For further information contact:
Steven Bono (COM) 630.663.2150
Steven Preston (CFO) 630.663.2260
Bruce Byots (INV) 630.663.2906
FOR IMMEDIATE RELEASE
August 5, 2003
SERVICEMASTER REPORTS PRELIMINARY
---------------------------------
2003 SECOND QUARTER RESULTS
---------------------------
DOWNERS GROVE, Illinois, AUGUST 5, 2003 - The ServiceMaster Company
(NYSE: SVM) today announced preliminary second quarter 2003 revenues of $1.05
billion, up 2 percent over the year ago period. Second quarter 2003 earnings per
share from continuing operations was $.22 compared with $.20 in 2002. For the
six months, revenues of $1.79 billion were up 1 percent over the year ago
period. Earnings per share from continuing operations was $.24, consistent with
the prior year.
In the second quarter of 2002, the Company recorded an extraordinary
loss of $.03 per share resulting from the early extinguishment of debt. As a
result of the Company's adoption of SFAS 145 (see attached financial statement
notes) in 2003, the aforementioned loss was reclassified into interest expense,
thereby reducing the previously reported 2002 diluted earnings per share by the
same amount.
"Our performance this year has been achieved against a backdrop of
difficult economic and weather conditions that have affected our industries,"
said Jonathan Ward, Chairman and Chief Executive Officer.
"During the quarter we regained some of the momentum lost early in the
year through strong production in TruGreen ChemLawn and a significant increase
in profitability from American Home Shield. Across our Company, the dedication
of our field personnel has been critical to delivering results in the quarter,"
continued Ward.
1
"Although Terminix has been fighting unfavorable weather and
economic conditions, the business continues to have solid prospects for
sustainable growth under normal conditions. We also continue to take action to
improve our under-performing units - TruGreen LandCare and ARS."
Review of Cash Flows
- --------------------
Net cash flow provided from operations for the first six months was $58
million, compared with $143 million in the previous year. The majority of the
reduction was experienced in the first quarter and is largely attributed to a
higher level of working capital, primarily due to the timing and amount of
customer prepayments, as well as the timing of certain payments and accruals.
The Company believes the year is trending in line with pre-2002 historical cash
flow patterns and still anticipates its net cash from operations to be
significantly in excess of its net income.
The Company completed $49 million in share repurchases in the first
half of the year and anticipates purchasing $25 to $50 million of additional
shares in the second half of 2003.
Outlook
- -------
"In spite of difficult conditions, we continue to target 2003 earnings
in the range of $.56 per share, reflecting an expected reduction of
approximately $.05 per share from higher healthcare and insurance costs and $.03
per share from a higher tax rate, partially offset by $.04 to $.05 per share in
savings generated by Six Sigma and strategic sourcing," said Ward.
"We are instituting additional cost and wage controls to keep us
on-track to meet our earnings goals for the year," commented Ward. "Our ability
to hit our targeted earnings depends on disciplined selling and field execution,
and a moderate upturn in the economy during the second half."
2
"While working to deliver short-term performance, we are simultaneously
enabling capacity for top-line growth by building compelling brand positions,
deepening geographic penetration and expanding our access to customers through
multiple channels," concluded Ward.
Business Review by Segment
- --------------------------
TruGreen
For the second quarter of 2003, the TruGreen segment reported revenues
of $455 million, up 5 percent compared with the prior year. For the six months
of 2003, the segment reported revenues of $681 million, up 3 percent compared to
2002. Revenues in the lawn care unit increased by 8 percent and 3 percent in the
quarter and six months, respectively, primarily reflecting growth in customer
counts and increased production in the second quarter in order to make up for
weather-related operating delays experienced in the first quarter. Revenues in
the landscaping unit decreased by 1 percent and increased by 2 percent in the
quarter and six months, respectively, reflecting a reduced level of enhancement
sales, offset by an increase in first quarter snow removal revenues.
