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, 1997
--------------
_______ 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: 182,753,179 shares on May 7, 1997. (This reflects the repurchase of 40.7
million (post split) shares from WMX Technologies Inc. on April 1, 1997 and the
three-for-two share split declared May 9, 1997 and payable to shareholders of
record as of June 11, 1997.)
This document consists of 11 pages, including the cover page.
<PAGE>
TABLE OF CONTENTS
Page
No.
----
SERVICEMASTER LIMITED PARTNERSHIP (Registrant) -
Part I. Financial Information
- ------ ---------------------
Consolidated Statements of Income for the
three months ended March 31, 1997 and March 31, 1996 2
Consolidated Statements of Financial Position
as of March 31, 1997 and December 31, 1996 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and March 31, 1996 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 9
Signature 10
1
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
SERVICEMASTER LIMITED PARTNERSHIP
Consolidated Statements of Income
(In thousands, except per share data)
Three Months Ended
March 31,
1997 1996
----------- --------
<S> <C> <C>
Operating Revenue.............................................. $ 817,136 $ 740,299
Operating Costs and Expenses:
Cost of services rendered
and products sold............................................ 657,145 598,183
Selling and administrative expenses............................ 101,391 91,779
----------- -----------
Total operating costs and expenses............................. 758,536 689,962
----------- -----------
Operating Income............................................... 58,600 50,337
Non-operating Expense (Income):
Interest expense............................................... 10,392 8,918
Interest and investment income................................. (2,567) (2,679)
Minority interest*............................................. 2,148 1,837
----------- -----------
Income before Income Taxes..................................... 48,627 42,261
Provision for income taxes..................................... 1,767 1,748
----------- -----------
Net Income..................................................... $ 46,860 $ 40,513
=========== ===========
Net Income Per Share........................................... $ .21 $ .19
===== =====
Cash Distributions Per Share................................... $ .11 $ .11
===== =====
Net income per share is based on 220,803 shares and 218,243 shares for the three
months ended March 31, 1997 and 1996, respectively. All share and per share data
have been restated to reflect the three-for-two share split declared May 9, 1997
and payable to shareholders of record as of June 11, 1997.
The Partnership is not currently subject to federal and state income taxes.
However, under current law, this tax status will expire at the end of 1997,
after which the Partnership will be taxed as a corporation. A reincorporating
plan has been approved by the shareholders and the Partnership currently expect
to reincorporate, on a tax-free basis to shareholders, by December 31, 1997. It
is currently estimated that the effective tax rate upon reincorporation will be
approximately 40 percent of pretax earnings. This estimate is necessarily
subject to change based on changes in circumstances, statutory tax rates, etc.
Proforma earnings per share would be $.13 in 1997, and $.11 in 1996, assuming
reincorporation had occurred at the beginning of each respective year.
* Includes General Partners' interest of $936 and $818 for the three months
ended March 31, 1997 and 1996, respectively.
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
<TABLE>
<CAPTION>
SERVICEMASTER LIMITED PARTNERSHIP
Consolidated Statements of Financial Position
(In thousands)
As of
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and marketable securities, including cash and
cash equivalents of $43,182 and $72,009, respectively............. $ 85,852 $ 114,413
Accounts and notes receivable, less allowances of $25,835
and $26,287, respectively......................................... 287,546 270,401
Inventories.......................................................... 53,099 43,529
Prepaid expenses and other assets.................................... 132,142 70,991
------------ -------------
Total current assets............................................. 558,639 499,334
------------ -------------
Property and Equipment:
At cost........................................................... 337,369 320,713
Less: accumulated depreciation................................... 185,295 174,313
------------ -------------
Net property and equipment....................................... 152,074 146,400
------------ -------------
Intangible assets, primarily trade names and goodwill,
net of accumulated amortization of $178,051
and $170,623, respectively........................................ 1,351,020 1,088,444
Notes receivable, long-term securities, and other assets............. 123,891 112,663
------------ -------------
Total assets.....................................................$ 2,185,624 $ 1,846,841
============ =============
Liabilities And Shareholders' Equity
Current Liabilities:
Accounts payable.....................................................$ 76,697 $ 66,025
Accrued liabilities.................................................. 230,392 205,567
Deferred revenues.................................................... 183,555 138,339
Current portion of long-term obligations............................. 17,912 15,621
------------ -------------
Total current liabilities........................................ 508,556 425,552
------------ -------------
Long-Term Debt....................................................... 572,863 482,315
Other Long-Term Obligations.......................................... 130,010 125,299
Commitments and Contingencies .......................................
