American Home Shield 2006 Annual Report Download

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SERVICEMASTER CO
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 02/28/2006
Filed Period 12/31/2005

Table of contents

  • Page 1
    SERVICEMASTER CO 10-K Annual report pursuant to section 13 and 15(d) Filed on 02/28/2006 Filed Period 12/31/2005

  • Page 2
    ...principal executive offices, including zip code) (630) 663-2000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange which registered Common Stock, $0.01 par value per share New York Stock Exchange...

  • Page 3
    ...9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Signatures Exhibit Index Exhibits and Financial Statement Schedules 45 47 50 Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related...

  • Page 4
    PART I ITEM 1. BUSINESS The ServiceMaster Company ("ServiceMaster") is a national company serving both residential and commercial customers. Its services include lawn care, landscape maintenance, termite and pest control, home warranty, home inspection, disaster restoration, cleaning, furniture ...

  • Page 5
    ... business is seasonal in nature. The termite swarm season, which generally occurs in early spring but varies by region depending on climate, leads to the highest demand for termite control services and therefore the highest level of revenues. Similarly, increased pest activity in the warmer months...

  • Page 6
    ... plumbing, central heating and central air conditioning systems, hot water heaters and appliances that break down due to normal wear and tear and administers those contracts through independent repair contractors and American Residential Services. As of December 31, 2005, American Home Shield issued...

  • Page 7

  • Page 8
    ... internal operations. Various administrative support departments also provide personnel, communications, marketing, government and public relations, administrative, accounting, financial, tax, human resources, information technology and legal services. The Business Support Center is headquartered in...

  • Page 9
    ...in the market for plumbing and drain cleaning services comes mainly from regional and local, independently owned firms throughout the United States and a few national companies. MAJOR CUSTOMERS ServiceMaster has no single customer that accounts for more than 10% of its consolidated operating revenue...

  • Page 10
    ... Safety Administration requirements with respect to their fleets of vehicles. American Home Shield is regulated by the Department of Insurance in certain states and the Real Estate Commission in Texas. Consumer Protection and Telemarketing Matters ServiceMaster is subject to numerous federal and...

  • Page 11
    6

  • Page 12
    ... in increased service calls in the home warranty business; cooler temperatures could impede the development of the termite swarm and lead to lower termite swarm activity; and mild weather conditions could result in lower demand for plumbing, heating and air conditioning services. Competition could...

  • Page 13
    Changes in general economic conditions affect the demand for ServiceMaster's services. Unfavorable general economic conditions, including, but not limited to, changes in interest rates, fuel and oil prices, and unemployment rates could reduce consumer spending levels and, in turn, reduce the demand ...

  • Page 14
    ... to support the Business Support Center's current needs in the Chicagoland and Memphis areas. OPERATING COMPANIES The headquarters for TruGreen ChemLawn, TruGreen LandCare, Terminix, American Residential Services and Rescue Rooter are located in leased premises at 860 Ridge Lake Boulevard, Memphis...

  • Page 15
    ServiceMaster's common stock is traded on the New York Stock Exchange under the symbol "SVM." At February 21, 2006, ServiceMaster's common stock was held of record by approximately 41,000 persons. ServiceMaster estimates that approximately 36,000 persons held shares of its common stock in the names ...

  • Page 16
    ...investment grade credit ratings and other strategic investment opportunities. ISSUER PURCHASES OF EQUITY SECURITIES Total Number of Shares Purchased as Part of Publicly Announced Plan Period Total Number of Shares Purchased Average Price Paid per Share Approximate Dollar Value of Shares that May...

  • Page 17
    ... share) and $9 million related to businesses held pending sale and discontinued operations ($.03 per diluted share). See the "Income Taxes" note in the Notes to the Consolidated Financial Statements. The Company intends to sell its American Residential Services (ARS) and American Mechanical Services...

  • Page 18
    ...sell American Residential Services (ARS) and American Mechanical Services (AMS). These are businesses, in large markets, with strong management teams. These companies are making good progress on key initiatives that will make them even better in the future. But there were two fundamental issues that...

  • Page 19

  • Page 20
    ... in employee health care benefits of approximately $.01 per share in 2006, as part of its efforts to further enhance its position as an employer of choice. On the positive side, the Company continues to experience very favorable results from its efforts to reduce safety-related costs, which...

  • Page 21
    ...American Home Shield Growth in Warranty Contracts Customer Retention Rate TruGreen ChemLawn Segment 1% 61.2% 3% 77.2% 0% 87.2% 6% 57.4% 8% 62.2% 7% 78.1% 0% 87.9% 5% 55.2% The TruGreen ChemLawn segment, which includes lawn care services, reported revenue in excess of $1 billion for the first time...

