<PAGE>
FORM 10-Q - A
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.
- --------------------------------------------------------------------------------
(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 19103
- ---------------------------------------- ----------
Philadelphia, Pennsylvania (Zip Code)
(Address of principal executive offices)
(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 20
<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
(Unaudited) 3
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
Consolidated Statements of Changes in Partner's Capital
for the Nine Months ended September 30, 1996, the
Twelve Months ended December 31, 1995, and the Nine
Months ended September 30, 1995
(Unaudited) 8
Notes to Consolidated Financial Statements
(Unaudited) 9-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
PART II. OTHER INFORMATION 19
SIGNATURES 20
Page 2 of 20
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1996 December 31, 1995
ASSETS (Unaudited) 1995 (Unaudited)
------ ------------- ------------- ------------
<S> <C> <C> <C>
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 1,463
----------- ----------- ----------
Total liabilities 162,143 159,648 160,363
----------- ----------- ----------
Commitments and contingencies
Partners' capital:
General partner 1,024 963 980
Limited partners:
Class A interests; 11,099,573 outstanding 67,642 67,642 67,642
Class B interests; 21,675,746 outstanding 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) (978)
----------- ----------- -----------
Total partners' capital 101,160 94,943 97,204
----------- ----------- ----------
Total liabilities and
partners' capital $ 263,303 $ 254,591 $ 257,567
=========== =========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 3 of 20
<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, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Net sales $ 167,125 $ 163,214
Cost of sales 99,096 96,704
------------ -----------
Gross profit 68,029 66,510
------------ -----------
Operating expenses:
Selling, general and administrative expenses 55,592 54,452
Management fee to general partner 840 840
Depreciation 915 959
Amortization 499 500
------------ -----------
Total operating expenses 57,846 56,751
------------ -----------
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
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 4 of 20
<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, September 30,
1996 1995
------------- -------------
<S> <C> <C>
Net sales $ 489,517 $ 481,826
Cost of sales 291,920 287,973
----------- -----------
Gross profit 197,597 193,853
------------ -----------
Operating expenses:
Selling, general and administrative expenses 166,059 161,425
Management fee to general partner 2,491 2,491
Depreciation 2,684 2,799
Amortization 1,449 1,515
------------ -----------
Total operating expenses 172,683 168,230
------------ -----------
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
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 5 of 20
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1996 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 1,350
- Divested divisions -- 109
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
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 6 of 20
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED
(dollars in thousands)
September 30, September 30,
1996 1995
-------- --------
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 4,012
- Divested divisions -- 302
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
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 7 of 20
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIODS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
PARTNER'S CAPITAL
-----------------------------------------------------------------------------------------
Cumulative
Foreign
Currency
Class A Class B Class B Translation
General Limited Limited Treasury Adjustment TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 791 $ 67,642 $ 12,300 $ (1,514) $ (1,338) $ 77,881
Net income 354 9,157 25,927 -- -- 35,438
Cash distributions paid and/
or declared to partners (165) (9,157) (7,153) -- -- (16,475)
Change in cumulative foreign
currency translation
adjustment -- -- -- -- 360 360
--------- --------- --------- --------- --------- ---------
Balance, September 30, 1995 980 67,642 31,074 (1,514) (978) 97,204
Net income 87 3,053 5,538 -- -- 8,678
Cash distributions paid and/
or declared to partners (104) (3,053) (7,360) -- -- (10,517)
Change in cumulative foreign
currency translation
adjustment -- -- -- -- (422) (422)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 963 67,642 29,252 (1,514) (1,400) 94,943
Net income 206 9,157 11,246 -- -- 20,609
Cash distributions paid and/
or declared to partners (145) (9,157) (5,202) -- -- (14,504)
Change in cumulative foreign
currency translation
adjustment -- -- -- -- 112 112
--------- --------- --------- --------- --------- ---------
Balance, September 30, 1996 $ 1,024 $ 67,642 $ 35,296 $ (1,514) $ (1,288) $ 101,160
========= ========= ========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 8 of 20
<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, 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
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, 1995, as amended.
Revision of Certain Items:
Statements of Income:
The consolidated statements of income have been revised to replace the Net
sales, Cost of sales, Gross profit and Operating expenses of the Downey Glass
division, which was sold in 1995 and which had previously been presented as Net
results of operations from divisions sold. This revision has no effect on income
from operations or net income.
Translation of Foreign Currencies:
The Cumulative foreign currency translation adjustment has been classified as a
separate component of Partners' capital with a corresponding increase in Other
Liabilities.
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").
Page 9 of 20
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Acquisitions/Divestitures:
On April 11, 1996, the Partnership'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.
4. Extraordinary Loss:
During the first quarter of 1995, the Partnership recorded an extraordinary loss
of $629 or approximately $.03 per Class B limited partnership interest due to
early extinguishment of a portion of the Partnership'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.)