Operating income for the quarter was $68 million, consistent with the
prior year, and for the six months was $59 million compared with $74 million in
the prior year. Margins in the first half declined due to higher sales and labor
related costs resulting from increased production in its lawn care unit, in
part, due to under utilization of labor in the first quarter, a decline in
profitability in its utility line clearing operations and a decreased level of
landscaping enhancement business.
Terminix
The Terminix segment reported second quarter 2003 revenues of $261
million, up 2 percent compared with the prior year. For the six months, Terminix
reported revenues of $486 million, up 2 percent compared with 2002. The growth
in higher priced bait contracts within the renewal base, as well as stronger
commercial pest control sales
3
contributed to the higher revenues. This growth
was partially offset by fewer sales of new termite contracts which is due to
abnormally cool weather conditions.
Operating income for the quarter was $42 million compared with $44
million in the prior year, and for the six months was $75 million compared with
$82 million in the prior year. Margins in the first half were lower reflecting
fewer high-margin new termite customers, as well as incremental costs associated
with the unit's new information system. This decline was offset in part by lower
than expected damage claims in its acquired Sears termite customer base.
American Home Shield
The American Home Shield (AHS) segment reported second quarter 2003
revenues of $126 million, up 8 percent compared with the prior period. For the
six months, AHS reported revenues of $220 million, up 9 percent compared with
2002. The unit experienced strong growth in renewal contracts offset in part by
a modest decrease in new contracts sold through its real estate channel.
Operating income for the quarter was $23 million compared with $18
million in 2002, and for the six months was $31 million compared with $21
million in the prior year. Margins in the first half were higher due to a lower
claims rate and favorable trending of prior year claims.
American Residential Services and American Mechanical Services
The American Residential Services (ARS) and American Mechanical
Services (AMS) segment reported second quarter 2003 revenues of $173 million,
down 10 percent compared with the prior year. For the six months, the segment
reported revenues of $324 million, down 9 percent as compared with 2002. The
decline in revenues reflects a reduction in HVAC construction activity, as well
as declines in the plumbing and HVAC service lines, offset by a modest
improvement in HVAC add-on/replacement volume. The business has been impacted by
both unfavorable economic and weather conditions which have affected this
business along with the entire industry.
4
Operating income for the quarter was $4 million compared with $10
million in the prior year, and for the six months was $3 million compared with
$7 million in the prior year. Margins in the first half were lower due to a
decrease in revenues and an increase in marketing and sales expenses.
Other Operations
The Other Operations segment reported second quarter 2003 revenues of
$37 million, up 6 percent compared with the prior year. For the six months, the
segment reported revenues of $74 million, up 6 percent, compared with 2002. The
increase in revenue reflects higher earned revenue at ServiceMaster Clean and
Merry Maids.
Operating loss for the quarter was $12 million compared with $6 million
in the prior year, and for the six months was $19 million compared with $11
million in the prior year. Continuing strong growth in the profits of the
franchise operations was offset by higher costs related to marketing, technology
and compliance initiatives incurred at the headquarters level.
Conference Call Details
- -----------------------
The Company will review these results and discuss its outlook in a call
at 10:00 a.m. CT on August 5, 2003. Interested parties may listen to the call at
(800) 633-8540. The conference call will include Jon Ward, Chairman and Chief
Executive Officer, and Steven Preston, 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 (#21155398).
5
Company Overview
- ----------------
ServiceMaster currently provides outsourcing services for more than
10.5 million residential and commercial customers. As America's Service Brands
for Home and Business, the core service capabilities of ServiceMaster include
lawn care and landscape maintenance, termite and pest control, plumbing, heating
and air conditioning services (HVAC), cleaning and disaster restoration,
furniture repair and home warranty.
These services are provided through a network of over 5,400
company-owned and franchised service centers and business units operating under
leading brands which include Terminix, TruGreen ChemLawn, TruGreen LandCare,
American Residential Services, Rescue Rooter, American Mechanical Services,
American Home Shield, ServiceMaster Clean, AmeriSpec, Merry Maids and Furniture
Medic.
