10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 14, 2000
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
Commission file number 1-13293
SunSource Inc.
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(Exact name of registrant as specified in its charter)
Delaware 23-2874736
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 One Logan Square
Philadelphia, Pennsylvania 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 282-1290
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on Which Registered
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Common Stock, New York Stock Exchange
par value $.01 per share
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
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On August 14, 2000 there were 6,865,678 Common Shares outstanding.
Page 1 of 27
SUNSOURCE INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE(S)
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2000
(Unaudited), December 31, 1999 and June 30, 1999
(Unaudited) 3
Consolidated Statements of Operations for
the Three Months ended June 30, 2000 and 1999
(Unaudited) 4
Consolidated Statements of Operations for
the Six Months ended June 30, 2000 and 1999
(Unaudited) 5
Consolidated Statements of Cash Flows
for the Three Months ended June 30, 2000 and 1999
(Unaudited) 6
Consolidated Statements of Cash Flows
for the Six Months ended June 30, 2000 and 1999
(Unaudited) 7
Consolidated Statement of Changes in Stockholders'
Equity for the Six Months ended June 30, 2000
(Unaudited) 8
Notes to Consolidated Financial Statements
(Unaudited) 9-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-25
PART II. OTHER INFORMATION 26
SIGNATURES 27
Page 2 of 27
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 3 of 27
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED,
(dollars in thousands, except for share amounts)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 4 of 27
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE SIX MONTHS ENDED,
(dollars in thousands, except for share amounts)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 5 of 27
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED,
(dollars in thousands)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 6 of 27
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED,
(dollars in thousands)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 7 of 27
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2000 (Unaudited)
(dollars in thousands)
(1) Cumulative foreign translation adjustment represents the only item of other
comprehensive income.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 8 of 27
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of
SunSource Inc. (the "Company" or "SunSource") and its wholly-owned subsidiaries
including SunSource Technology Services Company, Inc. ("STS"), The Hillman
Group, Inc. ("Hillman"), Harding Glass, Inc. ("Harding") and SunSource Capital
Trust (the "Trust"). All significant intercompany balances and transactions have
been eliminated. The Company is one of the leading providers of value-added
services and products to retail and industrial markets in North America.
The accompanying consolidated financial statements and related notes are
unaudited; 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,
1999.
Discontinued Operations:
In December 1999, the Company's Board of Directors approved management's plan to
dispose of the Company's Harding business. Accordingly, Harding has been
accounted for as a discontinued operation and its results of operations were
segregated from results of the Company's ongoing businesses including
restatement of the prior periods presented. On April 13, 2000, the Company
consummated the sale of Harding on which it had signed a letter of intent in
January 2000. See Note 2, Contribution of
Subsidiaries/Acquisitions/Divestitures.
For the year ended December 31, 1999, the Company recorded an after-tax loss of
$2,188 from Harding's operations and an estimated loss on its expected disposal
of $23,834 unadjusted for any potential future tax benefits. For the three
months ended March 31, 2000, the Company recorded an additional loss on disposal
of the discontinued Harding segment of $3,372, less an income tax benefit of
$6,208. For the period of April 1 through April 12, 2000, the Company recorded
an additional loss on disposal of the discontinued Harding segment of $1,200
less an income tax benefit of $721. Through June 30, 2000, the Company has
recorded a loss on disposal of the discontinued Harding segment of $21,477 in
the aggregate, net of tax benefits.
Page 9 of 27
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands)
1. Basis of Presentation (continued):
Following is summary financial information for the Company's discontinued
Harding operations:
As of June 30, 2000, the Company had $2,781 in accrued liabilities reserved for
the loss on disposal of the Harding segment.
1999 Restructuring Charges and Asset Write-downs
On June 29, 1999, the Board of Directors of SunSource Inc. approved the
Company's restructuring plan to reposition Technology Services and Kar Products,
write-down key machines at the Hillman division, and realign corporate overhead
expenses. As a result of this plan, the Company recorded a restructuring charge
of $4,818, a key machine write-down of $3,300 and an inventory write-down
related to restructuring of $2,130. Included in these charges and write-downs
was $5,392 related to Technology Services, $1,020 related to Kar Products,
$3,300 related to Hillman, and $536 related to Corporate Headquarters.
The Technology Services charge of $5,392 included termination benefits of
$2,744, an inventory write-down of $2,130, other exit costs of $415 and a
write-down of unamortized leasehold improvements of $103. The termination
benefits of $2,744 covered approximately 94 employees. The other exit costs and
write-down of unamortized leasehold improvements were related to lease buyouts
and losses on the sale of owned facilities as a result of Technology Services'
facilities consolidation. The inventory write-down of $2,130 was the result of a
reduction in vendor lines resulting principally from the facility consolidation
process.
The Kar Products charge of $1,020 was comprised solely of termination benefits
for about 10 employees.