Minority and General Partners' Interest
includes General Partners' interest of
$1,222 in 1997 and $1,604 in 1996................................. 2,003 16,908
Shareholders' Equity................................................. 972,192 796,767
------------ -------------
Total liabilities and shareholders' equity.......................$ 2,185,624 $ 1,846,841
============ =============
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
SERVICEMASTER LIMITED PARTNERSHIP
Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
March 31,
1997 1996
------------ ------------
<S> <C> <C>
Cash and Cash Equivalents at January 1................................ $ 72,009 $ 23,113
Cash Flows from Operations:
Net Income............................................................ 46,860 40,513
Adjustments to reconcile net income
to net cash flows from operations:
Depreciation................................................... 10,972 9,552
Amortization................................................... 7,428 5,667
Change in working capital, net of acquisitions:
Receivables.................................................. (12,403) (4,697)
Inventories and other current assets......................... (65,210) (71,216)
Accounts payable............................................. 2,906 2,847
Deferred revenues............................................ 39,197 27,426
Accrued liabilities.......................................... (642) 5,841
Minority interest and other, net............................... 1,320 4,958
------------- ------------
Net Cash Provided from Operations..................................... 30,428 20,891
------------- ------------
Cash Flows from Investing Activities:
Business acquisitions, net of cash acquired....................... (96,405) (21,390)
Property additions................................................ (12,970) (9,859)
Notes receivable and financial investments........................ (1,558) 5,848
Payments to sellers of acquired businesses........................ (1,062) (787)
Net purchases of investment securities............................ (763) (1,852)
Sale of equipment and other assets .............................. 553 389
------------- ------------
Net Cash Used for Investing Activities................................ (112,205) (27,651)
------------- ------------
Cash Flows from Financing Activities:
Borrowings, net................................................... 100,785 63,892
Payments of borrowings and other obligations...................... (14,618) (7,851)
Distributions to shareholders and shareholders' trust............. (24,815) (23,265)
Purchase of treasury shares....................................... (10,151) (26,519)
Proceeds from employee share option plans......................... 1,957 1,820
Distributions to holders of minority interests.................... (208) (2,178)
------------- ------------
Net Cash Provided from Financing Activities........................... 52,950 5,899
------------- ------------
Cash Decrease during the Period....................................... (28,827) (861)
------------- ------------
Cash and Cash Equivalents at March 31................................. $ 43,182 $ 22,252
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
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, 1996. 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, 1997 and December 31, 1996, and the results
of operations and cash flows for the three months ended March 31, 1997 and 1996,
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 9, 1997, the Partnership's Board of Directors declared a
three-for-two share split effective June 25, 1997, for shareholders of record on
June 11, 1997. All share and per share data have been restated for all periods
presented to reflect this three-for-two split.
Note 5: In February 1997, the FASB issued Statement No. 128, "earnings per
share" (SFAS 128). SFAS 128 is effective for financial statements for periods
ending after December 15, 1997. Therefore, the Partnership will adopt this
statement and reflect its disclosure in the Partnership's 1997 annual report.
SFAS 128 requires dual presentation of basic and diluted earnings per share.
Basic earnings per share includes no dilution from options, debentures or other
financial instruments and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could participate in the earnings of an entity. This statement requires
that prior period earnings per share data presented be restated. First quarter
1997 earnings per share data on a restated basis would reflect basic earnings
per share of $.22 and diluted earnings per share of $.21.
Note 6: 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, 1997
and 1996 is presented in the following table. The increase in interest paid in
1997 is primarily due to the timing of payments as well as overall higher debt
balances.
