debt (note 4) -- (629)
------------ ------------
Net income $ 20,609 $ 35,438
============ ============
Net income allocated to partners:
General partner $ 206 $ 354
------------ ------------
Class A limited partners $ 9,157 $ 9,157
------------ ------------
Class B limited partners $ 11,246 $ 25,927
------------ ------------
Earnings per Limited partnership interest:
Income before extraordinary loss
- Class A interest $ 0.82 $ 0.82
- Class B interest $ 0.52 $ 1.23
Extraordinary loss
- Class A interest -- --
- Class B interest -- ($ 0.03)
Net income
- Class A interest $ 0.82 $ 0.82
- Class B interest $ 0.52 $ 1.20
Weighted average number of outstanding
limited partnership interests:
- Class A interests 11,099,573 11,099,573
- Class B interests 21,675,746 21,675,746
*Restated for comparative purposes.
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
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<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995*
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,286 $ 7,828
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization - Existing divisions 1,414 1,322
Depreciation and amortization - Divested divisions -- 137
Provision for deferred compensation (39) 801
Deferred income tax benefit (37) (81)
Changes in current operating items:
Decrease (increase) in accounts and notes receivable 65 (243)
Increase in inventories (3,004) (2,968)
Decrease (increase) in other current assets (341) 3,113
Increase (decrease) in accounts payable 1,372 (1,232)
Increase in accrued interest 1,561 1,667
Increase (decrease) in other accrued liabilities 212 (1,110)
Other items, net 128 231
--------- --------
Net cash provided by operating activities 9,617 9,465
--------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment 18 46
Investment in life insurance policies (100) --
Capital expenditures (781) (793)
Other, net (11) (170)
--------- --------
Net cash used for investing activities (874) (917)
--------- --------
Cash flows from financing activities:
Repayments under the bank credit agreement (3,000) --
Cash distributions to partners (5,106) (4,452)
Borrowings (repayments) under other credit facilities, net (350) 208
Principal payments under capitalized lease obligations -- (20)
--------- --------
Net cash used for financing activities (8,456) (4,264)
--------- --------
Net increase in cash and cash equivalents 287 4,284
Cash and cash equivalents at beginning of period 1,442 4,965
--------- --------
Cash and cash equivalents at end of period $ 1,729 $ 9,249
========= ========
*Reclassified for comparative purposes.
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
Page 6 of 18
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995*
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,609 $ 35,438
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization - Existing divisions 4,133 2,799
Depreciation and amortization - Divested divisions -- 1,515
Gain on sale of division -- (16,500)
Extraordinary loss -- 629
Provision for deferred compensation 898 2,058
Deferred income tax benefit (903) (565)
Changes in current operating items:
Increase in accounts and notes receivable (10,580) (11,097)
Increase in inventories (2,132) (6,945)
Decrease in other current assets 112 2,192
Increase in accounts payable 10,342 4,160
Increase in accrued interest 1,561 1,562
Decrease in other accrued liabilities (3,675) (8,218)
Other items, net 258 655
-------- --------
Net cash provided by operating activities 20,623 7,683
-------- --------
Cash flows from investing activities:
Proceeds from sale of divisions -- 37,786
Proceeds from sale of property and equipment 39 762
Payment for purchase of assets (673) --
Investment in life insurance policies (100) --
Capital expenditures (2,713) (3,471)
Other, net (80) (219)
-------- --------
Net cash (used for) provided by investing activities (3,527) 34,858
-------- --------
Cash flows from financing activities:
Early extinguishment of senior notes -- (14,175)
Prepayment penalties and related costs -- (629)
Cash distributions to partners (20,535) (22,777)
Repayments under other credit facilities, net (732) (564)
Principal payments under capitalized lease obligations -- (50)
-------- --------
Net cash used for financing activities (21,267) (38,195)
-------- --------
Net (decrease) increase in cash and cash equivalents (4,171) 4,346
Cash and cash equivalents at beginning of period 5,900 4,903
-------- --------
Cash and cash equivalents at end of period $ 1,729 $ 9,249
======== ========
*Reclassified for comparative purposes.