The Hillman charge of $3,300 was primarily the result of Hillman's inability to
recover key machines from retailers. The $3,300 charge represented the total net
book value of key machines that had been capitalized as of June 30, 1999.
The Corporate Headquarters component of the restructuring charge aggregated $536
comprised of other exit costs of $434 and termination benefits of $102 for two
employees. The other exit costs included lease termination costs of $101 and
unamortized leasehold improvements of $333 on certain assets.
Page 10 of 27
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands)
1. Basis of Presentation (continued):
The Company completed the restructuring plan within six months. As of June 30,
2000, other accrued liabilities and other non-current liabilities include $861
and $64, respectively, of remaining reserves related to the restructuring
charge. These reserves are primarily associated with termination benefits.
Inventories
Inventories consisting predominantly of finished goods are valued at the lower
of cost or market, cost being determined principally on the first-in, first-out
method.
2. Contribution of Subsidiaries/Acquisitions/Divestitures:
On March 2, 2000, the Company contributed the interests in its Kar Products,
Inc. and A & H Bolt & Nut Company Limited operations (collectively, the "Kar"
business) to a newly-formed partnership affiliated with Glencoe Capital, L.L.C.
("Glencoe"). Glencoe contributed cash equity to the new partnership, G-C Sun
Holdings L.P. ("G-C"). The Company received $105,000 in cash proceeds from the
transaction through repayment of assumed debt by G-C. Affiliates of Glencoe hold
a 51% controlling interest with the remaining 49% interest held by SunSource.
The Company accounts for its investment in the partnership under the equity
method and recorded a pre-tax gain on the transaction of approximately $49,115
in the first quarter of 2000. Sales from Kar aggregated $22,122 from January 1,
2000 to March 2, 2000, and $124,724 for the year ended December 31, 1999.
On April 7, 2000, the Company acquired Axxess Technologies, Inc. ("Axxess") of
Tempe, Arizona through a stock merger transaction. Axxess is a manufacturer of
key duplication and identification systems. The transaction was structured as a
purchase of 100% of the stock of the privately held company and repayment of
outstanding Axxess debt in exchange for $87,000 in cash and $23,000 in
subordinated notes. In connection with the sale of Harding on April 13, 2000,
the Company repaid $9,600 of these subordinated notes leaving a balance of
$13,400 comprised as follows: 1) a $2,400 15% note due April 7, 2001 and 2) an
$11,000 note which is payable in seven equal quarterly installments commencing
the earlier of i) the first calendar quarter after payment in full of the Term
Loan extended by the Company's senior lenders or ii) March 31, 2004. Interest on
the $11,000 subordinated note ranges from prime plus 1% to prime plus 5% with a
maximum rate at any time of 15%. The aggregate consideration for the transaction
was $111,537, including $87,000 in cash, $23,000 in subordinated notes and
transaction costs of $1,537, plus the assumption of certain liabilities
aggregating $14,192. Axxess recorded goodwill and other intangible assets of
$49,758 related to this acquisition. Axxess sales aggregated $41,159 for the six
months ended June 30, 2000, and $82,132 for the year ended December 31, 1999.
Axxess' results of operations are included in the results of Hillman from the
date of acquisition.
On April 13, 2000, the Company sold substantially all of the assets of Harding
for a cash purchase price of $31,446 plus the assumption by the buyer of certain
liabilities aggregating $12,506, subject to certain post-closing adjustments.
Page 11 of 27
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands)
2. Contribution of Subsidiaries/Acquisitions/Divestitures
(continued):
The following disclosures indicate the Company's estimate of financial results
had the Axxess acquisition been consummated on January 1, 1999:
Pro forma
-----------------
Six Months Ended
6/30/00 6/30/99
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Net sales $269,048 $333,480
Income (loss) before discontinued operations 41,720 (10,046)
Net income (loss) 44,077 (10,150)
Basic and diluted earnings per share:
Before discontinued operations $6.10 ($1.49)
Net income (loss) $6.44 ($1.50)
3. Lines of Credit and Long-Term Debt:
On December 15, 1999, the Company refinanced its $60,000 senior notes and
$90,000 bank revolving credit with $155,000 in senior credit facilities (the
"Credit Agreement") consisting of $130,000 in revolving bank credit (the
"Revolver") and a $25,000 term loan (the "Term Loan"). The Credit Agreement has
a five-year term whose revolver availability is based on the Company's
receivables and inventory balances (the "Borrowing Base") evaluated on a monthly
basis. On April 7, 2000, the Company amended the Credit Agreement to reduce the
Revolver to $115,000.
As of June 30, 2000, the Company's Borrowing Base was $90,750 consisting of
receivables and inventory balances totaling $97,955 less letter of credit
commitments outstanding of $7,205. As of June 30, 2000, the Company had $13,850
available under the Revolver. The Company had $96,348 of outstanding debt at
June 30, 2000, consisting of bank revolver borrowings of $76,900, outstanding
Term Loan of $17,500 and capital lease obligations of $1,948. The Company and
its domestic and foreign corporate subsidiaries are borrowers and guarantors
("Credit Parties") under the Credit Agreement. Each credit party assigned,
pledged and granted a security interest in and to all its assets as collateral.
