August 9, 2005
Mr. Daniel L. Gordon
Branch Chief
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, D.C. 20549
Re: The ServiceMaster Company
Form 10-K for the fiscal year ended December 31, 2004,
Filed March 4, 2005
Form 10-Q for the quarterly period ended March 31, 2005,
Filed May 10, 2005
File No. 1-14762
Dear Mr. Gordon:
We are writing in response to your letter dated July 26, 2005 relating to the
above-referenced documents. We have listed each comment in the July 26th letter
as well as ServiceMaster's (the "Company's") response to that comment below.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004:
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BUSINESS, PAGE 5
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1. YOU DISCLOSE THAT THROUGH A SUBSIDIARY IN CANADA YOU ENTERED INTO
LICENSING ARRANGEMENTS TO PROVIDE SERVICES IN NINE OTHER COUNTRIES,
PRIMARILY IN THE MIDDLE EAST. PLEASE PROVIDE US WITH A LIST OF THE
COUNTRIES IN WHICH YOUR REVENUE WAS GENERATED.
Response:
We would like to clarify that our licensing agreements are not entered
into through our Canadian subsidiary, but through The ServiceMaster
Company (a U.S. corporation).
1
Approximately 0.4% of the Company's consolidated revenue is generated
in markets outside of the U.S. and Canada. Of this total,
approximately 80% and 18% of these revenues are generated through our
licensing arrangements in the United Kingdom and Japan, respectively.
The nine countries related to your question involve TruGreen ChemLawn
and include the following:
o Bahrain o Egypt
o Qatar o Jordan
o Lebanon o UAE
o Turkey o Japan
o United Kingdom
We also have other immaterial licensing arrangements that do not
involve TruGreen ChemLawn. These arrangements are also through The
ServiceMaster Company (a U.S. corporation) and represent primarily our
Terminix and ServiceMaster Clean businesses. For your information, the
following countries represent all of the remaining licensing
arrangements, Antigua & Barbuda, Aruba, Australia, Chile, China,
Curacao, Dominica, Dominican Republic, France, Germany, Guatemala,
Haiti, Honduras, Hong Kong, Indonesia, South Korea, Malaysia, New
Zealand, Panama, Philippines, Puerto Rico, St. Croix, St. Kitts, St.
Lucia, St. Maartin, St. Vincent & the Grenadines, Saudi Arabia,
Trinidad & Tobago, and the Virgin Islands.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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SEGMENT REVIEW, PAGE 4
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2. REVISE YOUR DISCUSSION OF SEGMENT INFORMATION IN FUTURE FILINGS TO
PRESENT THE RECONCILIATIONS REQUIRED BY SFAS 131, OR INCLUDE A
CROSS-REFERENCE TO THE SFAS 131 FOOTNOTE IN THE CONSOLIDATED FINANCIAL
STATEMENTS. REFER TO QUESTION 19 OF FREQUENTLY ASKED QUESTIONS
REGARDING THE USE OF NON-GAAP FINANCIAL MEASURES.
Response:
We agree to include a cross-reference in the MD&A to the required
information in the segment footnote in future quarterly and annual
reports. We have added this disclosure in our second quarter report
that will be filed on August 9, 2005. The enhanced disclosure reads as
follows:
"The following business segment reviews should be read in
conjunction with the required footnote disclosures presented in
the Notes to the Condensed Consolidated Financial Statements.
This disclosure provides a reconciliation of segment operating
income to income from continuing operations before income taxes,
with net non-operating expenses as the only reconciling item. The
Company's business segment reviews include discussions of capital
employed, which is a non-U.S. GAAP measure that is defined as the
segment's total assets less liabilities, exclusive of debt
balances. The Company believes this information is useful to
investors in helping them compute return on capital measures and
therefore better understand the performance of the Company's
business segments. The Notes to the Condensed Consolidated
Financial Statements also include a reconciliation of segment
capital employed to its most comparable U.S. GAAP measure."
2
BUSINESS SEGMENT REPORTING, PAGE 24
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3. REVISE YOUR BUSINESS SEGMENT TABLE IN FUTURE FILINGS TO: 1) RECONCILE
THE TOTAL OF THE REPORTABLE SEGMENTS' MEASURES OF PROFIT OR LOSS TO
THE COMPANY'S INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND 2) RECONCILE TOTAL CAPITAL EMPLOYED TO THE MOST COMPARABLE
GAAP MEASURE IN ACCORDANCE WITH PARAGRAPH 32 OF SFAS 131.
Response:
1) Operating income is the measure reported to the chief operating
decision maker for purposes of making decisions about allocating
resources to the segments and assessing their performance.
ServiceMaster agrees to prospectively reconcile the segment operating
income to consolidated income from continuing operations before income
taxes. For illustrative purposes, the reconciliation for 2004, 2003
and 2002 is shown below.
We will include a similar reconciliation in our second quarter report,
which will be filed on August 9, 2005.
2004 2003 2002
----------------- ----------------- ------------------
Segment operating income (loss) $ 336,556 $(166,243) $ 335,393
Non-operating expense (income):
Interest expense 60,708 65,255 92,901
Interest and investment income (15,469) (15,012) (6,431)
Minority interest and other expense, net 8,225 8,151 6,682
----------------- ----------------- ------------------
Income (loss) from continuing operations before income taxes $ 283,092 $(224,637) $ 242,241
================= ================= ==================
2) The Company will prospectively include a reconciliation of segment
capital employed to its most comparable U.S. GAAP measure. For
illustrative purposes, the reconciliation for 2004, 2003 and 2002 is
shown below.
We will include a similar reconciliation in our second quarter report,
which will be filed on August 9, 2005.
3
2004 2003 2002
----------------- ----------------- ------------------
Total assets $ 3,140,202 $ 2,956,426 $ 3,414,938
Less:
Current liabilities, excluding current portion of long-term debt 1,004,680 784,459 807,929
Long-term liabilities 238,899 435,870 452,525
----------------- ----------------- ------------------
Total capital employed in segments $ 1,896,623 $ 1,736,097 $ 2,154,484
================= ================= ==================
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, PAGE 5
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4. REVISE IN FUTURE FILINGS TO SEPARATELY STATE GROSS AMOUNTS OF CASH
BORROWINGS AND CASH PAYMENTS OF DEBT IN ACCORDANCE WITH SFAS 95.
Response:
ServiceMaster has historically netted payments and borrowings on the
Statement of Cash Flows. Prospectively, ServiceMaster will present the
gross amounts of debt borrowings and payments for all transactions. We
will include this information in our second quarter report, which will
be filed on August 9, 2005.
SERVICEMASTER REPRESENTATIONS
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ServiceMaster is responsible for the adequacy and accuracy of the disclosures in
our filings. Furthermore, we understand that the staff comments or changes to
disclosures do not foreclose the Commission from taking any action with respect
to the filings. Moreover, ServiceMaster understands that it may not assert staff
comments as a defense in any proceeding initiated by the Commission or any
person under the federal securities laws of the United States.
Please call me at (901) 766-1268 with your comments or questions.
Very truly yours,
/s/ Ernest J. Mrozek
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Ernest J. Mrozek
President and Chief Financial Officer
cc: Kristi Beshears, United States Securities and Exchange Commission