UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
-------
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
TRANSITION REPORT PURSUANT TO SECTION 13 OR
---------
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to_____
Commission file number 1-14762
THE SERVICEMASTER COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-3858106
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3250 Lacey Road, Ste. 600, Downers Grove, Illinois 60515-1700
(Address of principal executive offices) (Zip Code)
630-663-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 290,815,000 shares of common stock on November 8, 2004.
TABLE OF CONTENTS
Page
NO.
THE SERVICEMASTER COMPANY (Registrant) -
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 2004 and September 30, 2003 3
Condensed Consolidated Statements of Financial Position
as of September 30, 2004 and December 31, 2003 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2004 and September 30, 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3: Quantitative and Qualitative Disclosures About
Market Risk 23
Item 4: Controls and Procedures 24
PART II. OTHER INFORMATION
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 6: Exhibits 25
Signature 26
PART I. FINANCIAL INFORMATION
THE SERVICEMASTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
OPERATING REVENUE ........................................ $ 1,053,867 $ 1,018,263 $ 2,899,474 $ 2,762,076
OPERATING COSTS AND EXPENSES:
Cost of services rendered and products sold .............. 686,992 670,321 1,929,754 1,844,558
Selling and administrative expenses ...................... 240,546 221,105 679,984 637,362
Amortization expense ..................................... 1,503 1,126 4,436 4,488
Charge for impaired assets ............................... - 480,670 - 480,670
----------- ----------- ----------- -----------
Total operating costs and expenses ....................... 929,041 1,373,222 2,614,174 2,967,078
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) .................................. 124,826 (354,959) 285,300 (205,002)
NON-OPERATING EXPENSE (INCOME):
Interest expense ......................................... 15,210 16,285 45,148 49,223
Interest and investment income ........................... (3,913) (1,857) (11,519) (6,201)
Minority interest and other expense, net ................. 2,047 1,986 6,179 6,104
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ...................................... 111,482 (371,373) 245,492 (254,128)
Provision for income taxes, includes a $98 million benefit
relating to the impairment charge in 2003 ............. 43,139 (54,847) 95,000 (8,774)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS ................. 68,343 (316,526) 150,492 (245,354)
Loss from discontinued operations, net of income taxes ... (619) (1,440) (1,173) (2,387)
----------- ----------- ----------- -----------
NET INCOME (LOSS) ........................................ $ 67,724 $ (317,966) $ 149,319 $ (247,741)
=========== =========== =========== ===========
PER SHARE:
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations ................. $ 0.24 $ (1.08) $ 0.52 $ (0.83)
Loss from Discontinued operations ........................ - - - (0.01)
----------- ----------- ----------- -----------
Basic earnings (loss) per share .......................... $ 0.23 $ (1.08) $ 0.51 $ (0.84)
=========== =========== =========== ===========
SHARES ................................................... 290,258 294,119 290,647 296,233
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) from continuing operations ................. $ 0.23 $ (1.08) $ 0.51 $ (0.83)
Loss from Discontinued operations ........................ - - - (0.01)
----------- ----------- ----------- -----------
Diluted earnings (loss) per share ........................ $ 0.23 $ (1.08) $ 0.50 $ (0.84)
=========== =========== =========== ===========
SHARES ................................................... 303,336 294,119 303,437 296,233
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
THE SERVICEMASTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
As of Sept. 30, As of Dec. 31,
ASSETS 2004 2003
------------- -----------
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 202,730 $ 228,161
Marketable securities ........................................... 104,834 90,540
Receivables, less allowance of $28,808 and $26,220, respectively 426,917 333,834
Inventories ..................................................... 67,183 70,163
Prepaid expenses and other assets ............................... 50,267 33,408
Deferred customer acquisition costs ............................. 45,908 41,806
Deferred taxes and income taxes receivable ...................... 71,697 87,589
Assets of discontinued operations ............................... 4,887 5,273
----------- -----------
Total Current Assets ..................................... 974,423 890,774
----------- -----------
PROPERTY AND EQUIPMENT:
At cost ...................................................... 414,095 387,569
Less: accumulated depreciation ............................... (228,520) (208,054)
----------- -----------
Net property and equipment ................................. 185,575 179,515
----------- -----------
OTHER ASSETS:
Goodwill ........................................................ 1,552,865 1,516,206
Intangible assets, primarily trade names ........................ 220,393 216,453
Notes receivable ................................................ 38,417 46,441
Long-term marketable securities ................................. 111,355 92,562
Other assets .................................................... 11,792 14,475
----------- -----------
Total Assets ............................................. $ 3,094,820 $ 2,956,426
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................ $ 86,315 $ 86,963
Accrued liabilities:
Payroll and related expenses ................................. 117,434 89,427
Self-insured claims and related expenses ..................... 104,441 73,320
Income taxes payable ......................................... 17,341 -
Other ........................................................ 104,006 100,454
Deferred revenues ............................................... 435,899 419,915
Liabilities of discontinued operations .......................... 10,360 14,380
Current portion of long-term debt ............................... 21,758 33,781
----------- -----------
Total Current Liabilities ................................ 897,554 818,240
----------- -----------
LONG-TERM DEBT .................................................. 786,114 785,490
LONG-TERM LIABILITIES:
Deferred taxes ............................................. 323,063 276,000
Liabilities of discontinued operations ..................... 30,867 34,396
Other long-term obligations ................................ 122,463 125,474
----------- -----------
Total Long-Term Liabilities ............................. 476,393 435,870
----------- -----------
MINORITY INTEREST ............................................... 100,000 100,309
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock $0.01 par value, authorized 1,000,000 shares; issued
318,235 and 317,315 shares, respectively ................... 3,182 3,173
Additional paid-in capital ...................................... 1,071,442 1,061,640
Retained earnings ............................................... 62,348 6,365
Accumulated other comprehensive income .......................... 4,961 7,932
Restricted stock ................................................ (8,833) (4,368)
Treasury stock .................................................. (298,341) (258,225)
----------- -----------
Total Shareholders' Equity ............................... 834,759 816,517
----------- -----------
Total Liabilities and Shareholders' Equity ............... $ 3,094,820 $ 2,956,426
=========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
THE SERVICEMASTER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
September 30,
2004 2003
--------- ---------
CASH AND CASH EQUIVALENTS AT JANUARY 1 .................................. $ 228,161 $ 227,177
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) ....................................................... 149,319 (247,741)
Adjustments to reconcile net income to net cash flows from operating
activities:
Loss from discontinued operations ............................... 1,173 2,387
Charge for impaired assets, net of tax .......................... - 383,152
Depreciation expense ............................................ 36,658 36,972
Amortization expense ............................................ 4,436 4,488
Deferred income tax expense ..................................... 82,450 81,500
Change in working capital, net of acquisitions:
Receivables ................................................. (90,238) (71,876)
Inventories and other current assets ........................ (14,696) (16,495)
Accounts payable ............................................ 5,432 (5,665)
Deferred revenues ........................................... 7,569 (2,488)
Accrued liabilities ......................................... 53,400 (443)
Other, net .................................................. 5,540 2,156
--------- ---------
NET CASH PROVIDED FROM OPERATING ACTIVITIES ............................. 241,043 165,947
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions ................................................ (39,903) (30,059)
Sale of equipment and other assets ................................ 7,271 8,581
Business acquisitions, net of cash acquired ....................... (26,519) (24,297)
Notes receivable, financial investments and securities ............ (32,505) (15,155)
Proceeds from business sales ...................................... - 21,300
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES .................................. (91,656) (39,630)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments of debt .............................................. (29,778) (24,802)
Purchase of ServiceMaster stock ................................... (55,482) (56,768)
Shareholders' dividends ........................................... (93,336) (93,814)
Other, net ........................................................ 11,737 11,392
--------- ---------
NET CASH USED FOR FINANCING ACTIVITIES .................................. (166,859) (163,992)
--------- ---------
NET CASH USED FOR DISCONTINUED OPERATIONS ............................... (7,959) (18,260)
--------- ---------
CASH DECREASE DURING THE PERIOD ......................................... (25,431) (55,935)
--------- ---------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 ............................... $ 202,730 $ 171,242
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
THE SERVICEMASTER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: The condensed consolidated financial statements include the accounts of
ServiceMaster and its subsidiaries, collectively referred to as "the Company".
Intercompany transactions and balances have been eliminated in consolidation.
