American Home Shield 2002 Annual Report Download - page 29

2002 Compared with 2001
Consolidated Review
The Company has restated its financial statements for
2001 and 2000 as well as the previously reported 2002
quarterly results. See the “Restatement” section in the
Notes to the Consolidated Financial Statements for the
basis of the restatement and the financial statement
impact. This Management Discussion and Analysis
reflects the impacts of the restatement.
Revenues for 2002 were $3.6 billion, one percent above
2001 with operating income of $341 million. The Company
recorded income from continuing operations in 2002 of
$170 million, a loss from discontinued operations of $4
million, and a $9 million extraordinary loss from the
early extinguishment of debt. Net income was $157 million
in 2002 and $116 million in 2001 and diluted earnings
per share were $.52 in 2002 and $.39 in 2001.
Diluted earnings per share from continuing operations
was $.56 in 2002 compared with a loss of $(.55) in 2001.
There were three significant items in 2001 that impact
the comparability of the reported amounts with the
2002 figures. First, diluted earnings per share from
continuing operations for 2001 includes a charge of
$.94 per share ($345 million pretax) primarily related to
goodwill and asset impairments and other items. Second,
as discussed further in the Notes to the Consolidated
Financial Statements, Statement of Financial Accounting
Standards (SFAS) No. 142, “Goodwill and Other Intangible
Assets”, requires that beginning in 2002, goodwill and
trade names no longer be amortized. SFAS 142 does not
permit the restatement of 2001 financial information to
reflect the impact of this Statement. The diluted earnings
per share equivalent of reduced amortization expense
under SFAS 142 is $.14 ($60 million pretax) for 2001.
Third, in the fourth quarter of 2001, the Company
received approximately $740 million of after-tax proceeds,
net of expected cash payments relating to the sale and
exit of discontinued businesses.
In 2002, operating income was $341 million compared
to an operating loss of $23 million in 2001. The 2001
figure includes a $345 million charge primarily related
to goodwill and asset impairments and other items.
Additionally, the reduced amortization expense under
SFAS 142 was $60 million. Operating income margins
after adjusting for these items decreased to 9.5 percent
of operating revenue in 2002 from 10.7 percent in 2001.
The decline in operating income reflects strong growth
at American Home Shield offset by reduced volume in
the heating, ventilation and air conditioning (HVAC)
and plumbing businesses of ARS and AMS, increased
workers compensation and health insurance costs, as
well as increased expenditures related to enterprise-
wide initiatives.
Cost of services rendered and products sold were
unchanged compared to the prior year and decreased as
a percentage of revenue to 69.1 percent in 2002 from
69.6 percent in 2001. This decrease reflects a change in
the mix of business as TruGreen ChemLawn, Terminix,
and American Home Shield increased in size in relationship
to the overall business of the Company. These businesses
generally operate at higher gross margin levels than
the rest of the business, but also incur somewhat higher
selling and administrative expenses as a percentage
of revenue. Selling and administrative expenses
increased 11 percent and increased as a percentage of
revenue to 21.2 percent from 19.3 percent in 2001. This
increase in selling and administrative expenses reflects
increased expenditures for marketing leadership and
sales initiatives, as well as enterprise-wide expendi-
tures in procurement, technology and initiatives to
measure and improve customer and employee satisfaction.
Interest expense decreased from the prior year, reflecting
reduced debt levels resulting from the pay down of
debt with the proceeds received from the sales of the
Management Services and certain European pest
control businesses as well as strong cash flows from
operations. Interest income declined as a result of net
investment losses recorded on the American Home
Shield investment portfolio in 2002 compared with net
investment gains from this portfolio as well as venture
capital gains realized in 2001. Minority interest and
other expense increased in 2002 because 2001 included
minority interest income related to the ServiceMaster
Home Service Center initiative. In the first quarter of
2001 and until May 2001, the operating losses of
ServiceMaster Home Service Center had been offset
through minority interest income (below the operating
income line) because of investments in the venture made
by Kleiner Perkins Caufield & Byers. In December 2001,
the Company acquired the minority interest in the Service-
Master Home Service Center held by Kleiner Perkins.
The tax provision in 2002 reflects a lower effective tax
rate based on benefits received through the consolidation
for tax purposes of the ServiceMaster Home Service
Center. As a result of the Company’s acquisition of
the minority interest, it was able to reorganize the
subsidiary in 2002 and utilize prior year net operating
losses of this subsidiary operation.
Extraordinary Loss
In the second quarter of 2002, the Company repur-
chased a portion of its public debt securities and recorded
an extraordinary loss of $.03 per diluted share ($9 million
after-tax) resulting from the early extinguishment of debt.
In the fourth quarter of 2001, the Company used a
portion of the cash proceeds from the sale of Management
Services to pay down debt and recorded an extraordinary
loss of $.03 per diluted share ($9 million after-tax)
resulting from the early extinguishment of debt. This
was partially offset by the realization of gains ($.02 per
diluted share; $6 million after-tax) resulting from the
repurchase of certain ServiceMaster corporate debt in
the first quarter.
ServiceMaster 25
Management Discussion & Analysis of Financial Condition & Results of Operations