For further information contact:
Ernie Mrozek (CFO) 901.766.1268
Steve Bono (COM) 630.663.2150
Bruce Byots (INV) 630.663.2906
FOR IMMEDIATE RELEASE
November 3, 2005
SERVICEMASTER REPORTS THIRD QUARTER 2005 RESULTS; REVENUE GROWTH OF EIGHT PERCENT SUPPORTS NINE PERCENT GROWTH IN EPS
• Terminix achieves solid growth in termite completions and renewals, with sharply higher margins; |
• American Residential Services reports strong revenue and profit growth; |
• TruGreen ChemLawn achieves solid revenue growth with continued diversification of its sales channels; LandCare experiences improved margins; and |
• Continued savings from safety efforts help offset higher fuel costs. |
DOWNERS GROVE, Illinois, November 3, 2005 – The ServiceMaster Company (NYSE: SVM) today announced third quarter 2005 revenues of $1.1 billion, an eight percent increase compared to the prior year. Third quarter earnings per share from continuing operations were $.25, nine percent above the $.23 reported in 2004. For the nine months, revenues of $3.1 billion were up seven percent, and earnings per share from continuing operations were $.56, a 10 percent increase.
“Our teams in the field maintained a sure and steady course in the quarter even though our customers faced unpredictable economic conditions and volatility in gas and oil prices. We delivered top line growth in every business segment and remain on course for our revenue and earnings growth targets for the year as a whole,” said Jonathan Ward, Chairman and CEO. “We continue to focus on reaching and keeping more customers by delivering a consistently satisfying service experience, while we work and invest to become systematically stronger.”
“We are committed to grow faster than our markets, faster than the economy as a whole and do it in a sustainable way. We believe that our own actions are more important than any acceleration or difficulties that come from external conditions,” continued Ward.
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Review of Cash Flows and Balance Sheet
Net cash flow provided from operating activities for the nine months was $112 million, compared to $241 million in the previous year. This decrease in net cash flow primarily reflects the net tax payments associated with the previously disclosed January 2005 IRS agreement. Working capital usage increased $28 million resulting primarily from a higher level of incentive compensation payments made in early 2005 relating to 2004. Total debt on September 30, 2005 was $769 million, approximately $36 million lower than the level reported at December 31, 2004.
Outlook
“We continue to expect our annual revenue growth rate to be in the mid to high single digit range and that earnings per share will grow somewhat faster than revenues. In addition, excluding the impact of the IRS settlement, we expect cash from operating activities to increase and to again substantially exceed net income,” said Ward.
“There is no doubt that instability in gas and oil prices combined with increasing interest rates are having a negative effect on consumer confidence. It is too early to determine whether these trends will continue and how they will affect spending patterns in 2006, but we are watching the situation closely,” concluded Ward.
Business Review by Segment
TruGreen
The combined TruGreen segment reported third quarter revenues of $459 million, up five percent compared to the prior year. For the nine months, the segment reported revenues of $1.2 billion, a four percent increase. Operating income for the quarter was $79 million compared to $80 million in 2004. Prior year results included a non-recurring pre-tax gain of $4 million from the sale of a support facility. For the nine months, operating income was $140 million compared to $143 million in 2004.
Revenues in the lawn care operations increased five percent in both the third quarter (to $341 million) and the nine months (to $822 million). Revenue growth resulted primarily from improved price realization and an increase in supplemental customer services. Customer counts
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increased modestly, as the successful expansion of neighborhood selling efforts and direct mail programs were partially offset by a reduction in telemarketing sales, a reduced level of acquisitions and a decline in customer retention in the Canadian operations. Operating income in the lawn care operations declined $2 million for the third quarter as higher revenues and reduced safety-related costs were offset by higher fuel and fertilizer costs, changes in the timing of certain expenses between quarters and the effects of the previously mentioned 2004 facility gain. For the nine months, operating income decreased $6 million, reflecting the factors described above, as well as the first time absorption of first quarter seasonal losses of the Canadian operations ($3 million) that were acquired in April of 2004.