NOTE 2: The condensed consolidated financial statements have been prepared by
the Company in accordance with accounting principles generally accepted in the
United States (GAAP) and pursuant to the rules and regulations of the Securities
and Exchange Commission. The Company recommends that the quarterly condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's latest
Annual Report to Shareholders incorporated in the Form 10-K filed with the
Securities and Exchange Commission for the year ended December 31, 2003 (2003
Annual Report). The condensed consolidated financial statements reflect all
adjustments, which are, in the opinion of management, necessary for the fair
presentation of the financial position, results of operations and cash flows for
the interim periods. The results of operations for any interim period are not
necessarily indicative of the results which might be achieved for a full year.
NOTE 3: The Company has identified the most important accounting policies with
respect to its financial position and results of operations. These relate
primarily to revenue recognition and the deferral of customer acquisition costs.
The following revenue recognition policies have not changed since year-end.
Revenues from lawn care, pest control, liquid and fumigation termite
applications, as well as heating/air conditioning and plumbing services are
recognized as the services are provided. Revenues from landscaping services are
recognized as they are earned based upon agreed monthly contract arrangements or
when services are performed for non-contractual arrangements. Revenues from the
Company's commercial installation contracts, primarily relating to heating,
ventilation and air conditioning (HVAC), and electrical are recognized on the
percentage of completion method in the ratio that total incurred costs bear to
total estimated costs. The Company eradicates termites through the use of
baiting systems, as well as through non-baiting methods (e.g., fumigation or
liquid treatment). Termite services using baiting systems as well as home
warranty services typically are sold through annual contracts for a one-time,
upfront payment. Direct costs of these contracts (service costs for termite
contracts and claim costs for warranty contracts) are expensed as incurred. The
Company recognizes revenue over the life of these contracts in proportion to the
expected direct costs. Revenue from trade name licensing arrangements is
recognized when earned. Franchised revenues (which in the aggregate represent
approximately three percent of consolidated revenue) consist principally of
monthly fee revenue, which is recognized when the related customer level revenue
is reported by the franchisee and collectibility is assured. Franchise revenue
also includes initial fees resulting from the sale of a franchise. These fees
are fixed and are recognized as revenue when collectibility is assured and all
material services or conditions relating to the sale have been substantially
performed. Income from franchised revenue represented nine percent and eight
percent of consolidated operating income before impairment charges for the
three-month periods ended September 30, 2004 and 2003, respectively, and 12
percent and 11 percent of consolidated operating income before impairment
charges for the nine months ended September 30, 2004 and 2003, respectively. The
portion of total franchise fee income related to initial fees received from the
sale of a franchise were immaterial to the Company's consolidated financial
statements for all periods.
The Company had $436 million and $420 million of deferred revenue at September
30, 2004 and December 31, 2003, respectively, which consist primarily of
payments received for annual contracts relating to home warranty, termite
baiting, pest control and lawn care services. The revenue related to these
services is recognized over the contractual period as the direct costs occur,
such as when the services are performed or claims are incurred.
Customer acquisition costs, which are incremental and direct costs of obtaining
a customer, are deferred and amortized over the life of the related contract in
proportion to revenue recognized. These costs include sales commissions and
direct selling costs which can be shown to have resulted in a successful sale.
The Company also defers, on an interim basis, advertising costs incurred early
in the year. These costs are deferred and recognized approximately in proportion
to revenue over the balance of the year, and are not deferred beyond the
calendar year-end.
6
The cost of direct-response advertising at Terminix is capitalized and amortized
over its expected period of future benefits. This direct-response advertising
consists primarily of direct-mail promotions, for which the cost is capitalized
and amortized over the one-year customer contract life.
The preparation of the financial statements requires management to make certain
estimates and assumptions required under GAAP which may differ materially from
the actual results. Disclosures in the 2003 Annual Report presented the
significant areas that require the use of management's estimates and discussed
how management formed its judgments. The areas discussed included the allowance
for receivables, accruals for self-insured retention limits related to medical,
workers compensation, auto and general liability insurance, accruals for home
warranty claims, the possible outcome of outstanding litigation, accruals for
income tax liabilities as well as deferred tax accounts, useful lives for
depreciation and amortization expense, and the valuation of tangible and
intangible assets. In 2004, there have been no changes in these significant
areas that require estimates or in the methodologies which underlie these
associated estimates. In the second quarter of 2004, there was 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 primarily in the fourth quarter of 2004.
NOTE 4: The Company carries insurance policies on insurable risks at levels
which it believes to be appropriate, including workers' compensation, auto and
general liability risks. The Company has self-insured retention limits and
insured layers of excess insurance coverage above those limits. Accruals for
self-insurance losses and warranty claims in the American Home Shield business
are made based on the Company's claims experience and actuarial projections.
Current activity could differ causing a change in estimates. The Company has
certain liabilities with respect to existing or potential claims, lawsuits, and
other proceedings. The Company accrues for these liabilities when it is probable
that future costs will be incurred and such costs can be reasonably estimated.
The Company records deferred income tax balances based on the net tax effects of
temporary differences between the carrying value of assets and liabilities for
financial reporting purposes and income tax purposes. There are significant
amortizable intangible assets for tax reporting purposes (not for financial
reporting purposes) which arose as a result of the Company's reincorporation
from partnership to corporate form in 1997. The Company records its deferred tax
items based on the estimated ultimate value of the tax basis. The Company's tax
estimates are adjusted when required to reflect changes based on factors such as
changes in tax laws, results of tax authority reviews and statutory limitations.
In the event that actual results differ from the estimates discussed in this
note, the Company would reflect those changes, which could be material, in the
period that the difference is identified.
NOTE 5: In accordance with Statement of Financial Accounting Standards (SFAS)
142, goodwill and intangible assets that are not amortized are subject to
assessment for impairment by applying a fair-value based test on an annual basis
or more frequently if circumstances indicate a potential impairment. Such
circumstances could include actual earnings being significantly below
management's estimates. The Company's annual assessment date is October 1. In
the Company's next annual impairment review, the Company will carry forward
certain reporting unit valuations as their values were significantly in excess
of the recorded goodwill as of the most recent valuation date. However, the
Company will not be able to carry forward the most recent valuation for the ARS
operations as a result of the impairment charge recorded in 2003 and due to the
current operating performance of the business, which has been adversely impacted
by cooler seasonal temperatures. Accordingly, ARS will require a valuation
analysis in the fourth quarter. Based on management's expectations for the ARS
operations and in light of weather-affected results, the operating performance
of ARS in the third quarter does not constitute an event that requires an
earlier impairment assessment.
In the third quarter of 2003, the Company recorded a non-cash impairment charge
related to its goodwill and intangible assets totaling $481 million pre-tax or
$383 million net of tax. The charge consisted of $224 million at American
Residential Services, $68 million at American Mechanical Services and $189
million at TruGreen LandCare. The impairment charge included a portion of
goodwill that was not
7
deductible for tax purposes, resulting in a tax benefit of $98 million, or
approximately 20 percent of the pre-tax charge amount.
In April 2004, TruGreen ChemLawn acquired the assets of Greenspace Services
Limited, Canada's largest professional lawn care service company. Intangible
assets recorded were less than $15 million. The preliminary allocation of
purchase price is subject to change later this year as additional information is
obtained. The balance of goodwill and intangible assets that was added during
this year relate to tuck-in acquisitions completed by Terminix and TruGreen
ChemLawn.
The table below summarizes the goodwill and intangible asset activity and
balances:
(In thousands) As of As of
Dec. 31, Sept. 30,
2003 Additions Amort. 2004
----------- ----------- ----------- -------------
Goodwill(1) $ 1,516,206 $ 36,659 $ - $ 1,552,865
Trade names(1) 204,793 - - 204,793
Other intangible assets 35,432 8,376 - 43,808
Accumulated amortization(2) (23,772) - (4,436) (28,208)
----------- ----------- ----------- -----------
Net other intangibles 11,660 8,376 (4,436) 15,600
----------- ----------- ----------- -----------
Total $ 1,732,659 $ 45,035 $ (4,436) $ 1,773,258
=========== =========== =========== ===========
(1) Not subject to amortization.
(2) Annual amortization expense of approximately $6 million in 2004 is expected
to decline over the next five years.
