<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 June 30, 1996
-------------
Commission file number 1-9375
------
SunSource L.P.
- --------------------------------------------------------------------------------
(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
---------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(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 1 of 18
1
<PAGE>
SUNSOURCE L.P.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE(S)
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1996
(Unaudited), December 31, 1995, and June 30, 1995
(Unaudited) 3
Consolidated Statements of Income for
the Three Months ended June 30, 1996 and 1995
(Unaudited) 4
Consolidated Statements of Income for
the Six Months ended June 30, 1996 and 1995
(Unaudited) 5
Consolidated Statements of Cash Flows
for the Three Months ended June 30, 1996 and 1995
(Unaudited) 6
Consolidated Statements of Cash Flows
for the Six Months ended June 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
</TABLE>
Page 2 of 18
2
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1996 JUNE 30, 1995*
(UNAUDITED) DECEMBER 31, 1995* (UNAUDITED)
------------- ------------------ ----------------
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents $ 1,442 $ 5,900 $ 4,965
Accounts and notes
receivable, net 86,758 75,824 83,012
Inventories 95,514 96,022 88,096
Other current assets 4,289 4,742 6,699
-------- -------- --------
Total current assets 188,003 182,488 182,772
Property and equipment,
net 20,401 20,181 21,537
Goodwill 43,551 44,250 44,174
Other intangibles 980 1,312 1,684
Deferred income taxes 3,710 2,844 2,628
Cash surrender value of
life insurance policies 2,988 3,009 --
Other assets 590 507 674
-------- -------- --------
Total assets $260,223 $254,591 $253,469
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Current liabilities:
Accounts payable, trade $ 51,465 $ 42,437 $ 47,187
Notes payable 2,371 2,753 1,937
Current portion of
senior notes 6,395 6,395 4,795
Distributions payable to
partners 1,936 7,819 1,649
Accrued expenses:
Salaries and wages 4,573 5,109 4,533
Interest on senior
notes 520 520 556
Management fee due the
general partner 1,651 3,330 1,651
Income and other taxes 3,072 3,398 3,249
Other accrued expenses 13,935 14,886 15,423
-------- -------- --------
Total current
liabilities 85,918 86,647 80,980
Senior notes 63,934 63,934 70,330
Bank revolving credit 3,000 -- --
Deferred compensation 8,178 7,829 7,171
Other liabilities 1,289 1,238 238
-------- -------- --------
Total liabilities 162,319 159,648 158,719
-------- -------- --------
Commitments and
contingencies
Partners' capital:
General partner 992 963 946
Limited partners:
Class A interests 67,642 67,642 67,642
Class B interests 32,096 29,252 27,676
Class B interests held
in treasury (1,514) (1,514) (1,514)
Cumulative foreign
currency translation
adjustment (1,312) (1,400) --
-------- -------- --------
Total partners'
capital 97,904 94,943 94,750
-------- -------- --------
Total liabilities
and partners'
capital $260,223 $254,591 $253,469
======== ======== ========
</TABLE>
*Reclassified for comparative purposes.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 3 of 18
3
<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>
JUNE 30, 1996 JUNE 30, 1995*
------------- --------------
<S> <C> <C>
Net sales $167,500 $154,977
Cost of sales 100,396 91,877
---------- ----------
Gross profit 67,104 63,100
---------- ----------
Operating expenses:
Selling, general and administrative
expenses 55,734 50,894
Management fee to general partner 830 830
Depreciation 901 836
Amortization 465 486
---------- ----------
Total operating expenses 57,930 53,046
---------- ----------
Net results of operations from divisions
sold (note 3) -- 275
---------- ----------
Income from operations 9,174 10,329
Interest income 12 32
Interest expense 1,769 1,779
Other income (expense), net 503 (149)
---------- ----------
Income before provision for income taxes 7,920 8,433
Provision (benefit) for income taxes (393) 56
---------- ----------
Net income $8,313 $8,377
========== ==========
Net income allocated to partners:
General partner $83 $84
---------- ----------
Class A limited partners $3,053 $3,053
---------- ----------
Class B limited partners $5,177 $5,240
---------- ----------
Earnings per Limited partnership interest:
--Class A interest $0.28 $0.28
--Class B interest $0.24 $0.24
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
</TABLE>
*Restated for comparative purposes.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 4 of 18
4
