<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, 1997
-------------
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 19
<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, 1997
(Unaudited), December 31, 1996, and June 30, 1996
(Unaudited) 3
Consolidated Statements of Income for
the Three Months ended June 30, 1997 and 1996
(Unaudited) 4
Consolidated Statements of Income for
the Six Months ended June 30, 1997 and 1996
(Unaudited) 5
Consolidated Statements of Cash Flows
for the Three Months ended June 30, 1997 and 1996
(Unaudited) 6
Consolidated Statements of Cash Flows
for the Six Months ended June 30, 1997 and 1996
(Unaudited) 7
Consolidated Statements of Changes in Partners'
Capital for the six months ended June 30, 1996,
December 31, 1996 and June 30, 1997. 8
Notes to Consolidated Financial Statements
(Unaudited) 9-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-17
PART II. OTHER INFORMATION 18
SIGNATURES 19
</TABLE>
Page 2 of 19
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, June 30,
1997 December 31, 1996
ASSETS (Unaudited) 1996 (Unaudited)
------ ------------- ------------- ------------
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 6,085 $ 1,666 $ 1,442
Accounts and notes receivable, net 94,775 78,578 86,758
Inventories 101,450 102,396 95,514
Other current assets 4,701 4,672 4,289
---------- ---------- ----------
Total current assets 207,011 187,312 188,003
Property and equipment, net 21,306 21,409 20,401
Goodwill 42,335 43,036 43,551
Other intangibles 379 667 980
Deferred income taxes 5,667 5,007 3,710
Cash surrender value of
life insurance policies 4,894 4,566 2,988
Other assets 541 558 590
---------- ---------- ----------
Total assets $ 282,133 $ 262,555 $ 260,223
========== ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Current liabilities:
Accounts payable, trade $ 53,129 $ 48,557 $ 51,465
Notes payable 1,410 2,670 2,371
Current portion of senior notes 6,395 6,395 6,395
Current portion of capitalized
lease obligations 135 107 --
Distributions payable to partners 1,943 1,857 1,936
Bank revolving credit 21,000 -- --
Accrued expenses:
Salaries and wages 5,282 5,696 4,573
Interest on senior notes 473 473 520
Management fee due the general partner 1,651 3,330 1,651
Income and other taxes 3,094 2,695 3,072
Other accrued expenses 15,981 14,751 13,935
---------- ---------- ----------
Total current liabilities 110,493 86,531 85,918
Senior notes 57,539 57,539 63,934
Bank revolving credit -- 11,000 3,000
Capitalized lease obligations 609 504 --
Deferred compensation 10,218 8,644 8,178
Other liabilities 3,758 3,718 1,289
---------- ---------- ----------
Total liabilities 182,617 167,936 162,319
---------- ---------- ----------
Commitments and contingencies
Partners' capital:
General partner 1,010 960 992
Limited partners:
Class A interests;
11,099,573 outstanding 67,642 67,642 67,642
Class B interests;
21,675,746 outstanding 33,966 29,040 32,096
Class B interests held in treasury (1,514) (1,514) (1,514)
Cumulative foreign currency
translation adjustment (1,588) (1,509) (1,312)
---------- ---------- ----------
Total partners' capital 99,516 94,619 97,904
---------- ---------- ----------
Total liabilities and
partners' capital $ 282,133 $ 262,555 $ 260,223
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 3 of 19
<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, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 181,643 $ 167,500
Cost of sales 107,835 101,101
----------- -----------
Gross profit 73,808 66,399
----------- -----------
Operating expenses:
Selling, general and administrative expenses 59,966 55,029
Management fee to general partner 830 830
Depreciation 1,000 901
Amortization 451 465
----------- -----------
Total operating expenses 62,247 57,225
----------- -----------
Transaction costs 275 --
----------- -----------
Income from operations 11,286 9,174
Interest income 19 12
Interest expense 1,923 1,769
Other income (expense), net (133) 503
----------- -----------
Income before provision for income taxes 9,249 7,920
Income tax provision (benefit) 56 (393)
----------- -----------
Net income $ 9,193 $ 8,313
=========== ===========
Net income allocated to partners:
General partner $ 92 $ 83
----------- -----------
Class A limited partners $ 3,053 $ 3,053
----------- -----------
Class B limited partners $ 6,048 $ 5,177
----------- -----------
Earnings per Limited partnership interest:
Net Income
- Class A interest $ 0.28 $ 0.28
- Class B interest $ 0.28 $ 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>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 4 of 19
<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, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 350,659 $ 322,392
Cost of sales 209,251 194,093
----------- -----------
Gross profit 141,408 128,299
