<PAGE>
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 March 31, 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)
708-271-1300
(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: 141,791,403 shares on May 10, 1996 (this figure reflects the three-for-
two share split declared May 3, 1996 and payable to shareholders of record as
of June 10, 1996).
This document consists of 12 pages, including the cover page.
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TABLE OF CONTENTS
Page
No.
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SERVICEMASTER LIMITED PARTNERSHIP (Registrant) -
Part I. Financial Information
- ------- ---------------------
Consolidated Statements of Income for the
three months ended March 31, 1996 and March 31, 1995 2
Consolidated Statements of Financial Position
as of March 31, 1996 and December 31, 1995 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1996 and March 31, 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
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
SERVICEMASTER LIMITED PARTNERSHIP
Consolidated Statements of Income
(In thousands, except per share data)
Three Months Ended
March 31,
1996 1995
---------- ----------
<S> <C> <C>
Operating Revenue............................... $ 740,299 $ 707,764
Operating Costs and Expenses:
Cost of services rendered
and products sold............................. 598,183 574,306
Selling and administrative expenses............. 91,779 89,038
---------- ----------
Total operating costs and expenses.............. 689,962 663,344
---------- ----------
Operating Income................................ 50,337 44,420
Non-operating Expense (Income):
Interest expense................................ 8,918 8,902
Interest income................................. (2,679) (1,359)
Minority interest*.............................. 1,837 7,525
---------- ----------
Income before Income Taxes...................... 42,261 29,352
Provision for income taxes...................... 1,748 472
---------- ----------
Net Income...................................... $ 40,513 $ 28,880
========== ==========
Net Income Per Share............................ $ .28 $ .24
==== ====
Cash Distributions Per Share.................... $ .16 $ .15 1/3
==== ========
Net income per share is based on 145,495 shares and 118,476 shares for the three months ended
March 31, 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 payable to shareholders of record
as of June 10, 1996.
* Includes General Partners' interest of $818 and $587 for the three months ended March 31, 1996 and
1995, respectively.
See Notes to Consolidated Financial Statements
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<TABLE>
<CAPTION>
SERVICEMASTER LIMITED PARTNERSHIP
Consolidated Statements of Financial Position
(In thousands)
As of
March 31, December 31,
Assets 1996 1995
----------- -----------
<S> <C> <C>
Current Assets:
Cash and marketable securities, including cash and
cash equivalents of $22,252 and $23,113, respectively.... $ 49,581 $ 49,429
Accounts and notes receivable, less allowances of $20,124
and $20,468, respectively................................ 242,594 243,649
Inventories................................................. 47,268 40,583
Prepaid expenses and other assets........................... 125,970 59,578
----------- -----------
Total current assets...................................... 465,413 393,239
----------- -----------
Property and Equipment:
At cost.................................................. 304,004 292,283
Less: accumulated depreciation........................... 156,715 146,431
----------- -----------
Net property and equipment................................ 147,289 145,852
----------- -----------
Intangible assets, primarily trade names and goodwill,
net of accumulated amortization of $138,942
and $133,275, respectively............................... 1,046,619 1,021,050
Notes receivable, long-term securities, and other assets.... 94,013 89,749
----------- -----------
Total assets.............................................. $ 1,753,334 $ 1,649,890
=========== ===========
Liabilities And Shareholders' Equity
Current Liabilities:
Accounts payable............................................ $ 54,906 $ 50,456
Accrued liabilities......................................... 193,474 193,799
Deferred revenues........................................... 143,584 115,244
Current portion of long-term obligations.................... 11,963 13,431
---------- -----------
Total current liabilities................................. 403,927 372,930
---------- -----------
Long-Term Debt.............................................. 472,644 411,903
Other Long-Term Obligations................................. 121,454 105,700
Commitments and Contingencies...............................