  • Page 22
    ... workforce in the fourth quarter, improvements in safety-related costs and the impact of approximately $1.5 million of branch shut down costs incurred in 2004. These profit gains were offset in part by higher fuel prices. Capital employed in the TruGreen LandCare segment increased one percent. 13

  • Page 23
    ... of acquisitions. American Home Shield Segment The American Home Shield segment, which provides home warranties to consumers that cover HVAC, plumbing and other systems and appliances, reported an eight percent increase in revenue to $529 million from $487 million in 2004, and operating income of...

  • Page 24
    portion of total franchise fee profits related to initial fees received from the sales of franchises was not material to the Company's consolidated financial statements for all periods. 14

  • Page 25
    ... Residential Services (ARS) and American Mechanical Services (AMS) companies so it can concentrate resources on its main growth businesses. The Company has retained an investment banking firm to serve as its financial advisor in this process. The ARS/AMS operations provide heating, ventilation, air...

  • Page 26
    ... compensation expense at the headquarters level and increased investments in the sales force, particularly at Terminix and American Home Shield. Net interest expense decreased $5 million from 2003, primarily reflecting the favorable impact of interest rate swap agreements entered into at the...

  • Page 27
    ...business model at American Home Shield, and there will always be some market-based variability in the timing and amount of investment returns realized from year to year. The comparison of the effective tax rate is impacted by the 2004 reduction in the tax provision related to the Company's agreement...

  • Page 28
    ...fuel costs. Capital employed decreased 23 percent, reflecting improved working capital management supported by a program to reduce underutilized equipment. Terminix Segment The Terminix segment reported a five percent increase in revenue to $997 million from $945 million in 2003 and operating income...

  • Page 29
    .... American Home Shield's total new contract sales in the fourth quarter increased three percent, a rate less than the full year growth rate of six percent due in part to the relative timing of direct mail solicitations. Operating income increased, reflecting the effects of revenue growth...

  • Page 30
    17

  • Page 31
    ... 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 previously disclosed tax payments related to...

  • Page 32
    ... 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...

  • Page 33
    ... contracts, as well as home warranty agreements. These costs vary with and are directly related to a new sale. Property and equipment declined slightly. The Company does not have any material capital commitments at this time. The increase in accounts payable reflects a lengthening of payment terms...

  • Page 34
    19

  • Page 35
    ... pest control operations. The remaining liabilities primarily represent payables and other current liabilities at the businesses held pending sale and obligations related to long-term self-insurance claims. Critical Accounting Policies and Estimates The preparation of the financial statements...

  • Page 36

  • Page 37
    ...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. Newly Issued Accounting Statements and Positions In December 2004, the Financial Accounting Standards Board (FASB) issued...

  • Page 38
    21

  • Page 39
    ... 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...

  • Page 40
    ... and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control...

  • Page 41

  • Page 42
    ... to businesses held pending sale and discontinued operations ($.03 per diluted share). See the "Income Taxes" note in the Notes to the Consolidated Financial Statements. (2) (3) The Company intends to sell its American Residential Services (ARS) and American Mechanical Services (AMS) companies so...

  • Page 43
    ...: Deferred taxes Liabilities of businesses held pending sale and discontinued operations Other long-term obligations Total Long-Term Liabilities Minority Interest Commitments and Contingencies (See Note) Shareholders' Equity: Common stock $0.01 par value, authorized 1,000,000 shares; issued 321,338...

  • Page 44
    ... translation Total comprehensive income Shareholders' dividends Shares issued under options, grant plans, and other (2,711 shares) Treasury shares purchased (5,353 shares) Shares issued for acquisitions (297 shares) $ Balance December 31, 2004 Net income 2005 Other comprehensive income, net of tax...

  • Page 45
    ... assets Accounts payable Deferred revenue Accrued liabilities Other, net Net Cash Provided from Operating Activities Cash Flows from Investing Activities: Property additions Sale of equipment and other assets Business acquisitions, net of cash acquired Proceeds from business sales Notes receivable...

  • Page 46
    ... in 2005, 2004 and 2003, respectively. The Company had $433 million and $430 million of deferred revenue at December 31, 2005 and 2004, respectively, which consist primarily of payments received for annual contracts relating to home warranty, termite baiting, pest control and lawn care services.

