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 2, 2005
SERVICEMASTER REPORTS SECOND QUARTER 2005 RESULTS; REVENUE GROWTH OF EIGHT
PERCENT SUPPORTS 13 PERCENT GROWTH IN EPS
o Terminix experiences strong growth in termite completions and
profits;
o TruGreen ChemLawn achieves solid revenue growth with
continued diversification of its sales channels;
o American Residential Services and American Mechanical Services
report strong revenue and profit growth;
o American Home Shield continues to experience strong growth in
renewals and consumer sales.
DOWNERS GROVE, Illinois, August 2, 2005 - The ServiceMaster Company (NYSE:
SVM) today announced second quarter 2005 revenues of $1.2 billion, an eight
percent increase compared to the prior year. Second quarter earnings per share
from continuing operations were $.27, 13 percent above the $.24 reported in
2004. For the six months, revenues of $2 billion were up six percent over the
year ago period, and earnings per share from continuing operations were $.31, 11
percent above the $.28 reported in the prior year.
"We are very pleased with our strong first half performance, as we
experienced top line growth in every business segment," said Jonathan Ward,
Chairman and CEO. "We remain confident we will achieve our strategic revenue and
earnings growth targets for the year as a whole, even as we continue to reinvest
back into our core businesses, which is the surest way to sustain our
performance over the next several years. Although market conditions remain
slightly favorable, we continue to believe that our own actions ultimately
control our ability to achieve our growth objectives and enhance shareholder
value."
1
Review of Cash Flows and Balance Sheet
Net cash flow used for operating activities for the six months was $3
million, compared to $116 million provided from operating activities in the
previous year. This decrease in net cash flow of $119 million primarily reflects
$132 million of a previously disclosed tax payment pertaining to the January
2005 IRS agreement. The Company anticipates that this payment will be partially
offset by a reduction in estimated tax payments that would have otherwise been
due in the second half of 2005 of approximately $45 million. Working capital
usage was comparable to last year. Total debt on June 30, 2005 was $799 million,
approximately $6 million lower than the level reported at December 31, 2004.
Outlook
- --------
"We anticipate that earnings per share growth in the second half of the
year will be comparable to the first half. We continue to expect revenue growth
to be in the mid to high single digit range and 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.
Business Review by Segment
- --------------------------
TruGreen
The combined TruGreen segment reported second quarter revenues of $478
million, up five percent compared to prior year. For the six months, the segment
reported revenues of $701 million, up three percent compared to 2004. Operating
income for the quarter was $69 million compared to $66 million in the prior
year. For the six months, operating income was $61 million compared to $63
million in 2004.
Revenues in the lawn care operations of $357 million increased six percent
in the quarter. For the six months, revenues increased four percent. Revenue
growth resulted from improved price realization, the recapture of first quarter
production that was previously delayed, an increase in supplemental customer
services and overall customer count growth. Year-to-date unit sales were
comparable to prior year levels as the successful expansion of its neighborhood
selling efforts and direct mail programs offset a reduction in telemarketing
sales due to the increased impact of "do-not-call" restrictions. Operating
income increased
2
$5 million for the second quarter and included the recapture of some of the
first quarter production. For the six months, operating income decreased $4
million, reflecting the first time absorption of first quarter seasonal losses
of the Canadian operations that were acquired in April of 2004, as well as
higher fuel and fleet-related costs.
Revenues in the commercial landscaping operations of $120 million increased
two percent in the quarter. For the six months, revenues increased by one
percent. Revenue growth primarily reflected increased enhancement sales and
modest growth in contract maintenance revenues. Second quarter operating losses
increased by $3 million as a result of differences in the timing of certain
expenses, as well as increased fuel and vehicle costs. For the six months, the
level of operating loss improved $2 million, reflecting an increased volume of
higher margin enhancement revenues and the favorable effect on comparability of
one-time branch shut-down costs that were incurred last year. The Company
remains confident in the future success of this business.
Terminix
Terminix reported second quarter revenues of $306 million, up eight percent
compared to the prior year. For the six months, the segment reported revenues of
$553 million, a seven percent increase. Strong growth in revenues from initial
termite applications, despite a shift in mix toward lower price liquid
treatments, was supported by a sharp increase in unit sales from an expanded
sales force and geographic presence, as well as the favorable impact of a new
termite bait product introduced in 2005. Termite renewal revenues increased
modestly, reflecting improved pricing, partially offset by a slight decrease in
customer retention. The pest control operations experienced solid growth in
customers and revenues, reflecting the impact of acquisitions and a slight
increase in unit sales, partially offset by a decline in customer retention.
