<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 June 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: 141,704,408 shares on August 9, 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.
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TABLE OF CONTENTS
Page
No.
----
SERVICEMASTER LIMITED PARTNERSHIP (Registrant) -
Part I. Financial Information
- ------------------------------
Consolidated Statements of Income for the
three months and the six months ended
June 30, 1996 and June 30, 1995 2
Consolidated Statements of Financial Position
as of June 30, 1996 and December 31, 1995 3
Consolidated Statements of Cash Flows for the six
months ended June 30, 1996 and June 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
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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 Six Months Ended
June 30, June 30,
1996 1995 1996 1995
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Operating Revenue................................$ 916,931 $ 852,791 $ 1,657,230 $ 1,560,555
Operating Costs and Expenses:
Cost of services rendered
and products sold.............................. 695,426 652,063 1,293,609 1,226,369
Selling and administrative expenses.............. 138,597 127,358 230,376 216,396
--------- --------- ----------- ----------
Total operating costs and expenses............... 834,023 779,421 1,523,985 1,442,765
--------- --------- ----------- ----------
Operating Income................................. 82,908 73,370 133,245 117,790
Non-operating Expense (Income):
Interest expense................................. 9,904 9,492 18,822 18,394
Interest income.................................. (2,451) (2,143) (5,130) (3,502)
Minority interest*............................... 2,761 14,585 4,598 22,110
--------- --------- ----------- ----------
Income before Income Taxes....................... 72,694 51,436 114,955 80,788
Provision for income taxes....................... 1,430 1,276 3,178 1,748
--------- --------- ----------- ----------
Net Income.......................................$ 71,264 $ 50,160 $ 111,777 $ 79,040
========= ========= =========== ==========
Net Income Per Share.............................$ .49 $ .42 $ .77 $ .67
========= ========= =========== ==========
Cash Distributions Per Share.....................$ .16 $ .16 $ .32 $ .31 1/3
========= ========= =========== ==========
Net income per share is based on 144,836 shares and 119,054 shares for the three
months ended June 30, 1996 and 1995, respectively, and 145,165 share and 118,766
shares for the six months ended June 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 $1,453 and $1,016 for the three months
ended June 30, 1996 and 1995, respectively, and $2,271 and $1,603 for the six
months ended June 30, 1996 and 1995, respectively.
See Notes to Consolidated Financial Statements
</TABLE>
2
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<TABLE>
<CAPTION>
SERVICEMASTER LIMITED PARTNERSHIP
Consolidated Statements of Financial Position
(In thousands) As of
June 30, December 31,
Assets 1996 1995
------------ ---------
<S> <C> <C>
Current Assets:
Cash and marketable securities, including cash and
cash equivalents of $20,454 and $23,113, respectively............. $ 56,310 $ 49,429
Accounts and notes receivable, less allowances of $23,397
and $20,468, respectively......................................... 282,131 243,649
Inventories.......................................................... 46,761 40,583
Prepaid expenses and other assets.................................... 108,503 59,578
------------ -------------
Total current assets............................................. 493,705 393,239
------------ -------------
Property and Equipment:
At cost........................................................... 314,420 292,283
Less: accumulated depreciation.................................... 162,544 146,431
------------ -------------
Net property and equipment....................................... 151,876 145,852
------------ -------------
Intangible assets, primarily trade names and goodwill,
net of accumulated amortization of $148,917
and $133,275, respectively........................................ 1,062,620 1,021,050
Notes receivable, long-term securities, and other assets............. 100,983 89,749
------------ -------------
Total assets..................................................... $ 1,809,184 $ 1,649,890
============ =============
Liabilities And Shareholders' Equity
Current Liabilities:
Accounts payable..................................................... $ 63,823 $ 50,456
Accrued liabilities.................................................. 186,757 193,799
Deferred revenues.................................................... 139,906 115,244
Current portion of long-term obligations............................. 12,499 13,431
------------ -------------
Total current liabilities........................................ 402,985 372,930
------------ -------------
Long-Term Debt....................................................... 482,250 411,903
Other Long-Term Obligations.......................................... 123,278 105,700
Commitments and Contingencies .......................................
