1 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
August 5, 2004
SERVICEMASTER REPORTS 2004 SECOND QUARTER RESULTS;
--------------------------------------------------
REFLECTS CONTINUED GROWTH IN REVENUES AND EARNINGS
--------------------------------------------------
DOWNERS GROVE, Illinois, August 5, 2004 - The ServiceMaster Company (NYSE:
SVM) today announced second quarter 2004 revenues of $1.1 billion, a 6 percent
increase compared to the prior year. Second quarter earnings per share was $.24,
9 percent above the $.22 reported in 2003. For the six months, revenues of $1.8
billion were up 6 percent over the year ago period. Earnings per share from
continuing operations was $.28, 17 percent above the $.24 reported in the prior
year.
"Again this quarter, every one of our business segments delivered top line
growth. This reflects the hard work of our team and their unwavering dedication
to transforming the customer experience," said Jonathan Ward, Chairman and CEO.
"The earnings growth we have achieved during the last four quarters from our
continuing operations indicates the soundness of our strategy of brand
differentiation, organic sales growth, improving customer retention and price
realization. We are proving that we can pursue this strategy while
simultaneously making substantial changes in our sales channels and service
offerings particularly at TruGreen ChemLawn and Terminix."
Review of Cash Flows and Balance Sheet
Net cash flow provided by operating activities was $116 million in the
first six months, compared to $60 million in the previous year. The majority of
the improvement occurred in the first quarter and was a result of higher
earnings and a decrease in the use
1
of working capital, primarily due to the timing of vendor payments and the
relative impact of incentive compensation accruals and payments.
The Company completed approximately $40 million in share repurchases in the
first six months of the year with the majority of activity occurring in the
first quarter.
Total debt on June 30, 2004 was $816 million, slightly below the prior
year-end levels.
Outlook
- --------
"We are re-affirming our outlook for the year. We expect revenue growth to
be in the mid-single digits and that earnings per share will grow somewhat
faster than revenues. We project that for the last six months of the year,
earnings per share should be comparable to last year, reflecting continued solid
growth from operating activities offset by a lower level of gains from our
American Home Shield investment portfolio and a higher effective tax rate," said
Ward. "Economic conditions and consumer confidence continue to be favorable,
although our results for the year continue to be tempered by large increases in
key costs such as variable compensation (returning to more normal levels),
insurance and fuel as well as our commitment to make appropriate investments to
sustain our growth."
Business Review by Segment
- --------------------------
TruGreen
For the second quarter of 2004, the TruGreen segment reported revenues of
$454 million, up 4 percent compared with the prior year. For the six months, the
segment reported revenues of $678 million, up 6 percent compared to 2003.
Operating income for the quarter was $66 million compared with $68 million in
the prior year. For the six months, operating income was $63 million compared to
$59 million in 2003.
2
Revenues in the lawn care unit increased 6 percent and 9 percent in the
quarter and six months, respectively, reflecting increased production and higher
customer counts, supported by improved retention rates and more favorable
weather conditions during the first quarter, partially offset by a modest
decrease in new sales. The April 1, 2004 acquisition of Greenspace Services
Limited (in Canada) contributed 4 percent and 3 percent of revenue for the
quarter and six months, respectively. Operating income decreased by $4 million
in the quarter and increased by $7 million in the six months. The decline in
second quarter operating income was attributed to an increase in materials
expense resulting from a change in the estimated allocation of annual fertilizer
and weed control costs to first half applications, which are relatively more
costly. This change accelerated recognition of approximately $6 million of
expense into the second quarter that will result in a corresponding benefit in
later quarters of 2004. The increase in operating income for the six months
reflected higher revenues and labor and cost efficiencies partially offset by
the aforementioned materials expense.
Revenues in the landscaping unit were consistent with prior year levels in
both the quarter and six months, reflecting comparable amounts in base contract
maintenance combined with continued stronger enhancement sales volume, offset by
last year's higher snow removal business in the first quarter of 2003. Operating
income improved by $2 million in the quarter and declined by $3 million in the
six months, respectively. The decline in profitability for the six months
reflected a reduction in higher margin snow removal business and branch
consolidation costs in the first quarter, combined with higher insurance related
costs in both periods.
Terminix
The Terminix segment reported second quarter 2004 revenues of $282 million,
up 8 percent as compared to 2003. For the six months, the segment reported
revenues of $519 million, up 7 percent compared to the prior year. The increase
in revenue reflected improved pricing in termite renewals combined with strong
growth in new termite completions. Overall growth in termite completion revenues
reflected improved price
3
realization and a strong increase in volume following last year's
weather-plagued termite swarm season, offset by the previously disclosed mix
shift from higher priced bait treatments to lower priced liquid treatments.
Additionally, the pest control business experienced continued improvements in
customer retention and revenues.