Accounts payable includes $7,487 representing checks issued and outstanding as
of June 30, 2000, for which funds would have been drawn against the Company's
revolving credit facility if they had been presented on that date.
4. Contingencies:
On February 27, 1996, a lawsuit was filed against the Company by the buyer of
its Dorman Products division for alleged misrepresentation of certain facts by
the Company upon which the buyer allegedly based its offer to purchase Dorman.
The complaint seeks damages of approximately $21,000.
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 the pending litigation
matters will not have a material effect on the consolidated financial position,
operations or cash flows of the Company.
Page 12 of 27
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands)
5. Stockholders' Equity:
Earnings per Share
The Company accounts for earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share". SFAS
128 requires the presentation of basic and diluted earnings per share for
companies with complex capital structures. Under the Company's Equity
Compensation Plan, 929,500 options to purchase shares of the Company's common
stock having a potentially dilutive effect on earnings per share remain
outstanding to certain executives and key employees. Currently, due to market
conditions, the shares granted under the plan do not have a material dilutive
effect on earnings per share for the six months ended June 30, 2000.
Common Shares Issued to Certain Non-Employee Directors
Under the Company's Stock Compensation Plan for Non-Employee Directors, certain
non-employee directors were issued 10,828 Common Shares in the first six months
of 2000, which results in a compensation charge of $48.
Stock Options
On April 27, 1999, a grant of 150,000 non-qualified stock options was made to
attract and retain a new Chief Executive Officer, (the "CEO Grant"). On January
26, 2000, the Compensation Committee of the Board of Directors amended the CEO
Grant by reducing the number of shares from 150,000 to 50,000 and issued a grant
of 100,000 shares of restricted stock. One-third of the restricted shares will
vest six months from the date of grant. Vesting of the remaining two-thirds of
the restricted shares will be based on achievement of certain performance goals.
In the event that all or some of the performance goals are not achieved within a
three-year period from the date of grant, the then remaining shares will vest on
the third anniversary from their date of grant.
In May 2000, the Compensation Committee of the Board of Directors granted the
following stock options under the Company's 1998 Equity Compensation Plan:
(1) 293,500 incentive stock options at fair market value.
(2) 22,500 non-qualified stock options at 85% of fair
market value.
Common Stock Dividend
On June 30, 1999, the Board of Directors of the Company suspended indefinitely
the quarterly cash dividend of $.10 per common share.
6. Segment Information:
The Company has three reportable segments which are Hillman, Technology Services
and Integrated Supply-Mexico operating as SunSource Integrated Services de
Mexico, S.A. DE C.V. The three segments are disaggregated based on the products
and services provided, markets served, marketing strategies and delivery
methods. The Company measures segment profitability and allocates corporate
resources based on each segment's Earnings Before Interest, Taxes, Depreciation
and Amortization ("EBITDA") which is defined as income from operations before
depreciation and amortization. The Company also measures the segments on
performance of their tangible asset base.
Following is a tabulation of segment information for the three and six months
ended June 30, 2000 and 1999. Corporate information is included to reconcile
segment data to the consolidated financial statements.
Page 13 of 27
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands)
6. Segment Information (continued):
Page 14 of 27
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands)
6. Segment Information (continued):
The following supplemental table of segment tangible assets for ongoing
operations is presented due to the increase in segment tangible assets during
the six months ended June 30, 2000, which represents primarily the acquisition
of Axxess which is included with the Hillman Group.
Page 15 of 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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The following discussion provides information which management believes is
relevant to an assessment and understanding of the Company's operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere herein.
General
SunSource Inc. (the "Company" or "SunSource") is one of the largest providers of
value-added services and products to retail and industrial markets in North
America. The Company is organized into three business segments which are
SunSource Technology Services Company, Inc. ("Technology Services" or "STS"),
The Hillman Group, Inc.("Hillman"), and Integrated Supply, operating as
SunSource Integrated Services de Mexico, S.A. DE C.V. Also, the Company has an
investment in an affiliate, G-C Sun Holdings, L.P., operating as Kar Products.
Technology Services offers a full range of technology-based products and
services to small, medium and large manufacturers. The Hillman Group provides
small hardware and related items, keys and identification items such as tags,
letters, numbers and signs, and merchandising services to retail outlets,
primarily hardware stores, home centers, mass merchants and lumberyards.
Integrated Supply provides major industrial manufacturing customers with
comprehensive inventory management services for their maintenance, repair and
operating supplies ("MRO"). Kar Products offers personalized inventory
management systems of MRO products to industrial manufacturing customers and
maintenance and repair facilities.
