American Home Shield 2004 Annual Report Download - page 34

32 ServiceMaster 2004 annual report
The Company has minority investors in Terminix. This minority
ownership reflects an interest issued to the former owners of the
Allied Bruce Terminix Companies in connection with the acqui-
sition of that entity. At any time, the former owners may convert
this equity security into eight million ServiceMaster common
shares. The ServiceMaster shares are included in the shares
used for the calculation of diluted earnings per share, when their
inclusion has a dilutive impact. Subsequent to December 31,
2005, ServiceMaster has the ability to require conversion of the
security into ServiceMaster common shares, provided the closing
share price of ServiceMaster’s common stock averages at least
$15 per share for 40 consecutive trading days.
Total shareholders’ equity was $992 million and $817 million at
December 31, 2004 and 2003, respectively. The increase reflects
operating profits in the business as well as the non-cash reduction
in the 2004 tax provision relating to the agreement with the IRS,
partially offset by cash dividend payments and share repurchases.
Under federal tax rules, dividends are considered taxable only
when paid out of current or accumulated earnings and profits as
defined under federal tax laws. As a result of its December 1997
reincorporation, the Company only began generating corporate
earnings and profits for tax purposes in 1998. Since 1998, earnings
and profits for tax purposes have been reduced by dividend
payments, amortization of intangible assets for tax reporting,
deductions relating to business closures and the timing of
certain other tax-related items. Dividends paid during 2004 on
common stock will be 68 percent taxable as dividend income for
federal income tax reporting purposes. The Company currently
expects that approximately 80 percent of its 2005 dividends on
common stock will be taxable as dividend income, and that the
taxable portion of its dividend will grow to be fully taxable over
the next few years.
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, reflecting cash collections on receivables. The
decrease in liabilities from discontinued operations represents a
non-cash reduction in tax reserves resulting from the IRS agreement
as well as certain payments. The remaining liabilities primarily
represent obligations related to long-term self-insurance claims.
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 percent 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
percent to a variable rate based on LIBOR.
The Company generally maintains the majority of its debt at
fixed rates. After considering the effect of the interest swap
agreements, approximately 78 percent of total recorded debt at
December 31, 2004 was at a fixed rate.
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 $260 million in residual value guarantee) 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 December 31,
2004, a one rating category improvement in the Company’s
credit ratings would reduce annual expense by approximately
$0.8 million. A one rating category reduction in the Company’s
credit ratings would increase annual expense by approximately
$0.9 million.
The following table summarizes information about the Company’s
fixed rate debt as of December 31, 2004, 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 $673 million at December 31, 2004.
management discussion and analysis of financial condition and results of operations