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
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<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of
SunSource L.P. (the "Company"), formerly Sun Distributors L.P., and its
subsidiary partnership, SDI Operating Partners, L.P. (the "Operating
Partnership"). All significant intercompany balances and transactions have been
eliminated. The Company is one of the largest wholesale distributors of
industrial products and related services in the United States. The Company's
three business segments are Industrial Services, Retail Hardware Merchandising
and Retail Glass.
The accompanying consolidated financial statements and related notes are
unaudited, except for the balance sheet as of December 31, 1995; however, in
management's opinion all adjustments (consisting of normal recurring accruals)
considered necessary for the fair presentation of financial position, income and
cash flows for the periods shown have been reflected. Results for the interim
period are not necessarily indicative of those to be expected for the full year.
Certain information in note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to Form 10-Q requirements although the
Company believes that disclosures are adequate to make the information presented
not misleading. It is suggested that these financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's report on Form 10-K for the year ended December 31,
1995.
2. Related Party Transaction:
In March 1996, the Operating Partnership paid the 1995 management fee of $3,330
due the General Partner, SDI Partners I, L.P. (the "GP").
3. Acquisitions/Divestitures:
On April 11, 1996, the Company's Industrial Services segment, through its Warren
Fluid Power division, purchased certain assets of Hydraulic Depot, Inc., of
Reno, Nevada, for an aggregate purchase price of $700. Annual sales of Hydraulic
Depot, Inc. are approximately $2,500.
On January 3, 1995, the Operating Partnership sold certain assets of its Dorman
Products division for a cash consideration, net of expenses, of approximately
$36,600 (subject to certain post-closing adjustments) and the assumption of
certain liabilities. The Operating Partnership recorded a gain on the sale in
the amount of $16,500 or $.75 per Class B interest included in the consolidated
statement of income for the nine months ended September 30, 1995. The aggregate
assets sold, net of liabilities, in connection with the sale of Dorman Products
was approximately $20,100.
8
Page 8 of 18
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Acquisitions/Divestitures (continued):
For comparison purposes the Company has reclassified the results of operations
of its divested Downey Glass division (sold on October 27, 1995) for the three
and nine months ended September 30, 1995, to a separate component of income from
operations in the Consolidated Statement of Income for the three and nine months
ended September 30, 1995. Downey's sales, gross profit and operating income for
the three and nine months ended September 30, 1995, were $9,100 and $26,300,
$2,900 and $8,000 and $300 and $400, respectively. Total assets for Downey were
$9,996 at September, 1995, and are included in the Consolidated Balance Sheet as
of September 30, 1995.
4. Extraordinary Loss:
During the first quarter of 1995, the Company recorded an extraordinary loss of
$629 or approximately $.03 per Class B limited partnership interest due to early
extinguishment of a portion of the Company's Series A 9.08% and Series B 8.44%
senior notes. The extraordinary loss consists entirely of prepayment penalties.
(See Note 5, Lines of Credit and Long-Term Debt).
5. Lines of Credit and Long-Term Debt:
As of September 30, 1996, the Operating Partnership had $42,564 available under
its $50,000 Bank Credit Agreement which provides revolving credit for working
capital purposes and acquisitions. The $7,436 outstanding under the Bank Credit
Agreement consisted of letter of credit commitments only.
In addition, an indirect, wholly-owned Canadian subsidiary of the Operating
Partnership has a $2,500 Canadian dollar line of credit for working capital
purposes of which $829 USD was outstanding at September 30, 1996.
In connection with the sale of the Electrical Group divisions in December 1994
and the Dorman Products division in January 1995, the Operating Partnership was
required to offer the holders of its senior notes prepayment in the amount of
$14,175 which the noteholders accepted. Prepayment of the senior notes was made
on March 14, 1995, including accrued interest thereon of $360 and a prepayment
penalty of $629. (See Note 4 - Extraordinary Loss.)
