American Home Shield 2003 Annual Report Download - page 32

30    ServiceMaster
2003 season, prepayment programs were launched earlier
than the prior year resulting in an acceleration of prepayments
(and cash flow) from the first quarter of 2003 to the fourth
quarter of 2002. The Company also lowered the prepayment
discount it offers customers, resulting in fewer customers
prepaying overall. The Company believes the profit benefit
from a lower discount outweighed the temporary cash flow
benefit from receiving payments earlier. The Company also had
an outstanding year in 2002 relating to receivable collections.
Although most businesses maintained or improved their
days sales outstanding in 2003, there was not the same level
of incremental improvement that was experienced in 2002,
especially relating to both TruGreen LandCare and ARS.The
Company believes that the cash flow pattern experienced in
2003 is more indicative of a normalized pattern. In 2004 the
Company expects cash from operating activities to increase
consistent with earnings and to continue to substantially
exceed net income.
Net cash provided from operating activities has historically
exceeded net income and in 2003 net cash provided from
operating activities was 175 percent of net income. 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 tax deferral is expected to remain near its
current level for another nine years.Much of this benefit is 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 which arose in connection with the
1997 conversion from a limited partnership to a corporation.
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 notified the Company that it will examine the
Company’s consolidated income tax returns for 2002, 2001
and 2000. The Company expects the IRS to complete its
examination in 2005. As with any review of this nature, the
outcome of the IRS examination is not known at this time.
The Company believes it has recorded the appropriate tax
provision, tax liabilities and deferred tax balances.
Cash Flows from Investing Activities
Capital expenditures, which include recurring capital needs
and information technology projects, were below prior year
levels. In 2002, there was a significant payment relating to
the residual value guarantees for leases on assisted living
facilities that were subsequently sold.In addition, 2002 cap-
ital additions included the new Terminix operating system as
well as costs associated with the Company’s headquarters
relocation. The Company anticipates approximately $60
million of capital expenditures in 2004 reflecting systems
enhancements and other initiatives.
In 2003, acquisitions totaled $38 million with the majority
at TruGreen ChemLawn. The cash funding relating to the
acquisitions was $29 million with the remaining amount
seller financed.
Cash Flows from Financing Activities
Cash dividends paid to shareholders in 2003 amounted to
$.42 per share, a 2.4 percent increase over 2002. This was the
33rd consecutive year of annual growth in dividends for the
Company. Cash dividends in 2003 totaled $125 million, a
one percent increase over 2002, reflecting the per share
increase, partially offset by the impact of share repurchases.
The Company records its dividend liability in the Consolidated
Financial Statements on the record date.As of December 31,
2003, the Company had declared a cash dividend of $.105
per share to shareholders of record on January 9, 2004. In
March 2004, the Company declared a cash dividend of $.105
per share to shareholders of record on April 9, 2004. 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 objec-
tives and cash requirements.
In July 2000, the Board of Directors authorized $350 million
for share repurchases. In 2003, the Company repurchased
$86 million of its shares. There remains approximately
$143 million available for repurchases under the July 2000
authorization. The Company expects to repurchase $40
million to $50 million of shares early in 2004, and then
review its operating trends, business acquisition opportunities
and capital needs to determine the subsequent level of share
repurchases. Decisions relating to any future share repur-
chases will depend on various factors such as the Company’s
commitment to maintain investment grade credit ratings
and other strategic investment opportunities.
Liquidity
Cash and short and long-term marketable securities totaled
approximately $411 million at December 31, 2003, with
approximately $221 million of that amount at American
Home Shield to support regulatory requirements.As a result
of strong cash flows and the net proceeds received from
company dispositions, total debt represents the lowest level in
over six years.Total debt at December 31, 2003 was $819 million,
down slightly from the 2002 year end level of $835 million.
Approximately 65 percent of the Company’s debt matures
beyond five years and 35 percent beyond fifteen years. The
Company’s next public debt maturity is not until 2005.
Management Discussion and Analysis of
Financial Condition and Results of Operations