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
May 10, 2005
SERVICEMASTER REPORTS FIRST QUARTER 2005 RESULTS
------------------------------------------------
Retention rates and customer counts continue to improve at TruGreen
ChemLawn; Shift in timing of production to subsequent quarters
Investments in sales and marketing at Terminix and American
Home Shield made to sustain and improve top-line growth:
Revenue growth at Terminix supported by strong growth in unit
sales
Continued solid growth in revenues and profits at AHS
Improved operating results at TruGreen LandCare
DOWNERS GROVE, IL, May 10, 2005 - The ServiceMaster Company (NYSE: SVM)
today announced first quarter 2005 revenues of $782 million, a 3 percent
increase compared to the prior year. First quarter earnings per share from
continuing operations were $.04, comparable to 2004. Increased securities gains
at American Home Shield helped offset the effects of off-season sales and
operating investments and unfavorable March weather.
"As we entered 2005, our Company remained focused on revenue growth,
pricing, improved retention and consistently delivering a satisfied service
experience to our residential and commercial customers," said Jonathan Ward,
Chairman and Chief Executive Officer. "In order to enhance our ability to
achieve these objectives, during the first and continuing into the second
quarter, we continued to make key investments in salespeople and marketing
programs. These investments combined with our technology pilots and ongoing
process improvement developments should enable us to create a sustainable growth
profile for our shareholders."
1
Review of Cash Flows and Balance Sheet
Net cash flow used for operating activities in the quarter was $148
million, compared to $16 million provided from operating activities in the
previous year. This decrease in net cash flow of $164 million primarily reflects
$131 million of a previously anticipated and disclosed tax payment pertaining to
the 2004 IRS agreement. The Company anticipates that this payment will be
partially offset by a reduction in estimated tax payments of approximately $45
million in the second half of 2005. In addition, comparability of cash flows was
impacted by a higher level of incentive compensation payments in the first
quarter of 2005 versus 2004 relating to previous year's performance.
Total debt on March 31, 2005 was $876 million, approximately $71 million
more than the level reported at December 31, 2004. The increase in debt was the
result of the previously described tax payment, net of the use of available
cash, combined with normal seasonal operating needs. Additionally, in April, the
Company used its revolving credit facility to pay $137 million of 8.45 percent
bonds that matured.
Outlook
- -------
"We continue to expect revenue growth to be in the mid-to-high single digit
range in 2005 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 substantially exceed net income,"
said Ward.
"Throughout the year, we expect to continue to overcome certain external
factors that we do not directly control (e.g. rapidly rising fuel and health
insurance costs and unfavorable weather). However, as we demonstrated in 2004,
these challenges can be mitigated and in some cases used to our competitive
advantage through a combination of focused cost controls, strategic initiatives,
improved customer retention, and the proven ability of our employees to
effectively execute in the field," concluded Ward.
2
Business Review by Segment
- --------------------------
TruGreen
The TruGreen segment reported first quarter revenues of $223 million, down
1 percent compared to prior year. Operating loss for the quarter was $(8)
million compared to $(3) million in the prior year.
First quarter revenues in the lawn care operations were $123 million, down
2 percent compared to 2004. Customer count growth, excluding the Canadian
acquisition completed in April 2004, was 2 percent, reflecting improved
retention rates, partially offset by a modest decrease in new sales. A
successful expansion of its neighborhood selling efforts and other direct
marketing programs substantially offset reduced telemarketing sales. The
comparison of first quarter revenues was negatively impacted by late snow in
several operating regions which delayed available service applications.
Operating results for the quarter were approximately $9 million below prior year
levels. The aforementioned production delays and the first-time absorption of $3
million of seasonal losses from the Canadian operations contributed to the lower
operating results.
First quarter revenues in the commercial landscaping operations were $100
million, comparable to prior year results. Excluding the impact of
underperforming branches that had been shut down in 2004, revenue growth was 3
percent, primarily reflecting a solid increase in enhancement sales and modest
growth in contract maintenance revenues. These operations achieved a $5 million
reduction in operating losses for the quarter compared to prior year levels.
