ServiceMaster Reports First Quarter 2005 Results

DOWNERS GROVE, Ill - The ServiceMaster Co. this week announced first quarter 2005 revenue of $782 million, a 3-percent increase compared to the prior year. First quarter earnings per share from continuing operations were 4 cents, comparable to 2004. Increased securities gains in the company's American Home Shield division helped offset the effects of off-season sales and operating investments and unfavorable March weather.

"As we entered 2005, our company remained focused on revenue growth, pricing, improved retention and consistently delivering a satisfied service experience to our residential and commercial customers," said Jonathan Ward, chairman and chief executive officer. "In order to enhance our ability to achieve these objectives, during the first and continuing into the second quarter, we continued to make key investments in salespeople and marketing programs. These investments combined with our technology pilots and ongoing process improvement developments should enable us to create a sustainable growth profile for our shareholders."

CASH FLOW REVIEW & OUTLOOK. Net cash flow used for operating activities in the quarter was $148 million, compared to $16 million provided from operating activities in the previous year. This decrease in net cash flow of $164 million primarily reflects $131 million of a previously anticipated and disclosed tax payment pertaining to the 2004 IRS agreement. The company anticipates that this payment will be partially offset by a reduction in estimated tax payments of approximately $45 million in the second half of 2005. In addition, comparability of cash flows was impacted by a higher level of incentive compensation payments in the first quarter of 2005 versus 2004 relating to previous year's performance.

Total debt on March 31, 2005 was $876 million, approximately $71 million more than the level reported at December 31, 2004. The increase in debt was the result of the previously described tax payment, net of the use of available cash, combined with normal seasonal operating needs. Additionally, in April, the company used its revolving credit facility to pay $137 million of 8.45-percent bonds that matured.

"We continue to expect revenue growth to be in the mid-to-high single-digit range in 2005 and that earnings per share will grow somewhat faster than revenues. In addition, excluding the impact of the IRS settlement, we expect cash from operating activities to increase and substantially exceed net income," said Ward.

"Throughout the year, we expect to continue to overcome certain external factors that we do not directly control, such as rapidly rising fuel and health insurance costs and unfavorable weather," Ward added. "However, as we demonstrated in 2004, these challenges can be mitigated and in some cases used to our competitive advantage through a combination of focused cost controls, strategic initiatives, improved customer retention, and the proven ability of our employees to effectively execute in the field."

BUSINESS REVIEW BY SEGMENT. Related to the green industry specifically, ServiceMaster's TruGreen segment reported first quarter revenues of $223 million, down 1 percent compared to prior year. Operating loss for the quarter was $8 million compared to $3 million in the prior year.

First-quarter revenue in lawn care operations were $123 million, down 2 percent compared to 2004. Customer count growth, excluding the Canadian acquisition completed in April 2004, was 2 percent, reflecting improved retention rates, partially offset by a modest decrease in new sales. A successful expansion of its neighborhood selling efforts and other direct marketing programs substantially offset reduced telemarketing sales. The comparison of first-quarter revenues was negatively impacted by late snow in several operating regions, which delayed available service applications. Operating results for the quarter were approximately $9 million below prior year levels. The aforementioned production delays and the first-time absorption of $3 million of seasonal losses from the Canadian operations contributed to the lower operating results.

First-quarter revenue in commercial landscaping operations was $100 million, comparable to prior year results. Excluding the impact of underperforming branches that had been shut down in 2004, revenue growth was 3 percent, primarily reflecting a solid increase in enhancement sales and modest growth in contract maintenance revenues. These operations achieved a $5 million reduction in operating losses for the quarter compared to prior year levels. This improvement reflects higher volume and gross profit margins and the impacts of one-time branch shut-down costs incurred last year.