Minority and General Partners' Interest
includes General Partners' interest of
$1,880 in 1996 and $1,392 in 1995................................. 13,842 12,697
Shareholders' Equity................................................. 786,829 746,660
------------ -------------
Total liabilities and shareholders' equity....................... $ 1,809,184 $ 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)
Six Months Ended
June 30,
1996 1995
------------ ----------
<S> <C> <C>
Cash and Cash Equivalents at January 1................................ $ 23,113 $ 14,333
Cash Flows from Operations:
Net Income............................................................ 111,777 79,040
Adjustments to reconcile net income
to net cash flows from operations:
Depreciation................................................... 19,901 18,268
Amortization................................................... 15,642 11,401
Change in working capital, net of acquisitions:
Receivables.................................................. (40,348) (39,931)
Inventories and other current assets......................... (54,213) (42,163)
Accounts payable............................................. 11,044 7,447
Deferred revenues............................................ 19,905 21,149
Accrued liabilities.......................................... 181 1,013
Minority interest and other, net............................... 4,268 21,746
------------ -------------
Net Cash Provided from Operations..................................... 88,157 77,970
------------ -------------
Cash Flows from Investing Activities:
Business acquisitions, net of cash acquired....................... (30,718) (19,041)
Property additions................................................ (23,470) (24,023)
Net purchases of long-term marketable securities.................. (10,463) (1,952)
Proceeds from sale of businesses.................................. 4,526 20,057
Payments to sellers of acquired businesses........................ (1,685) (1,317)
Sale of equipment and other assets .............................. 863 1,102
Notes receivable and financial investments........................ 13 (15,613)
------------ -------------
Net Cash Used for Investing Activities................................ (60,934) (40,787)
------------ -------------
Cash Flows from Financing Activities:
Short-term borrowings, net........................................ 103,959 98,300
Distributions to shareholders and shareholders' trust............. (45,027) (56,117)
Payments of borrowings and other obligations...................... (44,743) (36,766)
Purchase of treasury shares....................................... (44,219) (21,567)
Distributions to holders of minority interests.................... (2,769) (8,827)
Proceeds from employee share option plans......................... 2,917 2,761
Other............................................................. --- 201
------------ -------------
Net Cash Used for Financing Activities................................ (29,882) (22,015)
------------ -------------
Cash Increase (Decrease) during the Period............................ (2,659) 15,168
------------ -------------
Cash and Cash Equivalents at June 30.................................. $ 20,454 $ 29,501
============ =============
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 June 30, 1996 and December 31, 1995, and the results
of operations for the three month and six month periods ended June 30, 1996 and
1995, and the cash flows for the six months ended June 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 six months ended June 30, 1996 and
1995 is presented in the following table. The increase in interest paid in 1996
from 1995 is primarily due to timing of interest and fees paid on revolving debt
and higher revolving credit balances in the first half of 1996.
(In thousands)
1996 1995
------- -------
Cash paid or received for:
- --------------------------
Interest expense, net of amounts capitalized.................$ 17,890 $ 16,773
Interest and dividend income.................................$ 3,668 $ 3,326
5
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SERVICEMASTER LIMITED PARTNERSHIP
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
SECOND QUARTER 1996 COMPARED TO SECOND QUARTER 1995
- ---------------------------------------------------
Revenues increased to $917 million in the second quarter of 1995, an 8% overall
increase, but with more rapid growth in higher margin service lines. Net income
was $71.3 million, reflecting a 42% increase over one year ago while net income
per share grew 17% to $.49. Net income and earnings per share both include the
effects of the December 1995 acquisition of WMX Technologies, Inc.'s 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 13%, to $82.9 million, while operating margins
increased from 8.6% to 9.0% of revenue, 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 growth in net income, despite adverse weather conditions.