This improvement reflects higher volume and gross profit margins and the impacts
of one-time branch shut-down costs incurred last year.
Terminix
Terminix reported first quarter revenues of $248 million, up 5 percent
compared to the prior year. Revenues from sales of initial termite treatments
were supported by a sharp increase in renewable unit sales from an expanded
sales force, despite lower swarm activity from cooler seasonal temperatures. The
favorable impact on revenues of this increased volume was partially offset by a
shift in mix to lower priced services. Termite renewal revenue increased
modestly reflecting improved pricing, partially offset by a slight decrease in
customer retention. The pest control operations experienced solid growth in
customers and
3
revenues, reflecting double-digit increases in unit sales, partially offset
by a decline in customer retention. Operating income for the quarter was $31
million compared to $36 million in the prior year. Operating results benefited
from the increased revenues but were adversely impacted by planned incremental
investments to increase the size of the sales force and to reorganize field
operations, as well as a $3 million unfavorable correction of reserve levels
established for termite damage claims in prior years.
American Home Shield
The American Home Shield (AHS) segment reported first quarter revenues of
$111 million, up 8 percent compared to the prior year. The home warranty
business experienced strong growth in its renewal and direct to consumer
channels, with comparable new sales in the real estate channel. Renewal sales
were supported by an overall improved customer retention rate, while consumer
sales benefited from an increased level of targeted direct mail. Operating
income was $14 million compared to $10 million in the prior year, primarily
reflecting revenue growth and a slightly lower incident rate of claims coupled
with continued favorable trending in costs per claim, partially offset by
incremental investments to increase market penetration and customer retention.
American Residential Services and American Mechanical Services
The American Residential Services (ARS) and American Mechanical Services
(AMS) segment reported first quarter revenues of $159 million, up 3 percent
compared to the prior year. The segment experienced continued strong growth in
AMS' commercial project revenues and modest gains in residential construction.
Continued growth in retail channel HVAC sales, commercial plumbing and sewer
line repairs were more than offset by declines in core HVAC and plumbing service
calls. Overall, the seasonal operating loss of $(4) million was comparable to
the prior year.
Other Operations
The Other Operations segment reported first quarter revenues of $42
million, up 9 percent compared to the prior year. The ServiceMaster Clean and
Merry Maids franchise operations reported a combined increase in earned revenue
of 9 percent, primarily driven by continued strong results in disaster
restoration and very strong internal growth in maid service. Operating loss for
the quarter was $(8) million compared with $(9) million in the
4
prior year, primarily reflecting increased profits from the franchise
businesses and lower insurance costs, offset in part by increases in costs of
certain strategic investments.
Non-Operating Expense/ (Income)
- -------------------------------
Non-Operating expenses for the quarter were $8 million compared with $12
million in the prior year. A modest increase in interest expense due to higher
interest rates and debt balances was more than offset by a $5 million increase
in income experienced on the AHS investment portfolio. This increase included a
$2.5 million favorable correction in the accounting for a specific investment at
AHS.
Conference Call Details
- -----------------------
The Company will review these results and discuss its outlook in a call at
11:00 a.m. CT on May 10, 2005. Interested parties may listen to the call at
(800) 287-0836. 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 (#21245235).
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.
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
5
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
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; 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.