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 landscaping services provided under the
TruGreen LandCare brand name. The Terminix segment includes domestic termite and
pest control services. The American Residential Services and American Mechanical
Services segment includes heating, ventilation, air conditioning (HVAC) and
plumbing services provided under the ARS, 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.
6
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): extreme weather
conditions that affect the demand for the Company's services; competition in the
markets served by the Company; labor shortages or increases in wage rates;
unexpected increases in operating costs, such as higher insurance, health care
or fuel prices; increased governmental regulation of telemarketing; general
economic conditions in the United States, especially as they may affect home
sales or consumer spending levels; time and expenses associated with integrating
and winding down businesses; and other factors described from time to time in
documents filed by the Company with the Securities and Exchange Commission.
7
THE SERVICEMASTER COMPANY
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
Statements of Income
2003 2002 2003 2002
------------- ------------ ------------ ------------
Operating Revenue $ 1,052,629 $ 1,034,937 $ 1,786,294 $ 1,769,200
Operating Costs and Expenses:
Cost of services rendered and products sold 679,241 680,381 1,217,160 1,211,192
Selling and administrative expenses 247,086 217,728 416,331 379,330
Goodwill, trade name and other intangible amortization 1,722 2,152 3,362 4,306
------------- ------------ ------------ ------------
Total operating costs and expenses 928,049 900,261 1,636,853 1,594,828
------------- ------------ ------------ ------------
Operating Income 124,580 134,676 149,441 174,372
Non-operating Expense (Income):
Interest expense (1) 16,655 37,107 32,938 59,648
Interest and investment income (3,125) (1,966) (4,344) (4,898)
Minority interest and other expense, net 2,046 2,014 4,118 3,584
------------- ------------ ------------ ------------
Income from Continuing Operations before Income Taxes 109,004 97,521 116,729 116,038
Provision for income taxes 42,817 35,313 45,867 41,972
------------- ------------ ------------ ------------
Income from Continuing Operations 66,187 62,208 70,862 74,066
Discontinued Operations, net of income taxes (637) 295 (637) 78
------------- ------------ ------------ ------------
Net Income $ 65,550 $ 62,503 $ 70,225 $ 74,144
============= ============ ============ ============
Diluted Earnings Per Share (2):
Income from Continuing Operations $ 0.22 $ 0.20 $ 0.24 $ 0.24
Discontinued Operations, net - - - -
Diluted Earnings Per Share $ 0.22 $ 0.20 $ 0.23 $ 0.24
======= ======= ======= ======
Number of Shares - Diluted 308,947 316,474 301,188 307,700
- ------------------------------------------------------------------------------------------------------------------------------
Dividends Per Share $ 0.105 $ 0.10 $ 0.21 $ 0.20
======= ======= ======= ======
Price Range Per Share:
High Price $10.95 $15.50 $11.41 $15.50
Low Price 8.97 12.70 8.95 12.70
- ------------------------------------------------------------------------------------------------------------------------------
THE SERVICEMASTER COMPANY
(In thousands) As of
Condensed Balance Sheets June 30, December 31,
2003 2002
---------- -----------
Assets
Cash and cash equivalents $ 101,553 $ 227,409
Marketable securities 95,893 75,194
Receivables, net of allowances 397,643 332,186
Inventories and other current assets 319,018 278,731
Assets in discontinued operations 1,342 5,654
---------- -----------
Total Current Assets 915,449 919,174
---------- -----------
Intangible assets, primarily trade names and goodwill, net of accumulated amortization 2,197,295 2,177,561
Property and equipment, net of accumulated depreciation 185,133 194,877
