American Home Shield 2004 Annual Report Download - page 32

30 ServiceMaster 2004 annual report
significantly impaired its financial flexibility. Also related to the
agreement, the Company will realize an approximate $45 million
reduction in estimated tax payments for 2005 that would other-
wise have been paid in the second half of that year. Finally, the
agreement resulted in incremental future tax benefits of approxi-
mately $57 million, which will be recovered on the Company’s
tax returns over the 11 year period ending in 2016.
In the ordinary course, the Company is subject to review by
domestic and foreign taxing authorities, including the IRS.
The Company has been notified by the IRS that it intends to
commence the audits of the Company’s 2003, 2004, and 2005
fiscal years in the second quarter of 2005.
Cash Flows from Investing Activities
Capital expenditures, which include recurring capital needs and
information technology projects, were above prior year levels
reflecting investments in information and productivity enhancing
operating systems. For 2005, the Company expects capital
expenditures to total approximately $50 million.
In 2004, acquisitions totaled $59 million, compared with $38
million in 2003. The increase in acquisitions reflects TruGreen
ChemLawn’s purchase of Greenspace as well as tuck-in acquisition
activity at Terminix and TruGreen ChemLawn. In 2005, the
Company expects to continue to expand its tuck-in acquisition
program at both Terminix and TruGreen ChemLawn, with
overall acquisitions slightly higher than the 2004 level.
Cash Flows from Financing Activities
Cash dividends paid to shareholders in 2004 amounted to $.43
per share, a 2.4 percent increase over 2003. This was the 34th
consecutive year of annual growth in dividends for the Company.
Cash dividends paid in 2004 totaled $125 million, a one percent
increase over 2003, reflecting the per share increase, partially
offset by the impact of share repurchases. In February 2005, the
Company announced the declaration of a cash dividend of $.11
per share to shareholders of record on February 14, 2005. This
dividend was paid on February 28, 2005. The Company
expects to continue to increase its per share dividend payment
although, as previously disclosed, at a rate lower than its corre-
sponding growth in profits. The timing and amount of future
dividend increases are at the discretion of the Board of Directors
and will depend among other things, on the Company’s capital
structure objectives and cash requirements.
In July 2000, the Board of Directors authorized $350 million for
share repurchases. In 2004, the Company repurchased $64 million
of its shares at an average price of approximately $11.70 per
share. There remains approximately $81 million available for
repurchases under the July 2000 authorization. The Company
anticipates continuing its share repurchase program in 2005 at a
similar level as 2004. The actual level of future share repurchases
will depend on various factors such as the Company’s commit-
ment to maintain investment grade credit ratings and other
strategic investment opportunities.
Liquidity
Cash and short and long-term marketable securities totaled
approximately $496 million at December 31, 2004, with approx-
imately $300 million of that amount effectively required to support
regulatory requirements at American Home Shield and for other
purposes. In February 2005, the Company utilized approxi-
mately $125 million of its excess cash amount to fund the previously
discussed tax payments to the IRS and various states.
Total debt at December 31, 2004 was $805 million, approxi-
mately $14 million below the amount at December 31, 2003 and
the lowest level since March of 1997. Approximately 45 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
intends to fund this debt payment with long-term financing
under existing credit facilities. Based on annual projected cash
flows, the amount of the borrowing is expected to be largely
repaid by December 31, 2005.
Management believes that funds generated from operating
activities and other existing resources provide it with significant
financial flexibility which will continue to be adequate to satisfy
its ongoing working capital needs, enable it to pay or refinance
the maturing debt, as well as meet its obligations under the
agreement with the IRS. 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 December 31, 2004, the Company had
issued approximately $158 million of letters of credit under this
facility and had unused commitments of approximately $342
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. 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. During 2004, there were no receivables sold to third
parties under this agreement.
management discussion and analysis of financial condition and results of operations