===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE THIRTEEN WEEKS ENDED DECEMBER 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-12188
SODEXHO MARRIOTT SERVICES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-0936594
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
9801 WASHINGTONIAN BOULEVARD, GAITHERSBURG, MARYLAND 20878
---------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(301) 987-4500
----------------------------------------------------
(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 [ ]
Shares outstanding
CLASS at January 9, 2001
------------------------------- ------------------
Common Stock $1.00
par value per share 63,289,575
===============================================================================
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Overview 1
Forward-Looking Statements 1
PART I.
FINANCIAL INFORMATION (UNAUDITED)
Condensed Consolidated Statements of Income - Thirteen Weeks Ended
December 1, 2000 and December 3, 1999 2
Condensed Consolidated Balance Sheets -
as of December 1, 2000 and September 1, 2000 3
Condensed Consolidated Statements of Cash Flows - Thirteen Weeks
Ended December 1, 2000 and December 3, 1999 4
Condensed Consolidated Statement of Stockholders' Deficit-
as of December 1, 2000 5
Notes to the Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations
and Financial Condition 13
Quantitative and Qualitative Disclosures about Market Risk 15
PART II.
OTHER INFORMATION AND SIGNATURES
Legal Proceedings 16
Changes in Securities 16
Defaults Upon Senior Securities 16
Submission of Matters to a Vote of Security Holders 16
Other Information 16
Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
<PAGE>
OVERVIEW
Sodexho Marriott Services, Inc. (the "Company") is the leading provider in North
America of outsourced food and facilities management services to businesses,
health care facilities, colleges and universities, and primary and secondary
schools. Food services include food and beverage procurement, preparation and
menu planning, as well as the operation and maintenance of food service and
catering facilities, generally on a client's premises. Facilities management
services include plant maintenance, energy management, grounds keeping,
housekeeping and custodial services.
FORWARD-LOOKING STATEMENTS
This report by the Company contains forward-looking statements within the
meaning of the federal securities laws. These statements are based on the
Company's current expectations and relate to anticipated future events that are
not historical facts, such as the Company's business strategies and their
intended results.
The forward-looking statements included in this report are subject to numerous
risks and uncertainties that could cause the Company's future activities and
results of operations to differ materially from those expressed or implied in
the forward-looking statements. These risks and uncertainties, which are further
discussed in Management's Discussion and Analysis of Results of Operations and
Financial Condition and other parts of this report, include: (i) the ability of
the Company to adapt to various changes, including changes in its structure,
senior management and in its relationship with its largest shareholder--Sodexho
Alliance, S.A., (ii) the potential adverse impact of the Company's substantial
indebtedness, including restrictions and remedies available within the related
debt covenants, (iii) the ability of the Company to attract, hire, train and
retain competent management personnel, (iv) competition in the food services and
facilities management industries, (v) the effects of general economic
conditions, including the record low level of unemployment, (vi) the ability of
the Company to retain clients and obtain new clients on satisfactory terms, and
other factors described from time to time in the Company's filings with the
Securities and Exchange Commission including those set forth in Exhibit 99 filed
herein.
As a result of these risks and uncertainties, readers are cautioned not to place
undue reliance on the forward-looking statements included in this report or that
may be made elsewhere from time to time by, or on behalf of, the Company. The
Company assumes no obligation to update any forward-looking statements.
1
<PAGE>
PART I
FINANCIAL INFORMATION (UNAUDITED)
ITEM 1.
FINANCIAL STATEMENTS
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-------------------------------------
DECEMBER 1, DECEMBER 3,
2000 1999
---------------- -----------------
<S> <C> <C>
SALES $1,359 $1,288
Operating Costs and Expenses 1,241 1,185
---------------- -----------------
OPERATING PROFIT 118 103
Corporate expenses, including amortization of intangible assets (35) (32)
Interest expense, net (20) (22)
---------------- -----------------
Income Before Income Taxes 63 49
Provision for income taxes (27) (21)
---------------- -----------------
NET INCOME $ 36 $ 28
================ =================
BASIC EARNINGS PER SHARE $ 0.57 $ 0.44
================ =================
DILUTED EARNINGS PER SHARE $ 0.56 $ 0.44
================ =================
</TABLE>
See notes to the condensed consolidated financial statements.
