-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TUfsoSkwyx0oIdY7qyuITcU0tfilZPNK26DBGN3D+vLzWXvyyaDrpiKZVLJdKGOv auKjxwNefA6bacA2UInTiw== 0000806027-96-000023.txt : 19961118 0000806027-96-000023.hdr.sgml : 19961118 ACCESSION NUMBER: 0000806027-96-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVICEMASTER LTD PARTNERSHIP CENTRAL INDEX KEY: 0000806027 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT SERVICES [8741] IRS NUMBER: 363497008 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09378 FILM NUMBER: 96666149 BUSINESS ADDRESS: STREET 1: ONE SERVICEMASTER WAY CITY: DOWNERS GROVE STATE: IL ZIP: 60515 BUSINESS PHONE: 7089641300 10-Q 1 THIRD QUARTER 1996 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q __x__ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 ------------------ _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 1-9378 SERVICEMASTER LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Delaware 36-3497008 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) One ServiceMaster Way, Downers Grove, Illinois 60515 (Address of principal executive offices) (Zip Code) 630-271-1300 (Registrant's telephone number, including area code) 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 . Indicate the number of shares outstanding of each of the issuer's classes of shares: 142,121,103 shares on November 12, 1996 (this figure reflects the three-for-two share split declared May 3, 1996 and paid to shareholders of record as of June 10, 1996). This document consists of 12 pages, including the cover page. TABLE OF CONTENTS Page No. ---- SERVICEMASTER LIMITED PARTNERSHIP (Registrant) - Part I. Financial Information - ------------------------------ Consolidated Statements of Income for the three months and the nine months ended September 30, 1996 and September 30, 1995 2 Consolidated Statements of Financial Position as of September 30, 1996 and December 31, 1995 3 Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and September 30, 1995 4 Notes to Consolidated Financial Statements 5 Management Discussion and Analysis of Financial Position and Results of Operations 6 Part II. Other Information - -------- ----------------- Exhibit 11 - Exhibit Regarding Detail of Income Per Share Computation 10 Signature 11 1
PART I. FINANCIAL INFORMATION SERVICEMASTER LIMITED PARTNERSHIP Consolidated Statements of Income (In thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ---- ---- ---- ---- Operating Revenue................................$ 927,227 $ 854,383 $ 2,584,457 $ 2,414,938 Operating Costs and Expenses: Cost of services rendered and products sold.............................. 708,100 654,699 2,001,709 1,881,068 Selling and administrative expenses.............. 137,094 130,513 367,470 346,909 -------- --------- ---------- ---------- Total operating costs and expenses............... 845,194 785,212 2,369,179 2,227,977 -------- --------- ---------- ---------- Operating Income................................. 82,033 69,171 215,278 186,961 Non-operating Expense (Income): Interest expense................................. 9,836 8,788 28,658 27,182 Interest and investment income................... (2,335) (2,044) (7,465) (5,546) Minority interest*............................... 3,623 12,785 8,221 34,895 -------- --------- ---------- ---------- Income before Income Taxes....................... 70,909 49,642 185,864 130,430 Provision for income taxes....................... 2,109 1,892 5,287 3,640 -------- --------- ---------- ---------- Net Income.......................................$ 68,800 $ 47,750 $ 180,577 $ 126,790 ======== ========= ============ ========== Net Income Per Share.............................$ .48 $ .40 $ 1.25 $ 1.07 ======== ========= ============ ========== Cash Distributions Per Share.....................$ .17 $ .16 $ .49 $ .47 1/3 ======== ========= ============ ========== Net income per share is based on 144,492 shares and 119,390 shares outstanding for the three months ended September 30, 1996 and 1995, respectively, and 144,529 shares and 118,973 shares outstanding for the nine months ended September 30, 1996 and 1995, respectively. All share and per share data have been restated to reflect the three-for-two share split declared May 3, 1996 and paid to shareholders of record as of June 10, 1996. * Includes General Partners' interest of $1,395 and $971 for the three months ended September 30, 1996 and 1995, respectively, and $3,666 and $2,574 for the nine months ended September 30, 1996 and 1995, respectively. See Notes to Consolidated Financial Statements
2
SERVICEMASTER LIMITED PARTNERSHIP Consolidated Statements of Financial Position (In thousands) As of September 30, December 31, Assets 1996 1995 ------------ ------------- Current Assets: Cash and marketable securities, including cash and cash equivalents of $46,147 and $23,113, respectively............. $ 85,980 $ 49,429 Accounts and notes receivable, less allowances of $27,158 and $20,468, respectively......................................... 283,508 243,649 Inventories.......................................................... 44,449 40,583 Prepaid expenses and other assets.................................... 78,937 59,578 ------------ ------------- Total current assets............................................. 492,874 393,239 ------------ ------------- Property and Equipment: At cost........................................................... 321,134 292,283 Less: accumulated depreciation.................................... 169,186 146,431 ------------ ------------- Net property and equipment....................................... 