The table below presents, by segment, the goodwill that is not subject to
amortization:
(In thousands) Sept. 30, Dec. 31,
2004 2003
---------- -----------
TruGreen $ 675,540 $ 652,534
Terminix 635,817 622,351
American Home Shield 72,085 72,085
ARS/AMS 56,171 56,171
Other Operations 113,252 113,065
---------- ----------
Total $1,552,865 $1,516,206
========== ==========
NOTE 6: Basic earnings per share is computed by dividing income available to
common stockholders by the weighted-average number of shares outstanding for the
period. 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. Due to losses
incurred for both the three and nine months ended September 30, 2003, the
earnings per share calculation does not include the effects of options or
conversion of debentures as it would result in a less dilutive computation. As a
result, diluted earnings per share for the three and nine months ended September
30, 2003 are the same as basic earnings per share. Had the Company recognized
income from continuing operations for the three and nine months ended September
30, 2003, incremental shares attributable to the assumed exercise of outstanding
options and conversion of the debentures would have increased diluted shares
outstanding by 12 million shares for both periods, 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 $1.2 million and $3.6 million for the
three and nine months ended September 30, 2003, respectively.
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.
8
(In thousands, except per share data) Three Months Three Months
Ended September 30, 2004 Ended September 30, 2003
-------------------------------- ---------------------------------
CONTINUING OPERATIONS: Income Shares EPS (Loss) Shares EPS
---------------------- ---------- --------- -------- ---------- --------- ----------
Basic earnings (loss) per share $68,343 290,258 $0.24 $(316,526) 294,119 $(1.08)
======== ==========
Effect of dilutive securities, net of tax:
Options 5,078 -
Convertible Securities 1,178 8,000 - -
---------- --------- ---------- ---------
Diluted earnings (loss) per share $69,521 303,336 $0.23 $(316,526) 294,119 $(1.08)
========== ========= ======== ========== ========= ==========
(In thousands, except per share data) Nine Months Nine Months
Ended September 30, 2004 Ended September 30, 2003
-------------------------------- ---------------------------------
CONTINUING OPERATIONS: Income Shares EPS (Loss) Shares EPS
---------------------- --------- --------- -------- ---------- --------- ----------
Basic earnings (loss) per share $150,492 290,647 $0.52 $(245,354) 296,233 $(0.83)
======== ==========
Effect of dilutive securities, net of tax:
Options 4,790 -
Convertible Securities 3,534 8,000 - -
---------- --------- ---------- ---------
Diluted earnings (loss) per share $154,026 303,437 $0.51 $(245,354) 296,233 $(0.83)
========== ========= ======== ========== ========= ==========
NOTE 7: The Company is accounting for employee stock options as compensation
expense in accordance with SFAS 123, "Accounting for Stock-Based Compensation."
SFAS 148 "Accounting for Stock-Based Compensation - Transition and Disclosure,
an amendment of FASB Statement No. 123", provides alternative methods of
transitioning to the fair-value based method of accounting for employee stock
options as compensation expense. The Company is using the "prospective method"
of SFAS 148 and is expensing the fair-value of new employee option grants
awarded subsequent to 2002.
Prior to 2003, the Company accounted for employee share options under the
intrinsic method of Accounting Principles Board Opinion No. 25, as permitted
under GAAP. Had compensation expense for employee options been determined under
the fair-value based method of SFAS 123 for all periods, proforma reported net
income and net earnings per share would reflect the following:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2004 2003 2004 2003
--------------- --------------- ------------- -- ------------
Net income (loss) as reported $67,724 $(317,966) $149,319 $(247,741)
Add back: Stock-based compensation
expense included in reported net income,
net of related tax effects 291 233 830 710
Deduct: Stock-based compensation
expense determined under fair-value method,
net of related tax effects (1,396) (1,922) (4,216) (5,683)
--------------- --------------- ------------- ------------
Proforma net income (loss) $66,619 $(319,655) $145,933 $(252,714)
=============== =============== ============= ============
Basic Earnings (Loss) Per Share:
As reported $0.23 $(1.08) $0.51 $(0.84)
Proforma $0.23 $(1.09) $0.50 $(0.85)
Diluted Earnings (Loss) Per Share:
As reported $0.23 $(1.08) $0.50 $(0.84)
Proforma $0.22 $(1.09) $0.49 $(0.85)
In March 2004, the Financial Accounting Standards Board (FASB) issued an
Exposure Draft, "Share-Based Payment, an Amendment of FASB Statements No. 123
and 95". In its current form, this Exposure Draft would require companies to
record stock options and share grants at fair value and recognize this value as
compensation expense over their vesting period. The Exposure Draft would require
companies to record compensation expense for newly issued awards as well as the
unvested portion of previously issued awards that remain outstanding as of the
date of the adoption of the Exposure Draft. ServiceMaster has recorded
compensation expense relating to the vesting of awards granted subsequent to
2002. In October 2004, the FASB tentatively agreed to delay the effective date
of the Exposure Draft to periods beginning after June
9
15, 2005 (ServiceMaster's third quarter 2005 financial statements).
ServiceMaster is currently assessing the potential impact of this Exposure
Draft.
NOTE 8: In the Condensed Consolidated Statements of Cash Flows, the caption Cash
and Cash Equivalents includes investments in short-term, highly-liquid
securities having a maturity of three months or less. Supplemental information
relating to the Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2004 and 2003 is presented in the following table:
(IN THOUSANDS)
2004 2003
-------- --------
CASH PAID FOR OR (RECEIVED FROM):
Interest expense ................ $ 52,836 $ 53,698
Interest and investment income... $(12,713) $ (5,680)
Income taxes .................... $ 11,796 $ 6,081
The increase in cash received from interest and investment income reflects a
higher level of gains realized on the investment portfolio at American Home
Shield. Cash paid for income taxes increased in 2004 as a result of a higher
level of tax refunds received in the prior year.
NOTE 9: Total comprehensive income (loss) was $66 million and ($317) million for
the three months ended September 30, 2004 and 2003, respectively and $146
million and ($242) million for the nine months ended September 30, 2004 and
2003, respectively. Total comprehensive income (loss) includes primarily net
income (loss), changes in unrealized gains and losses on marketable securities
and foreign currency translation balances.
NOTE 10: The Company has an agreement which provides for the ongoing revolving
sale of a designated pool of accounts receivable of TruGreen and Terminix to a
wholly owned, bankruptcy-remote subsidiary, ServiceMaster Funding LLC.
ServiceMaster Funding LLC has entered into an agreement to transfer, on a
revolving basis, an undivided percentage ownership interest in a pool of
accounts receivable to unrelated third party purchasers. ServiceMaster Funding
LLC retains an undivided percentage interest in the pool of accounts receivable
and bad debt losses for the entire pool are allocated first to this retained
interest. During the nine months ended September 30, 2004 and 2003, there were
no receivables sold to third parties under this agreement. However, the Company
may sell its receivables in the future, which would provide an additional
funding source. The agreement is a 364-day facility that is renewable at the
option of the purchasers. The Company may sell up to $65 million of its
receivables to these purchasers in the future and therefore has immediate access
to cash proceeds from these sales. The amount of the eligible receivables varies
during the year based on seasonality of the business and will at times limit the
amount available to the Company.
NOTE 11: Total debt was $808 million at September 30, 2004, approximately $11
million below the level at December 31, 2003. Approximately 44 percent of the
Company's debt matures beyond five years and 34 percent beyond fifteen years.
The Company's next public debt maturity of approximately $138 million is in
April 2005. The Company has both the intent and ability to pay this debt with
other long term financing, and it is classified as long-term debt in the
Consolidated Statements of Financial Position. On May 19, 2004, the Company
entered into a $500 million senior unsecured bank revolving credit facility that
expires on May 19, 2009. This credit facility replaced an existing $490 million
credit facility that was due to expire in December 2004. In the third quarter of
2004, the Company replaced an $80 million operating lease facility that was due
to expire in October 2004 with a new five-year operating lease facility of
approximately $53 million expiring in September 2009.
NOTE 12: During the third quarter of 2003, the Company sold substantially all of
the assets and related operational obligations of Trees, Inc., the utility line
clearing operations of TruGreen LandCare. The results of the utility line
clearing operations of Trees, Inc. have been reclassified as "Discontinued
Operations" and are not included in continuing operations.
In October 2001, the Company's Board of Directors approved a series of strategic
actions, which were the culmination of an extensive portfolio review process. As
part of this portfolio review, the Company sold or exited certain non-strategic
or under-performing businesses in 2001 and 2002. The results of these
10
discontinued business units have been reclassified as "Discontinued Operations"
in the accompanying financial statements.