2
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 1, SEPTEMBER 1,
2000 2000
-------------- ---------------
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 46 $ 54
Accounts and notes receivable, net 567 463
Other current assets 163 165
-------------- ---------------
Total current assets 776 682
Property and equipment, net 95 96
Intangible assets, net 487 497
Other long-term assets 105 89
-------------- ---------------
Total assets $ 1,463 $ 1,364
============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Current portion of long-term debt $ 116 $ 81
Accounts payable 353 305
Other current liabilities 375 379
-------------- ---------------
Total current liabilities 844 765
Long-term debt 879 900
Other long-term liabilities 113 112
-------------- ---------------
Total liabilities 1,836 1,777
Stockholders' Deficit
Preferred stock, no par value, 1 million shares authorized; no shares issued - -
Common stock, $1 par value, 300 million shares authorized;
63 million shares issued and outstanding at December 1, 2000,
and September 1, 2000 63 63
Additional paid-in capital 1,349 1,348
Accumulated deficit (1,790) (1,826)
Accumulated other comprehensive income 5 2
-------------- ---------------
Total stockholders' deficit (373) (413)
-------------- ---------------
Total liabilities and stockholders' deficit $ 1,463 $ 1,364
============== ===============
</TABLE>
See notes to the condensed consolidated financial statements.
3
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
----------------------------------------
DECEMBER 1, DECEMBER 3,
2000 1999
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 36 $ 28
Adjustments to reconcile to cash provided by operating activities:
Depreciation and amortization expense 22 21
Changes in working capital (59) (71)
Other (2) 3
------------------ -------------------
NET CASH USED IN OPERATING ACTIVITIES (3) (19)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (19) (15)
Dispositions - 3
Other (1) (1)
------------------ -------------------
NET CASH USED IN INVESTING ACTIVITIES (20) (13)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings from short-term credit facility 35 61
Repayments of long-term debt (20) (20)
Payments for redemption of convertible subordinated debt - (11)
Issuance of common stock - 1
------------------ -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15 31
------------------ -------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (8) (1)
CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD 54 48
------------------ -------------------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 46 $ 47
================== ===================
</TABLE>
See notes to the condensed consolidated financial statements.
4
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(amounts in millions)
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
NUMBER ADDITIONAL OTHER
OF COMMON PAID-IN ACCUMULATED COMPREHENSIVE
SHARES STOCK CAPITAL DEFICIT INCOME TOTAL
-------------- -------------------------------------- ------------- ------------- ---------------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
63.2 Balance, September 1, 2000 $63 $1,348 $(1,826) $ 2 $(413)
-- Net income - - 36 - 36
Cumulative-effect of change in
-- accounting method, net - - - 8 8
Change in fair value of
-- derivatives, net - - - (4) (4)
-- Foreign exchange translation, net - - - (1) (1)
-------------- -------------------------------------- ------------- ------------- ---------------- ------------------ -------------
-- TOTAL COMPREHENSIVE INCOME - - 36 3 39
Employee incentive plan
0.1 issuance and other - 1 - - 1
-------------- -------------------------------------- ------------- ------------- ---------------- ------------------ -------------
63.3 Balance, December 1, 2000 $63 $1,349 $(1,790) $ 5 $(373)
============== ====================================== ============= ============= ================ ================== =============
</TABLE>
See notes to the condensed consolidated financial statements.
5
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements of the Company have
been prepared without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted. The Company
believes the disclosures made are adequate to make the information presented not
misleading. However, the Condensed Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements and notes thereto
included in the Company's Annual Report on Form 10-K for the period ended
September 1, 2000.
In the opinion of management, the accompanying Condensed Consolidated Financial
Statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of December 1, 2000 and September 1, 2000, and the results of operations for
the 13 weeks ended December 1, 2000 and December 3, 1999.
Interim results are not necessarily indicative of fiscal year performance. All
material intercompany transactions and balances between Sodexho Marriott
Services, Inc., and its consolidated subsidiaries have been eliminated. Certain
amounts previously presented have been reclassified to conform to the current
presentation.
REVENUE RECOGNITION AND ACCOUNTS AND NOTES RECEIVABLE
Revenues are recognized at the time services are rendered or products are
delivered. Revenues include reimbursements for food and payroll costs incurred
on behalf of customers under contracts in which the Company manages food service
programs for a fee. Losses, if any, are provided for at the time management
determines the cost will ultimately exceed contract revenue for the duration of
the contract.
