American Home Shield 2006 Annual Report Download - page 31

profits comprised 10.3 percent and 10.9 percent of consolidated operating income (excluding the impairment charge in 2003) before
headquarter overhead in 2004 and 2003, respectively. The 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.
Capital employed in the Other Operations segment increased primarily reflecting the deferred tax assets recorded at the conclusion
of the IRS review.
2005 Financial Position and Liquidity
Cash Flows from Operating Activities
Net cash provided from operating activities was $243 million in 2005, compared to $370 million in 2004. This decrease primarily
reflects the tax payment impacts resulting from the IRS agreement. Related to this agreement, the Company realized tax savings of
$25 million in 2004, made tax payments in early 2005 totaling $131 million and realized a $45 million reduction in estimated tax
payments in the third and fourth quarters of 2005. Additionally, this agreement resulted in a deferred tax annuity totaling $57
million that will be realized through 2016. Excluding the impact of the IRS agreement, cash provided by operating activities totaled
$329 million in 2005, approximately 80 percent higher than net income from continuing operations, and $345 million in 2004. This
2004 amount was favorably impacted by a non-sustainable reduction in payments of incentive compensation in 2004 related to the
2003 year totaling approximately $20 million.
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 corresponding 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 repurchases. 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 authorization 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 investment 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 previously 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 significant
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