  • Page 47
    The revenue related to these services is recognized over the contractual period as the direct costs emerge, such as when the services are performed or claims are incurred. Deferred Customer Acquisition Costs: Customer acquisition costs, which are incremental and direct costs of 28

  • Page 48
    ... Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company has entered into specific financial arrangements in the normal course of business to manage certain market risks, with a policy of matching positions and limiting the terms of contracts...

  • Page 49

  • Page 50
    ...Consolidated Financial Statements for a description of the assumptions used to compute the above stock based compensation expense. Newly Issued Accounting Statements and Positions: In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)). This Statement replaces...

  • Page 51

  • Page 52
    ... 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 Other Operations segment...

  • Page 53
    ... these assets are reported below operating income in non-operating income/expense. In order to facilitate the comparison of return on invested capital for the American Home Shield segment, the Company has also presented capital employed for this segment excluding cash and marketable securities. The...

  • Page 54
    Total Assets Less: Current liabilities, excluding current portion of long-term debt Long-term liabilities Total Capital Employed 32 $ 3,028,870 936,449 279,631 1,812,790 $ 3,140,202 1,004,680 238,899 1,896,623 $ 2,956,426 784,459 435,870 1,736,097 $ $ $

  • Page 55
    ... pre-tax, $227 million after-tax), have been classified to the financial statement caption "businesses held pending sale and discontinued operations" for all periods. In April 2004, TruGreen ChemLawn acquired the assets of Greenspace Limited, Canada's largest professional lawn care service company...

  • Page 56
    ... of time effectively covered by the IRS' examination were recorded. This resulted in a non-cash reduction in the Company's 2004 income tax provision, thereby increasing 2004 consolidated net income by approximately $159 million ($150 million related to continuing operations and $9 million related to...

  • Page 57
    ...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. Accounting standards require that the Company recognize deferred taxes relating to the differences between the financial reporting and tax...

  • Page 58
    ... to the Company's agreement with the IRS. In 2004, total tax payments were $13 million. In 2003, the Company received net tax refunds of $1 million. Acquisitions Acquisitions have been accounted for using the purchase method and, accordingly, the results of operations of the acquired businesses have...

  • Page 59
    ... for sale noted above. The operating results and financial position of businesses held pending sale and discontinued operations are as follows: (In thousands, except per share data) Operating Results: 2005 2004 2003 Operating revenue ARS/AMS operating income Headquarter support and insurance costs...

  • Page 60
    ... the tax provision of businesses held pending sale and discontinued operations related to a comprehensive agreement with the IRS regarding its examination of the Company's federal income taxes through the year 2002. 2005 2004 Financial Position: Current assets 112,501 $ 135,100 $ Long-term assets...

  • Page 61
    ...retention limits and insured layers of excess insurance coverage above such self-insured retention limits. Accruals for self-insurance losses, termite damage claims in the Terminix business and warranty claims in the American Home Shield business are made based on the Company's claims experience and...

  • Page 62
    ...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...

  • Page 63
    ...interest, taxes, depreciation, and amortization (EBITDA)) and a minimum interest coverage ratio (EBITDA needs to exceed four times interest expense). In addition, under certain circumstances, the agreements may limit the Company's ability to pay dividends and repurchase shares of common stock. These...

  • Page 64
    ... losses totaled $133 million and $96 million at December 31, 2005 and 2004, respectively, and consist primarily of corporate bonds and common equity securities. Receivable Sales The Company has an agreement to provide for the ongoing revolving sale of a designated pool of accounts receivable...

  • Page 65
    ...valuation model. Prior to 2005, the Company used the Black-Scholes option pricing model. This change was made in order to provide a better estimate of fair value, as the lattice-based model reflects the impact of stock price changes on exercise behavior, and changes in volatility and interest rates.

  • Page 66
    ... of the Company's stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are...

  • Page 67
    ... estimated the value of these options assuming a single weighted-average expected life for the entire award. Options and grant transactions during the last three years are summarized below: Stock Options Price Range (1) Weighted Avg. Exercise Price Share Grants/ Restricted Stock Price Range Total...

  • Page 68
    ...the Consolidated Financial Statements operations computation to the numerator and the denominator of the diluted earnings per share from continuing operations computation. (In thousands, except per share data) Continuing Operations: Basic EPS Effect of Dilutive Securities: Options & SARS Convertible...

  • Page 69
    ... - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified...

  • Page 70
    ... Management Discussion and Analysis of Financial Position and Results of Operations for a discussion of the components of businesses held pending sale and discontinued operations. In January 2005, the Company announced that it had reached a comprehensive agreement with the Internal Revenue Service...