----------- -----------
Operating expenses:
Selling, general and administrative expenses 118,656 109,198
Management fee to general partner 1,651 1,651
Depreciation 2,018 1,769
Amortization 906 950
----------- -----------
Total operating expenses 123,231 113,568
----------- -----------
Transaction costs 625 --
----------- -----------
Income from operations 17,552 14,731
Interest income 55 44
Interest expense 3,790 3,428
Other income (expense), net (20) 507
----------- -----------
Income before provision for income taxes 13,797 11,854
Income tax provision (benefit) 28 (469)
----------- -----------
Net income $ 13,769 $ 12,323
=========== ===========
Net income allocated to partners:
General partner $ 138 $ 123
----------- -----------
Class A limited partners $ 6,105 $ 6,105
----------- -----------
Class B limited partners $ 7,526 $ 6,095
----------- -----------
Earnings per Limited partnership interest:
Net Income
- Class A interest $ 0.55 $ 0.55
- Class B interest $ 0.35 $ 0.28
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>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 5 of 19
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,193 $ 8,313
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,451 1,366
Increase in cash value of life insurance (457) --
Transaction costs 275 --
Provision for deferred compensation 806 230
Deferred income tax benefit (336) (612)
Changes in current operating items:
Increase in accounts and notes receivable (3,065) (4,270)
Increase in inventories (71) (1,303)
Decrease in other current assets 118 1,146
Increase (decrease) in accounts payable (1,616) 4,979
Decrease in accrued interest (1,419) (1,561)
Decrease in accrued restructuring charges
and transaction costs (849) --
Increase in other accrued liabilities 3,230 596
Other items, net 942 34
----------- -----------
Net cash provided by operating activities 8,202 8,918
----------- -----------
Cash flows from investing activities:
Payment for purchase of assets -- (673)
Proceeds from sale of property and equipment 178 17
Capital expenditures (1,026) (1,098)
Other, net 86 (27)
----------- -----------
Net cash used for investing activities (762) (1,781)
----------- -----------
Cash flows from financing activities:
Cash distributions to partners (5,106) (4,884)
Borrowing (repayments) under the
bank credit agreement, net 1,000 (1,000)
Borrowings (repayments) under other
credit facilities, net (307) (444)
Principal payments under capitalized
lease obligations (38) --
----------- -----------
Net cash used for financing activities (4,451) (6,328)
----------- -----------
Net increase in cash and cash equivalents 2,989 809
Cash and cash equivalents at beginning of period 3,096 633
----------- -----------
Cash and cash equivalents at end of period $ 6,085 $ 1,442
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 6 of 19
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,769 $ 12,323
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,924 2,719
Increase in cash value of life insurance (328) --
Transaction costs 625 --
Provision for deferred compensation 1,623 937
Deferred income tax benefit (660) (866)
Changes in current operating items:
Increase in accounts and notes receivable (16,197) (10,645)
Decrease in inventories 946 872
(Increase) decrease in other current assets (29) 453
Increase in accounts payable 4,572 8,970
Decrease in accrued restructuring charges
and transaction costs (1,568) --
Decrease in other accrued liabilities (46) (3,887)
Other items, net 490 130
----------- -----------
Net cash provided by operating activities 6,121 11,006
----------- -----------
Cash flows from investing activities:
Payment for purchase of assets -- (673)
Proceeds from sale of property and equipment 430 21
Capital expenditures (2,042) (1,932)
Other, net 34 (69)
----------- -----------
Net cash used for investing activities (1,578) (2,653)
----------- -----------
Cash flows from financing activities:
Cash distributions to partners (8,796) (15,429)
Borrowing under the bank credit agreement, net 10,000 3,000
Repayments under other credit facilities, net (1,260) (382)
Principal payments under capitalized
lease obligations (68) --
----------- -----------
Net cash used for financing activities (124) (12,811)
----------- -----------
Net increase (decrease) in cash
and cash equivalents 4,419 (4,458)
Cash and cash equivalents at beginning of period 1,666 5,900
----------- -----------
Cash and cash equivalents at end of period $ 6,085 $ 1,442
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 7 of 19
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIODS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL
-----------------
Cumulative
Foreign
Class A Class B Class B Translation
General Limited Limited Treasury Adjustment TOTAL
