American Home Shield 2002 Annual Report Download - page 33

On a consolidated basis, costs of services rendered and
products sold increased two percent and decreased as a
percentage of revenue to 69.6 percent from 71.1 percent
in 2000. Selling and administrative expenses increased
14 percent and increased as a percentage of revenue to
19.3 percent from 17.6 percent in 2000.
Interest expense decreased from 2000, primarily due
to reduced debt levels from improved cash flows, debt
retirements with the proceeds from the Management
Services sale, and the sale of certain of the Company’s
accounts receivable throughout the year. Interest income
decreased primarily due to a lower level of investment
gains realized, net of impairment losses in 2001.
Minority interest and other expense reflected $19 million
more expense than 2000 due to reduced minority interest
income of $8 million related to the ServiceMaster Home
Service Center venture, increased minority interest
expense of $8 million related to the equity security
issued in the Allied Bruce acquisition, and a $3 million
loss recorded in 2001 on the Company’s sale of receivables.
Throughout 2000 and until May 2001, the operating
losses of ServiceMaster Home Service Center had been
offset through minority interest income (below the
operating income line) because of investments in the
venture made by Kleiner Perkins Caufield & Byers. In
2001, this minority interest income totaled $6 million,
compared with $14 million in 2000. In May 2001, the
cumulative operating losses of ServiceMaster Home
Service Center began exceeding the funding provided
by Kleiner Perkins. As a result, all of the operating losses
after May of 2001 had been absorbed in the Company’s
financial statements without an offset at the minority
interest income line.
Extraordinary Loss
In the fourth quarter of 2001, the Company used a portion
of the cash proceeds from the sale of Management
Services to pay down debt balances and recorded an
extraordinary loss of $.03 per diluted share ($9 million
after-tax) resulting from the early extinguishment of
debt. This was partially offset by the realization of gains
($.02 per diluted share; $6 million after-tax) resulting
from the repurchase of corporate debt in the first quarter.
As previously discussed, the Company intends to
adopt SFAS 145 in 2003, which will result in the reclas-
sification of the extraordinary loss into interest expense
within income from continuing operations.
Segment Review (2001 vs. 2000)
2001 and 2000 results have been presented on a pro-
forma basis as if SFAS 142 had been in effect for 2001
and 2000 thereby excluding the amortization expense
affected by the new accounting standard. (See the
“Business Segment Reporting” note in the Notes to the
Consolidated Financial Statements). Managements
Discussion and Analysis focuses on the 2001 and 2000
proforma amounts.
TruGreen Segment
This segment’s results for both 2001 and 2000 exclude
the discontinued TruGreen LandCare Construction
business. The TruGreen segment reported revenue of
$1.4 billion, consistent with 2000. Operating income
decreased three percent to $181 million (proforma)
from $187 million (proforma) in 2000.
Revenue in the lawn care business was consistent with
2000, reflecting the realization of price increases and
growth in ancillary services, offset by a decrease in cus-
tomer counts. The lawn care operations’ results were
negatively impacted by winter weather conditions that
persisted much later in the first quarter of 2001 than in
2000, resulting in reduced production levels and lower
margins from sub-optimal labor utilization and fixed
cost leverage. In addition, management was optimistic
that the selling season, which had been delayed due to
adverse weather in March and April, would rebound in
the second and third quarters. However, sales were
below expectations and margins in the lawn care operations
were unfavorably impacted by a cost structure that was
in place to support a higher anticipated level of demand.
Landscape maintenance revenue increased one percent
compared to 2000. Revenue growth was negatively
affected by management’s decision to enforce stricter
profitability standards on contract sales and renewals
as well as soft sales in enhancement services. Operating
margins in the landscaping operations increased
reflecting improved labor efficiency, offset in part by
higher plant and material costs. Capital employed
decreased five percent primarily reflecting continued
improvement of working capital and the reduction of
excess equipment levels.
Terminix Segment
The Terminix segment reported a 16 percent increase
in revenue to $845 million from $728 million in 2000
and operating income growth of 25 percent to $123 million
(proforma) from $98 million (proforma) in 2000. The
strong growth reflects the impact of acquisitions, the
continued migration of the customer base to termite
baiting systems, improved customer retention, and the
impact of price increases. In January 2001, the Company
acquired the Allied Bruce Terminix Companies, the
largest Terminix franchise and the fourth largest pest
control company in the United States. In October 2001,
the Company completed the acquisition of certain assets
of Sears Termite and Pest Control, Inc. The improvement
in Terminix’s operating margins reflects the benefit of
acquisitions, in particular an increased mix of higher
margin termite baiting sales, as well as the impact of
price increases and ongoing productivity improve-
ments. Capital employed increased 15 percent primarily
due to acquisitions, offset in part by higher prepaid
contracts and improved working capital management.
ServiceMaster 29
Management Discussion & Analysis of Financial Condition & Results of Operations