The allowance for doubtful accounts was $23 million at December 1, 2000,
unchanged from September 1, 2000. Concentration of credit risk within accounts
receivable is limited because a large number of customers make up the Company's
customer base, thus spreading risk associated with trade credit. In addition,
the Company closely monitors its accounts receivable. The Company generally does
not require collateral and maintains reserves for potential uncollectible
amounts, which, in the aggregate, have not exceeded management's expectations.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average number of outstanding common shares. Diluted earnings per share
is computed by dividing net income, adjusted for interest expense related to
convertible securities (after-tax), by the diluted weighted-average number of
outstanding common shares, including the affect of the Company's employee
incentive plans (including deferred stock) and the convertible subordinated debt
securities.
SEGMENT REPORTING
Information from operating segments is derived from methods used by the
Company's management to allocate resources and measure performance. For fiscal
year reporting, the Company disclosed profit/loss, revenues and assets for each
segment identified, including reconciliations of these items to consolidated
totals. For interim reporting periods, the Company disclosed profit/loss and
revenues for each segment (see Note 5).
6
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133 ("SFAS NO. 133")
On September 2, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. In accordance with the provisions in SFAS No. 133, the
Company has designated all of its interest-rate agreements as cash flow hedges.
The Company has determined that these agreements are highly effective in
offsetting the variable interest cash flows of the Company's debt portfolio. The
agreements were recorded on the balance sheet at fair value in other long-term
assets with the offsetting entry to accumulated other comprehensive income, a
component of stockholders' deficit, net of tax. The transition adjustment from
the adoption of SFAS No. 133, resulted in a cumulative-effect adjustment to
accumulated other comprehensive income of $15 million, net of taxes totaling $7
million. All agreements were considered highly effective. The Company does not
anticipate any reclassifications to earnings from accumulated other
comprehensive income over the next 12 months, with adjustments during the year
related mostly to changes in the fair value of the related agreements. There
were no net gains or losses recognized on derivatives that had previously been
deferred, or as adjustments to the carrying amount of the hedged items.
Currently, the Company does not have any other financial contracts which contain
embedded derivatives or fair value hedge relationships which would fall within
the scope of SFAS No. 133.
CASH FLOW HEDGES
The Company's derivative and hedging strategy is aimed at managing interest-rate
risk and prohibits the use of derivative instruments for trading purposes.
Currently, the Company uses interest-rate agreements (the "agreements") to carry
out its interest-rate risk management strategy. These agreements generally
involve the exchange of fixed and variable rate interest payments between two
parties, based on a common notional principal amount and maturity date. The
notional amount and interest payments in these agreements match the cash flows
of assets and/or liabilities. The notional balances of these agreements
represent a balance used to calculate the exchange of cash flows and are not
assets or liabilities of the Company. Accordingly, any market risk or
opportunity associated with these agreements is offset by the opposite market
impact on the related debt. The Company's credit risk related to interest-rate
agreements is considered low because they are entered into with only strong
creditworthy counterparties and are generally settled on a net basis. The
difference paid or received on interest-rate agreements is recognized as an
adjustment to interest expense. See Note 2 for the notional amounts, related
rates, maturities, and fair values of these agreements. All derivatives are
recognized on the balance sheet at their fair value. Reflective of the Company's
current derivative and hedging strategy, derivative contracts entered into are
designated as a cash flow hedges; A HEDGE OF A FORECASTED TRANSACTION OR THE
VARIABILITY OF CASH FLOWS TO BE RECEIVED OR PAID RELATED TO A RECOGNIZED ASSET
OR LIABILITY. Accordingly, changes in the fair value of these highly effective
agreements are recorded in other accumulated comprehensive income, until
earnings are affected by the variability of their cash flows (e.g., when
periodic settlements on a variable-rate asset or liability are recorded in
earnings).
ACCUMULATED OTHER COMPREHENSIVE INCOME
Comprehensive income for the Company includes activity in foreign exchange
translation adjustments and cash flow hedges under the adoption of SFAS No. 133.
Items identified as comprehensive income are reported, under separate captions,
in the Condensed Consolidated Balance Sheets and the Condensed Consolidated
Statement of Stockholders' Deficit. Results for the Canada division are
translated to U.S. dollars using the average exchange rates during the period.
Assets and liabilities are translated using the exchange rate in effect at the
applicable balance sheet date, and the resulting translation adjustments are
reflected in stockholders' deficit as accumulated other comprehensive income.