TruGreen-ChemLawn achieved strong double-digit gains in both revenues and
profits despite an unusually long winter and a cool, wet spring in many parts of
the country. Continued growth in the residential customer base and strong
commercial sales, combined with the favorable effects of new service initiatives
such as interior plantscaping and home fertilizer delivery, helped offset the
weather related adversities. Terminix achieved strong growth in revenues and
profits with both termite completions and pest control revenues increasing at
double-digit rates, reflecting favorable marketing results as well as
management's continued focus on customer satisfaction and retention. American
Home Shield continued to achieve excellent overall growth in both revenues and
profits, resulting from very strong new contract sales and continuing
improvement in renewal rates. Merry Maids achieved double-digit revenue growth
with increased fees from existing customers and encouraging results from
company-owned branches. ServiceMaster Residential and Commercial achieved good
growth in revenues and profits, reflecting an increase in company-owned
distributors, which offset a decline in large disaster recovery projects.
The Management Services business unit recorded a solid overall increase in
profits, reflecting wind down costs incurred in 1995 relating to the sale of the
education food service business that were nonrecurring, as well as the ongoing
benefits of cost controls and improved customer retention in all three markets.
Revenues were consistent with prior year levels, as reductions in Healthcare
were offset by improvements in Education and Business & Industry. The Healthcare
market recorded reduced revenues and profits, reflecting difficult industry
conditions in the acute care sector of the market. The Education market had a
modest reduction in profits. However, new starts and customer retention both
improved over prior year levels. The Business & Industry market reported strong
increases in both revenues and profits, reflecting encouraging results in the
aviation and food processing sectors.
Diversified Health Services continued to realize significant growth, with strong
revenue increases in the major service lines and improvements in rehabilitation
services which were started in 1995. The results also reflect the successful
integration of DTEC, a pharmacy management company, which was acquired early in
1996. The International operations also achieved double-digit increases in
revenues and profits.
On a consolidated basis, cost of services rendered and products sold increased
7% due to general business growth, but decreased as a percentage of revenue from
76.5% in 1995 to 75.8% in 1996. This decrease primarily reflects the changing
6
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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 9% due to general
business growth and increased to 15.1% of revenue in 1996 from 14.9% in 1995. As
described above, this increase as a percentage of revenue is primarily
attributable to the changing business mix of the Partnership.
Interest expense increased over the prior year reflecting increased borrowings
relating to acquisitions and treasury share repurchases made in 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 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.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
- -------------------------------------------------------------------------
Revenues for the six months were $1.7 billion, a 6% increase over 1995.
Operating income increased 13%, to $133 million, while margins increased to 8.0%
of revenue from 7.5% 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 $111.8 million, a
41% increase, while earnings per share totalled $.77, an increase of 15%.
Results for the six 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 strong, double-digit
growth in revenues and profits. The TruGreen-Chemlawn operations had solid
growth in revenues and profits despite late winter and wet spring weather
throughout many parts of the country, which contrasted to generally mild
conditions in the previous year. Terminix achieved solid increases in revenues
and profits as a result of increases in pest control revenues and termite
completions, sharp improvements in termite contract renewals and improved
efficiencies. American Home Shield had excellent growth in revenues and profits,
with increased sales in all major geographic markets and continuing improvements
in contract renewals. The Merry Maids and Residential and Commercial operations
both had increased revenues and profits and continued their expansion of direct
operations.
The Management Services business segment recorded solid growth in profits for
the first six months, reflecting the elimination of losses incurred in 1995
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 were
consistent with prior year levels, as reductions in Healthcare were offset by
improvements in Education and Business & Industry. The Healthcare market was
slightly below last year in revenues and profits, reflecting difficult
conditions in the acute care sector of the industry, but customer retention has
shown good improvement. Profits in the Education business declined slightly, but
new starts and customer retention have improved significantly over prior year
levels. The Business & Industry group achieved double-digit growth in revenues
and profits, reflecting strong growth in the aviation market.
7
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ServiceMaster Diversified Health Services continued to achieve excellent growth
in revenues and profits reflecting solid increases in management services from
the DTEC acquisition and rehabilitation services. International operations
achieved solid growth in the European pest control operations and growth in
royalty fees from existing licensees.