Restructuring Charges and Asset Write-downs
In the second quarter of 1999, the Company recorded $10.2 million of
non-recurring restructuring charges and asset write-downs which were incurred to
reposition Technology Services and Kar Products, write-down impaired assets, and
realign corporate overhead expenses. Included in these charges and write-downs
were $5.4 million related to Technology Services, $1.0 million related to Kar
Products, $3.3 million related to Hillman, and $0.5 million related to Corporate
Headquarters. The Company completed the restructuring plan within six months.
Acquisitions/Divestitures
On March 2, 2000, the Company contributed the interests in its Kar Products,
Inc. and A & H Bolt & Nut Company Limited operations (collectively, the "Kar"
business) to a newly-formed partnership affiliated with Glencoe Capital, L.L.C.
("Glencoe"). Glencoe contributed cash equity to the new partnership, G-C Sun
Holdings L.P. ("G-C"). The Company received $105 million in cash proceeds from
the transaction through repayment of assumed debt by G-C. Affiliates of Glencoe
hold a 51% controlling interest with the remaining 49% interest held by
SunSource. The Company accounts for its investment in the partnership under the
equity method and recorded a pre-tax gain on the transaction of approximately
$49.1 million in the first quarter of 2000.
On April 7, 2000, the Company acquired Axxess Technologies, Inc. ("Axxess") of
Tempe, Arizona through a stock merger transaction. Axxess is a manufacturer of
key duplication and identification systems. The transaction was structured as a
purchase of 100% of the stock of the privately held company and repayment of
outstanding Axxess debt in exchange for $87 million in cash and $23 million in
subordinated notes. Axxess' sales aggregated $41.2 million for the six months
Page 16 of 27
ended June 30, 2000, and $82.1 million for the year ended December 31, 1999.
Axxess' results of operations are included in the results of Hillman from the
date of acquisition.
On April 13, 2000, the Company completed the sale of its Harding Glass, Inc.
("Harding") subsidiary to VVP America which was previously announced in January
2000 with the signing of a letter of intent. The Company sold substantially all
of the assets of Harding for a cash purchase price of $31.4 million plus the
assumption by the buyer of certain liabilities aggregating $12.5 million,
subject to certain post-closing adjustments. Proceeds from the sale of Harding
were used to repay the Company's outstanding debt. Harding sales aggregated
$28.0 million from January 1, 2000 through April 12, 2000, and $118.3 million
for the year ended December 31, 1999.
In December 1999, the Board of Directors approved a plan to dispose of the
Company's Harding business. Since December 1999, Harding has been accounted for
as a discontinued operation and, accordingly, its results of operations were
segregated from results of the Company's ongoing businesses including
restatement of prior periods presented.
In 1999, the Company recorded a loss of $2.2 million after-tax from Harding's
operations and an estimated loss on its expected disposal of $23.8 million or
$3.53 per common share unadjusted for any potential future tax benefits. For the
six months ended June 30, 2000, the Company recorded an additional loss on
disposal of the discontinued Harding segment of $4.5 million, less an income tax
benefit of $6.9 million, resulting in income from discontinued operations of
$2.4 million or $.34 per common share. Through June 30, 2000, the Company has
recorded a loss on the discontinued Harding segment of $21.5 million in the
aggregate or $3.14 per common share, net of tax benefits.
Page 17 of 27
(a) Includes sales, gross profit and EBITDA from Axxess Technologies, Inc.
which was acquired on April 7, 2000 through a stock merger transaction.
(b) Includes remaining Integrated Supply business in the U.S. as a result of
customer relationships with the Technology Services Group.
(c) Represents sales, gross profit and EBITDA from the Company's Kar Products,
Inc. and A & H Bolt & Nut Company Limited business (collectively, the
"Expediter Segment") which was contributed on March 2, 2000 to a newly
formed partnership affiliated with Glencoe Capital L.L.C.
(d) Represents sales, gross profit and EBITDA from the OEM Fastener Business,
which was sold on July 1, 1999 and contracts terminated in 1999 and 2000.
(e) Represents Equity in Earnings from the Contributed Expediter Segment since
March 2, 2000.
(f) "EBITDA" (earnings before interest, taxes, depreciation and amortization)
is defined as income (loss) from ongoing operations before depreciation and
amortization.
Page 18 of 27
Three Months Ended June 30, 2000 and 1999
Net sales from ongoing operations increased $17.5 million or 15.9% in the second
quarter of 2000 to $127.5 million from $110.0 million in 1999. Sales variances
by business segment are as follows:
Sales Increase (Decrease)
-------------------------
Amount %
------ ---
(In thousands)
Hillman Group $ 21,460 52.0 %
Technology Services (4,550) (6.9)%
Integrated Supply - Mexico 544 17.5 %
---------
Total Company - Ongoing Operations $ 17,454 15.9 %
=========
Hillman's sales increased $21.5 million or 52.0% in the second quarter of 2000
to $62.7 million from $41.2 million in the second quarter of 1999 primarily as a
result of the acquisition of Axxess. Technology Services' sales decreased $4.6
million or 6.9% in the second quarter of 2000 to $61.1 million from $65.7
million in 1999 as a result primarily of the restructuring of its sales force in
early 1999. Integrated Supply-Mexico sales increased $0.5 million in the second
quarter of 2000 from $3.1 million in the same period of 1999 as a result of the
addition of a new contract since June 30, 1999.
