American Home Shield 2004 Annual Report Download - page 29

2004 annual report ServiceMaster 27
Comparability of the effective tax rate is impacted by the impair-
ment charge recorded in the third quarter of 2003 and the use of
prior year net operating losses in 2002. The effective tax rate of
continuing operations reflects a one percent benefit in 2003 and a
35 percent provision in 2002. The impairment charge recorded
in 2003 included a portion of goodwill that was not deductible
for tax purposes, resulting in a tax benefit of $98 million, or only
approximately 20 percent of the pre-tax impairment charge of
$481 million. Excluding the impairment charge, the 2003 tax
rate was 37 percent. The 2002 rate included a one-time benefit
from utilizing the prior year net operating losses of the Service-
Master Home Service Center operations, which resulted in a
reduction in the tax provision.
Segment Review (2003 vs. 2002)
Key Performance Indicators
As of December 31, 2003 2002
TruGreen ChemLawn -
Growth in Full Program Contracts 4% 2%
Customer Retention Rate 59.5% 59.3%
Terminix -
Growth in Pest Control Customers 2% 2%
Pest Control Customer Retention Rate 77.1% 75.8%
Growth in Termite Customers -2% 0%
Termite Customer Retention Rate 88.1% 89.0%
American Home Shield -
Growth in Warranty Contracts 5% 15%
Customer Retention Rate 55.1% 55.0%*
* Restated to conform with the 2003 calculation
TruGreen Segment
The TruGreen segment reported revenue of $1.3 billion in
2003, five percent above 2002. The segment reported an oper-
ating loss of ($34) million, compared with operating income of
$165 million in 2002. During the third quarter of 2003, the
Company recorded a non-cash impairment charge of $189
million pre-tax, relating to goodwill and intangible assets of its
TruGreen LandCare operations. For a further discussion of the
impairment charge see the “Goodwill and Intangible Assets”
section in the Notes to Consolidated Financial Statements. The
decrease in segment operating income primarily reflects the
impact of the impairment charge as well as a $15 million decline
in profits in the landscaping operations, partially offset by a $5
million increase in operating income in the lawn care operations.
Revenue in the lawn care operations increased six percent
over 2002 reflecting a four percent increase in the number of
customers, which was supported by tuck-in acquisitions, and
growth in revenue from commercial accounts and ancillary
services. The Company has responded to increased state and
federal restrictions on telemarketing by broadening its marketing
approach, with increased expenditures on direct mail and other
advertising. A 10 percent decline in sales through the traditional
telemarketing channel was offset by a doubling of sales through
other channels, most notably direct mail. Sales through non-
telemarketing channels comprised 20 percent of new sales in
2003. Telemarketing is a cost effective sales channel relative to
other channels. Therefore, as a result of this shift, the Company
experienced an increase in its marketing costs.
Quality of service initiatives resulted in the customer retention
rate improving 20 basis points to 59.5 percent in 2003 compared
to 59.3 percent in 2002. This improvement followed a 160 basis
point increase in retention achieved in 2002. Customer feedback
indicated that cancellations due to quality issues decreased relative
to 2002, whereas those due to economic considerations
increased. The Company believed this trend is a result of its
increased focus on customer service and problem resolution.
Operating income in the lawn care operations increased three
percent compared to 2002. Favorable weather in the fourth
quarter of 2003 partially offset the impact of poor weather in the
first quarter of 2003. Margins declined slightly, reflecting the
higher marketing costs discussed above as well as increased
insurance costs.
Revenue in the landscape maintenance business increased two
percent compared to 2002, consisting of modest growth in base
contract maintenance volume and an increase in first quarter
snow removal revenue, offset by a reduced level of enhance-
ment sales. Enhancement sales activity was depressed due to the
weak economy and increased pricing pressure from competitors.
Operating income in the landscaping operations declined in
2003, reflecting the impact of the impairment charge as well as a
decreased level of higher margin enhancement sales, increased
insurance and labor costs, and approximately $1.5 million of
costs incurred to consolidate branch locations.
During the third quarter of 2003, the Company sold the assets and
related operational obligations of the utility line clearing opera-
tions of TruGreen LandCare for approximately $20 million in
cash. The impact of this sale was not material to the Company’s
consolidated financial statements for 2003. The results of the sold
utility line clearing operations have been classified as discontinued
operations and are not included in continuing operations.
Capital employed in the TruGreen segment decreased 16 percent,
primarily reflecting the impact of the impairment charge, partially
offset by tuck-in acquisitions.