On a consolidated basis, cost of services rendered and products sold increased
5.5% due to general business growth, but decreased as a percentage of revenue
from 78.6% in 1995 to 78.1% 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 6.5% over prior year
levels. As a percent of revenue, selling and administrative expenses were
consistent with 1995 at 13.9%.
Interest income increased over the prior year due to realized gains on the sale
of marketable securities at American Home Shield in 1996, whereas slight losses
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 of $88.2 million grew 13% compared to the
first six months of 1995. Due to the seasonality of the lawncare and pest
control operating cycles, the Partnerships' working capital needs are
significantly higher in the first half of the year than in the second half, 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 year-end levels reflects
traditional seasonal buildups in the Consumer Services business, partially
offset by the collection of short term notes receivable from specific financing
projects.
The increase in inventories is a result of normal seasonal build-ups in the pest
control and lawncare businesses. Prepaid expenses and other assets have
increased from year end as the lawncare operation defers certain marketing costs
that are incurred during the first six months 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. The
Partnership has no material capital commitments at this time.
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.
In early July, the Partnership completed a $125 million private placement of
debt at an overall effective interest rate of 7.4%, with the proceeds used to
repay floating rate bank debt.
8
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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 repurchases. 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 June 30, 1996, approximately $104 million of the total amount authorized
had not yet been expended.
Cash distributions paid directly to shareholders totalled $46 million ($.32 per
share) for the six months ended June 30, 1996, in comparison to $37 million
($.31 1/3 per share) in 1995. This reflects the increase in the authorized
payments per share announced last December (4% increase for the year as a whole)
as well as the higher number of shares outstanding. Distributions to the
shareholders' trust decreased from first half 1995 levels, reflecting
differences in the timing of payments. For the year as a whole, such
distributions are expected to increase over prior year levels.
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 Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---------- -------- --------- -------
<S> <C> <C> <C> <C>
Shares used for computing
Primary Earnings per share--
Shares outstanding on weighted
average basis...................................... 140,935 116,058 141,174 116,027
Equivalent shares--
Options and subscriptions outstanding.............. 3,901 2,996 3,991 2,739
---------- --------- --------- --------
Weighted average and
equivalent shares for primary calculation.......... 144,836 119,054 145,165 118,766
========== ========= ========= ========
Primary earnings per share........................... $ .49 $ .42 $.77 $.67
====== ====== ==== ====
Net income........................................... $ 71,264 $ 50,160 $ 111,777 $ 79,040
Interest on convertible debentures................... 465 475 938 950
---------- --------- --------- --------
Net income for fully diluted calculation............. $ 71,729 $ 50,635 $ 112,715 $ 79,990
========== ========= ========= ========
Shares used for computing fully
diluted earnings per share--
Shares outstanding................................... 145,137 119,234 145,403 119,201
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...................... 147,555 121,687 147,821 121,654
========== ========= ======== =========
Fully diluted earnings per share..................... $ .49 $ .42 $ .76 $ .66
===== ====== ===== =====
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: August 12, 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> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 20,454
<SECURITIES> 35,856
<RECEIVABLES> 305,528
<ALLOWANCES> 23,397
<INVENTORY> 46,761
<CURRENT-ASSETS> 493,705
<PP&E> 314,420
<DEPRECIATION> 162,544
<TOTAL-ASSETS> 1,809,184
<CURRENT-LIABILITIES> 402,985
<BONDS> 482,250
0
0
<COMMON> 0
<OTHER-SE> 786,829
<TOTAL-LIABILITY-AND-EQUITY> 1,809,184
<SALES> 0
<TOTAL-REVENUES> 1,657,230
<CGS> 0
<TOTAL-COSTS> 1,293,609
<OTHER-EXPENSES> 230,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,822
<INCOME-PRETAX> 114,955
<INCOME-TAX> 3,178
<INCOME-CONTINUING> 111,777
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 111,777
<EPS-PRIMARY> .77
<EPS-DILUTED> .76
</TABLE>