Operating income for the quarter was $57 million compared to $48 million in
the prior year. For the six months, operating income was $88 million compared to
$85 million in 2004. Operating results for the second quarter benefited from
increased termite revenues and lower material and labor costs associated with
the new termite bait product. In addition, since more of the total first year
costs associated with this product are incurred at the time of installation,
less revenue and gross profit is required to be deferred to future quarters.
This
3
timing benefit favorably impacted second quarter operating income by
approximately $5 million. Last year's second quarter results included a $6
million, favorable but non-recurring termite damage claim adjustment. For the
six months, the growth in operating income was supported by increased revenue
levels, partially offset by incremental pre-season investments made to expand
the sales force and reorganize the field operations.
American Home Shield
The American Home Shield (AHS) segment reported second quarter earned
revenues of $144 million, up eight percent compared to the prior year. For the
six months, the segment reported earned revenues of $255 million, up eight
percent compared to 2004. New contract sales, which are reported as earned
revenues over the subsequent twelve month contract period, increased nine
percent in the quarter and eight percent year-to-date. American Home Shield
experienced strong growth in its renewals and the direct-to-consumer channel.
This growth was partially offset by a modest decline in the real estate channel.
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 $24 million, comparable to the results
reported in the prior year. For the six months, operating income was $38 million
compared to $34 million in 2004. The second quarter comparison was impacted by
an increased incidence of claims this year due to hotter weather and planned
investments in market penetration and customer retention initiatives. For the
six months, operating income reflected favorable trending of service claims
pricing and a relatively consistent incidence of claims.
American Residential Services and American Mechanical Services
The American Residential Services (ARS) and American Mechanical Services
(AMS) segment reported second quarter revenues of $203 million, up 13 percent
compared to the prior year. For the six months, the segment reported revenues of
$362 million, up eight percent compared to 2004. The segment experienced very
strong growth in AMS' commercial project revenues and in ARS' volume of
replacement sales and residential new construction, partially offset by declines
in core HVAC and plumbing service calls.
4
Operating income for the quarter was $5 million, compared to $2 million in
the prior year. For the six months, operating income was $2 million compared to
a loss of $(2) million in 2004. The increase in profitability primarily resulted
from the increased level of revenues and an improvement in marketing costs,
partially offset by increased fuel and incentive compensation.
Other Operations
The Other Operations segment reported second quarter revenues of $43
million, up nine percent compared to the prior year. For the six months, the
segment reported revenues of $85 million, also up nine percent compared to 2004.
The ServiceMaster Clean and Merry Maids franchise operations reported a combined
increase in earned revenue of 10 percent in both the quarter and six months,
driven by continued solid results in disaster restoration, improvements in
commercial cleaning and strong internal growth in residential maid service.
Operating loss for the quarter was $(10) million, consistent with the prior
year. For the six months, operating loss was $(18) million compared to a loss of
$(19) million in 2004. This modest improvement primarily reflects favorable
trending of prior year insurance claims, as well as increased profits from the
franchise businesses, offset in part by increases in costs of certain strategic
investments.
Non-Operating Expense / (Income)
- --------------------------------
Non-Operating expenses for the quarter were $13 million compared with $14
million in the prior year. For the six months, these expenses were $21 million
compared to $26 million in 2004. The year-to-date improvement primarily reflects
a $5 million increase in realized gains experienced on the AHS investment
portfolio.
The Company's effective tax rate was slightly higher than last year in both
the quarter and six months.
Conference Call Details
- -----------------------
The Company will review these results and discuss its outlook in a call at
10:00 a.m. CT on August 2, 2005. Interested parties may listen to the call at
(888) 939-6306. 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
5
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 (#21252479).
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 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
6
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.