The Company's sales backlog on a consolidated basis from ongoing operations was
$52.8 million as of June 30, 2000, compared with $50.6 million at December 31,
1999, representing an increase of 4.3%.
The Company's consolidated gross margin from ongoing operations was 39.6% in the
second quarter of 2000 compared with 34.9% in the second quarter of 1999 before
the inventory write-down related to restructuring of $2.1 million and other
inventory charges related to integration of the Technology Services divisions of
$2.5 million. On a comparable basis, excluding Axxess, the consolidated gross
margin from ongoing operations was 35.6% for the three months ended June 30,
2000. Hillman's gross margin improved 3.5% in the comparison period as a result
of higher margin sales of keys and identification items related to the
acquisition of Axxess. Technology Services' gross margin was 23.8% in the second
quarter of 2000 compared with 24.3% before the aforementioned charges in the
second quarter of 1999 primarily as a result of a change in sales mix. The
Integrated Supply-Mexico segment's gross margin decreased 4.0% in the second
quarter of 2000 resulting mainly from increased activity from lower margin
customer contracts.
The Company's selling, general and administrative expenses ("S,G&A") from
ongoing operations on a comparable basis (excluding Axxess, restructuring
charges of $8.1 million and non-recurring charges related to integration of the
Technology Services business of $1.9 million)decreased $3.6 million from $38.1
million in the second quarter of 1999 to $34.5 million in the second quarter of
2000. Selling expenses on a comparable basis, excluding Axxess, decreased $1.5
million primarily as a result of reduced sales commissions at the existing
Hillman business and cost savings at STS associated with the June 1999
restructuring plan. Warehouse and delivery expenses on a comparable basis,
excluding Axxess, increased $0.5 million as a result primarily of facility
reorganization costs at STS. General and administrative expenses on a comparable
basis, excluding Axxess, decreased by $2.6 million as a result of headcount
reductions associated with the June 1999 restructuring plan at STS and reduced
corporate overhead expenses.
Page 19 of 27
Total S,G&A expenses from ongoing operations on a comparable basis excluding
Axxess as a percentage of sales compared with the second quarter 1999 are as
follows:
Three Months ended June 30,
As of a % of Sales 2000 1999
------------------ ---- ----
Selling Expenses 17.2% 18.0%
Warehouse and Delivery Expenses 7.4% 6.7%
General and Administrative Expenses 7.8% 9.9%
----- -----
Total S,G&A Expenses 32.4% 34.6%
====== =====
EBITDA from ongoing operations after corporate expenses for the second quarter
of 2000 was $9.3 million compared with $0.3 million excluding restructuring
charges of $10.2 million, and other non-recurring charges related to the
integration of STS of $4.4 million.
The Company's consolidated operating profit margin (EBITDA as a percentage of
sales) after corporate expenses increased to 7.3% in the second quarter of 2000
compared with 0.3% in the second quarter of 1999 (excluding the non-recurring
charges noted above). Hillman's operating profit margin increased to 16.4% in
the second quarter of 2000 compared with 10.9% primarily as a result of the
acquisition of Axxess and operational efficiencies. STS' operating profit margin
increased to 0.3% compared with an operating loss of 2.2% before the
aforementioned charges in the second quarter of 1999 as a result of cost savings
associated with the June 1999 restructuring plan. Integrated Supply-Mexico
segment's operating profit margin decreased to 0.6% from 3.2% as a result of
deceased profit margins associated with new customer contracts.
Depreciation expense for ongoing operations increased $1.7 million to $2.6
million in the second quarter of 2000 from $0.9 million in the same quarter of
1999 primarily as a result of the acquisition of Axxess.
Amortization expenses for ongoing operations increased $0.7 million to $1.0
million as a result of the acquisition of Axxess.
Interest expense, net increased $0.7 million in the second quarter of 2000 from
$2.3 million in the second quarter of 1999 due primarily to the acquisition of
Axxess, an increase in interest rates since the second quarter of 1999 and
amortization of deferred financing fees related to the Company's December 1999
debt refinancing.
The Company pays interest to the Trust on the Junior Subordinated Debentures
underlying the Trust Preferred Securities at the rate of 11.6% per annum on
their face amount of $105.4 million, or $12.2 million per annum in the
aggregate. The Trust distributes an equivalent amount to the holders of the
Trust Preferred Securities. For the three months ended June 30, 2000 and 1999,
the Company paid $3.1 million in interest on the Junior Subordinated Debentures,
equivalent to the amounts distributed by the Trust on the Trust Preferred
Securities.
