American Home Shield 2002 Annual Report Download - page 30

As discussed in the Notes to the Consolidated Financial
Statements, the Company intends to adopt SFAS 145,
“Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections” in 2003. Adoption of this Statement in
2003 will result in the reclassification of the extraordinary
loss resulting from extinguishment of debt into interest
expense within income from continuing operations.
Key Performance Indicators
The table below presents selected metrics related to
customer counts and customer retention for the three
most profitable businesses of the Company. These measures
are presented on a rolling, twelve-month basis.
Key Performance Indicators
As of December 31, 2002 2001
TruGreen -
Growth in Full Program Contracts 2% -4%
Customer Retention Rate 59.3% 57.7%
Terminix -
Growth in Pest Control Customers 2% 25%
Pest Control Customer
Retention Rate 75.8% 77.8%
Growth in Termite Customers -% 30%
Termite Customer Retention Rate 89.0% 89.7%
American Home Shield -
Growth in Warranty Contracts 15% 14%
Customer Retention Rate 53.5% 52.4%
Outlook
Economic uncertainty and world events contributing
to consumer confidence being at a ten-year low, make it
particularly difficult for the Company to have visibility
to the full year results for 2003. If current conditions
persist, the Company expects to achieve mid single-digit
earnings growth in 2003.
Segment Review (2002 vs. 2001)
Segment results for 2002 reflect the elimination of
goodwill and trade name amortization required under
SFAS 142. Therefore, for comparative purposes, 2001
results have been presented on a proforma basis as if
SFAS 142 had been in effect for 2001 thereby excluding
the amortization expense affected by the new account-
ing standard. (See the “Business Segment Reporting”
note in the Notes to the Consolidated Financial State-
ments). Managements Discussion and Analysis focuses
on the 2002 reported and the 2001 proforma amounts.
TruGreen Segment
The TruGreen segment includes lawn care services
performed under the TruGreen ChemLawn brand name
and landscape maintenance services provided under the
TruGreen LandCare brand name. The TruGreen segment
reported revenues of $1.4 billion, slightly above the prior
year. Operating income was $171 million, a decrease of
five percent compared to $181 million (proforma) in 2001.
Revenue in the lawn care business increased one percent
over 2001, which included a two percent increase in
customer contracts over 2001. This increase compares
with a four percent decline in customer contracts in
2001. The Company is realizing the benefit of improved
customer retention as well as the impact from new
marketing strategies. In addition to telemarketing,
which is the primary channel used by TruGreen Chem-
Lawn to sell its services, the business has increased
expenditures on direct mail and television advertising
leading to higher sales of new customers. Quality and
other satisfaction initiatives have resulted in the
customer retention rate improving 160 basis points to
59.3 percent compared with 57.7 percent in 2001. Margins
in the lawn care operations declined slightly, reflecting
increased expenditures in marketing and customer
retention initiatives, partially offset by margin
improvements resulting from revenue growth and the
quality of service and Six Sigma initiatives.
Revenue in the landscape maintenance business
declined one percent as a softer economic environment
contributed to a decline in the core maintenance business
as well as a decline in add-on services (e.g., seasonal
flower plantings). Despite the decline in the mainte-
nance business, the contract base is more profitable
reflecting lower job costs, improved pricing, and a
stronger customer base. This business has strengthened
and expanded its sales operations. Operating income
margins in the landscaping business declined primarily
as a result of higher workers compensation claims and
increased expenditures for field operations training.
Management continues to focus on labor efficiency and
margin improvement through Six Sigma projects.
Capital employed decreased two percent, primarily
reflecting improved working capital management
resulting from increased customer prepayments and
elimination of excess equipment.
Terminix Segment
The Terminix segment, which includes termite and
pest control services, reported a nine percent increase
in revenue to $924 million from $845 million in 2001
and operating income growth of four percent to $127
million from $123 million (proforma) last year. Revenue
growth was driven by the acquisition in October 2001 of
Sears Termite & Pest Control as well as solid internal
growth. As expected by the Company, there has been a
substantial decrease in profitable pest control customers
from the Sears name in certain markets. New sales in these
markets have not kept pace with cancellations and as a
result, overall customer retention rates have shown a
decline. The Company has begun to experience a reduc-
tion in revenue growth which is likely to continue into
2003. In addition, as experienced during late 2002,
operating margins have been impacted by the near-term
expenses associated with the rollout of Terminix’s new
branch information system. The rollout of this system
to the branches will continue through 2004. The system
will be an important tool in the Company’s efforts to
improve sales productivity, customer service, cost effi-
26 ServiceMaster
Management Discussion & Analysis of Financial Condition & Results of Operations