7
THE SERVICEMASTER COMPANY
(In thousands, except per share data)
Statements of Operations
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Operating Revenue $ 1,174,112 $ 1,088,716 $ 1,956,421 $ 1,845,607
Operating Costs and Expenses:
Cost of services
rendered and
products sold 745,384 697,706 1,301,707 1,242,762
Selling and
administrative
expenses 282,504 260,128 481,488 439,438
Amortization expense 1,331 1,511 2,483 2,933
----------- ----------- ----------- -----------
Total operating costs
and expenses 1,029,219 959,345 1,785,678 1,685,133
----------- ----------- ----------- -----------
Operating Income 144,893 129,371 170,743 160,474
Non-operating Expense (Income):
Interest expense 14,401 15,007 29,980 29,938
Interest and
investment income (3,226) (3,036) (12,600) (7,606)
Minority interest
and other
expense, net 2,047 2,086 4,093 4,132
----------- ----------- ----------- -----------
Income from
Continuing Operations
before Income Taxes 131,671 115,314 149,270 134,010
Provision for
income taxes 51,486 44,626 58,367 51,861
----------- ----------- ----------- -----------
Income from Continuing
Operations 80,185 70,688 90,903 82,149
Loss from discontinued
operations, net of
income taxes (384) (292) (530) (554)
----------- ----------- ----------- -----------
Net Income $ 79,801 $ 70,396 $ 90,373 $ 81,595
=========== =========== =========== ===========
Diluted Earnings Per Share (2):
Income from continuing
operations $ 0.27 $ 0.24 $ 0.31 $ 0.28
Loss from discontinued
operations --- --- --- ---
------ ------ ------ ------
Diluted Earnings
Per Share $ 0.27 $ 0.24 $ 0.30 $ 0.28
====== ====== ====== ======
Number of Shares -
Basic 291,634 289,887 291,400 290,843
Number of Shares -
Diluted 305,377 302,944 305,254 295,490
- ----------------------------------------------------------------------
Dividends Per Share $ 0.11 $ 0.105 $ 0.22 $ 0.21
====== ======= ====== ======
Price Range Per Share:
High Price $13.90 $12.50 $13.90 $12.50
Low Price 12.50 11.35 12.50 10.65
THE SERVICEMASTER COMPANY
(In thousands)
Condensed Balance Sheets As of
June 30, Dec. 31,
Assets 2005 2004
------------ ------------
Cash and cash equivalents $ 121,876 $ 256,626
Marketable securities 109,062 103,681
Receivables, net of allowances 459,585 369,026
Inventories and other current assets 292,477 244,467
Assets in discontinued operations 973 4,952
------------ ------------
Total Current Assets 983,973 978,752
------------ ------------
Intangible assets, primarily trade
names and goodwill, net of
accumulated amortization 1,810,599 1,788,824
Property and equipment,
net of accumulated depreciation 184,117 186,817
Long-term marketable securities 142,266 135,824
Notes receivable and other assets 45,469 49,985
------------ ------------
Total Assets $ 3,166,424 $ 3,140,202
============ ============
Liabilities and Equity
Current liabilities $ 949,978 $ 983,144
Liabilities in discontinued operations 18,042 21,536
Current debt maturities 22,116 23,247
------------ ------------
Total Current Liabilities 990,136 1,027,927
------------ ------------
Long-term debt 776,950 781,841
Other long-term obligations 268,955 229,842
Liabilities in discontinued operations 9,150 9,057
Minority interest 100,000 100,000
Shareholders' equity 1,021,233 991,535
------------ ------------
Total Liab. and Shareholders' Equity $ 3,166,424 $ 3,140,202
============ ============
Six Months Ended
June 30,
Statements of Cash Flows 2005 2004
------------ ------------
Cash and Cash Equivalents at January 1 $ 256,626 $ 228,161
Cash Flows from Operating Activities:
Net Income 90,373 81,595
Adjustments to reconcile net income to net
cash flows from operating activities:
Loss from discontinued operations 530 554
Depreciation 25,029 24,327
Amortization 2,483 2,933
Change in working capital,
net of acquisitions:
Change in tax accounts:
Deferred income taxes 49,224 44,961
Resolution of income tax audits (1) (131,562) ---
Other changes in working capital (45,509) (44,120)
Other, net 6,573 5,446
------------ ------------
Net Cash (Used for) Provided from
Operating Activities (2,859) 115,696
------------ ------------
Cash Flows from Investing Activities:
Property additions (22,328) (24,226)
Sale of equipment and other assets 1,138 1,525
Business acquisitions, net of
cash acquired (19,125) (20,875)
Notes receivable, financial investments
and securities (11,507) (3,370)
------------ ------------
Net Cash Used for Investing Activities (51,822) (46,946)
------------ ------------
Cash Flows from Financing Activities:
Net payments of debt (10,800) (17,751)
Purchase of ServiceMaster stock (16,979) (41,286)
Shareholders' dividends (64,025) (61,314)
Other 12,064 5,648
------------ ------------
Net Cash Used for Financing Activities (79,740) (114,703)
------------ ------------
------------ ------------
Net Cash Used for Discontinued
Operating Activities (329) (6,012)
------------ ------------
Cash Decrease During the Period (134,750) (51,965)
------------ ------------
Cash and Cash Equivalents at June 30 $ 121,876 $ 176,196
============ ============
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. During the six months ended June 30, 2005 (primarily
in the first quarter), the Company paid $132 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 include 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 and six months ended June, 30 2005, as well as
the three months ended June 30, 2004. For the six months ended June 30, 2004,
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, incremental shares
attributable to the assumed conversion of the debentures would have increased
shares outstanding by 8.0 million shares 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.