151,948 145,852 ------------ ------------- Intangible assets, primarily trade names and goodwill, net of accumulated amortization of $162,101 and $133,275, respectively........................................ 1,070,839 1,021,050 Notes receivable, long-term securities, and other assets............. 112,775 89,749 ------------ ------------- Total assets.....................................................$ 1,828,436 $ 1,649,890 ============ ============= Liabilities And Shareholders' Equity Current Liabilities: Accounts payable.....................................................$ 56,221 $ 50,456 Accrued liabilities.................................................. 209,370 193,799 Deferred revenues.................................................... 122,298 115,244 Current portion of long-term obligations............................. 14,360 13,431 ------------ ------------- Total current liabilities........................................ 402,249 372,930 ------------ ------------- Long-Term Debt....................................................... 501,140 411,903 Other Long-Term Obligations.......................................... 123,300 105,700 Commitments and Contingencies ....................................... Minority and General Partners' Interest includes General Partners' interest of $1,775 in 1996 and $1,392 in 1995................................. 15,226 12,697 Shareholders' Equity................................................. 786,521 746,660 ------------ ------------- Total liabilities and shareholders' equity.......................$ 1,828,436 $ 1,649,890 ============ ============= See Notes to Consolidated Financial Statements
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SERVICEMASTER LIMITED PARTNERSHIP Consolidated Statements of Cash Flows (In thousands) Nine Months Ended September 30, 1996 1995 ------------ ------------- Cash and Cash Equivalents at January 1................................ $ 23,113 $ 14,333 Cash Flows from Operations: Net Income............................................................ 180,577 126,790 Adjustments to reconcile net income to net cash flows from operations: Depreciation................................................... 30,613 27,985 Amortization................................................... 28,826 21,209 Change in working capital, net of acquisitions: Receivables.................................................. (40,273) (58,512) Inventories and other current assets......................... (24,000) (14,238) Accounts payable............................................. 3,541 8,658 Deferred revenues............................................ 1,893 6,448 Accrued liabilities.......................................... 23,872 19,712 Minority interest and other, net............................... 3,339 33,748 ------------ ------------- Net Cash Provided from Operations..................................... 208,388 171,800 ------------ ------------- Cash Flows from Investing Activities: Business acquisitions, net of cash acquired....................... (40,550) (24,676) Property additions................................................ (33,795) (35,505) Net purchases of securities....................................... (17,218) (5,679) Notes receivable and financial investments........................ (6,631) (16,371) Proceeds from sale of businesses.................................. 4,526 20,057 Payments to sellers of acquired businesses........................ (2,307) (2,175) Sale of equipment and other assets .............................. 1,399 1,759 ------------ ------------- Net Cash Used for Investing Activities............................ (94,576) (62,590) ------------ ------------- Cash Flows from Financing Activities: Short-term borrowings, net........................................ 129,573 101,364 Distributions to shareholders and shareholders' trust............. (107,930) (88,104) Purchase of treasury shares....................................... (60,093) (37,988) Payments of borrowings and other obligations...................... (53,975) (52,958) Proceeds from employee share option plans......................... 3,974 3,106 Distributions to holders of minority interests.................... (3,025) (22,573) Other............................................................. 698 274 ------------ ------------- Net Cash Used for Financing Activities................................ (90,778) (96,879) ------------ ------------- Cash Increase during the Period....................................... 23,034 12,331 ------------ ------------- Cash and Cash Equivalents at September 30............................. $ 46,147 $ 26,664 ============ ============= See Notes to Consolidated Financial Statements
4 SERVICEMASTER LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: The consolidated financial statements include the accounts of the Partnership and its significant subsidiaries, collectively referred to as "the Partnership". Intercompany transactions and balances have been eliminated in consolidation. Note 2: The consolidated financial statements included herein have been prepared by the Partnership pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, the Partnership believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Partnership's latest Annual Report to shareholders and the Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 1995. In the opinion of the Partnership, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the financial position of ServiceMaster Limited Partnership as of September 30, 1996 and December 31, 1995, and the results of operations for the three month and nine month periods ended