<TABLE>
<CAPTION>
(In thousands)
1997 1996
--------- ---------
<S> <C> <C>
Cash paid or received for:
Interest expense............................................ $ 10,842 $ 6,657
Interest and dividend income................................ $ 1,942 $ 1,815
</TABLE>
5
<PAGE>
SERVICEMASTER LIMITED PARTNERSHIP
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
- -------------------------------------------------
Revenues increased 10 percent over the first quarter of 1996 to $817 million
reflecting solid 7 percent growth from base operations and the effect of
acquisitions. The two recent acquisitions (Premier Manufacturing Support
Services which was acquired late last year and Barefoot Inc. ("Barefoot") which
was purchased in February, 1997) added incremental revenues that more than
offset the adverse impact from the termination of a large contract in the
Management Services segment. Operating income increased 16 percent, to $58.6
million while margins improved to 7.2 percent of revenue (from 6.8 percent of
revenue in 1996), reflecting growth in the higher margin business units. Net
income was $46.9 million, reflecting a 16 percent increase over one year ago
while net income per share was $.21, representing an increase of 11 percent. The
first quarter is typically the slowest quarter of the year due to the
investments made in the seasonal lawn care and pest control operations.
The Consumer Services business unit achieved strong double digit increases in
revenues and profits. The two largest companies, TruGreen-ChemLawn and Terminix
each had strong internal revenue growth, and combined with the successful
integration of the Barefoot customers, contributed to an overall 17 percent
increase in segment revenues. The TruGreen-ChemLawn operations experienced a
strong start with first quarter results reflecting favorable weather conditions
throughout many parts of the country, which contrasted to harsh conditions last
year, and resulted in acceleration of initial service applications in the first
quarter of 1997. The company also achieved a favorable response to its
pre-season marketing program which lays the foundation for growth in future
quarters. Terminix achieved good increases in revenues and significantly
improved margins reflecting favorable weather conditions, strong cost controls
and good growth in the high margin renewal business. American Home Shield
achieved very strong double digit increases in both revenues and profits, with
sharp increases in gross contracts written, as well as continued improvements in
the rate and magnitude of contract renewals. Merry Maids and
Residential/Commercial reported profits consistent with last year but achieved
solid revenue growth for the quarter, reflecting the continued conversion of
franchises and distributorships to company owned operations as well as the
growth in disaster restoration services.
The Management Services business unit achieved a solid overall increase in
revenues primarily reflecting the Premier acquisition, with a modest increase in
profits for the quarter. The health care market, which includes Diversified
Health Services, achieved a good increase in profits with improved sales and
customer retention. Diversified Health Services and the traditional Management
Services' long term care accounts performed well reflecting strong revenue and
profit growth which was offset by declines in the acute care sector of the
market due to continued competitive pressures. Revenues and profits in the
education market declined due to the loss of a significant contract and initial
investments at several new accounts. The business and industry group achieved
6
<PAGE>
excellent growth in revenues and profits, resulting from the Premier acquisition
as well as increased margins at several accounts.
The International operations achieved modest revenue growth with profits below
prior year levels reflecting investments in the European joint ventures and
unfavorable currency exchange rates.
Cost of services rendered and products sold increased 10 percent due to general
business growth, but decreased as a percentage of revenue from 80.8 percent in
1996 to 80.4 percent in 1997. 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 11 percent due to general business
growth. As a percent of revenue, selling and administrative expenses were
consistent with 1996 levels at 12.4 percent.
Interest expense increased over the prior year primarily due to increased debt
levels associated with the purchase of Barefoot. The increase in the provision
for taxes is attributable to strong growth at American Home Shield (which is
organized in the corporate form and subject to taxes) offset by reduced
requirements in foreign tax payments.
FINANCIAL POSITION
- -------------------
Net cash provided from operations of $30.4 million was 46 percent above first
quarter 1996, reflecting increased prepayments for services in the lawn care
operations combined with accelerated production due to favorable weather
conditions and the timing of the Barefoot acquisition. 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. 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.
On February 24, 1997, the Partnership completed the acquisition of Barefoot, the
second largest professional residential lawn care services company in the United
States for approximately $237 million, consisting of $146 million of
Partnership's shares and the remainder in cash.
The increase in accounts and notes receivable over year end levels reflects an
increase due to general business growth, increased seasonal activity in the
Consumer Services segment and the acquisition of Barefoot.
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,
7
<PAGE>
reflecting strong growth and increases in customer prepayments for lawncare
services.
Property and equipment increased primarily due to business growth in the
Consumer and Management Services business units as well as the acquisition of
Barefoot in the first quarter of 1997.
Intangible assets increased from year end, primarily reflecting the effect of
the acquisition of Barefoot. The increase in other assets is also primarily due
to Barefoot.