Minority and General Partners' Interest
includes General Partners' interest of
$1,295 in 1996 and $1,392 in 1995........................ 12,513 12,697
Shareholders' Equity........................................ 742,796 746,660
---------- -----------
Total liabilities and shareholders' equity................ $ 1,753,334 $ 1,649,890
========== ===========
See Notes to Consolidated Financial Statements
</TABLE>
3
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<TABLE>
<CAPTION>
SERVICEMASTER LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
March 31,
1996 1995
---------- ----------
<S> <C> <C>
Cash and Cash Equivalents at January 1................ $ 23,113 $ 14,333
Cash Flows from Operations:
Net Income............................................ 40,513 28,880
Adjustments to reconcile net income
to net cash flows from operations:
Depreciation....................................... 9,552 8,991
Amortization....................................... 5,667 4,145
Change in working capital, net of acquisitions:
Receivables...................................... (4,697) (15,999)
Inventories and other current assets............. (71,216) (53,130)
Accounts payable................................. 2,847 2,197
Deferred revenues................................ 27,426 27,160
Accrued liabilities.............................. 5,841 7,531
Minority interest and other, net................... 4,958 6,138
--------- ----------
Net Cash Provided from Operations..................... 20,891 15,913
--------- ----------
Cash Flows from Investing Activities:
Business acquisitions, net of cash acquired......... (21,390) (13,980)
Property additions.................................. (9,859) (15,148)
Notes receivable and financial investments.......... 5,848 (16,507)
Net purchases of securities......................... (1,852) (920)
Payments to sellers of acquired businesses.......... (787) (643)
Sale of equipment and other assets.................. 389 540
Proceeds from sale of businesses.................... --- 9,938
--------- ----------
Net Cash Used for Investing Activities................ (27,651) (36,720)
--------- ----------
Cash Flows from Financing Activities:
Short-term borrowings, net.......................... 63,892 64,211
Purchase of treasury shares......................... (26,519) (14,244)
Distributions to shareholders and shareholders' trust (23,265) (26,924)
Distributions to holders of minority interests...... (2,178) (3,147)
Payments of borrowings and other obligations........ (7,851) (3,142)
Proceeds from employee share option plans........... 1,820 2,223
Other............................................... --- 145
---------- ----------
Net Cash Provided from Financing Activities........... 5,899 19,122
---------- ----------
Cash Decrease during the Period....................... (861) (1,685)
---------- ----------
Cash and Cash Equivalents at March 31................. $ 22,252 $ 12,648
========== ==========
See Notes to Consolidated Financial Statements
</TABLE>
4
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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 March 31, 1996 and December 31, 1995, and the results of operations
and cash flows for the three months ended March 31, 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 three months ended
March 31, 1996 and 1995 is presented in the following table. The increase
in interest paid in 1996 from 1995 is primarily due to higher revolving credit
balances in the first quarter of 1996, reflecting increased borrowings.
(In thousands)
1996 1995
Cash paid or received for: ------ ------
- --------------------------
Interest expense, net of amounts capitalized...... $ 6,657 $ 6,058
Interest and dividend income...................... $ 1,815 $ 1,539
5
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SERVICEMASTER LIMITED PARTNERSHIP
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
FIRST QUARTER 1996 COMPARED TO FIRST QUARTER 1995
- -------------------------------------------------
Revenues increased 5% over the first quarter of 1995 to $740.3 million. Net
income was $40.5 million, reflecting a 40.3% increase over one year ago
while net income per share was $.28, representing an increase of 16.7%.
Revenue growth was adversely impacted by the sale of the Education food
service business last year and the effects of prolonged winter weather in
1996. This compared unfavorably to the mild conditions in March of last
year and resulted in production delays in the seasonal lawn care and termite
control operations. The variations in net income and earnings per share both
include the effects of the December acquisition of WMX Technologies,
Inc.'s minority ownership interest in Consumer Services, which increased
the number of shares outstanding by 27 million (on a post split basis) and
eliminated the 28% minority interest expense in Consumer Services'
earnings. This transaction had a modest adverse effect on first quarter
earnings per share due to the seasonality of the Consumer Services
operations, but is expected to be non-dilutive for the year as a whole.