September 30, 1996 and 1995, and the cash flows for the nine months ended September 30, 1996 and 1995, have been included. The results of operations for any interim period are not necessarily indicative of the results which might be obtained for a full year. Note 3: For interim accounting purposes, certain costs directly associated with the generation of lawn care revenues are initially deferred and recognized as expense as the related revenues are recognized. All such costs are fully recognized within the fiscal year in which they are incurred. Note 4: On May 3, 1996, the Partnership's Board of Directors declared a three-for-two share split effective June 24, 1996, for shareholders of record on June 10, 1996. All share and per share data have been restated for all periods presented to reflect this three-for-two split. Note 5: In the Consolidated Statements of Cash Flows, the caption Cash and Cash Equivalents includes investments in short-term, highly-liquid securities having a maturity of three months or less. Supplemental information relating to the Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995 is presented in the following table. The increase in interest paid in 1996 from 1995 is primarily due to increased debt balances. (In thousands) 1996 1995 ------- ------- Cash paid or received for: - ------------------------- Interest expense............................................. $ 24,295 $ 23,556 Interest and investment income............................... $ 5,640 $ 5,099 5 SERVICEMASTER LIMITED PARTNERSHIP MANAGEMENT DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS THIRD QUARTER 1996 COMPARED TO THIRD QUARTER 1995 - ------------------------------------------------- Revenues increased to $927 million in the third quarter of 1996, a 9% overall increase, reflecting growth in all segments, with more rapid increases in the Partnership's higher margin segments. Net income was $68.8 million, a 44% increase over one year ago while net income per share grew 20% to $.48. Net income and earnings per share both include the effects of the December 1995 acquisition of the then-outstanding minority ownership interest in Consumer Services, which eliminated the 28% minority interest expense in Consumer Services' earnings and increased the number of shares outstanding by approximately 27 million (on a post split basis). Operating income increased 19%, to $82 million, while operating income margins increased 70 basis points to 8.8% of revenue from 8.1% last year, reflecting the continued rapid growth of higher margin business units and the favorable effects of overhead leveraging throughout the enterprise. The Consumer Services business unit achieved a 15% increase in revenues and stronger double digit growth in profits. TruGreen-ChemLawn achieved strong revenue and profit growth, reflecting increased residential production and excellent growth in commercial revenues. Full program residential and commercial customer counts exceeded corresponding prior year totals despite unfavorable weather conditions which adversely affected marketing efforts earlier in the year. Terminix achieved solid growth in revenues, with strong increases in pest control contracts and termite completions. Profits increased at a more modest pace due to changes in sales mix and higher selling and production costs. American Home Shield achieved very strong growth in both revenues and profits due to increases in warranty contracts written as well as improvements in the contract renewal rate. The Merry Maids and ServiceMaster Residential and Commercial operations also achieved strong increases in revenues and profits as a result of growth from existing franchises, as well as the expansion of company-owned operations. The Management Services business segment achieved a sharp improvement in profits due to the combined effects of a 2% increase in revenues, strong cost controls and the elimination of wind-down costs relating to the disposition of the education food business that was sold in 1995. The Healthcare business, which primarily serves the acute sector of the health care market, recorded profits that were consistent with the prior year level. Strong cost controls offset a modest decline in revenues, reflecting continuing competitive pressures and industry consolidation. Revenues in the Education market showed a strong increase, resulting from improvements in sales and customer retention. Profits increased at a more modest pace due to lower margins on a higher mix of large school district contracts. The Business & Industry unit achieved strong growth in revenues and profits. Diversified Health Services, which provides services to the long term care sector of the health care market, continued to achieve excellent growth in revenues and profits, with strong growth in the units' core business, which consists of the contract management of nursing homes, skilled nursing and assisted living facilities. The International operations also achieved increases in revenue and profits, led by strong growth in fees from licensed partners in Japan and the Pacific Rim. 6 On a consolidated basis, cost of services rendered and products sold increased 8.2% due to general business growth, but decreased as a percentage of revenue from 76.6% in 1995 to 76.4% in 1996. This decrease primarily reflects the changing mix of the business as Consumer Services increases in size in relationship to the overall business of the Partnership. The Consumer Services business units generally operate at higher gross profit levels than the other major business units but also incur somewhat higher selling and administrative