Accounts payable and other liabilities increased from year end reflecting
seasonal activity in the Consumer Services businesses and the acquisition of
Barefoot. Debt levels increased due to the seasonal nature of the Partnership's
operating cash flows, combined with the effects of the Barefoot acquisition and
share repurchases. 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 $972 million in 1997 from $797 million
at December 31, 1996 reflecting strong earnings growth as well as the shares
issued to acquire Barefoot, partially offset 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 March
31, 1997, approximately $62 million of the total amount authorized had not yet
been expended. Cash distributions paid directly to shareholders totalled $24
million or $.11 per share an increase of 6 percent.
On April 1, 1997, ServiceMaster repurchased the entire 19 percent ownership
interest that WMX Technologies, Inc. ("WMX") had held in the Partnership for
approximately $626 million. WMX had owned 40.7 million restricted shares of
ServiceMaster, and also had an option to purchase an additional 2.8 million
shares which was cancelled as part of the transaction. This transaction is
expected to be immediately additive to earnings per share and will provide
significant, incremental tax benefits to the company. The transaction was
financed with a new $1 billion multi-currency revolving credit agreement, which
provides a 364 day revolving credit facility of $250 million with a one year
term loan option (two year total term) and a five year revolving credit facility
of $750 million. Management is evaluating a number of long-term financing
alternatives for both this transaction and the cash portion of the Barefoot
acquisition. Subject to market conditions, the Partnership currently anticipates
that approximately 50 percent of the $858 million combined value of the WMX and
Barefoot transactions will be ultimately refinanced through equity issuances
within the next two years.
8
<PAGE>
<TABLE>
<CAPTION>
Part II. OTHER INFORMATION
SERVICEMASTER LIMITED PARTNERSHIP
Exhibit 11
EXHIBIT REGARDING DETAIL OF INCOME PER SHARE COMPUTATION
(In thousands, except per share data)
Three Months Ended
March 31,
1997 1996
----- -----
<S> <C> <C>
Net income.....................................................$ 46,860 $ 40,513
Interest on convertible debentures............................. 465 472
---------- -----------
Net income for fully diluted calculation.......................$ 47,325 $ 40,985
========== ===========
Shares used for computing
primary earnings per share--
Shares outstanding on weighted
average basis................................................ 216,309 212,121
Equivalent shares--
Options and subscriptions outstanding........................ 4,494 6,122
---------- -----------
Weighted average and
equivalent shares for primary calculation.................... 220,803 218,243
========== ===========
Primary earnings per share..................................... $ .21 $ .19
====== ======
Shares used for computing fully
diluted earnings per share--
Shares outstanding
(weighted average basis with options and subscriptions)....... 221,175 218,504
Equivalent shares--
Shares issuable upon conversion of
convertible debentures....................................... 3,627 3,627
---------- -----------
Weighted average and equivalent shares
for fully diluted calculation................................ 224,802 222,131
========== ===========
Fully diluted earnings per share............................... $ .21 $ .18
===== ======
All share and per share data have been restated to reflect the three-for-two
share split declared May 9, 1997 and payable to shareholders of record as of
June 11, 1997.
</TABLE>
9
<PAGE>
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 14, 1997
SERVICEMASTER LIMITED PARTNERSHIP
(Registrant)
By: /s/Steven C. Preston
----------------------------------------------
Steven C. Preston
Senior Vice President and Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<CASH> 42,670
<SECURITIES> 43,182
<RECEIVABLES> 313,381
<ALLOWANCES> 25,835
<INVENTORY> 53,099
<CURRENT-ASSETS> 558,639
<PP&E> 337,369
<DEPRECIATION> 185,295
<TOTAL-ASSETS> 2,185,624
<CURRENT-LIABILITIES> 508,556
<BONDS> 572,863
0
0
<COMMON> 0
<OTHER-SE> 972,192
<TOTAL-LIABILITY-AND-EQUITY> 2,185,624
<SALES> 0
<TOTAL-REVENUES> 817,136
<CGS> 0
<TOTAL-COSTS> 657,145
<OTHER-EXPENSES> 101,391
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,392
<INCOME-PRETAX> 48,627
<INCOME-TAX> 1,767
<INCOME-CONTINUING> 48,860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,860
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