------- ------- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 963 $ 67,642 $ 29,252 $ (1,514) $ (1,400) $ 94,943
Net income 123 6,105 6,095 -- -- 12,323
Cash distributions paid and/or
declared to partners (94) (6,105) (3,251) -- -- (9,450)
Change in cumulative foreign
translation adjustment -- -- -- -- 88 88
-------- --------- -------- --------- --------- --------
Balance, June 30, 1996 992 67,642 32,096 (1,514) (1,312) 97,904
Net income 70 6,105 769 -- -- 6,944
Cash distributions paid and/or
declared to partners (102) (6,105) (3,825) -- -- (10,032)
Change in cumulative foreign
translation adjustment -- -- -- -- (197) (197)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1996 960 67,642 29,040 (1,514) (1,509) 94,619
Net income 138 6,105 7,526 -- -- 13,769
Cash distributions paid and/or
declared to partners (88) (6,105) (2,600) -- -- (8,793)
Change in cumulative foreign
translation adjustment -- -- -- -- (79) (79)
--------- --------- --------- --------- --------- ---------
Balance, June 30, 1997 $ 1,010 $ 67,642 $ 33,966 $ (1,514) $ (1,588) $ 99,516
========= ========= ========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 8 of 19
<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 "Partnership"), 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 Partnership is one of the largest wholesale distributors of
industrial products and related services in the United States. The Partnership's
three business segments are Industrial Services, Hardware Merchandising and
Glass Merchandising.
The accompanying consolidated financial statements and related notes are
unaudited, except for the balance sheet as of December 31, 1996; 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
Partnership 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 Partnership's report on Form 10-K for the year ended December
31, 1996.
2. Related Party Transaction:
In March 1997, the Operating Partnership paid the 1996 management fee of $3,330
due the General Partner, SDI Partners I, L.P. (the "GP").
3. Distributions:
On December 19, 1996, the Partnership in anticipation of its conversion to
corporate form, suspended payment of the monthly tax-related distributions to
Class B interest holders effective January 1, 1997, through March 31, 1997. Due
to the delay in completion of the Partnership's proposed conversion into
corporate form (the "Conversion"), the Partnership resumed payment of monthly
advance Class B tax distributions in the amount of $.03 per B interest in April
1997. The Partnership intends to pay this monthly rate to Class B holders until
the effective date of the conversion since it expects to allocate sufficient
Class B taxable income in the shortened tax year from January 1, 1997, through
the effective date to require the B tax distribution payment. The balance of the
required 1997 Class B tax distribution, if any will be paid on or before March
31, 1998.
Page 9 of 19
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
4. Lines of Credit and Long-Term Debt:
As of June 30, 1997, the Operating Partnership had $25,886 available under its
$50,000 Bank Credit Agreement which provides revolving credit for working
capital purposes and acquisitions through December 31, 1997. The $24,114
outstanding under the Bank Credit Agreement consisted of bank borrowings
amounting to $21,000 as reflected on the Partnership's consolidated balance
sheet at June 30, 1997, and letter of credit commitments aggregating $3,114. The
$21,000 in bank borrowings is included in the Partnership's current liabilities
as of June 30, 1997.
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, 1997. 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 no amount was outstanding at June 30, 1997.
On March 4, 1997, the Operating Partnership received the last of two financing
commitments which together aggregate $150,000 from lenders. These commitments
are available to the Partnership until September 30, 1997. The Partnership
intends to utilize the debt capacity to fund transaction costs and other
payments related to its conversion to corporate form, refinance its current
outstanding senior notes of $63,934 as of June 30, 1997, including interest
thereon and related make-whole amount of approximately $4,000, and outstanding
bank revolver borrowings of $21,000 as of June 30, 1997. Also, the new credit
facilities will provide working capital for reinvestment in the Partnership's
businesses and acquisition capital for future growth. The new financing
commitments consist of a $60,000 five-year fixed rate note at 7.66% and a
$90,000 five-year bank revolver with terms and conditions more favorable than
the Partnership's existing senior notes and bank credit lines including less
restrictive covenants and an effective interest rate reduction of approximately
1.00%.