Notes receivable, long-term securities, and other assets 136,235 123,326
---------- -----------
$ 3,434,112 $ 3,414,938
========== ===========
Liabilities and Equity
Current liabilities $ 797,199 $ 775,816
Liabilities in discontinued operations 15,976 32,113
Current debt maturities 30,213 31,135
---------- -----------
Total Current Liabilities 843,388 839,064
---------- -----------
Long-term debt 796,627 804,340
Other long-term obligations 470,886 423,725
Liabilities in discontinued operations 28,800 28,800
Minority interest 100,309 100,309
Shareholders' equity 1,194,102 1,218,700
---------- -----------
$ 3,434,112 $ 3,414,938
========== ===========
Six Months Ended
June 30,
Statements of Cash Flows
2003 2002
---------- -----------
Cash and Cash Equivalents at January 1 $ 227,409 $ 402,644
Cash Flows from Operations:
Net Income 70,225 74,144
Adjustments to reconcile net income to net cash flows from operations:
(Income) loss from discontinued operations 637 (78)
Depreciation 25,336 24,291
Amortization 3,362 4,306
Deferred income tax expense 39,738 39,758
Change in working capital, net of acquisitions (82,817) (10,642)
Other, net 1,554 11,394
---------- -----------
Net Cash Provided from Operations 58,035 143,173
---------- -----------
Cash Flows from Investing Activities:
Property additions (21,399) (29,387)
Sale of equipment and other assets 7,794 1,140
Business acquisitions, net of cash acquired (16,630) (6,849)
Notes receivable, financial investments and securities (20,173) (4,228)
---------- -----------
Net Cash Used for Investing Activities (50,408) (39,324)
---------- -----------
Cash Flows from Financing Activities:
Net payments of debt (15,256) (295,570)
Purchase of ServiceMaster stock (48,975) -
Shareholders' dividends (62,815) (59,598)
Other 6,399 12,825
---------- -----------
Net Cash Used for Financing Activities (120,647) (342,343)
---------- -----------
---------- -----------
Cash Used for Discontinued Operations (12,836) (31,406)
---------- -----------
Cash Decrease During the Period (125,856) (269,900)
---------- -----------
Cash and Cash Equivalents at June 30 $ 101,553 $ 132,744
========== ===========
NOTES:
(1) In 2003, the Company adopted Statement of Financial Accounting Standards
(SFAS) 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". The primary impact to the Company
of SFAS 145 is that it rescinds SFAS 4 which required all material gains and
losses from the extinguishment of debt to be classified as extraordinary items.
SFAS 145 requires that the more restrictive criteria of APB Opinion No. 30 be
used to determine whether such gains or losses are extraordinary. In the second
quarter of 2002, the Company recorded an extraordinary loss of $.03 per diluted
share ($15 million pretax, $9 million after-tax) from the early extinguishment
of debt. As a result of the Company's adoption of SFAS 145 in 2003, this loss
was reclassified into interest expense, thereby reducing the previously reported
2002 diluted earnings per share from continuing operations to $.20 and $.24 for
the second quarter and six months, respectively.
(2) The weighted average common shares for the diluted earnings per share
calculation includes the incremental effect related to outstanding options whose
market price is in excess of the exercise price. Shares potentially issuable
under convertible securities have been considered outstanding for purposes of
the diluted earnings per share calculations if their impact is dilutive. In
computing diluted earnings per share, the after-tax interest expense related to
convertible debentures is added back to net income in the numerator, while the
diluted shares in the denominator include the shares issuable upon conversion of
the debentures. Shares potentially issuable under convertible securities have
not been included in the diluted earnings per share calculation for the six
months ended June 30, 2003 and 2002, respectively, as their effect would have
been anti-dilutive.