The following table summarizes the activity during the nine months ended
September 30, 2004 for the remaining liabilities from the discontinued
operations. The Company believes that the remaining reserves continue to be
adequate and reasonable.
(IN THOUSANDS) Balance at Balance at
December 31, Cash Sept. 30,
2003 Payments 2004
--------------- ----------- --------------
Remaining liabilities from
discontinued operations
LandCare Construction $7,152 $2,287 $4,865
LandCare utility line
clearing business 9,011 1,963 7,048
Certified Systems, Inc. 11,024 2,192 8,832
Management Services 283 81 202
International businesses 21,306 1,026 20,280
NOTE 13: In the ordinary course, the Company is subject to review by domestic
and foreign taxing authorities, including the Internal Revenue Service ("IRS").
From 1986 through 1997 most operations of the Company were conducted in
partnership form, free of federal corporate income tax. During that period, the
Company was not reviewed by the IRS. In 1997, the Company converted from
partnership to corporate form. In 2003, the IRS commenced an examination of the
Company's consolidated income tax returns for 2002, 2001 and 2000. The Company
expects the IRS examination to be in its final stages in late 2004 and completed
early in 2005. As with any review of this nature, the outcome of the IRS
examination is not known at this time.
NOTE 14: The business of the Company is conducted through five operating
segments: TruGreen, Terminix, American Home Shield, ARS/AMS and Other
Operations. In accordance with SFAS 131, the Company's reportable segments are
strategic business units that offer different services. The TruGreen segment
provides residential and commercial lawn care and landscaping services through
the TruGreen ChemLawn and TruGreen LandCare companies. The Terminix segment
provides termite and pest control services to residential and commercial
customers. The American Home Shield segment provides home warranties to
consumers that cover HVAC, plumbing and other home systems and appliances. This
segment also includes home inspection services provided by AmeriSpec. The
ARS/AMS segment provides HVAC and plumbing installation and repair services
provided under the ARS Service Express, American Mechanical Services and Rescue
Rooter brand names. The Other Operations segment includes the franchise and
company-owned operations of ServiceMaster Clean, Furniture Medic and Merry
Maids, which provide disaster restoration, cleaning, furniture repair and maid
services. The segment also includes the Company's headquarters operations, which
provide various technology, marketing, finance and other support services to the
business units. Segment information is presented in the following table.
11
(IN THOUSANDS) Three Months Three Months Nine Months Nine Months
Ended Sept. 30, Ended Sept. 30, Ended Sept. 30, Ended Sept. 30,
2004 2003 2004 2003
-------------------------------------------------------------------------------- ------------------------------------------
Operating Revenue:
TruGreen $438,474 $418,106 $1,116,843 $1,056,943
Terminix 253,235 246,714 772,349 733,208
American Home Shield (1) 137,961 132,096 374,220 352,469
ARS/AMS 181,097 181,538 514,778 505,948
Other Operations 43,100 39,809 121,284 113,508
--------------------------------------------------------------------------------- -------------------------------------------
Total Operating Revenue $1,053,867 $1,018,263 $2,899,474 $2,762,076
================================================================================= ===========================================
Operating Income (Loss):
TruGreen (1) $79,983 $(117,148) $142,982 $(57,739)
TRUGREEN WITHOUT IMPAIRMENT CHARGE (2) 79,983 71,722 142,982 131,131
Terminix 26,695 32,461 111,432 107,886
American Home Shield (1) 23,433 21,602 57,386 52,923
ARS/AMS 4,302 (284,482) 2,267 (281,814)
ARS/AMS WITHOUT IMPAIRMENT CHARGE (2) 4,302 7,318 2,267 9,986
Other Operations (9,587) (7,392) (28,767) (26,258)
--------------------------------------------------------------------------------- -------------------------------------------
Total Operating Income (Loss) $124,826 $(354,959) $285,300 $(205,002)
================================================================================= ===========================================
(1) American Home Shield's results for the three months and nine months ended
September 30, 2004 include the impact of a $5.5 million cumulative non-cash
negative adjustment to revenue and operating income related to a conversion
of its deferred revenue calculation from a historical manual process to an
automated computation. TruGreen's results for the three months and nine
months ended September 30, 2004 include a $4 million gain from the sale of
a support facility.
(2) In the third quarter of 2003, the Company recorded a non-cash, pre-tax
impairment charge of $481 million related to its goodwill and intangible
assets. Approximately $189 million of the charge is associated with the
TruGreen LandCare operations reported in the TruGreen segment, and the
remaining $292 million relates to the ARS/AMS segment. In order to
facilitate comparisons of ongoing operating performance of continuing
operations, the Company also has presented segment results after adjusting
for the impact of the impairment charge.
(IN THOUSANDS) As of As of
Sept. 30, 2004 Dec. 31, 2003
----------------------------------------------------------------------------------------------------------------------
Identifiable Assets:
TruGreen $990,118 $911,958
Terminix 855,649 822,407
American Home Shield 483,527 422,765
ARS/AMS 201,119 185,528
Other Operations (and discontinued operations) 564,407 613,768
---------------------------------------------------------------------------------------------------------------------
Total Identifiable Assets $3,094,820 $2,956,426
=====================================================================================================================
(IN THOUSANDS) As of As of
Sept. 30, 2004 Sept. 30, 2003
---------------------------------------------------------------------------------------------------------------------
Capital Employed: (1)
TruGreen $899,813 $905,518
Terminix 617,342 589,101
American Home Shield 162,734 128,278
ARS/AMS 96,615 94,074
Other Operations (and discontinued operations) (33,873) 52,481
---------------------------------------------------------------------------------------------------------------------
Total Capital Employed $1,742,631 $1,769,452
=====================================================================================================================
(1) Capital employed 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.
12
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THIRD QUARTER 2004 COMPARED TO THIRD QUARTER 2003
CONSOLIDATED OVERVIEW
ServiceMaster (the "Company") reported third quarter 2004 revenue of $1.05
billion, a three percent increase compared to 2003. Third quarter 2004 diluted
earnings per share were $.23 compared to a loss of ($1.08) in 2003. The diluted
earnings per share for 2003 include a non-cash impairment charge of $1.30 per
share ($481 million pre-tax, $383 million after-tax).
Operating income for the third quarter was $125 million compared to a loss of
($355) million in 2003. The increase in operating income reflects the impact of
the 2003 impairment charge ($481 million) as well as increases from revenue
growth and operating efficiencies that were offset by significant one-time
step-ups in two key costs that have been previously disclosed throughout the
year: (i) the return to more normal levels of variable compensation and (ii)
umbrella insurance premiums, which increased significantly earlier this year
when a multi-year, fixed premium contract expired. The combined impact of these
items totaled approximately $9.5 million. Additionally, there were two
non-recurring items recorded in operating income in the third quarter of 2004.
Specifically, American Home Shield recorded a $5.5 million cumulative non-cash
negative adjustment to revenue and operating income related to a conversion of
its deferred revenue calculation from a historical manual process to an
automated computation. Also in the quarter, TruGreen ChemLawn realized a $4
million gain from the sale of a support facility.
Cost of services rendered and products sold increased two percent for the third
quarter and decreased as a percentage of revenue to 65.2 percent in 2004 from
65.8 percent in 2003. The decrease primarily reflects a change in the mix of the
business as TruGreen ChemLawn and Terminix increased in size in relationship to
the overall business of the Company. These businesses generally operate at
higher gross margins then the rest of the business, but incur somewhat higher
selling and administrative expenses as a percentage of revenue. Selling and
administrative expenses increased nine percent for the quarter. As a percentage
of revenue, these costs increased to 22.8 percent for the quarter in 2004 from
21.7 percent in 2003. The increase in selling and administrative expenses
primarily reflects the change in business mix described above.
Net non-operating expense improved by approximately $3 million from 2003,
primarily reflecting a higher level of investment income from security gains in
the American Home Shield investment portfolio, as well as the favorable impact
of interest rate swap agreements entered into at the end of 2003 and early 2004.
It is important to note that investment gains are an integral part of the
business model at American Home Shield, and there will always be some
market-based variability in the amount of gains realized from quarter to
quarter. Such gains, which were abnormally low in 2003, returned to more normal
levels in 2004, based on historical market returns and the size of the American
Home Shield investment portfolio.
The Company has re-affirmed its outlook for the year. The Company expects
revenue growth to be in the mid-single digits and that earnings per share will
grow somewhat faster than revenues.