The Company is subject to federal, state and local income taxes on its domestic
operations and foreign income taxes on its Canadian and Mexican operations as
accounted for in accordance with Statement of Financial Accounting Standard
("SFAS") 109, "Accounting for Income Taxes". Deferred income taxes represent
differences between the financial statement and tax bases of assets and
liabilities as classified on the Company's balance sheet. The Company recorded a
provision for income taxes of $0.1 million on a loss before provision for income
taxes of $0.4 million in the second quarter of 2000 primarily as a result of
non-deductible items related to the acquisition of Axxess. The effective income
tax rate in the 1999 comparison period was 39.6%.
Page 20 of 27
Six Months Ended June 30, 2000 and 1999
Net sales from ongoing operations increased $9.2 million or 4.2% in the first
six months of 2000 to $226.9 million from $217.7 million in 1999. Sales
variances by business segment are as follows:
Sales Increase (Decrease)
-------------------------
Amount %
------ ---
(In thousands)
Hillman Group $ 21,126 27.4 %
Technology Services (13,902) (10.3)%
Integrated Supply - Mexico 1,998 34.0 %
---------
Total Company - Ongoing Operations $ 9,222 4.2 %
=========
Hillman's sales increased $21.1 million or 27.4% in the first half of 2000 to
$98.3 million from $77.2 million in the first half of 1999 primarily due to the
acquisition of Axxess. Technology Services' sales decreased $13.9 million or
10.3% in the first six months of 2000 to $120.8 million from $134.7 million in
1999 as a result primarily of the restructuring of its sales force in early
1999. Integrated Supply-Mexico sales increased $2.0 million in the first half of
2000 from $5.9 million in the same period of 1999 as a result of the addition of
one new contract since June 30, 1999.
The Company's consolidated gross margin from ongoing operations was 37.6% in the
first half of 2000 compared with 35.2% in the first half of 1999 before the
inventory write-down related to restructuring of $2.1 million and charges
related to integration of the Technology Services divisions of $2.8 million. On
a comparable basis, excluding Axxess, the consolidated gross margin from ongoing
operations was 35.2% for the six months ended June 30, 2000. Hillman's gross
margin increased 2.7% in the comparison period as a result of higher margin
sales of keys, and identification items related to the acquisition of Axxess.
Technology Services' gross margin was 24.1% in the first half of 2000 compared
with 25.6% in the first half of 1999 before the aforementioned charges primarily
as a result of a change in sales mix. The Integrated Supply - Mexico segment's
gross margin decreased 1.9% in the first half of 2000 resulting mainly from
increased activity from lower-margin customer contracts.
The Company's S,G&A expenses from ongoing operations on a comparable basis
(excluding Axxess, restructuring charges of $8.1 million and non-recurring
charges related to integration of the Technology Services business of $2.6
million) decreased $4.5 million from $72.3 million to $67.8 million for the six
months ended June 30, 2000. Selling expenses on a comparable basis, excluding
Axxess, decreased by $2.2 million primarily as a result of cost savings at STS
associated with the June 1999 restructuring plan. Warehouse and delivery
expenses increased $1.0 million as a result primarily of facility reorganization
costs at STS. General and administrative expenses on a comparable basis
excluding Axxess decreased by $3.3 million as a result of headcount reductions
associated with the June 1999 restructuring plan at STS and reduced corporate
overhead expenses.
Total S,G&A expenses from ongoing operations on a comparable basis excluding
Axxess as a percentage of sales compared with the first half 1999 are as
follows:
Six Months ended June 30,
As of a % of Sales 2000 1999
------------------ ---- ----
Selling Expenses 17.5% 17.5%
Warehouse and Delivery Expenses 7.5% 6.6%
General and Administrative Expenses 8.0% 9.1%
----- -----
Total S,G&A Expenses 33.0% 33.2%
====== =====
Page 21 of 27
EBITDA from ongoing operations after corporate expenses for the first six months
of 2000 was $11.2 million compared with $4.4 million excluding restructuring
charges of $10.2 million and the aforementioned charges related to the
integration of STS of $5.4 million.
The Company's consolidated operating profit margin (EBITDA as a percentage of
sales) after corporate expenses increased to 4.9% in the first half of 2000
compared with 2.0% in the first half of 1999, excluding the aforementioned non-
recurring charges. Hillman's operating profit margin increased to 14.0% in the
first half of 2000 compared with 10.2% in the first half of 1999 primarily as a
result of the acquisition of Axxess and operational efficiencies. STS' operating
profit margin was breakeven in the first six months of 2000 compared with 0.9%
before the aforementioned charges in the first half of 1999 resulting from
integration and consolidation activities in the STS operation. Integrated
Supply- Mexico segment's operating profit margin increased to 2.3% from 2.0% as
a result of increased sales from a new account.
Depreciation expense for ongoing operations increased $1.6 million to $3.4
million in the first half of 2000 from $1.8 million in the same period of 1999
primarily as a result of the acquisition of Axxess.
Amortization expenses for ongoing operations increased $0.7 million to $1.3
million as a result of the acquisition of Axxess.
