American Home Shield 2003 Annual Report Download - page 30

28    ServiceMaster
11 percent and increased as a percentage of revenue to 21.7
percent from 19.8 percent in 2001. This increase in selling
and administrative expenses reflects increased expenditures
for marketing leadership and sales initiatives, as well as
enterprise-wide expenditures in procurement, technology
and initiatives to measure and improve customer and
employee satisfaction.
Interest expense decreased from the prior year, primarily
reflecting reduced debt levels resulting from the pay down of
debt with the proceeds received from the sales of Manage-
ment Services and certain European pest control businesses,
strong cash flows from operating activities, partially offset by
$6 million more in premium payments to repurchase public
bonds in 2002. 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 because of investments
in the venture made by Kleiner Perkins Caufield & Byers
(Kleiner Perkins). In December 2001, the Company acquired
the minority interest in the ServiceMaster 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.
Segment Review (2002 vs. 2001)
2001 results have been presented on a proforma basis as if SFAS
142 had been in effect for 2001 thereby excluding the amortiza-
tion expense affected by the new accounting standard. (See the
“Business Segment Reporting” note in the Notes to Consolidated
Financial Statements). Management’s Discussion and Analysis
focuses on the 2002 reported and 2001 proforma amounts.
TruGreen Segment
The TruGreen segment reported revenues of $1.3 billion,
consistent with 2001. Operating income was $165 million,
a decrease of five percent compared to $173 million (pro-
forma) 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. Quality
and other satisfaction initiatives have resulted in the customer
retention rate improving 160 basis points to 59.3 percent
in 2002 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
three percent as a softer economic environment contributed
to a decline in the core maintenance business as well as a
decline in enhancement services. Despite the decline in the
maintenance business, the contract base is more profitable
reflecting lower job costs, improved pricing, and a stronger
customer base.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 continued to focus on
labor efficiency and margin improvement through Six
Sigma projects.
Capital employed decreased four percent, primarily
reflecting improved working capital management resulting
from increased customer prepayments and elimination of
excess equipment.
Terminix Segment
The Terminix segment 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) in 2001. Revenue growth was
driven by the acquisition in October 2001 of Sears Termite &
Pest Control as well as internal growth. As expected by the
Company, there has been a substantial decrease in profitable
Sears pest control customers 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.In addition,operating margins were impacted by the
expenses associated with the rollout of Terminix’s new
branch information system. Operating margins for the year
decreased 80 basis points reflecting the expenses related to
the new information system as well as increased expenditures
for marketing and health insurance, partially offset by
improved branch efficiencies.
Capital employed increased one percent to support overall
business growth.
Management Discussion and Analysis of
Financial Condition and Results of Operations