6
THE SERVICEMASTER COMPANY
(In thousands, except per share data)
Three Months Ended
March 31,
Statements of Operations
2005 2004
------------ ------------
Operating Revenue $ 782,309 $ 756,891
Operating Costs and Expenses:
Cost of services rendered
and products sold 556,323 545,056
Selling and administrative expenses 198,984 179,310
Amortization expense 1,152 1,422
------------ ------------
Total operating costs and expenses 756,459 725,788
------------ ------------
Operating Income 25,850 31,103
Non-operating Expense (Income):
Interest expense 15,579 14,931
Interest and investment income (9,374) (4,570)
Minority interest and other expense, net 2,046 2,046
------------ ------------
Income from Continuing Operations
before Income Taxes 17,599 18,696
Provision for income taxes 6,881 7,235
------------ ------------
Income from Continuing Operations 10,718 11,461
Loss from discontinued operations,
net of income taxes (146) (262)
------------ ------------
Net Income $ 10,572 $ 11,199
============ ============
Diluted Earnings Per Share (2):
Income from continuing operations $ 0.04 $ 0.04
Loss from discontinued operations --- ---
------ ------
Diluted Earnings Per Share $ 0.04 $ 0.04
====== ======
Number of Shares - Basic 291,117 291,799
Number of Shares - Diluted 297,080 296,035
- ------------------------------------------------------------------
Dividends Per Share $ 0.11 $ 0.105
====== =======
Price Range Per Share:
High Price $13.90 $12.05
Low Price 12.74 10.65
- ------------------------------------------------------------------
1
THE SERVICEMASTER COMPANY
(In thousands)
Condensed Balance Sheets As of
March 31, Dec. 31,
Assets 2005 2004
------------ ------------
Cash and cash equivalents $ 114,536 $ 256,626
Marketable securities 106,443 103,681
Receivables, net of allowances 375,109 369,026
Inventories and other current assets 332,624 244,467
Assets in discontinued operations 1,689 4,952
------------ ------------
Total Current Assets 930,401 978,752
------------ ------------
Intangible assets, primarily trade
names and goodwill, net of
accumulated amortization 1,796,046 1,788,824
Property and equipment, net of
accumulated depreciation 186,635 186,817
Long-term marketable securities 138,117 135,824
Notes receivable and other assets 46,260 49,985
------------ ------------
Total Assets $ 3,097,459 $ 3,140,202
============ ============
Liabilities and Equity
Current liabilities $ 886,566 $ 983,144
Liabilities in discontinued operations 19,526 21,536
Current debt maturities 22,265 23,247
------------ ------------
Total Current Liabilities 928,357 1,027,927
------------ ------------
Long-term debt 853,503 781,841
Other long-term obligations 238,502 229,842
Liabilities in discontinued operations 8,568 9,057
Minority interest 100,000 100,000
Shareholders' equity 968,529 991,535
------------ ------------
Total Liab. and Shareholders' Equity $ 3,097,459 $ 3,140,202
============ ============
Three Months Ended
March 31,
Statements of Cash Flows 2005 2004
------------ ------------
Cash and Cash Equivalents at January 1 $ 256,626 $ 228,161
Cash Flows from Operating Activities:
Net Income 10,572 11,199
Adjustments to reconcile net income to net
cash flows from operating activities:
Loss from discontinued operations 146 262
Depreciation 12,545 12,175
Amortization 1,152 1,422
Change in working capital, net of acquisitions:
Decrease in tax accounts:
Deferred income taxes 4,391 5,815
Resolution of income tax audits (1) (130,568) ---
Other changes in working capital (49,018) (16,170)
Other, net 3,238 1,514
------------ ------------
Net Cash (Used for) Provided from
Operating Activities (147,542) 16,217
------------ ------------
Cash Flows from Investing Activities:
Property additions (12,283) (12,520)
Sale of equipment and other assets 393 488
Business acquisitions, net of cash acquired (5,662) (4,197)
Notes receivable, financial investments
and securities (10,790) 3,696
------------ ------------
Net Cash Used for Investing Activities (28,342) (12,533)
------------ ------------
Cash Flows from Financing Activities:
Net borrowings (payments) of debt 72,282 (9,962)
Purchase of ServiceMaster stock (15,401) (39,831)
Shareholders' dividends (31,980) (30,792)
Other 8,652 (2,646)
------------ ------------
Net Cash Provided from (Used for)
Financing Activities 33,553 (83,231)
------------ ------------
------------ ------------
Net Cash Provided from (Used for)
Discontinued Operations 241 (2,042)
------------ ------------
Cash Decrease During the Period (142,090) (81,589)
------------ ------------
Cash and Cash Equivalents at March 31 $ 114,536 $ 146,572
============ ============
2
Notes:
(1) In January 2005, the Company reached a comprehensive agreement with the
Internal Revenue Service (IRS) regarding its examination of the Company's
federal income taxes through the year 2002. The agreement resolved all matters
in the years under review. In the first quarter of this year, the Company paid
$131 million of taxes and interest to the IRS and various states. The Company
anticipates that, pursuant to its agreement with the IRS, this payment will be
partially offset by an approximate $45 million reduction in estimated tax
payments that would otherwise have been paid in the second half of the year.