Consummation of the refinancing with the new credit facilities is contingent
upon approval of the Conversion and certain other terms and conditions of
closing being satisfied in a manner acceptable to the lenders.
5. Contingencies:
On February 27, 1996, a lawsuit was filed against the Operating Partnership by
the buyer of its Dorman Products division for alleged misrepresentation of
certain facts by the Partnership upon which the buyer allegedly based its offer
to purchase Dorman. The complaint seeks damages of approximately $21,000.
On January 16, 1997, a holder of B Interests filed a purported class action
alleging that the terms of the Conversion unfairly transfer substantial equity
to the General Partner to the detriment of the B Interests and constitute a
breach of fiduciary duty. A second complaint containing substantially identical
allegations was filed by a limited partner on February 11, 1997. The cases have
been consolidated and an amended complaint was filed on April 16, 1997, which
added claims for breach of contract and breach of covenant of good faith and
fair dealing.
Certain other legal proceedings are pending which are either in the ordinary
course of business or incidental to the Partnership's business. Those legal
proceedings incidental to the business of the Partnership 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 Partnership.
Page 10 of 19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General
The Partnership is a publicly held master limited partnership operating in the
wholesale industrial distribution industry through a subsidiary partnership, SDI
Operating Partners, L.P. (the "Operating Partnership"). The Partnership consists
of a headquarters operation and three business segments which are Industrial
Services, Hardware Merchandising and Glass Merchandising.
The Partnership's Industrial Services segment is comprised of the Sun Inventory
Management ("SIMCO") divisions and the SunSource Technology Services divisions.
The SIMCO divisions are Kar Products, A&H Bolt, SIMCO/Special-T-Metals and SIMCO
de Mexico. The SIMCO divisions provide maintenance products and inventory
management services to both original equipment manufacturers and maintenance and
repair facilities, including in-plant systems. SunSource Technology Services,
formerly the Fluid Power group, is comprised of Activation, Air-Dreco, J.N.
Fauver Co., Hydra-Power de 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 Partnership's 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 Partnership's Glass Merchandising segment consists of the Harding division.
Harding provides glass products and point-of-sale related services such as the
installation and repair of automobile and flat glass.
Conversion to Corporate Form
On December 11, 1996, the Partnership announced the terms of a plan to convert
from its current limited partnership structure to a taxable C corporation, which
must be approved by a majority of the holders of the Class A and Class B
interests unaffiliated with SDI Partners I, L.P., the General Partner, each
voting separately as a class. In connection with the conversion of the
partnership to corporate form (the "Conversion"), the Partnership intends to
refinance its outstanding debt. The conversion and refinancing transaction will
be effected through the formation of a new corporation, SunSource Inc., of which
the Operating Partnership would be a wholly-owned subsidiary partnership. On
December 30, 1996, and amended thereafter, the Partnership filed a preliminary
proxy statement with the U.S. Securities and Exchange Commission (the "SEC")
relating to the proposed transaction. Review by the SEC and mailing of the proxy
statement are pending. The Partnership expects to complete the Conversion by
September 30, 1997.
The Partnership has recorded $2.7 million of transaction costs related to the
proposed conversion as of June 30, 1997 ($2.1 million in the fourth quarter of
1996 and $.6 million in the first six months of 1997) and anticipates incurring
an additional $1.8 million of transaction costs to complete the conversion
process.
Page 11 of 19
<PAGE>
Results of Operations
Three Months Ended June 30, 1997 and June 30, 1996
--------------------------------------------------
Net income for the quarter ended June 30, 1997, was $9.2 million compared with
$8.3 million in 1996. The results for the second quarter of 1997 included a $.3
million charge for transaction costs associated with the proposed Conversion.
Excluding this non-recurring item, net income increased $1.2 million or 13.9%
over the second quarter of 1996.
Net sales increased $14.1 million or 8.4% over the second quarter of 1996
resulting primarily from an increase in the volume of products sold due to
continued strengthening in existing product markets as well as additional market
penetration from new product lines and value-added services. Sales recorded in
the second quarter of 1997 were $181.6 million compared with the second quarter
of 1996 of $167.5 million.