Operating income increased 13.3%, to $50.3 million while margins increased
to 6.8% of revenue (from 6.3% of revenue in 1995), reflecting growth in
higher margin business units, favorable effects of leveraging throughout the
enterprise and improved efficiencies in the Management Services business
unit.
The Consumer Services business unit achieved an 8 percent increase in
revenues, despite adverse weather conditions. This growth, combined with
good cost controls and improved productivity, led to a strong increase in net
income. Each of the five companies within Consumer Services achieved
increased profits. The TruGreen/ChemLawn operations experienced
encouraging response to their pre-season marketing programs, which will
primarily benefit revenues and profits in subsequent quarters when the services
are actually rendered. Their first quarter results reflected late winter
weather throughout many parts of the country, which contrasted to very mild
conditions in March of last year, and resulted in postponement of initial
service applications. Terminix achieved solid increases in revenues and
profits as a result of increases in pest control revenues, sharp improvements
in termite contract renewals and improved efficiencies. American Home
Shield achieved very strong growth in both revenues and profits, with sharp
increases in gross contracts written in California and other major home
resale markets, as well as continued improvements in the rate and magnitude
of contract renewals. The Merry Maids business also achieved double-digit
increases in revenues and profits as a result of growth in royalty fees from
existing franchisees and encouraging results from company-owned branches.
ServiceMaster Residential and Commercial achieved higher revenues and
profits, as increased franchise fees and company-owned distributorships
offset a decline in large disaster recovery projects.
6
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The Management Services business unit achieved a solid overall increase in
profits, reflecting the elimination of losses incurred in 1995 prior to the sale
of the education food service business, as well as the ongoing benefits of
strong cost controls and improved customer retention. Revenues and profits
from continuing service lines increased modestly. The health care market
achieved modest increases in profits, despite difficult industry conditions,
with improvements in customer retention. Profits in the education market
declined slightly, but the survey log of potential new business remains at
high levels. The business and industry group achieved excellent growth in
revenues and profits, particularly in the aviation and food processing
markets.
Diversified Health Services continued to experience strong growth in
revenues and profits, with sharp improvements in facilities managed, and
consulting and rehabilitation services.
The International operations also achieved excellent results, with solid
growth in revenues and profits from direct pest control operations in Europe,
as well as continued growth in royalty fees from existing licensees.
Cost of services rendered and products sold increased 4.2% due to general
business growth, but decreased as a percentage of revenue from 81.1% in
1995 to 80.8% 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.
Selling and administrative expenses increased 3.1% due to general business
growth, but decreased to 12.4% of revenue in 1996 from 12.6% in 1995.
This decrease as a percentage of revenue reflects improved efficiencies in
the Management Services business unit and the effects of cost controls and
the leveraging of fixed costs throughout the enterprise.
Interest income increased over the prior year primarily due to realized gains
on the sale of marketable securities at American Home Shield in 1996,
whereas slight realized losses were incurred in 1995. 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 increase in the provision for income taxes is primarily attributable to
strong growth at American Home Shield (which is organized in corporate
form and subject to taxes) and increases in certain state taxes.
FINANCIAL POSITION
- -------------------
Net cash provided from operations of $20.9 million was 31% above first
quarter 1995. Due to the seasonality of the lawncare and pest control
operating cycles, the Partnership's working capital needs are the highest
during the first quarter. The current ratio improved to 1.2 from 1.1 at year
7
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end. 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 decrease in accounts and notes receivable reflects the first quarter
collection of short term notes receivable from specific financing projects,
partially offset by general business growth and increased seasonal activity in
the Consumer Services segment.