9
Page 9 of 18
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
6. Contingencies:
The Operating Partnership is a party to litigation in which the buyer of its
Dorman Products division claims that certain misrepresentations were made in
connection with the purchase. The buyer seeks damages of approximately $21,000.
In the opinion of management, the ultimate resolution of this matter will not
have a material effect on the consolidated financial position, operations or
cash flows of the Company.
Certain other legal proceedings are pending which are either in the ordinary
course of business or incidental to the Company's business. Those legal
proceedings incidental to the business of the Company are generally not covered
by insurance or other indemnity. In the opinion of management, the ultimate
resolution of these matters will not have a material effect on the consolidated
financial position, operations or cashflows of the Company.
10
Page 10 of 18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
General
The Company is a publicly held master limited partnership operating in the
wholesale distribution industry through a subsidiary partnership, SDI Operating
Partners, L.P. (the "Operating Partnership"). The Company consists of a
headquarters operation and three business segments which are Industrial
Services, Retail Hardware Merchandising and Retail Glass.
The Company's Industrial Services segment is comprised of the Sun Inventory
Management ("SIMCO") divisions and the Sun Technology Services divisions. The
SIMCO divisions are Kar Products, A&H Bolt and SIMCO/Special-T-Metals. The SIMCO
divisions provide maintenance products and inventory management services to both
original equipment manufacturers and maintenance and repair facilities,
including in-plant systems. Sun Technology Services, formerly the Fluid Power
group, is comprised of Activation, Air-Dreco, J.N. Fauver Co., Hydra-Power
Mexico, Walter Norris and Warren Fluid Power. The Technology Services divisions
provide fluid power products, engineering design, and equipment repair services
to a wide variety of industrial customers.
The Company's Retail Hardware Merchandising segment consists of the Hillman
division. Hillman distributes hardware items and related products and also
provides merchandising systems service and support to both large and small
hardware retailers.
The Company's Retail Glass segment consists of the Harding Glass division.
Harding provides glass products and point-of-sale related services such as the
installation and repair of automobile and flat glass.
Results of Operations
Three Months Ended September 30, 1996 and September 30, 1995
Net income for the quarter ended September 30, 1996, was $8.3 million compared
with $7.8 million in 1995. The results for the third quarter of 1995 included
$.3 million of operating income from Downey Glass which was divested on October
27, 1995. Excluding Downey, net income increased $.8 million or 10.4% over the
third quarter of 1995.
Net sales increased $13.0 million or 8.4% over the third quarter of 1995,
excluding Downey, due to strengthening in most product markets and the addition
of new product lines and value-added services. Sales recorded in the third
quarter of 1996 were $167.1 million compared with the third quarter of 1995
sales of $154.1 million, excluding divisions sold. Sales increases by business
segment are as follows:
Sales Increase
------------------------
Amount %
------- ---
Industrial Services
SIMCO divisions $ 4.1 million 11.3 %
Technology Services divisions 1.7 million 2.4 %
------
Total Industrial Services 5.8 million 5.4 %
Retail Hardware Merchandising 7.5 million 34.1 %
Retail Glass (.3) million (1.1)%
-------
Total Company $ 13.0 million 8.4 %
=======
11
Page 11 of 18
<PAGE>
The sales increase in the Retail Hardware Merchandising segment includes
approximately $3.0 million due to the acquisition of the retail division of
Curtis Industries, Inc., ("Curtis") acquired in November 1995 by the Company's
Hillman division. Excluding Curtis, sales increased 20.4% in the retail hardware
segment in the third quarter comparison period.
The increase in sales in the SIMCO divisions is comprised of sales growth in
inventory management services of $2.3 million or 32.0%, and in maintenance
products of $1.8 million or 6.3%.