SEGMENT REVIEW
The TruGreen segment includes lawn care operations performed under the TruGreen
ChemLawn brand name and landscape maintenance services provided under the
TruGreen LandCare brand name. The TruGreen segment reported a five percent
increase in third quarter revenue to $438 million compared to $418 million in
2003. The segment reported operating income of $80 million in 2004 compared to
an operating loss of ($117) million in 2003. During the third quarter of 2003,
the Company recorded a non-cash impairment charge of $189 million pre-tax,
relating to goodwill and intangible assets of its TruGreen LandCare operations.
13
Revenue in the lawn care operations grew six percent over 2003, reflecting an
increased customer count and a strong increase in ancillary service revenue
(e.g. aerations, grub control, etc.). Customer counts increased seven percent,
with half of that growth organic, resulting from continued significant
improvement in customer retention and the impact of acquisitions, partially
offset by a modest net decline in sales. The Company has been able to maintain
its significant improvement in customer retention. The gain in retention
continues to be geographically broad-based and a result of concerted management
focus including initiatives to produce more visible results, improving customer
communication and problem resolution procedures, focused incentive compensation
structures at all levels, and favorable weather conditions. This unprecedented
rate of improvement reflects three years of intense focus on customer
satisfaction by the entire TruGreen ChemLawn team. In April, TruGreen ChemLawn
acquired the assets of Greenspace Services Limited ("Greenspace"), Canada's
largest professional lawn care service company. The Greenspace acquisition
continues to perform very well. The lawn care operations have continued to make
progress in diversifying their sales channels, placing less reliance on
telemarketing and more emphasis on direct mail, neighborhood selling, and other
efforts. Third quarter operating income of the lawn care operations increased
reflecting the higher level of revenue and a $4 million pre-tax gain from the
sale of a support facility. Partially offsetting these benefits were higher
selling expenses associated with new sales channels, which are costlier but
produce customers who have tended to stick with us longer. In addition, the lawn
care operations experienced hurricane related production delays as well as sharp
increases in fuel and insurance costs during the period.
Third quarter revenue in the landscape maintenance business increased slightly,
reflecting comparable amounts of base contract maintenance revenue and continued
stronger enhancement sales volume (e.g. add-on services such as seasonal flower
plantings, mulching, etc.), partially offset by the effects of branch
consolidations. Solid growth in base contract maintenance revenue from new
customers was offset by lower retention, some of which the Company initiated.
The growth in enhancement revenue reflects focused sales efforts and an
improving economy. Excluding the impact of the branch consolidations, third
quarter revenue increased four percent, an encouraging sign that this business
is starting to turn. Third quarter operating income of the landscape maintenance
business improved, reflecting the 2003 non-cash impairment charge and a $2
million improvement from base operations. The improvement in base operations
included an increase in higher margin enhancement revenue and labor
efficiencies, partially offset by higher fuel and insurance costs. Management
remains focused on improving operating consistency through better process
disciplines, especially in the areas of labor management and in the pricing of
new jobs.
Capital employed in the TruGreen segment decreased one percent reflecting
improved working capital management offset in part by acquisitions. Capital
employed 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 Terminix segment, which includes termite and pest control services, reported
a three percent increase in third quarter revenue to $253 million, compared to
$247 million in 2003. Operating income decreased 18 percent to $27 million
compared to $32 million in 2003. Terminix continues to make encouraging progress
through the significant changes it has made to its operating model with the
implementation of a dual termite offering in 2004, and its continuing migration
in pest control from monthly to quarterly service. Continued strong growth in
termite renewal revenue was supported by improved pricing. As the Company had
anticipated and explained in its second quarter Form 10-Q filing, third quarter
termite completion revenue dollars were down modestly as very solid increases in
unit volume and improvements in realized prices were offset by the negative
effects on revenue of the mix shift from higher priced bait treatments to lower
priced liquid treatments. The Company is encouraged by the strong growth in
termite completion units which has been achieved thus far in the post-swarm
season, where weather is not as prominent of a factor. On the pest control side,
the continuing shift to quarterly service frequency has had an adverse short
term effect on revenues, but with an offsetting improvement in labor
efficiencies. This change in service frequency, along with other operating
measures that we have taken, has also contributed to a sharp improvement in
customer retention. The decrease in third quarter operating income primarily
resulted from factors that the Company had previously anticipated and disclosed,
and included timing differences related to the termite mix shift, increased
investments in the sales force and higher fuel and bad debt costs.
14
Hurricanes also had an adverse impact, as they hit areas where Terminix has a
strong presence. Overall, the Company believes that the Terminix team is making
solid progress on key operating and marketing initiatives, and expects it to
achieve good full year growth in revenues and profits. Capital employed in the
Terminix segment increased five percent, reflecting the impact of acquisitions
and growth in the business.
The American Home Shield (AHS) segment, which provides home warranties to
consumers that cover heating, ventilation and air conditioning (HVAC), plumbing
and other home systems and appliances, reported a four percent increase in
revenue to $138 million from $132 million in 2003 and operating income of $23
million compared to $22 million in 2003. Both the revenue and operating income
comparisons are impacted by a $5.5 million cumulative non-cash negative
adjustment recorded in the third quarter this year related to a conversion from
a historical manual deferred revenue calculation to an automated computation.
Solid new sales growth in the direct-to-consumer channel was supported by an
increase in direct mail solicitations. Renewal sales showed strong improvement,
reflecting the larger renewal base of customers and a modest decline in the
customer retention rate. Sales in the real estate channel declined as sales
volume has been adversely affected by double-digit declines in home resale
listings in high warranty usage states. In the first quarter, AHS launched a
pilot program in two states to increase real estate sales in under-penetrated
markets. This program has performed well and its scope was expanded in the third
quarter. Management is focused on replicating high performing account executives
through increased up-front training and marketing support in these markets. The
increase in third quarter operating income reflects the favorable effects of
revenue growth and lower air conditioning claims costs due to cooler seasonal
temperatures. This was partially offset by the aforementioned cumulative
deferred revenue adjustment and continuing investments in key marketing and
customer service initiatives.
Capital employed increased 27 percent reflecting volume growth in the business
resulting in a higher level of cash and marketable securities balances. The
calculation of capital employed for the AHS segment includes approximately $261
million and $209 million of cash, cash equivalents and marketable securities at
September 30, 2004 and 2003, respectively.
The ARS/AMS segment provides direct HVAC and plumbing installation and repair
services under the ARS Service Express, Rescue Rooter, and American Mechanical
Services (for large commercial accounts) brand names. Third quarter segment
revenue of $181 million was consistent with the prior year. Excluding the
effects of branch closures, third quarter revenue increased three percent.
Positive growth in two of the three service lines within ARS Service Express
continued from the second quarter into the third quarter. Plumbing revenue again
increased modestly as relatively strong improvements in sewer line repairs and
commercial services were partially offset by continued softness in core
residential service calls. Residential construction and commercial project
revenues had another strong quarter. Cooler seasonal temperatures, which
benefited American Home Shield, posed a significant challenge to the
air-conditioning business of ARS, which experienced a sharp decline in both
service and add-on replacement revenue. Unfortunately, this negated encouraging
progress on several underlying operating intitiatives, including the two hour
on-time arrival guarantee, the retail initiative and efforts to increase sales
closing rates and average ticket prices. The segment reported operating income
of $4 million compared with an operating loss of ($284) million in 2003. During
the third quarter of 2003, the Company recorded a pre-tax non-cash impairment
charge of $292 million relating to goodwill and intangible assets of its ARS/AMS
segment. The increase in the segment's operating income reflects the impact of
the 2003 non-cash impairment charge, partially offset by the negative impact of
cooler weather and increased costs related to sales, marketing, and insurance.
At AMS, the project backlog and revenue have shown strong increases over the
past several months and profits, while still cyclically reduced, were improved
over the prior year. However, due to continued competitive industry conditions,
related margins are still below prior year and the backlog consists of a greater
mix of longer duration contracts. If bidding activity continues to strengthen,
the Company would expect to see margins begin to improve to more normal levels.
Capital employed increased three percent to $97 million.
The Other Operations segment includes the Company's ServiceMaster Clean and
Merry Maids operations as well as its headquarters functions. Revenue in this
segment increased eight percent to $43 million compared to $40 million in 2003.
The ServiceMaster Clean and Merry Maids franchise operations reported a combined
increase in revenue of 11 percent, primarily driven by continued strong results
in disaster restoration services and improved internal growth in maid service.