expenses. Consolidated selling and administrative expenses increased due to general business growth but decreased as a percentage of revenue from 15.3% of revenue in 1995 to 14.8% in 1996. This decrease reflects improved efficiencies, cost controls and the leveraging of fixed costs throughout the enterprise. Interest expense increased over the prior year reflecting increased borrowings relating to acquisitions and share repurchases made throughout 1996. The decrease in minority interest expense primarily reflects the purchase of the Consumer Services minority interest from WMX Technologies, Inc., in December of 1995. The income tax provision has increased from the prior year primarily due to strong growth at American Home Shield (which is organized in corporate form and subject to taxes) and increases in certain state taxes. NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS - ------------------------------------------------------------- ENDED SEPTEMBER 30, 1995 - ------------------------ Revenues for the nine months were $2.6 billion, a 7% increase over 1995. Operating income increased 15%, to $215 million, while margins increased to 8.3% of revenue from 7.7% in 1995, reflecting the combined effects of the continued rapid growth of higher margin business units and the favorable effects of overhead leveraging throughout the enterprise. Net income was $181 million, a 42% increase, while earnings per share totalled $1.25, an increase of 17%. Results for the nine months include the effects of the December, 1995 transaction with WMX Technologies, Inc., which increased the number of shares outstanding by approximately 27 million (on a post split basis) and eliminated the 28% minority interest expense in Consumer Services' earnings. The Consumer Services business segment continued to achieve double-digit growth in revenues and profits. The TruGreen-ChemLawn operations had solid growth in revenues and profits despite late winter and damp spring weather throughout many parts of the country, which contrasted with generally mild conditions in the previous year. Continued growth in the residential customer base and strong commercial sales, combined with the favorable effects of new service initiatives, helped to offset these weather related adversities. Terminix achieved very good growth in revenues and profits as a result of increases in pest control revenues, termite completions and improvements in contract renewals and customer retention. American Home Shield had excellent growth in revenues and profits, with very strong increases in new contract sales and continuing improvements in contract renewals. The Merry Maids and Residential and Commercial operations both achieved strong growth in revenues and profits and continued their expansion of direct operations. The Management Services business segment recorded solid growth in profits for the first nine months, reflecting the elimination of losses incurred in 1995 7 prior to the sale of the education food service business as well as the ongoing benefit of strong cost controls and improved customer retention. Revenues from continuing operations increased slightly from the prior year as improvements in Education and Business and Industry offset the reductions in Healthcare. The Healthcare market achieved profits consistent with last year, as strong cost controls offset a modest decline in revenues, reflecting difficult industry conditions in the acute care sector of the market. The Education market experienced good revenue growth with increased sales and improved retention but profits declined slightly reflecting lower margins on contracts at larger facilities. The Business & Industry group achieved double-digit growth in revenues and profits. ServiceMaster Diversified Health Services continued to experience very significant growth in revenues and profits reflecting solid increases in management services and rehabilitation operations (which were started in 1995). The International operations also achieved significant increases in revenue and profits with continued growth in the customer base and strong sales from the European pest control businesses and continued improvements in royalty fees from existing licensees. On a consolidated basis, cost of services rendered and products sold increased 6.4% due to general business growth, but decreased as a percentage of revenue from 77.9% in 1995 to 77.5% in 1996. As noted for the quarter, this decrease primarily reflects the changing mix of the business as Consumer Services increases in size in relation to the overall business of the Partnership. Consolidated selling and administrative expenses increased 5.9% over prior year levels. As a percentage of revenue, selling and administrative expenses decreased from 14.4% in 1995 to 14.2% in 1996, reflecting the leveraging of fixed costs and improved productivity throughout the enterprise. Interest income increased over the prior year due to realized gains on the sale of marketable securities at American Home Shield in 1996, whereas small gains were realized in 1995. Minority interest expense decreased due to the purchase of the Consumer Services minority interest from WMX Technologies, Inc. in December of 1995. Income taxes increased from prior year reflecting strong growth in the American Home Shield and International operations. FINANCIAL POSITION - ------------------- Net cash provided from operations for the first nine months increased 21% to approximately $208 million. Due to seasonal factors, the Partnership has proportionately greater working capital needs for the first nine months of the year than for the year as a whole, with a corresponding impact on funds provided from operations. Management believes that funds generated from operations and other existing resources will continue to be adequate to satisfy the ongoing working capital needs of the Partnership. The increase in accounts and notes receivable over prior year levels reflects traditional seasonal buildups in the Consumer Services business and general business growth, partially offset by the collection of short term notes receivable from specific financing projects. The increase in inventories is a result of normal business growth. Prepaid expenses and other assets have increased from the prior year primarily due to strong growth at American Home Shield, where initial direct contract costs are capitalized and expensed over the life of the service contract. 