Cost of sales increased $8.6 million or 9.5% from the third quarter of 1995, due
primarily to increased sales levels in the comparison period.
Gross margins were 40.7% in the third quarter of 1996 compared with 41.3% in the
same period of 1995, comprised by business segment as follows:
3rd Quarter
--------------------
1996 1995
---- ----
Industrial Services
SIMCO divisions 60.5% 63.8%
Technology Services divisions 26.7% 27.6%
Total Industrial Services 38.6% 39.6%
Retail Hardware Merchandising 50.0% 53.2%
Retail Glass 39.4% 37.9%
The erosion in the gross margin in the SIMCO divisions is due mainly to
competitive pricing pressures and changes in sales mix. Gross margins in the
Retail Hardware Merchandising segment decreased due to reduced packaging
productivity levels and costs associated with the Curtis acquisition and other
business expansion programs.
Selling, general and administrative ("S,G&A") expenses increased by $3.6 million
or 7.0% over the third quarter of 1995, comprised as follows: increased selling
expenses of $2.3 million or 9.5%, increased warehouse and delivery expenses of
$1.9 million or 20.8% and decreased general and administrative ("G&A") expenses
of $.6 million or 3.5%.
Selling expenses increased generally due to the increased sales levels in the
comparison period. The increase in warehouse and delivery expenses is due to
increased costs associated with the Curtis acquisition and the addition of six
in-plant accounts in the SIMCO businesses. The decrease in G&A expenses was due
primarily to reduced provisions for deferred compensation and the adjustment of
casualty loss insurance liabilities.
Including the changes discussed above, S,G&A expenses as a percentage of sales
in the comparison period, were as follows:
3rd Quarter
--------------------
1996 1995*
---- ----
Selling Expenses 16.1% 15.9%
Warehouse and Delivery Expenses 6.7% 6.0%
General and Administrative Expenses 10.5% 11.8%
----- -----
Total S,G&A Expenses 33.3% 33.7%
===== =====
* Restated for comparison purposes.
As calculated in accordance with the partnership agreement, the management fee
due the General Partner (the "GP") annually amounts to $3.3 million which is
based on 3% of the aggregate initial capital investment ($111 million) of the
limited partners. The management fee is accrued each quarter in the amount of
approximately $.8 million.
12
Page 12 of 18
<PAGE>
The $.3 million in net results of operations from divisions sold represents
operating income from the divested Downey Glass division for the third quarter
of 1995.
Currently, the Company incurs state and local income taxes on its domestic
operations and foreign income taxes on its Canadian and Mexican Operations.
Also, the Company provides for deferred income taxes as determined in accordance
with Statement of Financial Accounting Standard No. 109 ("SFAS #109"). Deferred
income taxes represent state and federal income tax benefits expected to be
realized after December 31, 1997, when the Company will be taxed as a
corporation. The Company's provision for income taxes in the third quarter of
1996 decreased $.1 million from the third quarter of 1995 due primarily to the
adjustment of prior-year state income tax provisions.
The allocation of net income to the GP is based on the GP's 1% ownership
interest in the profits of the Company. The allocation of net income to the
limited partners for financial statement purposes represents a 99% interest in
the profits of the Company. The net income allocation resulted in $.27 of income
per Class A limited partnership interest for the quarters ended September 30,
1996 and September 30, 1995, respectively; and $.24 and $.22 of income per Class
B limited partnership interest for the quarters ended September 30, 1996 and
September 30, 1995, respectively. Income per Class B interest in the 1995 period
included $.02 of income from the divested Downey Glass division.
Results of Operations
Nine Months Ended September 30, 1996 and September 30, 1995
Net income for the first nine months of 1996 was $20.6 million compared with
$35.4 million in 1995. The results for the first nine months of 1995 included a
$16.5 million gain from the sale of Dorman Products, a $.6 million charge
related to the early retirement of debt, and $.4 million of operating income
from Downey Glass which was divested on October 27, 1995. Excluding these 1995
events, net income increased $1.4 million or 7.5% over the first nine months of
1995.