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 Partnership.
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 20
<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 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 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 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 Glass
division. Harding provides glass products and point-of-sale related services
such as the installation and repair of automobile and flat glass.
Market Developments
Through the first nine months of 1996, the Industrial Services and Hardware
Merchandising segments continued to expand as a result of economic strength in
most product markets and the addition of new products lines and value-added
services. However, the Glass business has experienced a decline in sales volume
primarily attributable to the discontinuation of certain product lines and
markets and competitive pressures from major glass manufacturers in the
wholesale distribution business. The decline has been partially offset by real
growth in Harding's retail glass shops, its primary strategic focus. Growth in
the retail glass business is expected to continue, complemented by internal
expansion and acquisition growth opportunities.
Operating expense control and liquidity in working capital investment allows the
operating divisions to respond quickly to market conditions effected by economic
recession or growth. Management has and will continue to respond to changing
market conditions.
Results of Operations
In 1995, the Operating Partnership sold its Dorman Products and Downey Glass
divisions. In order to provide an analysis of the results of ongoing operations,
the sales, gross profit and operating expenses of these divisions have been
excluded from the 1995 periods for the following discussion of results of
operations.
Page 11 of 20
<PAGE>
Three Months Ended September 30, 1996 and September 30, 1995
The following table of results from ongoing operations excludes from the three
months ended September 30, 1995, sales of $9.1 million and net results of
operations of $.3 million from divisions sold.
(dollars in thousands)
Three Months Ended
------------------------------
September 30, September 30,
1996 1995
------------ -------------
Net sales $167,125 $154,117
Cost of sales 99,096 90,516
-------- --------
Gross profit 68,029 63,601
-------- --------
Operating expenses:
Selling, general & admin. 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
-------- --------
Income from ongoing operations $ 10,183 $ 9,750
======== ========
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, resulting primarily from an increase in the volume of products
sold 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 %
Hardware Merchandising 7.5 million 34.1 %
Glass Merchandising (.3)million (1.1)%
------
Total Partnership $ 13.0 million 8.4 %
======
The sales increase in the 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 Partnership'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.
Page 12 of 20
<PAGE>
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%
Hardware Merchandising 50.0% 53.2%
Glass Merchandising 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%
===== =====
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.
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"). 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
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.
Page 13 of 20
<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 $.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.
Nine Months Ended September 30, 1996 and September 30, 1995
The following table of results from ongoing operations excludes from the nine
months ended September 30, 1995, sales of $26.3 million and net results of
operations of $.4 million from divisions sold.
(dollars in thousands)
Nine Months Ended
-------------------------------
September 30, September 30,
1996 1995
------------- -------------
Net sales $ 489,517 $ 455,501
Cost of sales 291,920 269,623
---------- ----------
Gross profit 197,597 185,878
---------- ----------
Operating expenses:
Selling, general & admin. 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
---------- ----------
Income from ongoing operations $ 24,914 $ 25,227
========== ==========
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, resulting primarily from an increase in the volume of products
sold 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 %
Hardware Merchandising 15.6 million 24.4 %
Glass Merchandising (.9)million (1.3)%
-------
Total Partnership $ 34.0 million 7.5 %
=======
Page 14 of 20
<PAGE>
The sales increase in the 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%.
The decline in sales volume in the Glass Merchandising segment is attributable
to the discontinuation of certain product lines and markets served accounting
for $.7 million of the sales decline and a decrease in wholesale glass,
contract, brokerage and other product line sales of $1.4 million, offset by an
increase in retail glass sales of $1.2 million, or almost 4%.
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%
Hardware Merchandising 49.9% 52.3%
Glass Merchandising 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%
===== =====
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.
Page 15 of 20
<PAGE>
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.
Other income increased by $.9 million in the comparison period due primarily to
legal settlements and post-closing adjustments from divisions sold.
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 SFAS #109. 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 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
Partnership'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 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 $.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 Partnership'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 Partnership'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.
Page 16 of 20
<PAGE>
The Partnership'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 Partnership's current ratio increased to 2.14 at September 30,
1996 from the December 31, 1995 level of 2.11.
As of September 30, 1996, the Partnership's total debt as a percentage of its
consolidated capitalization is 40.8% compared with 43.1% as of September 30,
1995.
The Partnership 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 Partnership 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 Partnership's Dorman Products Division. 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.
Acquisitions
On April 11, 1996, the Partnership'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.
Page 17 of 20
<PAGE>
Other
On June 12, 1996, the Board of Directors of the Partnership'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.
Page 18 of 20
<PAGE>
PART II
OTHER INFORMATION
Items 1-6 - None
Page 19 of 20
<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:__________________________ BY___________________________
Joseph M. Corvino John J. Dabrowski
Vice President - Finance Controller
Chief Financial Officer (Chief Accounting Officer)
DATE: March 7, 1997
Page 20 of 20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This 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>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<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>