Operating income for the quarter was $48 million compared with $42 million
in the prior year. For the six months, operating income was $85 million compared
to $75 million in 2003. The increase in operating income was primarily due to
the increase in revenues and strong cost controls, partially offset by the mix
shift from the higher priced bait treatments to liquid treatments. In both the
second quarter of 2003 and 2004 the segment's results reflected a comparable
level of favorable trending in termite damage claims from the portion of the
customer base previously acquired from Sears.
American Home Shield
The American Home Shield (AHS) segment reported second quarter 2004
revenues of $133 million, up 6 percent as compared to 2003. For the six months,
the segment reported revenues of $236 million, up 7 percent compared to the
prior year. AHS experienced strong growth in its consumer channels and more
moderate growth in its renewal and real estate channels. New contract sales,
which are reported as earned revenues over the subsequent twelve month contract
period, increased at faster rates of 10 percent and 9 percent for the quarter
and six months, respectively.
Operating income for the quarter was $24 million compared with $23 million
in the prior year. For the six months, operating income was $34 million compared
to $31 million in 2003. As had been expected, operating income in the second
quarter grew less rapidly than revenues, as the favorable effects of revenue
growth were partially offset by a lower level of favorable trending in prior
year contract claims activity than was realized in last year's second quarter,
as well as current investments in key marketing and customer service
initiatives.
4
American Residential Services and American Mechanical Services
The American Residential Services (ARS) and American Mechanical Services
(AMS) segment reported second quarter 2004 revenues of $180 million, up 4
percent as compared to 2003. For the six months, the segment reported revenues
of $334 million, up 3 percent compared to the prior year. The segment
experienced continued increases in construction and project revenue, as well as
modest growth in its HVAC and plumbing service lines during the second quarter,
an improvement over the unfavorable growth trends experienced over the prior
several quarters. This growth was partially offset by a decrease in revenues due
to operations shut-down in the second half of 2003.
Operating income for the quarter was $2 million compared with $4 million in
the prior year. For the six months, the segment reported an operating loss of $2
million compared to operating income of $3 million in 2003. This decline in
profitability was primarily due to cyclically depressed project margins at AMS
and higher marketing, fuel and insurance costs at ARS. Additionally,
profitability was negatively impacted by a modest revenue mix shift to the lower
margin construction business.
Other Operations
The Other Operations segment reported second quarter revenues of $40
million, up 6 percent compared with the prior year. For the six months, the
segment reported revenues of $78 million, also up 6 percent. The combined
ServiceMaster Clean and Merry Maids franchise operations reported a combined
increase in earned revenue of 8 percent in both the quarter and six months,
primarily driven by continued strong results in disaster restoration and
steadily improved internal growth in maid service.
Operating loss for the quarter was $10 million compared with $12 million in
the prior year. For the six months, operating loss was $19 million in both 2004
and 2003. The second quarter reduction in the segment's operating loss reflected
an increase in
5
profits from the franchise businesses and a reduction in overhead spending,
partially offset by higher costs related to insurance and variable
compensation.
Change in Dividend Payment Timing
The ServiceMaster Company and its Board review dividend policy and other
capital structure objectives on a regular basis. As part of this review, it was
determined that prevailing corporate best practice in the United States is to
have dividends declared in the same quarter that they are paid. To achieve this
result, it will be necessary to slightly modify the Company's historic pattern
of dividend declaration and payment dates. The Company plans to continue to
approve and pay its dividends quarterly, with the payment schedule for each
quarter pushed back one month, to the end of November, February, May and August.
This change would become effective for the fourth quarter 2004 dividend payment,
which was previously expected to be paid in October, and would now be declared
in October and paid in November.
In 2003, the Company recorded its 33rd consecutive year of annual growth in
its dividend payment. Furthermore, as a result of the $.11 per share quarterly
dividend paid in July 2004, the Company is on track to continue this consecutive
growth trend for 2004.
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, 2004. Interested parties may listen to the call at
(800) 718-4684. 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 (#21202158).
6
Company Overview
ServiceMaster 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, ventilation
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, ARS Service
Express, 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, 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.
7
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; competition in the
markets served by the Company; labor shortages or increases in wage rates;
unexpected increases in operating costs, such as higher insurance, self
insurance and health care costs; higher fuel prices; increased governmental
regulation including 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.