Net sales increased $34.0 million or 7.5% over the first nine months of 1995,
excluding Downey, due to strengthening in most product markets and the addition
of new product lines and value-added services. Sales recorded in the first nine
months of 1996 were $489.5 million compared with sales of $455.5 million in the
first nine months of 1995, excluding divisions sold. Sales increases (decreases)
by business segment are as follows:
Sales Increase (Decrease)
--------------------------
Amount %
-------- ---
Industrial Services
SIMCO divisions $ 12.2 million 11.7 %
Technology Services divisions 7.1 million 3.3 %
-------
Total Industrial Services 19.3 million 6.0 %
Retail Hardware Merchandising 15.6 million 24.4 %
Retail Glass (.9)million (1.3)%
-------
Total Company $ 34.0 million 7.5 %
=======
The sales increase in the Retail Hardware Merchandising segment includes
approximately $8.0 million which is due to the Curtis acquisition. The increase
in sales in the SIMCO divisions is comprised of sales growth in inventory
management services of $6.8 million or 36.7% and in maintenance products of $5.4
million or 6.3%.
13
Page 13 of 18
<PAGE>
The decline in sales volume in the Retail Glass Segment is attributable to the
discontinuation of certain product lines and markets served accounting for $.2
million of the sales decline and a decrease in wholesale glass, brokerage and
other product line sales of $1.0 million, offset by an increase in retail glass
sales of $.3 million.
Cost of sales increased $22.3 million or 8.3% from the first nine months of
1995, due primarily to increased sales levels in the comparison period.
Gross margins were 40.4% in the first nine months of 1996 compared with 40.8% in
the same period of 1995, comprised by business segment as follows:
Nine Months
-----------------
1996 1995
---- ----
Industrial Services
SIMCO divisions 61.4% 64.8%
Technology Services divisions 26.7% 27.2%
Total Industrial Services 38.6% 39.4%
Retail Hardware Merchandising 49.9% 52.3%
Retail Glass 38.0% 36.6%
The erosion in gross margin in the SIMCO divisions is due mainly to competitive
pricing pressures and changes in sales mix. Gross margins in the Retail Hardware
Merchandising segment decreased due to reduced packaging productivity levels and
costs associated with the Curtis acquisition and other business expansion
programs.
SG&A expenses increased by $11.9 million or 7.7% over the first nine months of
1995, comprised as follows: increased selling expenses of $6.1 million or 8.3%,
increased warehouse and delivery expenses of $4.6 million or 16.7% and increased
general and administrative expenses of $1.2 million or 2.3%. The increase in
S,G&A expenses supported increased 1996 sales levels, the integration of the
Curtis retail division, the addition of six large in-plant accounts in the SIMCO
divisions and expansion programs by several other operating units.
Including the changes discussed above, S,G&A expenses as a percentage of sales
in the comparison period, were as follows:
Nine Months
-----------------
1996 1995*
---- ----
Selling Expenses 16.3% 16.1%
Warehouse and Delivery Expenses 6.5% 6.0%
General and Administrative Expenses 11.1% 11.7%
----- -----
Total S,G&A Expenses 33.9% 33.8%
===== =====
*Restated for comparison purposes.
As calculated in accordance with the partnership agreement, the management fee
due the GP annually amounts to $3.3 million which is based on 3% of the
aggregate initial capital investment ($111 million) of the limited partners. The
management fee is accrued each quarter in the amount of approximately $.8
million.
The $.4 million of net results of operations from divisions sold represents
operating income from the divested Downey Glass division for the first nine
months of 1995.
Interest income decreased $.3 million in the comparison period due primarily to
reduced investment of excess cash that was generated during the fourth quarter
of 1994 and the first quarter of 1995 from divisions sold.
14
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<PAGE>
Interest expense decreased $.4 million in the comparison period due primarily to
reduced financing costs from the prepayment of senior notes on March 14, 1995.