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
FOR THE SIX MONTHS ENDED
(dollars in thousands, except for partnership interest amounts)
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995*
-------------- --------------
<S> <C> <C>
Net sales $ 322,392 $ 301,384
Cost of sales 192,824 179,107
----------- -----------
Gross profit 129,568 122,277
----------- -----------
Operating expenses:
Selling, general and administrative
expenses 110,467 102,173
Management fee to general partner 1,651 1,651
Depreciation 1,769 1,669
Amortization 950 993
----------- -----------
Total operating expenses 114,837 106,486
----------- -----------
Net results of operations from divisions
sold (note 3) -- 73
----------- -----------
Income from operations 14,731 15,864
Interest income 44 301
Interest expense 3,428 3,869
Other income (expense), net 507 (383)
Gain on sale of divisions (note 3) -- 16,500
----------- -----------
Income before provision for income taxes 11,854 28,413
Provision (benefit) for income taxes (469) 174
----------- -----------
Income before extraordinary loss 12,323 28,239
Extraordinary loss from early extinguishment
of debt (note 4) -- (629)
----------- -----------
Net income $ 12,323 $ 27,610
=========== ===========
Net income allocated to partners:
General partner $ 123 $ 276
----------- -----------
Class A limited partners $ 6,105 $ 6,105
----------- -----------
Class B limited partners $ 6,095 $ 21,229
----------- -----------
Earnings per Limited partnership interest:
Income before extraordinary loss
--Class A interest $ 0.55 $ 0.55
--Class B interest $ 0.28 $ 1.01
Extraordinary loss
--Class A interest -- --
--Class B interest -- ($0.03)
Net income
--Class A interest $ 0.55 $ 0.55
--Class B interest $ 0.28 $ 0.98
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
</TABLE>
*Restated for comparative purposes.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 5 of 18
5
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995*
-------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,313 $ 8,377
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization--Existing
divisions 1,366 1,322
Depreciation and amortization--Divested
divisions -- 103
Provision for deferred compensation 230 419
Deferred income tax benefit (612) (280)
Changes in current operating items:
Increase in accounts and notes
receivable (4,270) (4,517)
Increase in inventories (1,303) (1,351)
Decrease (increase) in other current
assets 1,146 (75)
Increase (decrease) in accounts
payable 4,979 (1,105)
Decrease in accrued interest (1,561) (1,667)
Increase in other accrued liabilities 596 791
Other items, net 34 230
------- -------
Net cash provided by operating activities 8,918 2,247
------- -------
Cash flows from investing activities:
Payment for purchase of assets (673) --
Proceeds from sale of property and
equipment 17 267
Capital expenditures (1,098) (1,619)
Other, net (27) (5)
------- -------
Net cash used for investing activities (1,781) (1,357)
------- -------
Cash flows from financing activities:
Repayments under the bank credit agreement (1,000) --
Cash distributions to partners (4,884) (7,694)
Borrowings under other credit facilities,
net (444) (179)
Principal payments under capitalized lease
obligations -- (15)
------- -------
Net cash used for financing activities (6,328) (7,888)
------- -------
Net increase (decrease) in cash and cash
equivalents 809 (6,998)
Cash and cash equivalents at beginning of
period 633 11,963
------- -------
Cash and cash equivalents at end of period $ 1,442 $ 4,965
======= =======
</TABLE>
*Reclassified for comparative purposes.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 6 of 18
6
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED
(dollars in thousands)
June 30, 1996 June 30, 1995*
------------- --------------
Cash flows from operating activities:
Net income $ 12,323 $ 27,610
Adjustments to reconcile net income to net
cash provided by (used for) operating
activities:
Depreciation and amortization--Existing
divisions 2,719 2,662
Depreciation and amortization--Divested
divisions -- 193
Gain on sale of division -- (16,500)
Extraordinary loss -- 629
Provision for deferred compensation 937 1,257
Deferred income tax benefit (866) (484)
Changes in current operating items:
Increase in accounts and notes
receivable (10,645) (10,854)
Decrease (increase) in inventories 872 (3,977)
Decrease (increase) in other current
assets 453 (921)
Increase in accounts payable 8,970 5,392
Decrease in other accrued liabilities (3,887) (7,213)
Other items, net 130 424
-------- --------
