American Home Shield 2005 Annual Report Download - page 26

SERVICEMASTER 2005 ANNUAL REPORT P.24
Three factors contribute to the Company’s strength in its
annual cash provided from operating activities: a solid
earnings base, businesses that need relatively little working
capital to fund growth in their operations, and significant
annual deferred taxes. The Company receives a significant
annual cash tax benefit due to a large base of amortizable
intangible assets which exist for income tax reporting
purposes, but not for book purposes. A significant portion
of these assets arose in connection with the 1997 conversion
from a limited partnership to a corporation. The 2004
agreement with the IRS affirmed the previously identified
step-up in the tax basis of the Company’s assets which
occurred upon reincorporation. The amortization of the tax
basis will result in approximately $57 million of average
annual cash tax benefits through 2012 for which no corre-
sponding income statement benefit is recorded. The
Company estimates that the divestitures of ARS and AMS
will result in a reduction of approximately $4 million in the
average annual cash tax benefits, however, the cash tax
benefits in the year of divestiture will increase such that the
aggregate tax benefits are unchanged.
Cash Flows from Investing Activities
Capital expenditures, which include recurring capital needs
and information technology projects, were slightly below
prior year levels. In 2006, the Company expects capital
expenditures to total approximately $45 million. The
Company has no material capital commitments at this time.
Acquisitions in 2005 totaled $51 million, compared with
$59 million in 2004. The decrease in acquisitions primarily
reflects TruGreen ChemLawn’s 2004 purchase of
Greenspace. In 2006, the Company expects to continue to
expand its tuck-in acquisition program at both Terminix and
TruGreen ChemLawn, with overall acquisitions at these
two units higher than the 2005 level.
Cash Flows from Financing Activities
Cash dividends paid to shareholders in 2005 amounted to
$.44 per share, a 2.3 percent increase over 2004. This was
the 35th consecutive year of annual growth in dividends for
the Company. Cash dividends paid in 2005 totaled $128
million, a two percent increase over 2004, reflecting the per
share increase, partially offset by the impact of share repur-
chases. In February 2006, the Company announced the
declaration of a cash dividend of $.11 per share payable on
February 28, 2006 to shareholders of record on February
17, 2006. The Company expects to continue to increase its
per share dividend payment although, as previously
disclosed, at a rate lower than its corresponding growth in
profits. 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.
In February 2006, ServiceMaster’s Board of Directors
authorized $250 million for share repurchases. This author-
ization replaces the unused portion ($30 million at
December 31, 2005) from the previous authorization granted
in July 2000. In 2005, the Company repurchased $52 million
of its shares at an average price of approximately $13.61
per share. The Company anticipates share repurchases in
2006 to be in the $80 to $100 million range. The actual
level of future share repurchases will depend on various
factors such as the Company’s commitment to maintain
investment grade credit ratings and other strategic invest-
ment opportunities.
Liquidity
Cash and short and long-term marketable securities
totaled approximately $367 million at December 31, 2005,
compared with approximately $496 million at December
31, 2004. The Company used existing resources and cash
generated from operations during 2005 to fund the previ-
ously disclosed tax payments related to the IRS agreement,
as well as the repayment of $137 million of public debt that
matured in April 2005. Approximately $348 million of the
cash and short and long-term marketable securities
balance is effectively required to support regulatory
requirements at American Home Shield and for other
purposes. Total debt at December 31, 2005 was $658
million, approximately $147 million below the amount at
December 31, 2004 and the lowest level since 1997.
Approximately 55 percent of the Company’s debt matures
beyond five years and 42 percent beyond fifteen years. The
Company’s next significant debt maturity is not until 2007.
Management believes that funds generated from operating
activities and other existing resources provide it with signifi-
cant financial flexibility which will continue to be adequate
to satisfy its ongoing working capital needs. The Company
maintains a revolving credit facility of $500 million. In May
2005, this agreement was amended to extend the maturity
date to May 2010 and reduce by 50 basis points the interest
rate payable under the facility. At December 31, 2005, the
Company had no borrowings outstanding under this facility
and had issued approximately $142 million of letters of
credit, resulting in unused commitments of approximately
$358 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 $70 million of its receivables to these pur-
chasers 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 that will at times limit the
amount available to the Company. During 2005, there were
no receivables sold to third parties under this agreement.
Management Discussion and Analysis of Financial Condition and Results of Operations