Sales increases (decreases) by business segment are as follows:
<TABLE>
<CAPTION>
Sales Increase (Decrease)
-------------------------
Amount %
------ -
<S> <C> <C>
Industrial Services
Technology Services $ 6.8 million 8.8 %
Inventory Management 4.0 million 10.2 %
-------
Total Industrial Services 10.8 million 9.3 %
Hardware Merchandising 3.9 million 14.1 %
Glass Merchandising (0.6)million (2.3)%
-------
Total Partnership $ 14.1 million 8.4 %
========
</TABLE>
The sales increase in the Hardware Merchandising segment is due primarily to an
expansion of Hillman's customer base and market penetration from new product
lines associated with the acquisition of the retail business of Curtis
Industries in November 1995 (the "Curtis acquisition"). The increase in sales in
the Inventory Management divisions is comprised of sales growth primarily from
maintenance products of $2.1 million and new in-plant inventory management
programs of $1.9 million.
The decline in sales volume in the Glass Merchandising Segment is attributable
to decreases in retail flat glass, wholesale glass and other product line sales
aggregating $.9 million, offset by an increase in contract sales and other
retail sales of $.3 million.
Cost of sales increased $6.7 million or 6.7% from the second quarter of 1996,
due primarily to increased sales levels in the comparison period. The 1996
period also reflects a reclassification of $.7 million in costs from selling,
warehouse and delivery and general and administrative expense (S,G&A) to cost of
sales which is consistent with accounting initiated in 1997 within the
Technology Services divisions.
Gross margins were 40.6% in the second quarter of 1997 compared with 39.6% in
the second quarter of 1996, comprised by business segment as follows:
<TABLE>
<CAPTION>
2nd Quarter
-----------
1997 1996
---- ----
<S> <C> <C>
Industrial Services
Technology Services 26.4% 25.5%
Inventory Management 59.6% 60.9%
Total Industrial Services 37.6% 37.4%
Hardware Merchandising 52.8% 49.3%
Glass Merchandising 40.5% 38.4%
</TABLE>
Page 12 of 19
<PAGE>
The improvement in gross margin in the Technology Services divisions of
Industrial Services is due primarily to labor efficiencies in its service and
repair business and lower freight costs.
The erosion in gross margin in the Inventory Management divisions of Industrial
Services is due mainly to competitive pricing pressures and changes in sales mix
as a result of new inventory management programs.
Gross margins in the Hardware Merchandising segment increased due to reduced
packaging costs from the comparable 1996 period.
The increase in gross margins in the Glass Merchandising segment is due
primarily to improved purchasing management in auto and flat glass and exiting
from low-margin product lines.
SG&A expenses increased by $4.9 million or 9.0% over the second quarter of 1996,
comprised as follows: increased selling expenses of $2.0 million or 7.5% to
support increased 1997 sales levels; increased warehouse and delivery expenses
of $.9 million or 9.1% due to the addition of eight large in-plant inventory
management accounts in the Industrial Services segment and expansion programs by
certain operating units; and increased general and administrative expenses of
$2.0 million or 11.1% to support the increased number of system accounts in the
Industrial Services segment and the overall increase in 1997 sales levels. S,G&A
expenses as a percentage of sales increased marginally in the second quarter of
1997 from the second quarter of 1996 as follows:
<TABLE>
<CAPTION>
2nd Quarter
-----------
1997 1996
---- ----
<S> <C> <C>
Selling Expenses 15.9% 16.0%
Warehouse and Delivery Expenses 6.2% 6.2%
General and Administrative Expenses 10.9% 10.7%
----- -----
Total S,G&A Expenses 33.0% 32.9%
===== =====
</TABLE>
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.
Interest expense increased $.2 million in the comparison period due primarily to
increased borrowing levels under the Partnership's revolving credit facility to
support working capital requirements, offset by reduced financing costs from the
scheduled principal repayment on senior notes in the amount of $6.4 million on
December 1, 1996.
Other income decreased by $.6 million in the comparison period due primarily to
favorable non-recurring legal settlements and post-closing adjustments from
divisions sold recorded in the 1996 period.
Currently, the Partnership incurs state and local income taxes on its domestic
operations and foreign income taxes on its Canadian and Mexican Operations.
