American Home Shield 2004 Annual Report Download - page 27

2004 annual report ServiceMaster 25
Within ARS Service Express, revenue decreased three percent.
These operations reported good growth in residential construction
revenue, excluding the impact of closed branches. Plumbing
revenue increased modestly as relatively strong improvements
in sewer line repairs and light commercial services were partially
offset by continued softness in core residential service revenue.
Cooler seasonal temperatures posed a significant challenge to
the air-conditioning business, which experienced a decline in
service revenue. HVAC replacement sales volume increased
modestly as the Company’s retail initiative and efforts to
increase the sale of higher priced and more energy efficient units
helped mitigate the adverse, weather-related impact on volume.
AMS’ revenue increased 16 percent, with profits showing
improved momentum in the second half of the year. The project
backlog increased substantially from prior year-end levels.
However, due to competitive industry conditions, backlog margin
percentages were below prior year and the backlog consisted of
a greater mix of longer duration contracts.
The segment’s increase in operating income reflects the favorable
grow-over impact of the 2003 impairment charge, offset in part
by higher sales, marketing, insurance and fuel costs as well as
the negative impact on ARS Service Express’ HVAC volume
from cooler seasonal temperatures.
Capital employed in the ARS/AMS segment increased two percent.
Other Operations Segment
The Other Operations segment includes the Company’s Ser-
viceMaster Clean and Merry Maids operations as well as its
headquarters functions. Revenue in this segment increased
eight percent to $164 million in 2004 compared with $152 million
in the prior year. On a combined basis, the ServiceMaster Clean
and Merry Maids franchise operations reported revenue growth
of 10 percent and a solid increase in operating income. Service-
Master Clean continued to experience strong growth in disaster
restoration services. At Merry Maids, a better economy and
improved sales processes have driven steady increases in internal
revenue growth in both the branch and franchise operations.
The segment’s operating loss increased over the prior year,
primarily reflecting a higher level of variable incentive compen-
sation expense at the headquarters level, partially offset by
increased profits in the franchise operations.
Total initial and recurring franchise fees represented 2.7 percent
and 2.6 percent of consolidated revenue in 2004 and 2003,
respectively and direct franchise operating expenses were 1.7
percent and 1.6 percent of consolidated operating expenses in
2004 and 2003, respectively. Total franchise fee profits comprised
10.1 percent and 10.5 percent of consolidated operating income
(without the impairment charge in 2003) before headquarter
overheads in 2004 and 2003, respectively. The portion of total
franchise fee profits related to initial fees received from the sales
of franchises was not material to the Company’s consolidated
financial statements for all periods.
Capital employed in the Other Operations segment increased
primarily reflecting the deferred tax assets recorded at the
conclusion of the IRS review.
Discontinued Operations
During the third quarter of 2003, the Company sold the assets
and related operational obligations of Trees, Inc., the utility line
clearing operations of TruGreen LandCare. In October 2001,
the Company’s Board of Directors approved a series of strategic
actions which were the culmination of an extensive portfolio
review process. As part of this portfolio review, the Company sold
or exited certain non-strategic or under-performing businesses
in 2001 and 2002.
As discussed in the “Income Taxes” note to the consolidated
financial statements, as a result of the Company’s compre-
hensive agreement with the IRS regarding its examination of
the Company’s federal income taxes through 2002, the Company
recorded a non-cash reduction in the 2004 tax provision of
discontinued operations, thereby increasing net income of
discontinued operations by $9 million.
The components of discontinued operations income (loss), net
of income taxes are as follows:
(In thousands) 2004 2003 2002
Income (loss) from
discontinued operations $7,170 $(2,107) $ 4,531
Net loss on disposition —(605) (4,840)
Discontinued operations $7,170 $(2,712) $ (309)
2003 Compared with 2002
The Company faced challenging weather and economic condi-
tions and 10 year lows in consumer confidence in the first half of
2003. Late snow and cooler temperatures early in the year
in many regions of the country delayed TruGreen’s lawn care
production season and impeded the development of the termite
swarm, negatively impacting the volume of termite services in
Terminix. The Company responded to these challenges by
implementing an aggressive cost reduction program which
resulted in the elimination of over 600 jobs, enacting a wage and
hiring freeze, reducing significantly or eliminating incentive
compensation for senior management, and enforcing tighter
management of field labor. These actions, as well as more normal
weather conditions in the fourth quarter of 2003, contributed to
improved results in the second half of the year.