Net cash provided by (used for) operating
activities 11,006 (1,782)
-------- --------
Cash flows from investing activities:
Proceeds from sale of divisions -- 37,786
Payment for purchase of assets (673) --
Proceeds from sale of property and equipment 21 716
Capital expenditures (1,932) (2,678)
Other, net (69) (49)
-------- --------
Net cash (used for) provided by investing
activities (2,653) 35,775
-------- --------
Cash flows from financing activities:
Early extinguishment of senior notes -- (14,175)
Borrowings under the bank credit agreement 3,000 --
Prepayment penalties and related costs -- (629)
Cash distributions to partners (15,429) (18,325)
Repayments under other credit facilities,
net (382) (772)
Principal payments under capitalized lease
obligations -- (30)
-------- --------
Net cash used for financing activities (12,811) (33,931)
-------- --------
Net (decrease) increase in cash and cash
equivalents (4,458) 62
Cash and cash equivalents at beginning of
period 5,900 4,903
-------- --------
Cash and cash equivalents at end of period $ 1,442 $ 4,965
======== ========
*Reclassified for comparative purposes.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 7 of 18
7
<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 six months ended June 30, 1995. The aggregate assets
sold, net of liabilities, in connection with the sale of Dorman Products was
approximately $20,100.
Page 8 of 18
8
<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 six months ended June 30, 1995, to a separate component of income from
operations in the Consolidated Statement of Income for the three and six months
ended June 30, 1995. Downey's sales, gross profit and operating income for the
three and six months ended June 30, 1995, were $8,800 and $17,200, $2,800 and
$5,000 and $300 and $100, respectively. Total assets for Downey were $9,982 at
June 30, 1995, and are included in the Consolidated Balance Sheet as of June 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 June 30, 1996, the Operating Partnership had $39,900 available under its
$50,000 Bank Credit Agreement which provides revolving credit for working
capital purposes and acquisitions. The $10,100 outstanding under the Bank Credit
Agreement consisted of bank borrowings amounting to $3,000 as reflected on the
Company's consolidated balance sheet at June 30, 1996, and letter of credit
commitments aggregating $7,100.
The Operating Partnership has another credit facility available in the amount of
$500 for letter of credit commitments only, of which no amount was outstanding
as of June 30, 1996. 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 $967 USD was outstanding at June 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.)
Page 9 of 18
9
<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.
Page 10 of 18
10
<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
Fastener division. Hillman distributes hardware 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 point-of-sale glass related products and services including the
distribution and installation of automobile and flat glass.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 and June 30, 1995
--------------------------------------------------
Net income for the quarter ended June 30, 1996, was $8.3 million compared with
$8.4 million in 1995. The results for the second quarter of 1995 included $.3
million of operating income from Downey Glass which was divested on October 27,
1995. Excluding Downey, net income increased $.2 million or 2.6% over the second
quarter of 1995.
Net sales increased $12.5 million or 8.1% over the second quarter of 1995,
excluding Downey, due to strengthening in most product markets and growth from
sales programs and services initiated since 1992. Sales recorded in the second
quarter of 1996 were $167.5 million compared with the second quarter of 1995
sales of $154.9 million, excluding divisions sold. Sales increases by business
segment are as follows:
<TABLE>
<CAPTION>
SALES INCREASE
--------------
AMOUNT %
------ --
<S> <C> <C>
Industrial Services
SIMCO divisions $ 4.8 million 13.9%
Technology Services divisions 2.5 million 3.4%
-----
Total Industrial Services 7.3 million 6.7%
Retail Hardware Merchandising 5.1 million 22.6%
Retail Glass .1 million .5%
-----
Total Company $12.5 million 8.1%
=====
</TABLE>
Page 11 of 18
11
<PAGE>
The sales increase in the retail hardware merchandising segment includes
approximately $2.8 million due to the acquisition of the retail division of
Curtis Industries, Inc., acquired in November 1995 by the Company's Hillman
Fastener division.
