American Home Shield 2002 Annual Report Download - page 34

American Home Shield Segment
The American Home Shield segment reported a 17 percent
increase in revenue to $369 million compared to $315
million in 2000 reflecting double-digit growth in all
sales channels. Operating income increased 25 percent
to $26 million (proforma) compared to $21 million
(proforma) in 2000. Operating margin improvement
reflected a decrease in the incidence of claims and
expanded use of network contractors with negotiated
lower rates, partially offset by a greater mix of higher
cost claims. Capital employed decreased four percent,
resulting from improved management of working capital.
ARS/AMS Segment
The ARS/AMS segment reported revenue growth of
four percent to $820 million, compared to $787 million
in 2000. Operating income decreased ten percent to $49
million (proforma), compared to $55 million (proforma)
in 2000. Revenue growth was supported primarily by
acquisitions and price increases. Call volume for
residential plumbing and HVAC services was below
management’s expectations and was impacted by cooler
weather, a softening economic environment and a slow-
down in construction activity. Of all the businesses in
ServiceMaster, ARS/AMS has the largest mix of
non-recurring revenue and is most affected by new
construction, and consequently appears to be most
impacted by the condition of the economy. In an effort to
mitigate the impact of the volume shortfall on operating
margins, the Company implemented a detailed cost
reduction program in the second and third quarters of
2001. In addition, in order to focus on improving
performance, the Company discontinued acquisition
activity in the fourth quarter of 2001. Capital employed
increased three percent, primarily reflecting the impact
of acquisitions.
Other Operations Segment
Revenues in the Other Operations segment decreased
30 percent to $158 million from $226 million, primarily
reflecting divestitures in 2000. The operating loss in
2001 of $342 million (proforma) compared with operating
income of $19 million (proforma) in 2000. 2001 results
include a charge of $345 million primarily related to
goodwill and asset impairments and other items.
In 2001, the Company recognized $15 million of
license fee income related to a three-year licensing
agreement with ARAMARK for the use of the Service-
Master trade name in certain markets. This fee income
was offset by increased expenditures in ServiceMaster
Home Service Center and corporate support functions.
The franchise operations, ServiceMaster Clean and
Merry Maids, achieved double-digit revenue and profit
growth, reflecting growth in disaster restoration services
(which included a significant level of direct managed
disaster restoration work at the Pentagon in 2001), the
benefit of successful marketing programs, national
account relationships, and employee retention initiatives.
Total initial and recurring franchise fees (excluding the
aforementioned licensing fee) represented 2.5 percent
of consolidated revenue in both 2001 and 2000 and 1.7
percent of consolidated operating expenses in both 2001
and 2000. Total franchise fee income comprised 10.2
percent and 9.8 percent of consolidated operating
income in 2001 and 2000, respectively.
2002 Financial Position and Cash Flows
Net cash provided from operations was $381 million in
2002, $18 million higher than 2001 and $224 million in
excess of 2002 net income. The increase reflects lower
working capital usage. This improvement included better
receivable and payables management, most notably in
the TruGreen ChemLawn and ARS businesses.
Property additions increased $19 million, reflecting the
net purchase price relating to the residual value guar-
antees of leases for five assisted living facilities sold in
the second quarter. Cash used for acquisitions declined to
$13 million from $56 million in 2001 reflecting the reduction
or curtailment of acquisitions at Terminix and ARS.
Cash and Debt Levels
Cash and marketable securities totaled approximately
$303 million at December 31, 2002. In 2002, the Company
repurchased a portion of its publicly traded debt with a
principal amount of $252 million, including approxi-
mately $218 million repurchased in a tender offer during
the second quarter of 2002. The Company has completed
the debt reduction program announced in October
2001. As a result of continued strong cash flows and the
application of the net proceeds received from the
Company’s 2001 dispositions, total debt was reduced by
$320 million for the twelve months ended December 31, 2002.
This represents a reduction in debt outstanding of
approximately $1.0 billion over the last two years and
the Company’s lowest level in over five years. The debt
repurchase allowed the Company the opportunity to
lengthen its maturity profile by focusing the majority of the
repurchase on debt with shorter maturities. Approximately
67 percent of the Company’s debt now matures beyond
five years and 42 percent beyond fifteen years. The Com-
pany’s next significant debt maturity is not until 2005.
The Company is party to a number of debt agreements
which require it to maintain certain financial and other
covenants, including limitations on indebtedness (debt
cannot exceed 3.5 times EBITDA) and 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 divi-
dends and repurchase shares of common stock. These
limitations are not expected to be a factor in the Company’s
future dividend and share repurchase plans. Failure by
the Company to maintain these covenants could result
in the acceleration of the maturity of the debt. At December
31, 2002, the Company was in compliance with the
covenants related to these debt agreements and based
on its operating outlook for 2003 expects to be able to
maintain compliance in the future. The Company does
not have any debt agreements that contain put rights or
provide for acceleration of maturity as a result of a
change in credit rating.
30 ServiceMaster
Management Discussion & Analysis of Financial Condition & Results of Operations