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, 2005
------------------
Continuing Operations: Income Shares EPS
- ---------------------- -------- ------- ------
Basic EPS $ 80,185 291,634 $ 0.27
Effect of dilutive securities, net of tax:
Options 5,743
Convertible Securities 1,178 8,000
-------- -------
Diluted EPS $ 81,363 305,377 $ 0.27
======== ======= ======
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
======== ======= ======
Six months ended
June 30, 2005
----------------
Continuing Operations: Income Shares EPS
- ---------------------- -------- ------- ------
Basic EPS $ 90,903 291,400 $ 0.31
Effect of dilutive securities, net of tax:
Options 5,854
Convertible Securities 2,356 8,000
-------- -------
Diluted EPS $ 93,259 305,254 $ 0.31
======== ======= ======
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
Convertible Securities --- ---
-------- -------
Diluted EPS $ 82,149 295,490 $ 0.28
======== ======= ======
THE SERVICEMASTER COMPANY
(In thousands)
Segment Summaries
For the three months ended June 30,
2005 2004 % Change
----------- ----------- --------
Operating Revenue:
TruGreen $ 477,783 $ 453,710 5%
Terminix 305,616 282,318 8%
American Home Shield 144,286 133,462 8%
ARS/AMS 203,485 179,697 13%
Other Operations 42,942 39,529 9%
----------- ----------- --------
Total Operating Revenue $ 1,174,112 $ 1,088,716 8%
=========== =========== ========
Operating Income:
TruGreen $ 68,603 $ 65,897 4%
Terminix 57,246 48,483 18%
American Home Shield 23,678 23,837 -1%
ARS/AMS 5,189 1,613 222%
Other Operations (9,823) (10,459) 6%
----------- ----------- --------
Total Operating Income $ 144,893 $ 129,371 12%
=========== =========== ========
For the six months ended June 30,
2005 2004 % Change
----------- ----------- --------
Operating Revenue:
TruGreen $ 700,765 $ 678,369 3%
Terminix 553,361 519,114 7%
American Home Shield 255,296 236,259 8%
ARS/AMS 362,034 333,681 8%
Other Operations 84,965 78,184 9%
----------- ----------- --------
Total Operating Revenue $ 1,956,421 $ 1,845,607 6%
=========== =========== ========
Operating Income:
TruGreen $ 60,995 $ 62,999 -3%
Terminix 88,011 84,737 4%
American Home Shield 37,951 33,953 12%
ARS/AMS 1,684 (2,035) N/M
Other Operations (17,898) (19,180) 7%
----------- ----------- --------
Total Operating Income $ 170,743 $ 160,474 6%
=========== =========== ========
The combined operations of ServiceMaster Clean and Merry Maids comprised
approximately 4% and 3% of the consolidated revenue for the three months ended
June 30, 2005 and 2004, respectively, and 4% of the consolidated revenue for the
six months ended June 30, 2005 and 2004, respectively. These operations
comprised approximately 7% and 8% of the consolidated operating income before
headquarter overheads for the three months ended June 30, 2005 and 2004,
respectively, and 11% of the consolidated operating income before headquarter
overheads for the six months ended June 30, 2005 and 2004, respectively.
As of June 30,
2005 2004 % Change
----------- ---------- --------
Capital Employed:
TruGreen $ 900,395 $ 895,246 1%
Terminix 629,728 602,811 4%
American Home Shield 193,110 144,082 34%
ARS/AMS 89,736 93,933 -4%
Other Operations and
Discontinued Operations 107,330 (16,301) N/M
----------- ----------- --------
Total Capital Employed $ 1,920,299 $ 1,719,771 12%
=========== =========== ========
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,
2005 2004
---------- ----------
TruGreen ChemLawn -
Growth in Full Program Contracts 2% 8%(a)
Customer Retention Rate 66.4% 66.8%
Terminix -
Growth in Pest Control Customers 4% 6%
Pest Control Customer Retention Rate 77.3% 78.6%
Growth in Termite Customers 1% -1%
Termite Customer Retention Rate 88.0% 88.7%
American Home Shield -
Growth in Warranty Contracts 5% 6%
Customer Retention Rate 55.9% 54.9%
(a) Customer count growth in 2004, excluding the impact of the Canadian
acquisition completed in April 2004, was approximately 3%.