Interest expense, net increased $1.1 million in the first half of 2000 from $4.4
million in the first half of 1999 due primarily to the acquisition of Axxess, an
increase in interest rates since the first half of 1999 and amortization of
deferred financing fees related to the Company's December 1999 debt refinancing.
For the six months ended June 30, 2000 and 1999, the Company paid $6.1 million
in interest on the Junior Subordinated Debentures, equivalent to the amounts
distributed by the Trust on the Trust Preferred Securities.
The Company's effective income tax rate was 11.5% in the first half of 2000 due
primarily to a significant portion of the gain from the contribution of Kar
being non-taxable as a result of the Company's remaining 49% ownership in G-C,
offset by non-deductible items related to the acquisition of Axxess. For the
first half of 1999, the Company recorded a benefit for income taxes of $5.6
million or 39.3% of the pre-tax loss of $14.3 million.
Liquidity and Capital Resources
The Company's cash position of $2.0 million as of June 30, 2000, decreased $3.2
million from the balance at December 31, 1999. Cash was provided during this
period primarily from proceeds from the Kar and Harding transactions previously
discussed ($105.0 million and $31.4 million, respectively). Cash was used during
this period predominantly for the acquisition of Axxess Technologies ($87.0
million), repayments under the bank credit agreement ($29.9 million), repayment
of a portion of the subordinated notes issued in conjunction with the
Acquisition of Axxess ($9.6 million), working capital investments in operations
($6.5 million), capital expenditures ($3.6 million), and other disbursements,
net ($3.0 million).
The Company's net interest coverage ratio from continuing operations for the
first six months ended June 30, 2000 including Kar for the first two months of
the year declined to .78X (earnings before interest, distributions on trust
preferred securities and income taxes, excluding non-recurring events, over net
interest expense and distributions on trust preferred securities), from 1.23X in
the 1999 comparison period as a result of reduced earnings and increased
interest expense.
Page 22 of 27
The Company's working capital position of $88.3 million at June 30, 2000,
represents a decrease of $47.3 million from the December 31, 1999 level of
$135.6 million as a result of the Kar and Harding transactions, offset by the
Axxess acquisition and working capital reinvestments. The Company's current
ratio decreased to 2.04x at June 30, 2000 from 2.56x at December 31, 1999.
On March 2, 2000, SunSource contributed the interests in the Company's Kar
Products subsidiary including its Canadian operation, to a newly formed
partnership affiliated with Glencoe as previously mentioned. The Company
received $105 million in cash proceeds from the transaction which were used to
reduce the bank revolver borrowings. The Company also recorded a pre-tax gain of
$49.1 million which has restored the Company's stockholders' equity to a
significant positive position of $27.4 million at June 30, 2000, or $3.99 per
common share, from its deficit balance of $17.2 million at December 31, 1999. In
addition, SunSource's remaining investment in Kar of 49% allows the Company to
participate in the capital appreciation of Kar in the future with Glencoe.
On April 7, 2000, the Company completed the acquisition of Axxess for a purchase
price of $110.0 million composed of $87.0 million in cash and $23.0 million in
subordinated notes. In connection with the sale of Harding on April 13, 2000,
the Company repaid $9.6 million of these subordinated notes leaving a balance of
$13.4 million, as follows: 1) a $2.4 million 15% note due April 7, 2001 and 2)
an $11.0 million note which is payable in seven equal quarterly installments
commencing the earlier of i) the first calendar quarter after payment in full of
the term loan provided by the Company's senior lenders (the "Term Loan") or ii)
March 31, 2004. Interest on the $11.0 million subordinated note ranges from
prime plus 1% to prime plus 5% with a maximum rate at any time of 15%. Interest
is payable upon maturity of the subordinated notes.
The Company further strengthened its financial position upon consummation of the
sale of the Harding Glass business on April 13, 2000. The Company sold
substantially all of the assets of Harding for a cash purchase price of
approximately $31.4 million plus the assumption of certain liabilities
aggregating $12.5 million by the buyer, subject to certain post-closing
adjustments. Proceeds from the sale of Harding were used by the Company as
follows: 1) a repayment of bank revolver borrowings of $15.8 million
(representing primarily Harding's collateral in the borrowing base), 2) a
principal repayment of the Term Loan of $4.0 million, 3) a repayment of certain
Axxess subordinated notes in the amount of $9.6 million, and 4) a cash reserve
of $2.0 million to support the issuance of a stand by letter of credit in the
same amount provided to the purchaser of Harding.
As of June 30, 2000, the Company had $13.9 million available under its senior
secured credit facilities. The Company had approximately $96.3 million of
outstanding debt at June 30, 2000, consisting of a $17.5 million senior secured
term loan currently at 9.5%, bank revolver borrowings totaling $76.9 million at
an effective interest rate of 9.5%, and capitalized lease obligations of $1.9
million at various interest rates.