Revenues in the commercial landscaping operations of $117 million increased three percent in the quarter. For the nine months, revenues increased two percent to $337 million. Revenue growth primarily reflected increased enhancement sales and growth in contract maintenance revenues. Third quarter and nine month operating losses improved by $1 million and $3 million, respectively, reflecting improvements in labor, material and safety-related costs, partially offset by higher fuel prices. The nine month improvement also reflects the favorable effect on comparability of one-time branch shutdown costs that were incurred last year.
Terminix
Terminix reported third quarter revenues of $267 million, a five percent increase. For the nine months, segment revenues grew by six percent to $820 million. In both periods, solid growth was achieved in revenues from initial termite applications as an expanded sales force and geographic presence generated increased unit sales despite a relatively weak termite swarm. Termite renewal revenues experienced strong growth, reflecting improved pricing, partially offset by a slight decrease in customer retention. Terminix realized solid growth in pest control revenues, reflecting the impact of acquisitions, partially offset by a decline in customer retention. Pest unit sales decreased modestly during the quarter but remain up for the nine months.
Operating income for the quarter was $34 million compared to $27 million in the prior year, a 28 percent increase. For the nine months, operating income rose 10 percent to $122 million. In addition to higher revenues, third quarter results also benefited from improved labor and material cost efficiencies resulting from the new termite liquid application technique and the
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new termite bait product. Terminix also experienced reduced safety related costs and lower bad debt expenses. Collectively, these factors more than offset the effects of higher fuel costs and a $4 million increase to prior years termite damage claim reserves. New termite damage claims are trending favorably.
For the nine months, the growth in operating income was supported by the factors described above, partially offset by incremental pre-season investments made to expand the sales force and reorganize the field operations, as well as a $6 million favorable but non-recurring adjustment recorded in the second quarter of last year. In addition, since more of the total first year costs associated with the new bait product are incurred at the time of installation, less revenue and gross profit is required to be deferred to future quarters. This factor benefited second quarter results but did not have a significant net impact during the third quarter.
American Home Shield
The American Home Shield (AHS) segment reported third quarter earned revenues of $155 million, a 12 percent increase. For the nine months, earned revenues were up 10 percent to $410 million. New contract sales, which are reported as earned revenues over the subsequent twelve month contract period, increased nine percent in both the quarter and nine months. AHS experienced strong growth in its renewals and in the direct-to-consumer channel while the real estate channel experienced improved momentum. Warranty contract renewals were supported by an overall improved customer retention rate, while consumer sales benefited from an increased level of targeted direct mail.
Operating income for the quarter was $23 million, consistent with the prior year. Year-to-date, operating income increased to $61 million, a six percent improvement. In both the quarter and year-to-date period, revenue growth was more than offset by higher claim costs associated with weather that was much hotter than the generally mild conditions that prevailed last summer. This led to an 11 percent increase in the rate of service requests, as well as a higher cost per claim, which combined had an incremental impact on costs of approximately $11 million. Additionally, operating income comparisons were impacted by investments in market penetration and customer retention initiatives in 2005, as well as a $5.5 million cumulative
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negative adjustment to deferred revenue and operating income that was reported in the third quarter of last year.
American Residential Services and American Mechanical Services
The American Residential Services (ARS) and American Mechanical Services (AMS) segment reported third quarter revenues of $208 million, up 15 percent compared to the prior year. For the nine months, revenues totaled $570 million, an 11 percent increase. The segment experienced continued strong growth in ARS’ volume of replacement sales and residential new construction installations, partially offset by modest declines in core plumbing service calls. HVAC service revenues increased modestly in the quarter but are down year-to-date. AMS had strong growth in commercial project revenues in both the quarter and nine month periods.
Operating income for the quarter was $5 million, compared to $4 million in the prior year. For the nine months, operating income was $7 million compared to $2 million in 2004. The increase in profitability primarily resulted from the increased level of revenues due to hotter weather, a more favorable mix of replacement sales, and a reduction in marketing and insurance costs, partially offset by increased fuel costs and charges to recognize losses on construction projects at an AMS location.