Also, the Partnership provides for deferred income taxes as determined in
accordance with Statement of Financial Accounting Standard No. 109 ("SFAS
#109"). As currently calculated, deferred income taxes represent state and
federal income tax benefits expected to be realized after December 31, 1997,
when the Partnership will be taxed as a corporation. The Partnership's provision
for income taxes in the first quarter of 1997 increased $.4 million from the
first quarter of 1996 due to a reduction in the deferred income tax benefit of
$.3 million relating to book/tax differences in the Partnership's deferred
compensation programs and to a $.1 million increase in the foreign income tax
provision.
Page 13 of 19
<PAGE>
The allocation of net income to the GP is based on the GP's 1% ownership
interest in the profits of the Partnership. The allocation of net income to the
limited partners for financial statement purposes represents a 99% interest in
the profits of the Partnership.
The net income allocation resulted in $.28 of income per Class A limited
partnership interest for the quarters ended June 30, 1997 and June 30, 1996; and
$.28 of income per Class B limited partnership interest in the second quarter of
1997 compared with $.24 of income per Class B interest for the second quarter of
1996. Income per Class B interest in 1997 includes non-recurring transaction
costs of $.01 related to the proposed conversion to corporate form. Excluding
the transaction costs, income per Class B limited partnership interest amounted
to $.29 in the second quarter of 1997 compared with $.24 in the second quarter
of 1996.
Six Months Ended June 30, 1997 and June 30, 1996
------------------------------------------------
Net income for the six months ended June 30, 1997, was $13.8 million compared
with $12.3 million in the 1996 period. The results for the first six months of
1997 included a $.6 million charge for transaction costs associated with the
proposed conversion to a C corporation. Excluding this non-recurring item, net
income increased $2.1 million or 16.8% over the first six months of 1996.
Net sales increased $28.3 million or 8.8% over the first six months of 1996
resulting primarily from an increase in the volume of products sold due to
continued strengthening in existing product markets as well as additional market
penetration from new product lines and value-added services. Sales recorded in
the first six months of 1997 were $350.7 million compared with the first six
months of 1996 of $322.4 million.
Sales increases (decreases) by business segment are as follows:
<TABLE>
<CAPTION>
Sales Increase (Decrease)
-------------------------
Amount %
------ -
<S> <C> <C>
Industrial Services
Technology Services $ 12.8 million 8.5 %
Inventory Management 9.5 million 12.3 %
-------
Total Industrial Services 22.3 million 9.8 %
Hardware Merchandising 8.0 million 16.0 %
Glass Merchandising (2.0)million (4.4)%
-------
Total Partnership $ 28.3 million 8.8 %
=======
</TABLE>
The sales increase in the Hardware Merchandising segment is due primarily to an
expansion of Hillman's customer base and market penetration from new product
lines associated with the Curtis acquisition. The increase in sales in the
Inventory Management divisions is comprised of sales growth primarily from new
in-plant inventory management programs of $6.1 million and in maintenance
products of $3.4 million.
The decline in sales volume in the Glass Merchandising Segment is attributable
to decreases in retail flat glass, wholesale glass and other product line sales
aggregating $2.3 million, offset by an increase in retail automotive glass sales
of $.3 million.
Cost of sales increased $15.2 million or 7.8% from the first six months of 1996,
due primarily to increased sales levels in the comparison period. The 1996
period also reflects a reclassification of $1.3 million in costs from S,G&A to
cost of sales which is consistent with accounting initiated in 1997 within the
Technology Services divisions.
Page 14 of 19
<PAGE>
Gross margins were 40.3% in the first six months of 1997 compared with 39.8% in
the 1996 period, comprised by business segment as follows:
<TABLE>
<CAPTION>
Six Months
----------
1997 1996
---- ----
<S> <C> <C>
Industrial Services
Technology Services 26.1% 25.7%
Inventory Management 59.0% 61.9%
Total Industrial Services 37.5% 37.9%
Hardware Merchandising 52.3% 49.8%
Glass Merchandising 40.7% 37.7%
</TABLE>
The improvement in gross margin in the Technology Services divisions of
Industrial Services is due primarily to labor efficiencies in its service and
repair business and lower freight costs.
The erosion in gross margin in the Inventory Management divisions of Industrial
Services is due mainly to competitive pricing pressures and changes in sales mix
as a result of new inventory management programs.