Cost of sales increased $8.5 million or 9.3% from the second quarter of 1995,
due primarily to increased sales levels in the comparison period.
Gross margins were 40.1% in the second quarter of 1996 compared with 40.7% in
the same period of 1995, comprised by business segment as follows:
<TABLE>
<CAPTION>
2nd Quarter
-----------
1996 1995
---- ----
<S> <C> <C>
Industrial Services
SIMCO divisions 60.9% 65.4%
Technology Services divisions 26.6% 27.0%
Total Industrial Services 38.1% 39.1%
Retail Hardware Merchandising 49.3% 51.8%
Retail Glass 37.9% 36.9%
</TABLE>
The erosion in the gross margin in the SIMCO divisions is due mainly to
competitive pricing pressure and changes in sales mix. Gross margins in the
retail hardware merchandising segment decreased due to reduced packaging
productivity levels and costs associated with business expansion programs.
Selling, general and administrative ("S,G&A") expenses increased by $4.8 million
or 9.5% over the second quarter of 1995, comprised as follows: increased selling
expenses of $1.7 million or 6.7%, increased warehouse and delivery expenses of
$2.4 million or 27.8% and increased general and administrative expenses of $.8
million or 4.6%. The increase in S,G&A expenses supported increased 1996 sales
levels, the integration of Curtis and expansion programs by several other
operating units.
S,G&A expenses as a percentage of sales, were as follows:
<TABLE>
<CAPTION>
2nd Quarter
-----------
1996 1995
---- ----
<S> <C> <C>
Selling Expenses 15.9% 16.0%
Warehouse and Delivery Expenses 6.5% 5.5%
General and Administrative Expenses 10.9% 11.3%
---- ----
Total S,G&A Expenses 33.3% 32.8%
==== ====
</TABLE>
The increase in warehouse and delivery expenses as a percentage of sales is due
to increased costs associated with the Curtis acquisition and the addition of
five large in-plant accounts in the SIMCO businesses.
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.
The $.3 million in net results of operations from divisions sold represents
operating income from the divested Downey Glass division for the second quarter
of 1995.
Other income increased by $.7 million in the comparison period due primarily to
legal settlements and post-closing adjustments from divisions sold.
Page 12 of 18
12
<PAGE>
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 second quarter of
1996 decreased $.4 million from the second quarter of 1995 due primarily to the
recording of a $.4 million deferred income tax benefit relating to book/tax
differences in the Company's casualty loss insurance program.
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 $.28 of income
per Class A limited partnership interest for the quarters ended June 30, 1996
and June 30, 1995, respectively; and $.24 of income per Class B limited
partnership interest for both quarters ended June 30, 1996 and June 30, 1995.
Income per Class B interest in the 1995 period included $.01 of income from the
divested Downey Glass division.
Results of Operations
Six Months Ended June 30, 1996 and June 30, 1995
------------------------------------------------
Net income for the first six months of 1996 was $12.3 million compared with
$27.6 million in 1995. The results for the first six 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 $.1 million of operating income
from Downey Glass which was divested on October 27, 1995. Excluding these items,
net income increased $.7 million or 5.6% over the first six months of 1995.
Net sales increased $21.0 million or 7.0% over the first six months of 1995,
excluding Downey, due to strengthening in most product markets and growth from
sales programs and services initiated since 1992. Sales recorded in the first
six months of 1996 were $322.4 million compared with sales of $301.4 million in
the first six months of 1995, excluding divisions sold. Sales increases
(decreases) by business segment are as follows:
<TABLE>
<CAPTION>
SALES INCREASE (DECREASE)
--------------------------
AMOUNT %
------ --
<S> <C> <C>
Industrial Services
SIMCO divisions 8.2 million 11.9 %
-----
Technology Services divisions $ 5.4 million 3.7 %
Total Industrial Services 13.6 million 6.3 %
Retail Hardware Merchandising 8.1 million 19.3 %
Retail Glass (.7)million (1.4)%
-----
Total Company $21.0 million 7.0 %
=====
</TABLE>
The sales increase in the retail hardware merchandising segment includes
approximately $5.0 million or 11.9% which is due to the Curtis acquisition. 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 flat glass, brokerage and other
product line sales of $1.8 million, offset by an increase in retail auto glass
sales of $1.3 million.
