American Home Shield 2002 Annual Report Download - page 31

ciency and regulatory compliance. Operating margins
for the year decreased 80 basis points reflecting the
near-term 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 four percent to
support overall business growth.
American Home Shield Segment
The American Home Shield segment, which provides
home warranties to consumers that cover HVAC, plumbing
and other appliances, reported a 15 percent increase in
revenue to $424 million from $369 million in 2001 and
operating income growth of 84 percent to $48 million
compared to $26 million (proforma) in 2001. Revenue
growth reflected increases in all sales channels, comple-
mented by improved customer retention. Operating
margins improved as the segment benefited from
strong volume growth, improved management of service
costs and reduced incidence of claims resulting, in part,
from less extreme weather trends. In light of the favorable
impact that the weather had on operating margins,
management believes margins will be somewhat lower
in 2003. Capital employed increased 21 percent reflecting
the volume growth in the business resulting in an
increased level of required regulatory investments.
ARS/AMS Segment
The ARS/AMS segment, which provides direct HVAC
and plumbing services reported revenue of $719 million,
a decrease of 12 percent compared with $820 million in
2001. Operating income decreased 65 percent to $17
million, compared with $49 million (proforma) in the
prior year. Industry wide there is a growing trend by
consumers to repair rather than replace defective
equipment, reflecting uncertainties in the economy, as
well as a marked reduction in construction activity.
A decline in call volume for residential air conditioning
and plumbing service resulted in the Company’s
decrease in revenue and profit. Margins declined in part
due to higher marketing and insurance costs. In addition,
lower revenue led to reduced leverage of the fixed cost
structure. ARS and AMS continue their efforts towards
a comprehensive rebuilding of marketing and sales
strategies by hiring a marketing leader and expanding
the sales force and sales training. Management has
realigned its field operating structure to narrow the
span of control. The leaders of ARS are conducting a
thorough review of individual branches to determine
their long-term profit potential and whether under
performing locations should be exited. Capital employed
decreased four percent, reflecting improved working
capital management from a reduction in accounts
receivable days sales outstanding.
Other Operations Segment
The Other Operations segment includes the Company’s
ServiceMaster Clean, Merry Maids, and international
operations as well as its headquarters functions.
Reported segment revenues of $149 million in 2002
compared with $158 million in the prior year. The segment
reported an operating loss of $23 million compared
with a loss of $342 million (proforma) in 2001. The 2001
results include a charge of $345 million related primarily
to goodwill and asset impairments and other items.
The 2002 results reflect continuing growth in profit
from the franchise businesses, offset by higher costs
related to enterprise initiatives and lower profits from
trade name licensing. Revenues from the franchise
operations decreased by one percent. ServiceMaster
Clean revenue in 2001 included direct management of a
significant disaster restoration project at the Pentagon,
which was, in part, offset in 2002 by growth in the
remaining franchise disaster restoration business
and acquisitions at Merry Maids. Operating margin
improvement in the franchise operations reflects the
impact of prior year work at the Pentagon which was at a
lower margin and higher fee income, offset in part by an
increased mix of direct owned branches at Merry Maids,
which carry lower margins than the base franchise business.
Operating income in the Other Operations segment
includes income from license agreements for the use of
Company-owned trade names in certain markets. In the
third quarter of 2002, the Company sold its Terminix
operations in the United Kingdom and entered into a
two-year licensing agreement with the buyer for the use
of the Terminix trade name in the United Kingdom. This
agreement was valued at $6 million and accordingly, a
like amount was allocated from the purchase price. In
the fourth quarter of 2001, the Company sold its
Management Services business unit and the Company
entered into a three-year licensing agreement with
ARAMARK for the use of the ServiceMaster trade name
in certain markets. This agreement was valued at $15
million and accordingly, a like amount was allocated
from the purchase price. The Company recorded the
license fee income in the fourth quarter of 2001 related
to this agreement.
Total initial and recurring franchise fees (excluding
the aforementioned trade name license agreements)
represented 2.5 percent of consolidated revenue in both
2002 and 2001 and related franchise operating expenses
were 1.6 percent and 1.7 percent of consolidated operating
expenses in 2002 and 2001, respectively. Franchised
revenue consist principally of continuing monthly fees
based upon the franchisee revenue and is recognized
when the related franchise revenue is reported from the
franchisee and collectibility is assured. Franchise revenue
also includes initial franchise fees resulting from the
sale of the franchise, which are fixed and are recognized
as revenue when collectibility is assured and all material
services or conditions relating to the sale have been
substantially performed. Total initial and recurring
franchise fee income (excluding the aforementioned
trade name license agreements) comprised 11.3 percent
and 10.2 percent of consolidated operating income in
2002 and 2001, respectively. The portion of total franchise
fee income related to initial fees received from the sales
of franchises was not material to the Company’s consoli-
dated financial statements for all periods.
ServiceMaster 27
Management Discussion & Analysis of Financial Condition & Results of Operations