The strong momentum in disaster restoration services is expected to continue in
the fourth quarter, supported by clean-up work related to the
15
hurricanes. The increase in the segment's operating loss for the quarter
reflects an increase in variable compensation at the headquarters level, offset
in part by an increase in profits from the combined franchise operations.
Capital employed in this segment decreased approximately $86 million reflecting
the Company's annual cash benefit from deferred income taxes.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO SEPTEMBER 30, 2003
CONSOLIDATED REVIEW
The Company reported revenue of $2.90 billion for the nine months ended
September 30, 2004, a five percent increase over 2003. Substantially all of the
five percent reported revenue growth was derived from internal sources
(reflecting increased customer counts and improved pricing) as the impact of
acquisitions was offset by a decrease in revenue related to selected branches
that were shut-down in 2003. For the nine months, diluted earnings per share
were $.50 compared with a loss of ($.84) in 2003. Diluted earnings per share
from continuing operations were $.51, compared with a loss of ($.83) reported in
2003. The 2003 results include the non-cash impairment charge of $1.29 for the
nine months ($481 million pre-tax, $383 million after-tax).
Operating income for the nine months was $285 million compared with a loss of
($205) million in 2003, which includes the impact of the impairment charge ($481
million). For the nine months, all of the Company's business segments reported
increases in revenue and most segments also reported solid increases in profits
before the impact of the 2003 impairment charge, led by TruGreen's lawn care
operations and American Home Shield. The cost controls and the focus on improved
efficiencies that were evident throughout the enterprise during the second half
of last year remained firmly in place, helping the Company to offset large
increases in certain key costs such as variable compensation, insurance and
fuel.
Cost of services rendered and products sold increased five percent for the nine
months and decreased as a percentage of revenue to 66.6 percent in 2004 from
66.8 percent in 2003. Selling and administrative expenses increased seven
percent and increased as a percentage of revenue to 23.5 percent in 2004 from
23.1 percent in 2003. As discussed in the third quarter comparison, the decrease
in cost of services as a percentage of revenue and increase in selling and
administrative expense as a percentage of revenue primarily reflects a change in
the mix of the business as TruGreen ChemLawn and Terminix increased in size in
relationship to the overall business of the Company.
Net non-operating expense for the nine months decreased $9 million from 2003,
reflecting higher investment income from realized securities gains in the
American Home Shield investment portfolio, as well as the favorable impact from
interest rate swap agreements.
KEY PERFORMANCE INDICATORS
The table below presents selected metrics related to customer counts and
customer retention for the three most profitable businesses of the Company.
These measures are presented on a rolling, twelve-month basis in order to avoid
seasonal anomalies.
16
KEY PERFORMANCE INDICATORS
As of September 30,
2004 2003
------------ -----------
TRUGREEN CHEMLAWN-
Growth in Full Program Contracts 7% 4%
Customer Retention Rate 64.8% 62.2%
TERMINIX -
Growth in Pest Control Customers 6% 2%
Pest Control Customer Retention Rate 80.1% 76.7%
Growth in Termite Customers -1% -2%
Termite Customer Retention Rate 88.1% 88.0%
AMERICAN HOME SHIELD -
Growth in Warranty Contracts 5% 8%
Customer Retention Rate 55.0% 55.4% *
* Restated to conform with the 2004 calculation.
SEGMENT REVIEW
For the nine months, the TruGreen segment reported revenues of $1.1 billion, six
percent above the prior year. The segment reported operating income of $143
million compared with an operating loss of ($58) million in 2003. The 2003
results include a non-cash impairment charge of $189 million pre-tax, relating
to goodwill and intangible assets of the TruGreen LandCare operations.
Revenue in the lawn care operations increased eight percent, of which four
percent was internal, and operating income grew nine percent, or $13 million,
for the nine months. The strong revenue growth reflects higher customer counts
driven by significantly improved retention rates and the impact of acquisitions,
partially offset by a modest decrease in sales. Overall year-to-date new sales
were down less than two percent, reflecting a decline in telemarketing sales of
10 percent, consistent with the Company's expectations in light of the
implementation of the National Do Not Call Registry. This decline was mostly
offset by substantial increases in sales from new channels such as direct mail
and neighborhood sales efforts. Management is encouraged with the progress
TruGreen has made in diversifying its marketing model, with telemarketing now
accounting for about 60 percent of its new sales, down from over 90 percent just
a few years ago. The new sales channels are more costly than telemarketing, but
they are also expected to produce customers with somewhat higher customer
retention rates. The customer retention rate reflects a strong 260 basis point
improvement, consistent with that reported as of June 30. The increase in
operating income for the nine months reflects the higher revenue and the
resulting labor and cost efficiencies as well as the impact of the Greenspace
acquisition, partially offset by fuel and other key cost increases. As disclosed
in the Company's second quarter Form 10-Q, the lawn care operation's nine month
results were adversely impacted by 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 more of interim expense into
the second quarter that will result in a corresponding benefit primarily in the
fourth quarter of 2004.
Revenue in the landscape maintenance business was consistent with prior year
levels reflecting stronger enhancement sales volume and a comparable level of
base contract maintenance revenue, offset by a lower level of first quarter snow
removal revenue than was experienced in 2003. Excluding the impact of branch
consolidations, nine month revenue increased three percent. Operating income of
the landscape maintenance operations improved reflecting the 2003 non-cash
impairment charge. However, in the first nine months of 2004 base operations had
a $1 million decline reflecting a reduction in higher margin snow removal
volume, higher insurance and labor-related costs as well as $1.8 million of
branch consolidation costs. The Company has strengthened its leadership team
throughout the year and has expanded its sales efforts.
The Terminix segment reported a five percent increase in revenue for the nine
months to $772 million compared to $733 million in 2003 and operating income
growth of three percent to $111 million compared
17
to $108 million in 2003. The revenue increase was supported by improved pricing
on termite renewal contracts, slightly offset by a modest decline in customers
available to renew coming out of last year's weather-plagued termite swarm.
Termite completion revenue increased, reflecting a solid increase in volume
following last year's weak termite swarm season and improved price realization,
partially offset by the mix shift from the higher priced bait product to lower
priced liquid treatments. As previously disclosed, with the improved efficacy of
liquid termite treatments, the Company is providing consumers with the choice of
receiving termite services through baiting systems or liquid treatments. With
this enhanced termite offering, the Company has experienced a shift in the mix
of its termite customer base from baiting systems to liquid treatments. This
change in mix is generally proceeding in line with management's expectations. By
offering consumers a choice in treatments and by tightening controls over price
discounting, Terminix has been able to increase the average price realized for
each of the two treatment alternatives, thus offsetting the adverse, short-term
revenue and profit impacts of the mix shift. As previously disclosed, liquid
termite treatments are generally less profitable than bait treatments during the
first year, but are more profitable in the subsequent, renewal years with the
two alternatives having approximately equal values over the average life of a
customer. Pest control revenue increased modestly for the nine months and was
driven by continued strong improvement in customer retention, partially offset
by a decline in volume of commercial pest control business. The Company is
experiencing an unfavorable impact to revenues from the increased number of
customers receiving quarterly service visits from monthly service visits. This
shift is slightly favorable to profits this year reflecting labor efficiencies
gained from this change. For the nine months, the improvement in operating
income resulted from an increase in revenue and the resulting production labor
efficiencies, partially offset by higher insurance, fuel and other key cost
areas.
For the nine months the American Home Shield segment reported a six percent
increase in revenue to $374 million from $352 million in 2003 and operating
income growth of eight percent to $57 million compared to $53 million in 2003.
Both the revenue and operating income comparisons are impacted by a $5.5 million
cumulative non-cash negative adjustment recorded in the third quarter this year
related to a conversion from a historical manual deferred revenue calculation to
an automated computation. A very strong increase in sales in the
direct-to-consumer channel was supported by an increased level of direct mail
solicitations. In addition, the Company continues to expand its marketing
efforts with premier mortgage lenders and financial institutions. American Home
Shield experienced more moderate growth in its real estate and renewal channels,
with the growth in renewal sales being supported by an increase in renewable
customers, partially offset by less favorable customer retention rates. The
growth in operating income reflected the impact of lower contract claims
activity, primarily due to cooler seasonal temperatures, as well as continued
effective management of the cost per claim, partially offset by the cumulative
deferred revenue adjustment and investments in key marketing and customer
service initiatives.