Page 13 of 18
13
<PAGE>
Cost of sales increased $13.7 million or 7.7% from the first six months of 1995,
due primarily to increased sales levels in the comparison period.
Gross margins were 40.2% in the first six months of 1996 compared with 40.6% in
the same period of 1995, comprised by business segment as follows:
<TABLE>
<CAPTION>
Six Months
----------
1996 1995
---- ----
<S> <C> <C>
Industrial Services
SIMCO divisions 61.9% 65.3%
Technology Services divisions 26.6% 27.0%
Total Industrial Services 38.6% 39.3%
Retail Hardware Merchandising 49.8% 51.8%
Retail Glass 37.2% 35.9%
</TABLE>
The erosion in the gross margin in the SIMCO division is due mainly to
competitive pricing pressure and changes in sales mix. Gross margins in the
retail hardware merchandising segment decreased due to reduced packaging
productivity levels and costs associated with business expansion programs.
Selling, general and administrative ("S,G&A") expenses increased by $8.3 million
or 8.1% over the first six months of 1995, comprised as follows: increased
selling expenses of $3.4 million or 7.0%, increased warehouse and delivery
expenses of $3.7 million or 21.4% and increased general and administrative
expenses of $1.2 million or 3.3%. The increase in S,G&A expenses supported
increased 1996 sales levels, the integration of the Curtis retail division and
expansion programs by several other operating units.
S,G&A expenses as a percentage of sales, were as follows:
<TABLE>
<CAPTION>
Six Months
----------
1996 1995
---- ----
<S> <C> <C>
Selling Expenses 16.4% 16.4%
Warehouse and Delivery Expenses 6.5% 5.7%
General and Administrative Expenses 11.4% 11.8%
---- ----
Total S,G&A Expenses 34.3% 33.9%
==== ====
</TABLE>
The increase in warehouse and delivery expenses as a percentage of sales is due
to increased costs associated with the Curtis acquisition and the addition of
five large in-plant accounts in the SIMCO businesses.
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 $.1 million of net results of operations from divisions sold represents
operating income from the divested Downey Glass division for the first six
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.
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.
Page 14 of 18
14
<PAGE>
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
six months of 1996 decreased $.6 million from the first six months of 1995 due
to the recording of a $.4 million deferred income tax benefit relating to
book/tax differences in the Company's casualty loss insurance program 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 $.55 of income
per Class A limited partnership interest for the six months ended June 30, 1996
and June 30, 1995; and $.28 of income per Class B limited partnership interest
in the first six months of 1996 compared with $.98 of income per Class B
interest for the first six months of 1995. Income per Class B interest in 1995
included a gain of $.75 from the sale of Dorman Products and an extraordinary
loss of $.03 from the early extinguishment of debt. Excluding these items,
income per Class B limited partnership interest amounted to $.28 in the first
six months of 1996 compared with $.26 in the first six months of 1995.
Liquidity and Capital Resources
Net cash provided by operations in the first six months of 1996 was $11.0
million compared with net cash used in operations in the first six months of
1995 of $1.8 million, a change of $12.8 million. This change was due primarily
to decreased working capital investment in operations in the comparison period
of approximately $13.3. The Company's net interest coverage ratio (earnings
before interest, taxes and gain on sale of divisions over net interest expense)
improved to 4.50X in the first six months of 1996 from 4.34X in the comparable
prior year period.