Gross margins in the Hardware Merchandising segment increased due to reduced
packaging costs from the comparable 1996 period.
The increase in gross margins in the Glass Merchandising segment is due
primarily to improved purchasing management in auto and flat glass, exiting from
low-margin product lines and efforts to improve margins in the wholesale flat
glass business and miscellaneous product sales.
SG&A expenses increased by $9.5 million or 8.7% over the first six months of
1996, comprised as follows: increased selling expenses of $4.0 million or 7.5%
to support increased 1997 sales levels; increased warehouse and delivery
expenses of $1.8 million or 9.1% due to the addition of eight large in-plant
inventory management accounts in the Industrial Services segment and expansion
programs by certain operating units; and increased general and administrative
expenses of $3.7 million or 10.1% to support the increased number of inventory
system accounts in the Industrial Services segment and the overall increase in
1997 sales levels.
S,G&A expenses as a percentage of sales decreased marginally in the first half
of 1997 versus the first half of 1996 as follows:
<TABLE>
<CAPTION>
Six Months
----------
1997 1996
---- ----
<S> <C> <C>
Selling Expenses 16.3% 16.5%
Warehouse and Delivery Expenses 6.2% 6.2%
General and Administrative Expenses 11.3% 11.2%
----- -----
Total S,G&A Expenses 33.8% 33.9%
===== =====
</TABLE>
As previously discussed, the management fee is accrued each quarter in the
amount of approximately $.8 million.
Depreciation expense increased by $.2 million in the comparison period due
primarily to an increase in the depreciable asset base.
Interest expense increased $.4 million in the comparison period due primarily to
increased borrowing levels under the Partnership's revolving credit facility to
support working capital requirements, offset by reduced financing costs from the
scheduled principal repayment on senior notes in the amount of $6.4 million on
December 1, 1996.
Page 15 of 19
<PAGE>
Other income decreased by $.5 million in the comparison period due primarily to
favorable non-recurring legal settlements and post-closing adjustments from
divisions sold recorded in the 1996 period.
As previously discussed, the Partnership incurs state, local and foreign income
taxes and provides for deferred income taxes as determined in accordance with
SFAS #109. The Partnership's provision for income taxes in the first six months
of 1997 increased $.5 million from the first six months of 1996 due to a
reduction in the deferred income tax benefit of $.3 million relating to book/tax
differences in the Partnership's deferred compensation programs and to a $.2
million increase in the foreign income tax provision.
The allocation of net income, which was previously discussed, resulted in $.55
of income per Class A limited partnership interest for the six months ended June
30, 1997 and June 30, 1996; and $.35 of income per Class B limited partnership
interest in the first six months of 1997 compared with $.28 of income per Class
B interest for the first six months of 1996. Income per Class B interest in 1997
includes non-recurring transaction costs of $.03 related to the proposed
conversion to corporate form. Excluding the transaction costs, income per Class
B limited partnership interest amounted to $.38 in the first six months of 1997
compared with $.28 in the first six months of 1996.
Liquidity and Capital Resources
Net cash provided by operations was $6.1 million in the first six months of 1997
compared with $11.0 million in the first six months of 1996, a decrease of $4.9
million. This decrease was due primarily to increased working capital investment
in operations in the comparison period of approximately $8.1 million offset by
increased net income of $1.4 million and other non-cash items of $1.8 million.
The Partnership's net interest coverage ratio (earnings before interest and
taxes over net interest expense) improved to 4.86X in the first six months of
1997 from 4.50X in the comparable prior year period.
The Partnership's cash position of $6.1 million as of June 30, 1997, increased
$4.4 million from the balance at December 31, 1996. Cash was provided during
this period primarily from operations of $6.1 million, borrowings under the bank
credit agreement of $10.0 million and proceeds from the sale of property and
equipment of $.4 million. Cash was used during this period predominantly for
distributions to the general and limited partners, capital expenditures and
repayments under other credit facilities of $8.8 million, $2.0 million, and $1.3
million, respectively.