8
THE SERVICEMASTER COMPANY
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
Statements of Income
2004 2003 2004 2003
----------- ----------- ----------- -----------
Operating Revenue $ 1,088,716 $ 1,031,470 $ 1,845,607 $ 1,743,813
Operating Costs and Expenses:
Cost of services rendered
and products sold 697,706 657,883 1,242,762 1,174,237
Selling and administra-
tive expenses 260,128 247,049 439,438 416,257
Amortization expense 1,511 1,722 2,933 3,362
----------- ----------- ----------- -----------
Total operating costs
and expenses 959,345 906,654 1,685,133 1,593,856
----------- ----------- ----------- -----------
Operating Income 129,371 124,816 160,474 149,957
Non-operating Expense (Income):
Interest expense 15,007 16,655 29,938 32,938
Interest and
investment income (3,036) (3,125) (7,606) (4,344)
Minority interest and
other expense, net 2,086 2,046 4,132 4,118
----------- ----------- ----------- -----------
Income from
Continuing Operations
before Income Taxes 115,314 109,240 134,010 117,245
Provision for
income taxes 44,626 42,911 51,861 46,073
----------- ----------- ----------- -----------
Income from Continuing
Operations 70,688 66,329 82,149 71,172
Loss from discontinued
operations, net
of income taxes (292) (779) (554) (947)
----------- ----------- ----------- -----------
Net Income $ 70,396 $ 65,550 $ 81,595 $ 70,225
=========== =========== =========== ===========
Diluted Earnings Per Share (1):
Income from continuing
operations $ 0.24 $ 0.22 $ 0.28 $ 0.24
Loss from discontinued
operations --- --- --- ---
------ ------ ------ ------
Diluted Earnings
Per Share $ 0.24 $ 0.22 $ 0.28 $ 0.23
====== ====== ====== ======
Number of Shares -
Diluted 302,944 308,947 295,490 301,188
- ----------------------------------------------------------------------
Dividends Per Share $ 0.105 $ 0.105 $ 0.21 $ 0.21
======= ======= ====== ======
Price Range Per Share:
High Price $12.50 $10.95 $12.50 $11.41
Low Price 11.35 8.97 10.65 8.95
- ----------------------------------------------------------------------
THE SERVICEMASTER COMPANY
(In thousands)
Condensed Balance Sheets As of
June 30, Dec. 31,
Assets 2004 2003
------------ ------------
Cash and cash equivalents $ 176,196 $ 228,161
Marketable securities 87,293 90,540
Receivables, net of allowances 420,568 333,834
Inventories and other current assets 297,812 232,966
Assets in discontinued operations 4,894 5,273
------------ ------------
Total Current Assets 986,763 890,774
------------ ------------
Intangible assets, primarily
trade names and goodwill, net
of accumulated amortization 1,765,248 1,732,659
Property and equipment, net of
accumulated depreciation 184,779 179,515
Long-term marketable securities 97,560 92,562
Notes receivable and other assets 53,610 60,916
------------ ------------
Total Assets $ 3,087,960 $ 2,956,426
============ ============
Liabilities and Equity
Current liabilities $ 900,513 $ 770,079
Liabilities in discontinued operations 11,494 14,380
Current debt maturities 29,346 33,781
------------ ------------
Total Current Liabilities 941,353 818,240
------------ ------------
Long-term debt 786,431 785,490
Other long-term obligations 425,118 401,474
Liabilities in discontinued operations 31,064 34,396
Minority interest 100,000 100,309
Shareholders' equity 803,994 816,517
------------ ------------
Total Liab. and Shareholders' Equity $ 3,087,960 $ 2,956,426
============ ============
Six Months Ended
June 30,
Statements of Cash Flows 2004 2003
------------ ------------
Cash and Cash Equivalents at January 1 $ 228,161 $ 227,177
Cash Flows from Operating Activities:
Net Income 81,595 70,225
Adjustments to reconcile net income to net
cash flows from operating activities:
Loss from discontinued operations 554 947
Depreciation 24,327 24,782
Amortization 2,933 3,362
Deferred income tax expense 44,961 39,738
Change in working capital, net
of acquisitions (44,120) (80,228)
Other, net 5,446 1,554
------------ ------------
Net Cash Provided from Operating Activities 115,696 60,380
------------ ------------
Cash Flows from Investing Activities:
Property additions (24,226) (21,142)
Sale of equipment and other assets 1,525 7,702
Business acquisitions, net of cash acquired (20,875) (16,630)
Notes receivable, financial investments
and securities (3,370) (20,173)
------------ ------------
Net Cash Used for Investing Activities (46,946) (50,243)
------------ ------------
Cash Flows from Financing Activities:
Net payments of debt (17,751) (15,256)
Purchase of ServiceMaster stock (41,286) (48,975)
Shareholders' dividends (61,314) (62,815)
Other 5,648 6,399
------------ ------------
Net Cash Used for Financing Activities (114,703) (120,647)
------------ ------------
------------ ------------
Cash Used for Discontinued Operations (6,012) (15,123)
------------ ------------
Cash Decrease During the Period (51,965) (125,633)
------------ ------------
Cash and Cash Equivalents at June 30 $ 176,196 $ 101,544
============ ============
Note:
(1) 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. 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 been considered
outstanding for the three months ended June 30, 2004 and 2003. However, for the
six months ended June 30, 2004 and 2003, shares potentially issuable under
convertible securities have not been considered outstanding as their inclusion
results in a less dilutive computation. Had the inclusion of convertible
securities not resulted in a less dilutive computation for the six months ended
June 30, 2004 and 2003, incremental shares attributable to the assumed
conversion of the debentures would have increased shares outstanding by 8.0
million shares and 8.2 million shares, respectively, and the after-tax interest
expense related to the convertible debentures that would have been added to net
income in the numerator would have been $2.4 million for both periods.