  • Page 71
    ...its American Residential Services (ARS) and American Mechanical Services (AMS) operations. The Company is currently holding these operations for sale, accordingly, the financial results for the ARS and AMS operations, as well as the impairment charge related to these operations ($292 million pre-tax...

  • Page 72
    ...New York Stock Exchange Listed Company Manual. The Company has also filed, as exhibits to its Annual Report on Form 10-K for the year ended December 31, 2005, the certifications of its Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. ITEM...

  • Page 73
    ..., Corporate Communications 49 Group President and Chief Executive Officer, American Home Shield 53 Chief Marketing Officer 42 Senior Vice President, Human Resources 48 Senior Vice President and Chief Information Officer 40 President, Terminix International 52 President and Chief Operating Officer...

  • Page 74
    ... the 2006 Annual Meeting of Shareholders under the headings "Compensation of Directors," "Executive Officer Compensation" and "Agreements with Officers and Directors" is incorporated by reference in this Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED...

  • Page 75
    ...in Part II, Item 8 of this Form 10-K. 2. Financial Statements Schedules The following information is filed as part of this Form 10-K and should be read in conjunction with the financial statements contained in Part II, Item 8 of this Form 10-K: Report of Independent Registered Public Accounting Firm...

  • Page 76
    ... exhibit's number identify management contracts or compensatory plans, contracts or arrangements in which a director or any of ServiceMaster's executive officers to be identified in the summary compensation table included in ServiceMaster's Definitive Proxy Statement for the 2006 Annual Meeting of...

  • Page 77
    ... Chairman and Chief Executive Officer and Director (Principal Executive Officer) President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Director February 28, 2006 February 28, 2006 February 24, 2006 Director February 24, 2006 Director February 24...

  • Page 78
    ...issued our reports thereon dated February 27, 2006; such consolidated financial statements and reports are included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. This schedule is the responsibility of the Company...

  • Page 79
    ...for accounts and notes receivable reflect write-offs of uncollectible accounts. Deductions for the remaining items reflect cash payments. Includes accruals for residual value guarantees on leased properties, severance for former executives and terminated employees and transaction and other costs. 49...

  • Page 80
    ... Association and Wachovia Bank, N.A. as documentation agents, is incorporated by reference to Exhibit 4.1 to the registrant's Current Report on Form 8-K dated May 12, 2005 (File No. 1-14762). Senior Executive Ownership Election Plan, as approved by the registrant's Board of Directors on December 10...

  • Page 81
    ...the "1994 S-8"). Form of Option Agreement for the 1994 Non-Employee Director Share Option Plan is incorporated by reference to Exhibit 4.3 to the 1994 S-8. 1997 Share Option Plan is incorporated by reference to Exhibit 10.28 to the ServiceMaster Limited Partnership Annual Report on Form 10-K for the...

  • Page 82
    ... Deferred Compensation Plan, as amended and restated effective January 1, 2005, is incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated December 14, 2005. Stock Option Agreement dated as of January 9, 2001 between The ServiceMaster Company and Jonathan...

  • Page 83
    ... BSC L.L.C. ServiceMaster Funding Company L.L.C. ServiceMaster Management Corporation Steward Insurance Company 1 2 3 TruGreen LandCare L.L.C. has 9 subsidiaries. American Home Shield Corporation has 14 subsidiaries, including AmeriSpec, Inc. ARS American Residential Services of California, Inc. has...

  • Page 84
    ... of our reports dated February 27, 2006, relating to the financial statements and financial statement schedule of The ServiceMaster Company and subsidiaries, and management's report on the effectiveness of the internal control over financial reporting, appearing in this Annual Report on Form 10-K of...

  • Page 85
    ...financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 28, 2006 /s/ Jonathan P. Ward Jonathan P. Ward Chairman and Chief Executive Officer

  • Page 86
    ...financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 28, 2006 /s/ Ernest J Mrozek Ernest J. Mrozek President and Chief Financial Officer

  • Page 87
    ... material respects, the financial condition and results of operations of The ServiceMaster Company. /s/ Jonathan P. Ward Jonathan P. Ward Chairman and Chief Executive Officer February 28, 2006 A signed original of this written statement required by Section 906 has been provided to The ServiceMaster...

  • Page 88
    ... material respects, the financial condition and results of operations of The ServiceMaster Company. /s/ Ernest J. Mrozek Ernest J. Mrozek President and Chief Financial Officer February 28, 2006 A signed original of this written statement required by Section 906 has been provided to The ServiceMaster...