As of June 30, 2000, the Company's senior debt (including distributions payable)
as a percentage of its consolidated capitalization (total debt, trust preferred
securities and stockholders' equity) was approximately 38.2% compared with 56.6%
at December 31, 1999 and 52.4% as of June 30, 1999. The Company's consolidated
capitalization (including distributions payable) as of June 30, 2000, was
approximately $252.6 million compared to $225.7 million at December 31, 1999 and
$266.4 million at June 30, 1999.
On December 15, 1999, the Company refinanced its $90 million bank revolver and
$60 million senior notes with $155 million in senior secured credit facilities.
As a result of the Kar transaction on March 2, 2000 and the acquisition of
Axxess on April 7, 2000, the Company reduced the revolving credit portion of the
facility from $130 million to $115 million. The senior secured credit facilities
expire on December 14, 2004 and provide SunSource with adequate funds for
working capital and other corporate requirements.
Page 23 of 27
The Company has spent $3.0 million and $3.6 million, respectively, for capital
expenditures for the three and six months ended June 30, 2000, primarily for
warehouse improvements, machinery and equipment, and computer hardware and
software. The Company expects to spend an additional $5.7 million by December
31, 2000, for a total of $9.3 million in 2000 including $4.6 million for Axxess.
The total anticipated spending of $9.3 million in 2000 represents an increase of
$4.5 million compared to total year 1999 as a result of the acquisition of
Axxess.
On June 30, 1999, the Board of Directors of the Company suspended indefinitely
the quarterly cash dividend of $.10 per common share.
On August 6, 1998, the Company's Board of Directors authorized $15.0 million for
management to repurchase up to 10% of the Company's outstanding common shares
through open market transactions and private block trades dependent upon market
conditions. The Company subsequently suspended the repurchase program on March
16, 1999. The Company has acquired and placed into treasury 479,100 common
shares through June 30, 2000, at an average cost of $18.17 per common share.
The Company has deferred tax assets aggregating $14.2 million as of June 30,
2000, as determined in accordance with SFAS 109. Management believes that the
Company's deferred tax assets will be realized through the reversal of existing
temporary differences between the financial statement and tax bases, as well as
through future taxable income.
Year 2000 Issue
All of the Company's operating segments successfully met the Year 2000
compliance requirement for proprietary and purchased software, and machinery and
equipment utilized in the daily business process. In addition, the Company's
suppliers or customers did not experience any material Year 2000
compliance-related problems of which the Company is aware.
All operating divisions continued to monitor their non-critical processing
software to ensure that all non-critical programs have been successfully
executed through the second quarter of 2000.
The Company's established Year 2000 compliance budget of $1.7 million, funded
from operating cash flows, was adequate. In addition, the Company has not
incurred any significant expenses related to the Year 2000 compliance issue
during the first half of 2000.
Inflation
Inflation in recent years has had a modest impact on the operations of the
Company. Continued inflation, over a period of years at higher than current
rates, would result in significant increases in inventory costs and operating
expenses. However, such higher cost of sales and operating expenses can
generally be offset by increases in selling prices, although the ability of the
Company's operating divisions to raise prices is dependent on competitive market
conditions.
Page 24 of 27
Forward Looking Statements
Certain disclosures related to acquisitions and divestitures, refinancing and
capital expenditures contained in this report involve risks and uncertainties
and may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. We have based these forward-looking
statements on our current expectations, assumptions and projections about future
events. These forward-looking statements are subject to known and unknown risks,
uncertainties and assumptions that may cause our actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Actual results could differ
materially from those currently anticipated as a result of a number of factors,
including the risks and uncertainties discussed under captions "Risk Factors" -
Restructuring, Risks Associated with Acquisitions and the New York Stock
Exchange Listing set forth in Item 1 of the Company's Annual Report on Form 10-K
for the year ended December 31, 1999. Given these uncertainties, current or
prospective investors are cautioned not to place undue reliance on any such
forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "could," "would," "expect," "plan," "anticipate,"
"believe," "estimate," "continue" or the negative of such terms or other similar
expressions. All forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements included in this Report. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this Report might not
occur.
Page 25 of 27
PART II
OTHER INFORMATION
Items 1 - 5 - None
Item 6 - Exhibits and Reports on Form 8-K
A Current Report on Form 8-K was filed on March 17, 2000 reporting a disposition
under Item 2 of Form 8-K.
A Current Report on Form 8-K was filed on April 24, 2000 reporting an
acquisition and a disposition under Item 2 of Form 8-K.
A Current Report on Amendment No. 1 to Form 8-K originally filed on April 24,
2000 was filed on May 11, 2000, under Item 7 of Form 8-A including the December
31, 1999 audited financial statements of Axxess Technologies, Inc.
Page 26 of 27
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 INC.
/s/ Joseph M. Corvino /s/ Edward L. Tofani
- -------------------------- ---------------------------
Joseph M. Corvino Edward L. Tofani
Vice President - Finance Controller
(Chief Financial Officer) (Chief Accounting Officer)
DATE: August 14, 2000
Page 27 of 27