The increase in inventories is a result of normal seasonal build-ups in the
pest control and lawncare businesses. Prepaids and other assets have
increased from year end as the lawncare operation defers certain marketing costs
that are incurred during the first quarter but are directly associated with
revenues that are realized in subsequent quarters of the current year. These
costs are then amortized over the balance of the current lawncare production
season, as the related revenues are recognized. Deferred revenues also
increased significantly, reflecting strong growth at American Home Shield
and increases in customer prepayments for lawncare services.
Property and equipment increased slightly due to general business growth in
the Consumer and Management Services business units and relatively small
acquisitions made in the first quarter of 1996. The Partnership has no
material capital commitments at this time.
Intangible assets increased from year end, reflecting the effects of
acquisitions.
Accounts payable increased from year end reflecting seasonal activity in the
Consumer Services business. Debt levels increased due to the seasonal
nature of the Partnership's operating cash flows, combined with the effects of
acquisitions and share repurchases.
At the end of April, the Partnership received commitments for a $125 million
private placement of debt at an overall effective interest rate of 7.4%,
with the proceeds to be used to repay floating rate bank debt and for general
Partnership purposes.
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 decreased slightly to $743 million as distributions
and treasury share repurchases more than offset the positive effects of
seasonal first quarter earnings. 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 March 31, 1996, approximately $123 million of the total
amount authorized had not yet been expended.
8
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Cash distributions paid directly to shareholders totalled $23 million or $.16
per share. Distributions to the shareholders' trust decreased from first
quarter 1995 levels, reflecting differences in the timing of payments.
Property additions declined from prior year levels due to timing differences
and non-recurring expenditures in 1995 that were associated with moving
into an expanded segment headquarters facility in Memphis.
9
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<TABLE>
<CAPTION>
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
March 31,
1996 1995
--------- ---------
<S> <C> <C>
Shares used for computing
Primary Earnings per share--
Shares outstanding on weighted
average basis.................................... 141,414 115,993
Equivalent shares--
Options and subscriptions outstanding............ 4,081 2,483
--------- ---------
Weighted average and
equivalent shares for primary calculation........ 145,495 118,476
========= =========
Primary earnings per share......................... $ .28 $ .24
===== =====
Net income......................................... $ 40,513 $ 28,880
Interest on convertible debentures................. 472 475
--------- ---------
Net income for fully diluted calculation........... $ 40,985 $ 29,355
========= =========
Shares used for computing fully
diluted earnings per share--
Shares outstanding................................. 145,669 118,476
Equivalent shares--
Shares issuable upon conversion of
convertible debentures........................... 2,418 2,467
--------- ---------
Weighted average and equivalent shares
for fully diluted calculation.................... 148,087 120,943
========= =========
Fully diluted earnings per share................... $ .28 $ .24
==== ====
All share and per share data have been restated to reflect the three-for-two
share split declared May 3, 1996 and payable to shareholders of record as of
June 10, 1996.
</TABLE>
10
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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: May 13, 1996
SERVICEMASTER LIMITED PARTNERSHIP
(Registrant)
By: /s/Ernest J. Mrozek
------------------------------
Ernest J. Mrozek
Senior Vice President and Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 22,252
<SECURITIES> 27,329
<RECEIVABLES> 262,718
<ALLOWANCES> 20,124
<INVENTORY> 47,268
<CURRENT-ASSETS> 465,413
<PP&E> 304,004
<DEPRECIATION> 156,715
<TOTAL-ASSETS> 1,753,334
<CURRENT-LIABILITIES> 403,927
<BONDS> 472,644
0
0
<COMMON> 0
<OTHER-SE> 742,796
<TOTAL-LIABILITY-AND-EQUITY> 1,753,334
<SALES> 0
<TOTAL-REVENUES> 740,299
<CGS> 0
<TOTAL-COSTS> 598,183
<OTHER-EXPENSES> 91,779
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,918
<INCOME-PRETAX> 42,261
<INCOME-TAX> 1,748
<INCOME-CONTINUING> 40,513
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,513
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