Other income increased by $.9 million in the comparison period due primarily to
legal settlements and post-closing adjustments from divisions sold.
Currently, the Company incurs state and local income taxes on its domestic
operations and foreign income taxes on its Canadian and Mexican Operations.
Also, the Company provides for deferred income taxes as determined in accordance
with SFAS #109. Deferred income taxes represent state and federal income tax
benefits expected to be realized after December 31, 1997, when the Company will
be taxed as a corporation. The Company's provision for income taxes in the first
nine months of 1996 decreased $.7 million from the first nine months of 1995 due
to the recording of the following: a $.3 million deferred income tax benefit
relating to book/tax differences in the Company's casualty loss insurance
program, a $.2 million favorable adjustment to prior year's state income tax
provisions and to a $.2 million reduction in the foreign income tax provision.
The allocation of net income to the GP is based on the GP's 1% ownership
interest in the profits of the Company. The allocation of net income to the
limited partners for financial statement purposes represents a 99% interest in
the profits of the Company. The net income allocation resulted in $.82 of income
per Class A limited partnership interest for the nine months ended September 30,
1996 and September 30, 1995; and $.52 of income per Class B limited partnership
interest in the first nine months of 1996 compared with $1.20 of income per
Class B interest for the first nine months of 1995. Income per Class B interest
in 1995 included a gain of $.75 from the sale of Dorman Products, results of
operations from divisions sold of $.02 and an extraordinary loss of $.03 from
the early extinguishment of debt. Excluding these 1995 events, income per Class
B limited partnership interest amounted to $.52 in the first nine months of 1996
compared with $.46 in the first nine months of 1995.
Liquidity and Capital Resources
Net cash provided by operations in the first nine months of 1996 was $20.6
million, an increase of $12.9 million over the first nine months of 1995. The
increase was due primarily to decreased working capital investment in operations
in the comparison period of approximately $14.0. The Company's net interest
coverage ratio (earnings before interest, taxes and gain on sale of divisions
over net interest expense) improved to 4.91X in the first nine months of 1996
from 4.77X in the comparable prior year period.
The Company's cash position of $1.7 million as of September 30, 1996, decreased
$4.2 million from the balance at December 31, 1995. Cash was provided during
this period primarily from operations in the amount of $20.6 million. Cash was
used during this period predominantly for distributions to the general and
limited partners, capital expenditures, repayment of credit facilities and other
items in the amounts of $20.5 million, $2.7 million, $.7 million and $.9
million, respectively.
The Company's working capital position of $101.5 million at September 30, 1996,
represents an increase of $5.6 million from the December 31, 1995 level of $95.8
million. The increase is attributable to reinvestment in working capital of $4.1
million, a decrease in distributions payable to partners of $5.9 million, a
decrease in management fee payable to the General Partner of $.8 million and
working capital from acquisitions of $.6 million, offset by an increase in
accrued interest on senior notes of $1.6 and decrease in cash of $4.2 million.
The Company's current ratio increased to 2.14 at September 30, 1996 from the
December 31, 1995 level of 2.11.
15
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<PAGE>
As of September 30, 1996, the Company's total debt as a percentage of its
consolidated capitalization is 41.7% compared with 44.1% as of September 30,
1995.
The Company anticipates spending approximately $3.5 million for capital
expenditures for the full year 1996, primarily for machinery and equipment.
As of September 30, 1996, the Operating Partnership had $42.6 million available
under its $50.0 million Bank Credit Agreement which provides revolving credit
for working capital purposes and acquisitions through December 31, 1997. The
$7.4 million outstanding under the Bank Credit Agreement consisted entirely of
Letter of Credit commitments. In addition, an indirect, wholly-owned Canadian
subsidiary of the Operating Partnership has a $2.5 million Canadian dollar line
of credit for working capital purposes of which $.8 million USD was outstanding
at September 30, 1996.