The following table reconciles both the numerator and the denominator of the
basic earnings per share from continuing operations computation to the numerator
and the denominator of the diluted earnings per share from continuing operations
computation:
(in thousands, except per share data)
Three months ended June 30, 2003 Three months ended June 30, 2002
---------------------------------- -----------------------------------
Income Shares EPS Income Shares EPS
------- ------- ------- ------- ------ ------
Continuing Operations:
- ----------------------------------------
Basic EPS $66,187 296,819 $ 0.22 $62,208 301,092 $ 0.21
Effect of dilutive securities,
net of tax:
Options 3,928 7,182
Convertible debentures 1,195 8,200 1,195 8,200
------- ------- -------- -------
Diluted EPS $67,382 308,947 $ 0.22 $63,403 316,474 $ 0.20
========= ======== ======= ========= ======== =========
Six months ended June 30, 2003 Six months ended June 30, 2002
---------------------------------- -----------------------------------
Income Shares EPS Income Shares EPS
------- ------- ------- ------- ------ ------
Continuing Operations:
- ----------------------------------------
Basic EPS $ 70,862 297,307 $ 0.24 $ 74,066 300,653 $ 0.25
Effect of dilutive
securities-options 3,881 7,047
-------- -------- --------- -------- ---------
Diluted EPS $ 70,862 301,188 $ 0.24 $ 74,066 307,700 $ 0.24
========= ======== ======= ========= ======== =========
THE SERVICEMASTER COMPANY
(In thousands)
Segment Summaries
For the three months ended June 30, For the six months ended June 30,
Percent Percent
2003 2002 Change 2003 2002 Change
---------- ---------- ---------- ---------- ---------- --------
---------- ---------- ---------- ---------- ---------- --------
Operating Revenue:
TruGreen $ 455,449 $ 434,279 5% $ 681,318 $ 663,422 3%
Terminix 260,588 256,652 2% 486,494 476,925 2%
American Home Shield 126,149 116,440 8% 220,373 202,356 9%
ARS/AMS 172,977 192,079 -10% 324,410 357,170 -9%
Other Operations 37,466 35,487 6% 73,699 69,327 6%
---------- ---------- ---------- ---------- ---------- --------
---------- ---------- ---------- ---------- ---------- --------
Total Operating Revenue $ 1,052,629 $ 1,034,937 2% $ 1,786,294 $1,769,200 1%
========== ========== ========== ========== ========== ========
========== ========== ========== ========== ========== ========
Operating Income:
TruGreen $ 67,723 $ 67,920 0% $ 58,893 $ 74,444 -21%
Terminix 41,897 44,289 -5% 75,425 82,225 -8%
American Home Shield 23,162 17,834 30% 31,321 21,189 48%
ARS/AMS 3,838 10,191 -62% 2,668 7,305 -63%
Other Operations (12,040) (5,558) N/A (18,866) (10,791) N/A
---------- ---------- ---------- ---------- ---------- --------
---------- ---------- ---------- ---------- ---------- --------
Total Operating Income $ 124,580 $ 134,676 -7% $ 149,441 $ 174,372 -14%
========== ========== ========== ========== ========== ========
========== ========== ========== ========== ========== ========
As of June 30,
Percent
2003 2002 Change
---------- ---------- ----------
---------- ---------- ----------
Capital Employed:
TruGreen $ 1,080,456 $ 1,058,207 2%
Terminix 577,985 580,883 0%
American Home Shield 119,337 89,367 34%
ARS/AMS 387,016 416,691 -7%
Other Operations and Discontinued Operations (43,543) 70,341 N/A
---------- ---------- ----------
---------- ---------- ----------
Total Capital Employed $ 2,121,251 $ 2,215,489 -4%
========== ========== ==========
========== ========== ==========
Capital employed is defined as the segment's total assets less liabilities,
exclusive of debt balances. The Company believes these figures are useful to
investors in helping them compute return on capital measures and therefore
better understand the performance of the Company's business segments.
Key Performance Indicators
Rolling twelve month metrics
as of June 30,
2003 2002
---------- ----------
---------- ----------
TruGreen -
Growth in Full Program Contracts 2% 1%
Customer Retention Rate 64.1% 64.5%
Terminix -
Growth in Pest Control Customers 1% 12%
Pest Control Customer Retention Rate 75.8% 77.5%
Growth in Termite Customers -2% 8%
Termite Customer Retention Rate 88.6% 90.1%
American Home Shield -
Growth in Warranty Contracts 9% 15%
Customer Retention Rate 53.2% 53.2%