8 Property and equipment increased slightly due to general business growth. The Partnership has no material capital commitments at this time. Notes receivable, long-term securities and other assets increased from year end reflecting larger investment balances at American Home Shield, and to a lesser degree, non-compete agreements entered into as part of recent acquisitions. Accounts payable and other liabilities increased from the prior year level due to general business growth and the effects of acquisitions. Deferred revenues increased primarily as a result of strong growth in warranty contracts written at American Home Shield. The Partnership completed a $125 million private placement of debt during the third quarter at an overall effective interest rate of 7.4%, with the proceeds used to refinance floating rate bank debt that was previously outstanding. The Partnership is a party to a number of long-term debt agreements which require it to maintain compliance with certain financial covenants, including limitations on indebtedness, restricted payments, fixed charge coverage ratios and net worth. The Partnership is in compliance with the covenants related to these debt agreements. Total shareholders' equity increased to $787 million in 1996 from $747 million at December 31, 1995, reflecting strong earnings offset in part by distributions and treasury share purchases. In December, 1995, the Board of Directors of the Partnership authorized the repurchase of up to $150 million of outstanding Partnership shares in the open market or in privately-negotiated transactions. As of September 30, 1996, approximately $89 million of the total amount authorized had not yet been expended. Cash distributions paid directly to shareholders totalled $70 million ($.49 per share) for the nine months ended September 30, 1996, in comparison to $56 million ($.47 1/3 per share) in 1995. This reflects the increase in the authorized payments per share announced last December (a 4% increase for the year as a whole) as well as the higher number of shares outstanding. Distributions of $36 million were also made to the shareholder trust. This increase was virtually offset by a reduction in distributions to minority interest holders, which resulted from the December 1995 repurchase of the minority ownership interest in the partnership's Consumer Services subsidiary. 9
Part II. OTHER INFORMATION SERVICEMASTER LIMITED PARTNERSHIP Exhibit 11 EXHIBIT REGARDING DETAIL OF INCOME PER SHARE COMPUTATION (In thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ---------- -------- --------- --------- Shares used for computing primary earnings per share-- Shares outstanding on weighted average basis...................................... 140,712 115,778 141,019 115,943 Equivalent shares-- Options and subscriptions outstanding.............. 3,780 3,612 3,510 3,030 ---------- --------- --------- --------- Weighted average and equivalent shares for primary calculation.......... 144,492 119,390 144,529 118,973 ========== ========= ========= ======== Primary earnings per share........................... $ .48 $ .40 $ 1.25 $ 1.07 ====== ====== ======= ====== Net income........................................... $ 68,800 $ 47,750 $ 180,577 $ 126,790 Interest on convertible debentures................... 465 479 1,403 1,429 ---------- --------- --------- ---------- Net income for fully diluted calculation............. $ 69,265 $ 48,229 $ 181,980 $ 128,219 ========== ========= ========== ========== Shares used for computing fully diluted earnings per share-- Shares outstanding................................... 144,792 119,481 145,099 119,646 Equivalent shares-- Shares issuable upon conversion of convertible debentures............................. 2,418 2,453 2,418 2,453 ---------- --------- --------- --------- Weighted average and equivalent shares for fully diluted calculation...................... 147,210 121,934 147,517 122,099 ========== ========= ======== ========= Fully diluted earnings per share..................... $ .47 $ .40 $ 1.23 $ 1.05 ===== ====== ====== ====== All share and per share data have been restated to reflect the three-for-two share split declared May 3, 1996 and paid to shareholders of record as of June 10, 1996.
10 SIGNATURE 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. Date: November 13, 1996 SERVICEMASTER LIMITED PARTNERSHIP (Registrant) By: /s/Ernest J. Mrozek ------------------------------ Ernest J. Mrozek Senior Vice President and Chief Financial Officer 11 EX-27 2 FDS NINE MONTHS 1996
5 1,000 9-mos DEC-31-1996 SEP-30-1996 46,147 39,833 310,666 27,158 44,449 492,874 321,134 169,186 1,828,436 402,249 501,140 0 0 0 786,521 1,828,436 0 2,584,457 0 2,001,709 367,470 0 28,658 185,864 5,287 180,577 0 0 0 180,577 1.25 1.23
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