The ARS/AMS segment reported a two percent increase in revenues for the nine
months to $515 million. Excluding the effects of year-end 2003 branch closures,
revenue growth was five percent. The segment reported operating income of $2
million compared with an operating loss of ($282) million in 2003. As noted in
the third quarter comparison, the 2003 results include a $292 million pre-tax
charge relating to goodwill and intangible asset impairment. The growth in
revenue reflected strong increases in residential new construction and
commercial project revenue, offset by a decline in HVAC service revenue. HVAC
volume was adversely impacted by a reduced level of demand resulting from cooler
seasonal temperatures. Plumbing revenue increased one percent for the nine month
period. Within ARS, meaningful progress has been made on specific initiatives to
improve brand differentiation (through such measures as on-time arrival
guarantee), expand sewer line repair revenue, and increase closing rates and the
average sales ticket prices on replacement HVAC sales. The segment's increase in
operating income reflects the impact of the 2003 non-cash impairment charge,
offset in part by higher sales, marketing, and insurance costs and the negative
impact of cooler seasonal temperatures at ARS, as well as lower margins at AMS
due to depressed industry conditions in commercial real estate.
The Other Operations segment reported a seven percent increase in revenues to
$121 million for the nine months compared with $114 million in 2003. The
combined ServiceMaster Clean and Merry Maids franchise operations reported
revenue growth of nine percent and a solid increase in operating income.
ServiceMaster Clean continued to experience strong growth in disaster
restoration services and favorable currency impacts on international operations.
At Merry Maids, a better economy and improved sales
18
processes have driven a steady increase in internal revenue growth in both the
branch and franchise operations. The segment's operating loss increased over the
prior year reflecting a higher level of variable compensation expense at the
headquarters level partially offset by increased profits in the combined
franchise operations.
FINANCIAL POSITION AND LIQUIDITY
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities increased by $20 million in the third
quarter and $75 million year-to-date, totaling $241 million for the nine months.
The improvement reflects both reduced working capital usage of $58 million and
an increased level of profits. The improvement in working capital reflects a
lower rate of cash outflows in early 2004 relating to incentive compensation
earned in 2003, combined with an increased level of non-cash accruals for 2004
incentives, reflecting a return to more normal incentive rates. Additionally,
the Company experienced favorable impacts from the timing and magnitude of other
payments, partially offset by earlier spending on certain full year marketing
and advertising initiatives. For the full year 2004, the Company expects cash
from operating activities to again exceed reported net income by at least 50
percent and increase at a rate at or above the earnings growth rate.
The Company receives a significant annual cash benefit due to a large base of
tax-deductible intangible assets that exist for income tax reporting purposes
but not for book purposes, a significant portion of which arose in connection
with the Company's 1997 conversion from a limited partnership to a corporation.
From 1986 through 1997 most operations of the Company were conducted in
partnership form, free of federal corporate income tax. During that period, the
IRS did not review the Company. In 2003, the IRS commenced an examination of the
Company's consolidated income tax returns for 2002, 2001 and 2000. The Company
expects the IRS examination to be in its final stages in late 2004 and completed
in early 2005. As with any review of this nature, the outcome of the IRS
examination is not known at this time.
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, which include recurring capital needs and information
technology projects, were above prior year levels. The Company anticipates
approximately $50 million of capital expenditures in 2004 reflecting systems
enhancements and other initiatives. The Company has no material capital
commitments at this time.
Tuck-in acquisitions for the nine months ended September 30, 2004 totaled $41
million, compared with $31 million in 2003. Consideration consisted of cash
payments ($27 million of the total), seller financed notes and Company stock.
The increase in acquisitions reflects TruGreen ChemLawn's purchase of Greenspace
as well as the resumption of tuck-in acquisition activity at Terminix and
TruGreen ChemLawn. The Company's current expectation for full year is that
approximately $50 million in cash will be used for acquisitions.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid to shareholders totaled $93 million or $.32 per share for
the nine months ended September 30, 2004. In November 2004, the Company
announced a fourth quarter cash dividend of $.11 per share (compared to $.105
per share paid in the fourth quarter last year), payable on November 30, 2004,
to shareholders of record on November 11, 2004. With this dividend, the
Company's full year payment will increase 2.4 percent over 2003 and will
represent the Company's 34th consecutive year of dividend increases. The timing
and amount of future dividend increases are at the discretion of the Board of
Directors and will depend on, among other things, the Company's capital
structure objectives and cash requirements.
The ServiceMaster Company and its Board of Directors 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, the Company modified its historic pattern of dividend declaration
and payment dates. The Company will continue to pay its dividends quarterly,
with the payment schedule for each quarter pushed back one month, to the end of
November, February, May and August.
19
In July 2000, the Board of Directors authorized $350 million for share
repurchases. The Company completed approximately $55 million in share
repurchases in the first nine months of 2004 with approximately $14 million
occurring in the third quarter. There remains approximately $90 million
available for repurchases under the July 2000 authorization. The Company plans
to continue its share repurchase program in the fourth quarter, and is currently
pacing toward a full year total in the $75 million range. The actual level of
repurchases will be based on operating trends and business acquisition
opportunities, and will be consistent with the Company's strategy to retain its
investment grade status.
LIQUIDITY
Cash and short and long-term marketable securities totaled approximately $419
million at September 30, 2004, with approximately $300 million of that amount
effectively required to support regulatory requirements at American Home Shield
and for other purposes. Total debt was $808 million at September 30, 2004,
approximately $11 million below the amount at December 31, 2003 and the lowest
level since March of 1997. Approximately 44 percent of the Company's debt
matures beyond five years and 34 percent beyond fifteen years. The Company's
next public debt maturity of approximately $138 million is in April 2005. The
Company has both the intent and ability to pay this debt with other long term
financing.
Management believes that funds generated from operating activities and other
existing resources will continue to be adequate to satisfy ongoing working
capital needs of the Company. During the second quarter of 2004, the Company
replaced its previous $490 million credit facility with a new five-year
revolving credit facility of $500 million expiring in May 2009. As of September
30, 2004, the Company had issued approximately $162 million of letters of credit
under this facility and had unused commitments of approximately $338 million.
The Company also has $550 million of senior unsecured debt and equity securities
available for issuance under an effective shelf registration statement. In
addition, the Company has an arrangement enabling it to sell, on a revolving
basis, certain receivables to unrelated third party purchasers. At September 30,
2004, there were no receivables outstanding that had been sold to third parties.
The agreement is a 364-day facility that is renewable at the option of the
purchasers. The Company may sell up to $65 million of its receivables to these
purchasers in the future and therefore would have immediate access to cash
proceeds from these sales. The amount of the eligible receivables varies during
the year based on seasonality of the business and will at times limit the amount
available to the Company.
The Company is party to a number of debt agreements that require it to maintain
certain financial and other covenants, including limitations on indebtedness and
interest coverage ratio. In addition, under certain circumstances, the
agreements may limit the Company's ability to pay dividends and repurchase
shares of common stock. These limitations are not expected to be a factor in the
Company's dividend and share repurchase plans in the near future. Failure by the
Company to maintain these covenants could result in the acceleration of the
maturity of the debt. At September 30, 2004, the Company was in compliance with
the covenants related to these debt agreements and based on its operating
outlook for the remainder of 2004, expects to be able to maintain compliance in
the future.
During the third quarter of 2004, the Company replaced an $80 million operating
lease facility with a new five-year operating lease facility of approximately
$53 million expiring in September 2009. The Company also maintains a $15 million
operating lease facility that expires in January 2008. These facilities provided
for the financing of branch properties to be leased by the Company. At September
30, 2004, the total amount of the facilities, approximately $68 million, was
funded. The Company has guaranteed the residual value of the properties under
the leases up to 82 percent of the fair market value at the commencement of the
lease. Approximately $15 million of these leases have been included on the
balance sheet as assets with related debt as of September 30, 2004 and
approximately $20 million as of December 31, 2003.
The majority of the Company's fleet and some equipment are leased through
operating leases. The lease terms are non-cancelable for the first twelve month
term, and then are month-to-month, cancelable at the Company's option. There are
residual value guarantees (ranging from 70 percent to 87 percent depending on
the agreement) on these vehicles and equipment, which historically have not
resulted in significant net payments to the lessors. At September 30, 2004,
there was approximately $254 million of residual value relating to the Company's
fleet and equipment leases.