Other Operations
The Other Operations segment reported third quarter revenues of $45 million, up five percent compared to the prior year. For the nine months, the segment reported revenues of $130 million, a seven percent increase. The ServiceMaster Clean and Merry Maids franchise operations reported combined revenue increases of six percent and eight percent in the quarter and nine months, respectively, driven by strong internal growth in residential maid service, continued solid results in disaster restoration and improvements in commercial cleaning.
Operating loss for the quarter was $(9) million, a three percent improvement over the prior year. For the nine months, operating loss was reduced six percent to $(27) million. Favorable trending of prior year insurance claims, as well as increased profits from the franchise businesses, were partially offset by increases in costs of certain strategic investments.
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Non-Operating Expense / (Income)
Non-Operating expenses for the quarter were $10 million compared with $13 million in the prior year. For the nine months, these expenses were $32 million compared to $40 million in 2004. The year-to-date improvement primarily reflects an increase in gains experienced on the AHS investment portfolio.
Discontinued Operations
The income from discontinued operations, net of income taxes for the third quarter and nine months ended September 30, 2005 primarily reflects the favorable conclusion of certain obligations related to international pest control operations.
Conference Call Details
The Company will review these results and discuss its outlook in a call at 10:00 a.m. CT on November 3, 2005. Interested parties may listen to the call at (888) 882-0147. The conference call will include Jon Ward, Chairman and Chief Executive Officer, and Ernie Mrozek, President and Chief Financial Officer. The call will be broadcast live and can be accessed at the ServiceMaster web site, www.svm.com. The call will be archived on the site for 30 days and may also be accessed for seven days at (800) 633-8284 (#21265518).
Company Overview
ServiceMaster provides outsourcing services for residential and commercial customers through a network of over 5,500 company-owned and franchised service centers and business units operating under leading brands, which include Terminix, TruGreen ChemLawn, TruGreen LandCare, ARS Service Express, Rescue Rooter, American Mechanical Services, ServiceMaster Clean, American Home Shield, Amerispec, Merry Maids, and Furniture Medic. As America’s Service Brands for Home and Business, the core service capabilities of the Company include lawn care and landscape maintenance, termite and pest control, plumbing, heating and air conditioning services, cleaning, furniture repair and home warranty.
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Business Segments
The Company is primarily comprised of five business segments: The TruGreen segment includes the lawn care operations performed under the TruGreen ChemLawn brand name and commercial landscaping services provided under the TruGreen LandCare brand name. The Terminix segment includes termite and pest control services. The American Residential Services and American Mechanical Services segment includes heating, ventilation, air conditioning, electrical and plumbing services provided under the ARS Service Express, AMS and Rescue Rooter brand names. The American Home Shield segment offers warranty contracts on home systems and appliances and home inspection services through AmeriSpec. The Other Operations segment includes the Company’s franchised operations, which include ServiceMaster Clean, Merry Maids, Furniture Medic, the Company’s international operations and headquarters.
Forward-Looking Statements
This press release contains statements concerning future results and other matters that may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends that these forward-looking statements, which look forward in time and include everything other than historical information, be subject to the safe harbors created by such legislation. The Company notes that these forward-looking statements involve risks and uncertainties that could affect its results of operations, financial condition or cash flows. Factors that could cause actual results to differ materially from those expressed or implied in a forward-looking statement include the following (among others): weather conditions that affect the demand for the Company’s services; changes in the source and intensity of competition in the markets served by the Company; labor shortages or increases in wage rates; unexpected increases in operating costs, such as higher insurance premiums, self insurance and healthcare claim costs; higher fuel prices; changes in the types or mix of the Company’s service offerings or products; increased governmental regulation including telemarketing and environmental restrictions; general economic conditions in the United States, especially as they may affect home sales or consumer spending levels; and other factors described from time to time in documents filed by the Company with the Securities and Exchange Commission.
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