The Company's cash position of $1.4 million as of June 30, 1996, decreased $4.5
million from the balance at December 31, 1995. Cash was provided during this
period primarily from operations in the amount of $11.0 million and from
borrowings under the bank credit agreement of $3.0 million. Cash was used during
this period predominantly for distributions to the general and limited partners,
capital expenditures, and other items in the amounts of $15.4 million, $1.9
million and $1.2 million, respectively.
The Company's working capital position of $102.1 million at June 30, 1996,
represents an increase of $6.2 million from the December 31, 1995 level of $95.8
million. The increase is attributable to reinvestment in working capital of $2.5
million, a decrease in distributions payable to partners of $5.9 million, a
decrease in management fee payable to the General Partner of $1.7 million and
working capital from acquisitions of $.6 million, offset by a decrease in cash
of $4.5 million. The Company's current ratio increased to 2.19 at June 30, 1996
from the December 31, 1995 level of 2.11.
As of June 30, 1996, the Company's total debt as a percentage of its
consolidated capitalization is 43.6% compared with 44.9% as of June 30, 1995.
15 Page 15 of 18
15
<PAGE>
The Company anticipates spending approximately $3.4 million for capital
expenditures for the full year 1996, primarily for machinery and equipment.
As of June 30, 1996, the Operating Partnership had $39.9 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 $10.1
million outstanding under the Bank Credit Agreement consisted of bank borrowings
totaling $3.0 million and Letter of Credit commitments aggregating $7.1 million.
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 $1.0 million USD was outstanding at June 30, 1996.
On April 19, 1996, the Company announced an increase in the monthly Class B tax-
related cash distribution from $.02 to $.03 per Class B interest to holders of
record May 1, 1996, payable May 31, 1996 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 this report, for the description of a recent 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
See Part II, Item 5 for a description of the status of a plan to convert the
partnership into a corporation.
Page 16 of 18
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS.
- --------------------------
With respect to the action commenced by Dorman Products of America, Ltd.
("Dorman") against the Company's Operating Partnership ("SDI") reported in the
Form 10-K for the year ended December 31, 1995, SDI filed a motion to dismiss
for lack of jurisdiction. Dorman subsequently withdrew this action. On April 25,
1996, SDI filed an action against Dorman and its parent, R&B, Inc., in the Court
of Common Pleas of Montgomery County, Pennsylvania alleging breach of contract,
intentional interference with contractual relations and negligence and
requesting a declaratory judgment that SDI did not make any misrepresentations
in connection with the sale of the Dorman Products division. Dorman has
counterclaimed in this action with the same claims it had raised in the original
action.
ITEMS 2-4--NONE.
- ----------------
ITEM 5--OTHER INFORMATION.
- --------------------------
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 advisors 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.
ITEM 6--NONE.
- -------------
Page 17 of 18
17
<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: August 14, 1996
Page 18 of 18
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1996 AND THE RELATED STATEMENT OF INCOME FOR THE
YEAR-TO-DATE ENDED JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,442
<SECURITIES> 0
<RECEIVABLES> 88,888
<ALLOWANCES> 2,130
<INVENTORY> 95,514
<CURRENT-ASSETS> 188,003
<PP&E> 48,428
<DEPRECIATION> 28,027
<TOTAL-ASSETS> 260,223
<CURRENT-LIABILITIES> 85,918
<BONDS> 63,934<F1>
0
0
<COMMON> 0
<OTHER-SE> 97,904
<TOTAL-LIABILITY-AND-EQUITY> 260,223
<SALES> 322,392
<TOTAL-REVENUES> 322,392
<CGS> 192,824
<TOTAL-COSTS> 114,837
<OTHER-EXPENSES> 507
<LOSS-PROVISION> 568
<INTEREST-EXPENSE> 3,428
<INCOME-PRETAX> 11,854
<INCOME-TAX> (469)
<INCOME-CONTINUING> 12,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,323
<EPS-PRIMARY> 0.28<F2>
<EPS-DILUTED> 0.28
<FN>
<F1>BONDS REPRESENTS ALL LONG-TERM DEBT FOR SENIOR NOTES.
<F2>EPS REPRESENTS CLASS B LIMITED PARTNERSHIP INTEREST ONLY.
</FN>
</TABLE>