20
The Company's 2003 Annual Report included disclosure of the Company's
contractual obligations and commitments as of December 31, 2003. The Company
continues to make the contractually required payments and therefore, the 2004
obligations and commitments as listed in the December 31, 2003 Annual Report
have been reduced by the required payments. As disclosed in the Company's second
quarter Form 10-Q filing, the Company's Board of Directors authorized two
commitments for telecommunication services totaling approximately $30 million.
During the third quarter, the Company signed one of the agreements totaling
approximately $21 million. The remaining telecommunication agreement is expected
to be finalized during the fourth quarter of 2004. The net payments on previous
obligations approximately offset the addition of the two telecommunication
agreements and therefore, the level of net purchase obligations existing at
September 30, 2004 are comparable to year-end 2003 levels.
FINANCIAL POSITION - CONTINUING OPERATIONS
Receivables increased from year-end levels, reflecting general business growth
and increased seasonal activity. Prepaid expenses and other assets increased
from year-end primarily reflecting preseason advertising costs at TruGreen
ChemLawn and Terminix as well as annual repairs and maintenance procedures that
are performed in the first quarter at TruGreen ChemLawn. These costs are
deferred and recognized over the production season and are not deferred beyond
the calendar year end. Deferred customer acquisition costs increased reflecting
the seasonality in the lawn care operations. In the winter and early spring,
this business sells a series of lawn applications to customers, which are
rendered primarily in March through October. These direct and incremental
selling expenses which relate to successful sales are deferred and recognized
over the production season and are not deferred beyond the calendar year-end.
On the other side of the balance sheet, deferred revenue increased from year-end
levels, reflecting the impact from the seasonal volume of termite baiting sales
and growth in contracts written at American Home Shield partially offset by a
decrease from year-end 2003 levels in customer prepayment balances for lawn care
services. Payroll and related expenses have increased from year-end levels
reflecting an increased level of accruals for 2004 incentives as the Company
returns to more normal incentive rates. Incentive compensation payments are
expected to be made in the first quarter of 2005. Income taxes payable at
September 30, 2004 reflects the Company's 2004 estimated federal tax payment
expected to be made in the fourth quarter. Deferred taxes increased reflecting
the annual tax benefit realized as a result of the large base of tax-deductible
intangible assets that exist for income tax reporting purposes but not for book
purposes. As previously discussed, a significant portion of the tax-deductible
intangible assets arose in connection with the Company's 1997 conversion from a
limited partnership to a corporation.
Property and equipment increased modestly from year-end levels, reflecting
general business growth. The Company does not have any material capital
commitments at this time.
The Company has minority investors in Terminix. This minority ownership reflects
an interest issued to Allied Bruce Terminix Companies in connection with the
acquisition of its business in 2001. This equity security is convertible into
eight million ServiceMaster common shares. The ServiceMaster shares are
considered in the shares used for the calculation of diluted earnings per share.
Total shareholders' equity was $835 million at September 30, 2004 and $817
million at December 31, 2003. The increase primarily reflects earnings in the
business partially offset by cash dividend payments and share repurchases.
FINANCIAL POSITION - DISCONTINUED OPERATIONS
The assets and liabilities related to discontinued businesses have been
classified in separate captions on the Consolidated Statements of Financial
Position. Assets from the discontinued operations have declined slightly from
year-end levels representing collections on receivables. The remaining
liabilities primarily represent obligations related to long-term self-insurance
claims.
21
FORWARD-LOOKING STATEMENTS
THE COMPANY'S ANNUAL REPORT CONTAINS OR INCORPORATES BY REFERENCE 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 AND 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.
22
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The economy and its impact on discretionary consumer spending, labor wages, fuel
prices, insurance costs and medical inflation rates could be significant to
future operating earnings.
The Company does not hold or issue financial instruments for trading or
speculative purposes. The Company has entered into specific financial
arrangements, primarily fuel hedges, in the normal course of business to manage
certain market risks, with a policy of matching positions and limiting the terms
of contracts to relatively short durations. The effect of derivative financial
instrument transactions is not material to the Company's financial statements.
In December 2003 and January 2004, the Company entered into interest rate swap
agreements with a total notional amount of $165 million. Under the terms of
these agreements, the Company pays a floating rate of interest (based on a
specified spread over six-month LIBOR) on the notional amount and the Company
receives a fixed rate of interest at 7.88% on the notional amount. The impact of
these swap transactions was to convert $165 million of the Company's debt from a
fixed rate of 7.88% to a variable rate based on LIBOR (5.7% average rate during
the third quarter).
The Company generally maintains the majority of its debt at fixed rates. After
the effect of the interest swap agreements, approximately 78 percent of total
debt at September 30, 2004 was at a fixed rate. With respect to other
obligations, the payments on the approximately $68 million of funding
outstanding under the Company's real estate operating lease facilities as well
as its fleet and equipment operating leases (approximately $254 million in
residual value) are tied to floating interest rates. The Company's exposure to
interest expense based on floating rates is partially offset by floating rate
investment income earned on cash and marketable securities. The Company believes
its overall exposure to interest rate fluctuations is not material to its
overall results of operations.
The Company has several debt and lease agreements where the interest rate or
rent payable under the agreements automatically adjusts based on changes in the
Company's credit ratings. While the Company is not currently expecting a change
in its credit ratings, based on amounts outstanding at September 30, 2004, a one
rating category improvement in the Company's credit ratings would reduce pre-tax
annual expense by approximately $0.8 million. A one rating category reduction in
the Company's credit ratings would increase pre-tax expense on an annualized
basis by approximately $0.9 million.
The following table summarizes information about the Company's fixed rate debt
as of December 31, 2003, including the principal cash payments and related
weighted-average interest rates by expected maturity dates. The fair-value of
the Company's fixed rate debt was approximately $862 million at December 31,
2003.
Expected Maturity Date
-------------------------------------
There-
(In millions) 2004 2005 2006 2007 2008 after Total
--------------------------------------------------------------------------
Fixed rate debt $28 $151 $12 $60 $8 $540 $799
Avg. rate 4.8% 8.3% 6.0% 6.7% 6.1% 7.7% 7.6%
===========================================================================
As previously discussed, the Company has entered into interest rate swap
agreements, the impact of which was to convert $165 million of the Company's
2009 maturity debt from a fixed rate of 7.88% to a variable rate based on LIBOR.
23
CONTROLS AND PROCEDURES
The Company's Chairman and Chief Executive Officer, Jonathan P. Ward, and the
Company's President and Chief Financial Officer, Ernest J. Mrozek, have
evaluated the Company's disclosure controls and procedures as of the end of the
period covered by this report.
The Company's disclosure controls and procedures include a roll-up of financial
and non-financial reporting that is consolidated in the principal executive
office of the Company in Downers Grove, Illinois. The reporting process is
designed to ensure that information required to be disclosed by the Company in
the reports that it files with or submits to the Securities and Exchange
Commission is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Messrs. Ward and Mrozek have concluded that both the design and operation of the
Company's disclosure controls and procedures are effective.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
24
PART II. OTHER INFORMATION
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
SHARE REPURCHASES:
In July 2000, the Board of Directors authorized $350 million for share
repurchases. The following table summarizes the Company's common stock share
repurchases for the three months ended September 30, 2004 under its share
repurchase authorization. Decisions relating to any future share repurchases
will depend on various factors such as the Company's commitment to maintain
investment grade credit ratings and other strategic investment opportunities.
Total Approximate
Number Dollar Value
of Shares of Shares that
Purchased as May Yet be
Total Number Average Price Part of Publicly Purchased
of Shares Paid per Announced Under the
Purchased (a) Share Plan Plan
-------------------------------------------------------------------------------------------------------------------------
July 1, 2004 through
July 31, 2004 - $ - - $ 104,000,000
August 1, 2004 through
August 31, 2004 499,300 $ 11.73 499,300 $ 98,000,000
September 1, 2004 through
September 30, 2004 651,200 $ 12.80 651,200 $ 90,000,000
------------------------------------------------------------
Total 1,150,500 $ 12.34 1,150,500
============================================================
(a) Does not include 639 shares acquired from employees in connection with the
settlement of income tax and related withholding obligations arising from the
exercise of stock options or vesting of restricted stock grants.
ITEM 6: EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a -
14(a) or 15d - 14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a -
14(a) or 15d - 14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 1350
of Chapter 63 of Title 18 of the United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 1350
of Chapter 63 of Title 18 of the United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 9, 2004
THE SERVICEMASTER COMPANY
(Registrant)
By: /S/ ERNEST J. MROZEK
----------------------------
Ernest J. Mrozek
President and Chief Financial Officer
26