7
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
ACCUMULATED OTHER COMPREHENSIVE INCOME, CONTINUED
Total accumulated other comprehensive income included $2 million of gross
foreign exchange translations gains, net of taxes totaling $1 million and $7
million of gross unrealized gains on the fair value of derivatives, net of taxes
totaling $3 million, at December 1, 2000. Total accumulated other comprehensive
income included gross foreign exchange translation gains totaling $3 million,
net of taxes totaling $1 million at September 1, 2000. During the first quarter
fiscal year 2001, total comprehensive income was comprised of $36 million in net
income, $15 million for the gross cumulative effect of change in accounting
method, net of taxes totaling $7 million, a $8 million decrease in fair value of
derivatives, net of taxes totaling $4 million, and $1 million of foreign
exchange translation losses, net of taxes.
(2) DEBT
<TABLE>
<CAPTION>
DECEMBER 1, SEPTEMBER 1,
2000 2000
----------------- --- -----------------
($ in millions)
<S> <C> <C>
SHORT-TERM DEBT:
Current Portion of Long-Term Debt $ 80 $ 80
Senior Secured Revolving Credit Facility 35 --
Other 1 1
----------------- -----------------
Total $ 116 $ 81
================= =================
LONG-TERM DEBT:
Senior Secured Credit Facility, maturing 2004
averaging 6.76% in fiscal year 2001 $ 330 $ 350
Senior Guaranteed Credit Facility, due 2005
averaging 7.10% in fiscal year 2001 620 620
Unsecured debt:
Senior Debt, maturing through 2009
averaging 7.07% in fiscal year 2001 6 6
Other -- 1
Capital lease obligations 3 3
----------------- -----------------
Total $ 959 $ 980
Amount Reclassified to Short-Term Debt (80) (80)
----------------- -----------------
$ 879 $ 900
================= =================
</TABLE>
Senior Secured Credit Facility - the senior secured credit facility consists of
$235 million of revolving credit and an additional $500 million, six-year term
loan facility. Interest is based on a bank prime rate, an amount over the
Federal funds rate, or an amount over the London interbank offered rate for
Eurodollar deposits ("LIBOR"), payable in arrears quarterly. At December 1,
2000, the Company is paying a rate of 6.90% on the term loan facility, adjusted
for fee amortization and hedging costs. The senior secured credit facility is
secured predominately by inventory, accounts receivable and the stock of certain
subsidiaries of the Company. Up to $100 million of the $235 million revolving
credit may be used to collateralize letters of credit, which totaled $21 million
at December 1, 2000, and September 1, 2000. At December 1, 2000, $179 million of
this facility was not used and was available to the Company, compared with $214
million at September 1, 2000.
8
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(2) DEBT, CONTINUED
Senior Guaranteed Credit Facility - the senior guaranteed credit facility
consists of a $620 million seven-year term loan. Interest is based on a bank
prime rate, an amount over the Federal funds rate, or an amount over LIBOR,
payable in arrears quarterly. At December 1, 2000, the Company is paying a rate
of 6.91% on this facility, adjusted for fee amortization and hedging costs. This
facility is guaranteed by Sodexho Alliance, S.A. ("Sodexho") for which the
Company pays Sodexho an annual fee of 0.5% of the outstanding balance of the
Senior Guaranteed Credit Facility, or $3 million pretax.
The Company's debt agreements require the maintenance of certain financial
ratios and stockholders' equity balances, and also include, among other things,
limitations on additional indebtedness, certain acquisitions, dividend payments,
pledging of assets, and other restrictions on operations related to cash flows.
The Company met the financial covenants of the debt agreements as of December 1,
2000 and for the 13 weeks then ended.
CASH FLOW HEDGES
In accordance with the provisions in SFAS No. 133, the Company has designated
all of its interest-rate agreements as cash flow hedges. The Company entered
these agreements to convert its floating-rate debt to fixed rates. At December
1, 2000, the majority of the Company's debt was payable at variable rates of
interest. In May 1998, the Company entered into several interest-rate agreements
totaling $900 million in notional principal balances to hedge a portion of its
variable rate debt. These agreements guarantee a fixed rate of interest over the
life of the agreements. The Company is paying a fixed rate ranging between 5.70%
and 5.90%, plus a residual margin that is not hedged relating to the underlying
variable-rate debt. The aggregate fair value of the interest-rate agreements at
December 1, 2000 was $7 million, pretax, compared with $15 million at the end of
fiscal year 2000 (see Note 1). At December 1, 2000 and the 13-week period ended,
the Company did not have any ineffective or deferred gain/loss adjustments
related to its cash flow hedges.