The Partnership's working capital position of $96.5 million at June 30, 1997,
represents a decrease of $4.3 million from the December 31, 1996 level of $100.8
million. The decrease is attributable to an increase in current liabilities of
$21.0 million as a result of the classification of bank revolver debt as current
at June 30, 1997, and an increase in distributions payable to partners of $.1
million; offset by reinvestment in working capital of $10.7 million, an increase
in cash balance of $4.4 million and a decrease in management fee payable to the
General Partner of $1.7 million. The Partnership's current ratio decreased to
1.87 at June 30, 1997 from the December 31, 1996 level of 2.16, primarily as a
result of the classification of bank revolver debt as current at June 30, 1997,
compared with long-term at December 31, 1996.
As of June 30, 1997, the Partnership's total debt as a percentage of its
consolidated capitalization is 45.8% compared with 43.9% as of December 31,
1996, and 42.6% as of June 30, 1996.
Page 16 of 19
<PAGE>
The Partnership's existing bank credit facility of $50 million expires December
31, 1997. Financing commitments of $150 million are available to the Partnership
until September 30, 1997, to fund costs related to the Conversion, prepay its
existing senior notes and provide capital for internal and acquisition growth.
The new financing arrangements will provide capital for a five-year term from
the date of conversion to corporate form. If the Conversion is not consummated,
an extension of the Partnership's existing bank credit facility beyond December
31, 1997, will be requested. See Note 4 of Notes to Financial Statements.
As of June 30, 1997, the Operating Partnership had $25.9 million available under
its existing bank credit facility which provides revolving credit for working
capital purposes and acquisitions through December 31, 1997. The $24.1 million
outstanding under the bank credit facility consisted of bank borrowings totaling
$21.0 million and Letter of Credit commitments aggregating $3.1 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 no amount was outstanding at June 30, 1997.
The Partnership anticipates spending approximately $4.1 million for capital
expenditures in 1997, primarily for machinery and equipment.
The Partnership suspended the payment of monthly advance Class B tax
distributions effective January 1, 1997 through March 31, 1997, pending the
Conversion. Due to the delay in completion of the Conversion, the Partnership
resumed payment of monthly advance Class B tax distributions in April 1997 in
the amount of $.03 per B Interest. The Partnership intends to pay this monthly
rate to Class B holders until the effective date of the Conversion since it
expects to allocate sufficient Class B taxable income in the shortened tax year
from January 1, 1997, through the effective date to require a B tax
distribution. The balance of the required 1997 Class B tax distribution, if any,
will be paid on or before March 31, 1998.
See Item 3 - Legal Proceedings, of Form 10-K dated December 31, 1996, and Note 5
of Notes to Consolidated Financial Statements, for the description of a lawsuit
with respect to the sale of the Partnership's Dorman Products Division and
lawsuits involving the Partnership's General Partner related to the Conversion.
Certain other legal proceedings are pending which are either in the ordinary
course of business or incidental to the Partnership's business. Those legal
proceedings incidental to the business of the Partnership 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 Partnership.
Page 17 of 19
<PAGE>
PART II
OTHER INFORMATION
Items 1-6 - None
- ------------------
Page 18 of 19
<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, 1997
Page 19 of 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet as of June 30, 1997 and the related Statement of Income for the
year-to-date ended June 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 6,085
<SECURITIES> 0
<RECEIVABLES> 94,775
<ALLOWANCES> 2,357
<INVENTORY> 101,450
<CURRENT-ASSETS> 207,011
<PP&E> 52,257
<DEPRECIATION> 30,951
<TOTAL-ASSETS> 282,133
<CURRENT-LIABILITIES> 110,493
<BONDS> 57,539<F1>
0
0
<COMMON> 0
<OTHER-SE> 99,516
<TOTAL-LIABILITY-AND-EQUITY> 282,133
<SALES> 350,659
<TOTAL-REVENUES> 350,659
<CGS> 209,251
<TOTAL-COSTS> 123,231
<OTHER-EXPENSES> 20
<LOSS-PROVISION> 735
<INTEREST-EXPENSE> 3,790
<INCOME-PRETAX> 13,797
<INCOME-TAX> 28
<INCOME-CONTINUING> 13,769
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,769
<EPS-PRIMARY> .35<F2>
<EPS-DILUTED> .35<F2>
<FN>
<F1> Bonds represents all long-term debt for Senior Notes.
</FN>
<FN>
<F2> EPS represents Class B Limited Partnership Interests only.
</FN>
</TABLE>