Effective May 1, 1996, the Company increased its monthly Class B tax-related
cash distribution from $.02 to $.03 per Class B interest and expects this tax
distribution rate to continue for the balance of 1996 to assist the holders of
Class B interests in meeting their 1996 estimated tax obligations.
See Item 3 - Legal Proceedings of Form 10-K dated December 31, 1995, and Part
II, Item 1 of Forms 10-Q dated March 31 and June 30, 1996 and Note 6 of Notes to
Consolidated Financial Statements, for the description of a lawsuit with respect
to the sale of the Company's Dorman Products Division. Certain other legal
proceedings are pending which are either in the ordinary course of business or
incidental to the Company's business. Those legal proceedings incidental to the
business of the Company are generally not covered by insurance or other
indemnity. In the opinion of management, the ultimate resolution of these
matters will not have a material effect on the consolidated financial position,
operations or cash flows of the Company.
Acquisitions
On April 11, 1996, the Company's Industrial Services segment, through its Warren
Fluid Power Division, purchased certain assets of Hydraulic Depot, Inc. of Reno,
Nevada for an aggregate purchase price of $.7 million. Annual sales of Hydraulic
Depot, Inc. are approximately $2.5 million. This acquisition expands Warren's
previous geographic markets.
Other
On June 12, 1996, the Board of Directors of the Company's General Partner
authorized management to proceed with the development of a plan to recapitalize
and convert the limited partnership into a corporation. The Board also appointed
a special committee of disinterested directors to review, evaluate and reach a
determination with respect to the terms of the proposed recapitalization. The
Special Committee will then make a recommendation to the Board with respect to
the proposal. Pursuant to the Board's authorization, the Special Committee has
appointed Smith Barney, Inc. as financial advisor and Dechert Price & Rhoads as
legal counsel to assist the committee with its work. It is expected that the
general partner and holders of Class A and B limited partnership interests of
SunSource will receive securities of a newly formed corporation, although the
type and amount of securities has not yet been determined. Once the proposal is
approved by the Board, a proxy statement will be sent to the partners describing
the plan and soliciting their approval.
16
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<PAGE>
PART II
OTHER INFORMATION
Items 1-6 - None
17
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<PAGE>
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 thereunto duly authorized.
SUNSOURCE L.P.
BY: /s/ Joseph M. Corvino BY: /s/ John J. Dabrowski
--------------------------------- --------------------------------
Joseph M. Corvino John J. Dabrowski
Vice President - Finance Controller
Chief Financial Officer (Chief Accounting Officer)
DATE: November 14, 1996
18
Page 18 of 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1996 AND THE RELATED STATEMENT OF INCOME FOR THE
YEAR-TO-DATE ENDED SEPTEMBER 30, 1996, 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-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,729
<SECURITIES> 0
<RECEIVABLES> 88,629
<ALLOWANCES> 1,936
<INVENTORY> 97,088
<CURRENT-ASSETS> 190,140
<PP&E> 48,994
<DEPRECIATION> 28,727
<TOTAL-ASSETS> 263,303
<CURRENT-LIABILITIES> 88,664
<BONDS> 63,934<F1>
0
0
<COMMON> 0
<OTHER-SE> 101,160
<TOTAL-LIABILITY-AND-EQUITY> 263,303
<SALES> 489,517
<TOTAL-REVENUES> 489,517
<CGS> 291,920
<TOTAL-COSTS> 172,683
<OTHER-EXPENSES> 470
<LOSS-PROVISION> 872
<INTEREST-EXPENSE> 5,207
<INCOME-PRETAX> 20,237
<INCOME-TAX> (372)
<INCOME-CONTINUING> 20,609
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,609
<EPS-PRIMARY> .52<F2>
<EPS-DILUTED> .52<F2>
<FN>
<F1>=Bonds represents all Long-Term Debt for Senior Notes.
<F2>=EPS represents Class B Limited Partnership Interests Only.
</FN>
</TABLE>