The weighted-average rate for the total debt portfolio, including the effect of
the interest-rate agreements, was 6.98% at December 1, 2000. These agreements
expire between May 2001 and February 2005. At December 1, 2000, the Company did
not have any accrued interest receivable or payable to its counterparties and
did not have any unamortized fees or premiums under these agreements. All of the
Company's interest-rate agreements are for purposes other than trading.
Details of these interest-rate agreements as of December 1, 2000 are as follows:
<TABLE>
<CAPTION>
YEAR-TO-DATE
REALIZED
NOTIONAL WEIGHTED-AVERAGE COMPREHENSIVE
PRINCIPAL FAIR INTEREST RATE INCOME
TERMS BALANCE VALUE* PAID RECEIVED (PRETAX)
------------------------------------------------------ ----------- ---------- ------------ ----------- ------------------
($ in millions)
<S> <C> <C> <C> <C> <C>
Received Variable-Pay Fixed, Maturing 5/01--8/01 $400 $2 5.73% 6.82% $1
Received Variable-Pay Fixed, Maturing 8/02 300 2 5.84 6.82 1
Received Variable-Pay Fixed, Maturing 2/05 200 3 5.90 6.82 --
------------------------------------------------------ ----------- ---------- ------------ ----------- ------------------
$900 $7 5.80% 6.82% $2
====================================================== =========== ========== ============ =========== ==================
<FN>
*-- based on the termination cost for these agreements obtained by third party market quotes.
</FN>
</TABLE>
9
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(3) STOCKHOLDERS' DEFICIT
STOCKHOLDERS' DEFICIT
The Company is authorized to issue three hundred million shares of the Company's
common stock, with a par value of $1 per share. At December 1, 2000, the Company
had 63,275,137 shares outstanding. One million shares of preferred stock,
without par value, are authorized, with none issued.
EARNINGS PER SHARE
The following table details earnings and number of shares used in the basic and
diluted earnings per share calculations.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-------------------------------------
DECEMBER 1, DECEMBER 3,
2000 1999
---------------- -----------------
(in millions, except per share
amounts)
<S> <C> <C>
COMPUTATION OF BASIC EARNINGS PER SHARE:
Net Income $ 35.8 $ 27.8
================ =================
Weighted Average Shares Outstanding 63.3 62.5
================ =================
BASIC EARNINGS PER SHARE $ 0.57 $ 0.44
================ =================
COMPUTATION OF DILUTED EARNINGS PER SHARE:
Net Income $ 35.8 $ 27.8
After-tax Interest Expense on Convertible Subordinated Debt -- 0.1
---------------- -----------------
Diluted Net Income $ 35.8 $ 27.9
================ =================
Weighted Average Shares Outstanding 63.3 62.5
Effect of Dilutive Securities*:
Employee Stock Option Plan 0.3 0.2
Deferred Stock Incentive Plan -- 0.1
Convertible Subordinated Debt -- 0.9
---------------- -----------------
Diluted Weighted Average Shares Outstanding 63.6 63.7
================ =================
DILUTED EARNINGS PER SHARE $ 0.56 $ 0.44
================ =================
<FN>
* -- Certain employee stock options to purchase shares of common stock were outstanding but were not included in the computation of
diluted earnings per share because the exercise prices of the options were greater than the average market price of the common
shares and thus were anti-dilutive. The weighted-average total of excluded shares was approximately 3.1 million for the 13 weeks
ended December 1, 2000, compared to approximately 3.9 million for the 13 weeks ended December 3, 1999.
</FN>
</TABLE>
10
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(4) EMPLOYEE BENEFIT AND INCENTIVE PLANS
BENEFIT PLANS
Employees meeting certain eligibility requirements can participate in the
Company's savings and deferred compensation plans. The Company currently
contributes generally 50% of the participants' contributions to these plans,
limited to 6% of compensation, with certain exceptions. For the 13-week period
ended December 1, 2000, expenses that related to these plans totaled
approximately $4 million, unchanged from the 13-week period ended December 3,
1999.