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, 2004
Continuing Operations: Income Shares EPS
- ---------------------- -------- ------- ------
Basic EPS $ 70,688 289,887 $ 0.24
Effect of dilutive securities, net of tax:
Options 5,057
Convertible Securities 1,178 8,000
-------- -------
Diluted EPS $ 71,866 302,944 $ 0.24
======== ======= ======
Three months ended
June 30, 2003
Continuing Operations: Income Shares EPS
- ---------------------- -------- ------- ------
Basic EPS $ 66,329 296,819 $ 0.22
Effect of dilutive securities, net of tax:
Options 3,928
Convertible Securities 1,195 8,200
-------- -------
Diluted EPS $ 67,524 308,947 $ 0.22
======== ======= ======
Six months ended
June 30, 2004
Continuing Operations: Income Shares EPS
- ---------------------- -------- ------- ------
Basic EPS $ 82,149 290,843 $ 0.28
Effect of dilutive securities, net of tax:
Options 4,647
-------- -------
Diluted EPS $ 82,149 295,490 $ 0.28
======== ======= ======
Six months ended
June 30, 2003
Continuing Operations: Income Shares EPS
- ---------------------- -------- ------- ------
Basic EPS $ 71,172 297,307 $ 0.24
Effect of dilutive securities, net of tax:
Options 3,881
-------- -------
Diluted EPS $ 71,172 301,188 $ 0.24
======== ======= ======
THE SERVICEMASTER COMPANY
(In thousands)
Segment Summaries
For the three months ended June 30,
2004 2003 % Change
------------ ----------- --------
Operating Revenue:
TruGreen $ 453,710 $ 434,290 4%
Terminix 282,318 260,588 8%
American Home Shield 133,462 126,149 6%
ARS/AMS 179,697 172,977 4%
Other Operations 39,529 37,466 6%
------------ ----------- --------
Total Operating Revenue $ 1,088,716 $ 1,031,470 6%
============ =========== ========
Operating Income:
TruGreen $ 65,897 $ 67,959 -3%
Terminix 48,483 41,897 16%
American Home Shield 23,837 23,162 3%
ARS/AMS 1,613 3,838 -58%
Other Operations (10,459) (12,040) 13%
------------ ----------- --------
Total Operating Income $ 129,371 $ 124,816 4%
============ =========== ========
For the six months ended June 30,
2004 2003 % Change
------------ ----------- --------
Operating Revenue:
TruGreen $ 678,369 $ 638,837 6%
Terminix 519,114 486,494 7%
American Home Shield 236,259 220,373 7%
ARS/AMS 333,681 324,410 3%
Other Operations 78,184 73,699 6%
------------ ----------- --------
Total Operating Revenue $ 1,845,607 $ 1,743,813 6%
============ =========== ========
Operating Income:
TruGreen $ 62,999 $ 59,409 6%
Terminix 84,737 75,425 12%
American Home Shield 33,953 31,321 8%
ARS/AMS (2,035) 2,668 N/M
Other Operations (19,180) (18,866) -2%
------------ ----------- --------
Total Operating Income $ 160,474 $ 149,957 7%
============ =========== ========
As of June 30,
2004 2003 % Change
------------ ----------- --------
Capital Employed:
TruGreen $ 895,246 $ 1,063,659 -16%
Terminix 602,811 577,985 4%
American Home Shield 144,082 119,337 21%
ARS/AMS 93,933 387,016 -76%
Other Operations and
Discontinued Operations (16,301) (26,746) 39%
------------ ----------- --------
Total Capital Employed $ 1,719,771 $ 2,121,251 -19%
============ =========== ========
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,
2004 2003
------- -------
TruGreen ChemLawn -
Growth in Full Program Contracts 8% 2%
Customer Retention Rate 66.8% 64.1%
Terminix -
Growth in Pest Control Customers 6% 1%
Pest Control Customer Retention Rate 79.3% 75.8%
Growth in Termite Customers -1% -2%
Termite Customer Retention Rate 88.7% 88.6%
American Home Shield -
Growth in Warranty Contracts 6% 9%
Customer Retention Rate 54.9% 55.1% (a)
(a) Restated to conform with the 2004 calculation.