(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. 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
considered outstanding for the three months ended March 31, 2005 and 2004,
respectively, as it would result in a less dilutive computation. Had the
inclusion of convertible securities not resulted in a less dilutive computation,
incremental shares attributable to the assumed conversion of the debentures
would have increased shares outstanding by 8.0 million shares for the three
months ended March 31, 2005 and 2004 and the after-tax interest expense related
to the convertible debentures that would have been added to the net income in
the numerator would have been $1.2 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
March 31, 2005
Continuing Operations: Income Shares EPS
- ---------------------- -------- ------- ------
Basic EPS $ 10,718 291,117 $ 0.04
Effect of dilutive securities, net of tax:
Options 5,963
-------- -------
Diluted EPS $ 10,718 297,080 $ 0.04
======== ======= ======
Three months ended
March 31, 2004
Continuing Operations: Income Shares EPS
- ---------------------- -------- ------- ------
Basic EPS $ 11,461 291,799 $ 0.04
Effect of dilutive securities, net of tax:
Options 4,236
-------- -------
Diluted EPS $ 11,461 296,035 $ 0.04
======== ======= ======
3
THE SERVICEMASTER COMPANY
(In thousands)
Segment Summaries
For the three months ended March 31,
2005 2004 % Change
----------- ----------- --------
Operating Revenue:
TruGreen $ 222,982 $ 224,659 -1%
Terminix 247,745 236,796 5%
American Home Shield 111,010 102,797 8%
ARS/AMS 158,549 153,984 3%
Other Operations 42,023 38,655 9%
----------- ----------- --------
Total Operating Revenue $ 782,309 $ 756,891 3%
=========== =========== ========
Operating Income:
TruGreen $ (7,608) $ (2,898) -163%
Terminix 30,765 36,254 -15%
American Home Shield 14,273 10,116 41%
ARS/AMS (3,505) (3,648) 4%
Other Operations (8,075) (8,721) 7%
----------- ----------- --------
Total Operating Income $ 25,850 $ 31,103 -17%
=========== =========== ========
The combined franchise operations of ServiceMaster Clean and Merry Maids
comprised approximately 5% of the consolidated revenue for the three months
ended March 31, 2005 and 2004. Due to the seasonality of the TruGreen and
Terminix operations, these operations comprised approximately 24% and 21% of the
consolidated operating income before headquarter overheads for the three months
ended March 31, 2005 and 2004, respectively, a much higher percentage than is
expected for subsequent quarters and the year as a whole.
As of March 31,
2005 2004 % Change
----------- ----------- --------
Capital Employed:
TruGreen $ 862,573 $ 850,163 1%
Terminix 626,962 598,445 5%
American Home Shield 167,813 135,435 24%
ARS/AMS 90,871 94,805 -4%
Other Operations and
Discontinued Operations 196,078 6,717 N/M
----------- ----------- --------
Total Capital Employed $ 1,944,297 $ 1,685,565 15%
=========== =========== ========
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 March 31,
2005 2004
------- -------
TruGreen ChemLawn-
Growth in Full Program Contracts 6% (a) 2%
Customer Retention Rate 65.5% (a) 63.6%
Terminix -
Growth in Pest Control Customers 6% 4%
Pest Control Customer Retention Rate 77.2% 77.6%
Growth in Termite Customers 0% -2%
Termite Customer Retention Rate 87.8% 88.2%
American Home Shield -
Growth in Warranty Contracts 5% 6%
Customer Retention Rate 55.7% 54.7%
(a) Customer count growth in 2005, excluding the impact of the Canadian
acquisition completed in April 2004, was approximately 2%. The customer
retention rate improvement in 2005, excluding the impact of the Canadian
acquisition added to the customer base, was approximately 90 basis points.
4