INCENTIVE PLANS
The Company has two stock-based incentive plans-- the Sodexho Marriott Services,
Inc. 1993 and 1998 Comprehensive Stock Incentive Plans (the "1993 Plan" or the
"1998 Plan"). The purpose of these plans is to promote and enhance the long-term
growth of the Company by aligning the interests of the employees with the
interests of the Company's shareholders. The 1993 Plan administers converted
stock options prior to the merger in March 1998, with no new awards made under
this plan. The 1998 Plan governs the issuance and administration of conversion
awards and is also available for the issuance of new awards. These stock plans
are administered by the Compensation Policy Committee as authorized by the Board
of Directors. As part of the amendment of these plans, the Board of Directors
has approved up to 10 million shares of common stock to be available under the
1998 Plan for converted options as well as new awards. In addition, on January
10, 2001, the shareholders approved the Board of Directors recommendation to
increase the number of shares approved under the 1998 Plan from 10 million to
11.5 million. This increase ensures the Company's ability to continue to promote
and enhance the long-term growth of the Company through rewarding and
recognizing outstanding employee performance.
Employee stock options may be granted to officers and key employees at exercise
prices not less than the market price of the Company's stock on the date of
grant. Most options under the stock option plans are exercisable in cumulative
installments of one-fourth at the end of each of the first four years following
the date of grant.
A summary of the Company's stock option activity during the 13 weeks ended
December 1, 2000, is presented below:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
DECEMBER 1, 2000
-----------------------------------
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISE
(IN MILLIONS) PRICE
---------------- ---------------
<S> <C> <C>
Outstanding at September 1, 2000 6.5 $20
Granted during the thirteen weeks -- --
Exercised during the thirteen weeks -- --
Forfeited during the thirteen weeks (0.1) 21
---------------- ---------------
Outstanding at December 1, 2000 6.4 $20
================ ===============
Options exercisable at December 1, 2000 3.4 $19
================ ===============
</TABLE>
11
<PAGE>
SODEXHO MARRIOTT SERVICES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
(5) BUSINESS SEGMENTS
The Company is the leading provider in North America of outsourced food and
facilities management services to businesses, health care facilities, colleges
and universities, primary and secondary schools and other clients. The Company
has six business segments within these markets: Corporate Services, Health Care,
Education, Schools, Canada, and Laundries/Other.
SALES AND OPERATING PROFIT BY BUSINESS SEGMENT:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-------------------------------------
DECEMBER 1, DECEMBER 3,
2000 1999
----------------- ----------------
($ in millions)
<S> <C> <C>
GROSS SALES
Corporate Services $ 361 $ 351
Health Care 355 335
Education 448 422
Schools 129 118
Canada 46 44
Laundries/Other 20 18
----------------- ----------------
Total Gross Sales $1,359 $1,288
================= ================
GROSS OPERATING PROFIT
Corporate Services $ 24 $ 21
Health Care 28 27
Education 53 44
Schools 9 7
Canada 3 3
Laundries/Other 1 1
----------------- ----------------
Total Gross Operating Profit $ 118 $ 103
================= ================
Amortization, Interest, Net, and Corporate Expenses (55) (54)
----------------- ----------------
Income Before Income Taxes $ 63 $ 49
================= ================
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
The nature of the Company's business causes it to be involved in routine legal
proceedings from time to time. Management of the Company believes that there are
no pending or threatened legal proceedings that upon resolution would have a
material adverse impact to the Company.
12
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
THE FIRST QUARTER FISCAL YEAR 2001 COMPARED WITH THE FIRST QUARTER
FISCAL YEAR 2000
The Company had net income for the first quarter of fiscal year 2001 (13 weeks
ended December 1, 2000) of $36 million, or $0.56 per diluted common share,
compared with $28 million, or $0.44 per diluted common share for the first
quarter of fiscal year 2000 (13 weeks ended December 3, 1999). Diluted average
shares totaled 63.6 million for the current quarter compared with 63.7 million
for the prior year's quarter.
Total sales for the first quarter of fiscal year 2001 were $1.36 billion,
an increase of $71 million, or 6% over the $1.29 billion in total sales for the
first quarter of fiscal year 2000. All the divisions had solid growth
performance, with particularly strong increases of 9% and 6% in the Schools and
Education divisions, respectively. Excluding Corporate Services, this
performance was the result of solid growth in sales at existing accounts and
good retention in the prior year. Also, the Company's divisions continued to
benefit from favorable outsourcing trends in the North American markets. The
Corporate Services division had sales growth of 3% in the current quarter versus
the prior year's quarter, due to lower account retention in the prior year and
slower new sales in the later half of fiscal year 2000. This division's overall
sales growth will continue to be challenged by the very competitive nature of
this segment.
Operating profit for the current quarter totaled $118 million, an increase
of $15 million, or 14% compared with operating profit of $103 million for the
first quarter of last year. Excluding Laundries/Other, which experienced some
start-up related costs in the current quarter, operating profits increased
across the remaining divisions, with 20%+ increases in the Education and Schools
divisions, low double digits in Corporate Services, and a solid 8% in Canada.
Last fiscal year, the Company experienced inefficiencies in several first
year accounts in the Education and Schools divisions, negatively impacting
operating profits for those divisions in fiscal year 2000. Beginning in fiscal
year 2001, the Company implemented several initiatives to reduce the negative
impact of opening new business in these divisions as well as changes in the
under-performing accounts to improve their operating results. The results in
these divisions for the first quarter of fiscal year 2001 have been strong; but,
as fiscal year 2001 progresses, the Education and Schools divisions are expected
to compare less favorably to the stronger operating profit results in these
divisions in the latter part of fiscal year 2000. As with the trends in sales,
the divisions mostly had strong growth in operating profits at existing accounts
and the Corporate Services division benefited from their continued focus on
labor costs, which improved slightly over the prior year's quarter. In addition,
Corporate Services, Education and Schools are seeing continued improvement in
their operating profit performance from ongoing procurement initiatives.
In the Health Care division, continued stable labor costs and improvements
from procurement initiatives were partially offset by some under-performance in
a few larger clients. The Health Care segment continues to be a challenging and
consolidating market segment with significant pressure to assist new and
existing clients in meeting their demanding and changing fiscal requirements.
The Health Care division continues to focus on opportunities to improve its
under-performing accounts, in addition to offering additive services which bring
value to clients and improve the operating results of this segment. Overall,
management believes that the under-performing accounts will improve in the
second half of the current fiscal year. This, along with other initiatives in
place to improve the division's operating results, should result in the Health
Care division's performance comparing more favorably for the full fiscal year
2001 versus the prior year.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
THE FIRST QUARTER FISCAL YEAR 2001 COMPARED WITH THE FIRST QUARTER
FISCAL YEAR 2000, CONTINUED
Partially offsetting the operating profit growth for the first quarter of
fiscal year 2001 was a $3 million increase in corporate expenses when compared
to the last year's first quarter. Adjusting for Y2k costs in last year's
quarter, corporate expenses increased an adjusted $5 million. Most of this
increase was the result of positions unfilled in last year's first quarter which
were filled in the latter half of fiscal year 2000 and into the current quarter,
predominately in the Human Resources and Information Technology areas.
Interest expense decreased $2 million or 10%, impacted by reduced levels
of debt and improved working capital results that helped keep down the use of
the Company's short-term credit facility (see "Liquidity and Capital Resources"
below). The effective tax rate for the current quarter was 43.5%, down slightly
from 44.0% in last year's first quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its capital needs from a combination of existing cash balances
and cash from operations. The Company's large debt portfolio is a result of the
Company's merger in March 1998. Net cash flows from operations for the first
quarter of fiscal year 2001 totaled a negative $3 million, an improvement of $16
million when compared with the first quarter of fiscal year 2000. This favorable
result was attributed to increases in net income and the continued positive
impact of favorable working capital trends, which improved $12 million when
comparing the current quarter with the prior year's quarter. The Company
continues to focus on increasing collection efforts in its accounts receivable
portfolio and refinements to its vendor payment cycles.
The Company achieved its $40 million cumulative synergy target for fiscal
year 2000. The Company anticipates it will meet its overall objective
established at the time of the March 1998 merger of $60 million in cumulative
synergies by the middle of fiscal year 2001.
The Company's board of directors did not declare a dividend during the
first quarter of fiscal year 2001. The Company may pay dividends in the future,
subject to the restrictive covenants contained in the Company's credit facility
agreements and other relevant considerations. The payment and amount of cash
dividends on the Company's common stock will be subject to the sole discretion
of the Company's Board, which will review the Company's dividend policy at such
times as may be deemed appropriate. The Board will closely monitor the results
of the Company's operations, capital requirements, and other considerations to
determine the extent to which a dividend may be declared in future periods.
In addition, the Company has undertaken an information systems strategy
study to evaluate the current state of its information systems, and consider
information technology options. Among the options under consideration is the
adoption of certain elements of the technology platform adopted by Sodexho
Alliance. At the most recent Board of Directors meeting, the Board approved an
initial phase of the Company's information technology strategy, which has now
moved from a strategic study to a phased-in implementation process. This phase
includes the approval of a new accounting system in the Company's Financial
Services Center located in Buffalo, New York, with an estimated cost of
approximately $30 million over the next 24 months. Of this $30 million,
approximately $26 million would be capitalized and the remaining balance would
be recognized within the Company's operating expenses. The impact to fiscal year
2001 is not expected to be material to the income statement, with approximately
$8 million anticipated to be disbursed within the current fiscal year.
Management anticipates that additional details regarding the system, vendor
selection and related implementation strategy will be
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
available later in the fiscal year. Information regarding additional steps of
the Company's overall information systems strategy will be made available as
those stages are approved.
Most recently, the Company began a study of a solution set for its
payroll, benefits and human resources information systems, as the Company
migrates from the current Marriott International payroll-related systems. Though
the current agreement requires the Company to migrate off the Marriott
International payroll infrastructure no later than fiscal year 2002, Marriott
International and the Company are finalizing terms to extend this agreement
beyond fiscal year 2002. This extension is anticipated to be finalized later in
fiscal year 2001. This extension will provide the Company additional time to
select the best payroll and benefit alternatives to meet the Company's and its
client's needs.
NEW ACCOUNTING STANDARDS
On September 2, 2000, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended ("SFAS No. 133"). In accordance with the provisions in
SFAS No. 133, the Company has designated all of its interest-rate agreements as
cash flow hedges. The Company has determined that these agreements are highly
effective in offsetting the variable interest cash flows of the Company's debt
portfolio. The agreements have been recorded on the balance sheet at fair value
in other long-term assets with the offsetting entry to accumulated other
comprehensive income, a component of stockholders' deficit, net of tax. The
transition adjustment resulting from the adoption of SFAS No. 133 at September
2, 2000, resulted in a cumulative-effect adjustment to accumulated other
comprehensive income of $15 million, net of taxes totaling $7 million. At
December 1, 2000, all agreements were considered highly effective. The Company
does not anticipate any reclassifications to earnings from accumulated other
comprehensive income in fiscal year 2001, with adjustments during the year
related mostly to changes in the fair value of the related agreements. There
were no net gains or losses recognized on derivatives that had previously been
deferred, or as adjustments to the carrying amount of the hedged items.
Currently, the Company does not have any other financial contracts which contain
embedded derivatives or fair value hedge relationships which would fall within
the scope of SFAS No. 133.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings are not materially affected by changes in interest rates,
due to the relatively low balances of borrowings at floating interest rates as
well as notes receivable which earn a variable rate of interest. However,
changes in interest rates also impact the fair value of the Company's debt,
totaling $995 million at December 1, 2000. If interest rates increased by 100
basis points, the fair value of the Company's debt would have decreased by
approximately $16 million, while a 100 basis point decrease in rates would have
increased the fair value of the Company's debt by approximately $16 million,
based on balances at December 1, 2000.
15
<PAGE>
PART II
OTHER INFORMATION AND SIGNATURES
ITEM 1. LEGAL PROCEEDINGS
--------------------------
There are no material legal proceedings pending against the Company.
ITEM 2. CHANGES IN SECURITIES
------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
--------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) Exhibits
Exhibit
NO. DESCRIPTIONS
--- ------------
27 Financial Data Schedule of the Registrant
99 Forward-Looking Statements
(b) Reports on Form 8-K
October 19, 2000 Change in the Annual Meeting
of Stockholders of the Company to
10:00 a.m., January 10, 2001.
November 29, 2000 Press Release, dated November 29, 2000,
announcing the retirement of Anthony Alibrio,
President of the Health Care
division, with Richard Macedonia
appointed as successor.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SODEXHO MARRIOTT SERVICES, INC.
January 12, 2001 /S/ JOHN M. BUSH
---------------------------------------------
John M. Bush
Senior Vice President and
Chief Financial Officer
/S/ CHARLES B. RUSSELL
---------------------------------------------
Charles B. Russell
Vice President, Corporate Controller and
Chief Accounting Officer
17
