American Home Shield 2003 Annual Report Download

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ServiceMaster→  →       

Table of contents

  • Page 1
    Ser v iceMaster â†'     â†'                â†'â†' â†' â†' â†' ...

  • Page 2
    ... the third quarter of 2003, the Company recorded a non-cash impairment charge associated with goodwill and intangible assets at its American Residential Services, American Mechanical Services and TruGreen LandCare business units of $481 million pre-tax ($383 million after-tax). The impact on diluted...

  • Page 3
    ...- we go to them, where they live and work, some 45 million times a year. We confront conditions that vary by home and business, by season of the year, and by customer preference.We have built leading brands by delivering expert service under these conditions. We have eight brands that are number one...

  • Page 4
    .... Our service people work hard. They are on the road. They go into our customers' properties - homes and businesses - and they clean and fix, protect and enhance. They want and deserve to work in a safe environment. We have increased our activity in this area, formed a new executive safety council...

  • Page 5
    ... services. Terminix increased its revenues by 2 percent, on higher termite and pest renewals, overcoming unfavorable weather in the first half of the year. American Home Shield increased its revenues by 6 percent, reflecting strong growth in renewal contracts and continuing sales improvement...

  • Page 6
    ... three new directors in 2003. They are: Jonathan P. Ward, Chairman & CEO (right), Ernest J. Mrozek, President & CFO (left) John Carl, who retired in 2002 as Senior Vice President and Chief Financial Officer of Allstate Insurance Company Roberto Herencia, President, Banco Popular North America and...

  • Page 7
    L i v i n g O u r Va l u e s                                                    . â†'        ...

  • Page 8
    ... my employees be successful - that is one of the most satisfying things about my job. So it's about people, it's about customers and relationships and it's about processes and doing things the right way. And it all just gets mixed together with your values. You make hundreds of decisions every day...

  • Page 9
    ... you take on a commercial account, then you'll do fine. And if there is a problem, you have to take care of your customer and apologize. We're prepared to do that; that's part of our guarantee. We have very productive individuals on our team and they have fun doing the job. If they need help in some...

  • Page 10
    ... an issue for an entry level fellow associate as I am when addressing a request from the highest ranking executives in our enterprise. A highlight of my transportation responsibilities is meeting new people. I consider it a great thing that someone in Saudi Arabia or Japan, Germany or England...

  • Page 11
    Our Brands      â†'â†' â†' â†' â†' â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'    â†'â†'â†'â†' â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'â†'    â†'â†' â†' â†' â†' ...

  • Page 12
    ... supplier to be so reliable I can focus on other things." New management tools, such as a formal quality assurance process with on-site audits, help to ensure that our LandCare unit speaks the language of our business customers. With better data, we're better able to demonstrate results. Land Care

  • Page 13
    ..., we implemented a new business-to-business sales process, anchored by a contract management software tool, a new pricing module, and electronic billing capabilities. Together, these operating enhancements are helping to create an effective discipline in selling and serving our commercial customers.

  • Page 14
    ... plan that fits my needs - and my budget." Today, when customers contact us for a termite treatment, they get something they don't really expect: Choice. Terminix offers both a liquid and a bait system for termite control, along with a choice of price points and payment options, to further enhance...

  • Page 15
    ... expert technicians. We are working hard to ensure that we are answering the customer's needs by being attentive and responsive every time we take care of the customer's home and family. New marketing messages will focus on our guarantee, for which our brand has a strong heritage and high consumer...

  • Page 16
    ..., new service rep phone training, and flexibility in coverage and payment are all being explored for improvement and effectiveness. Home Inspection H o m e Wa r r a n t y " Who'd risk buying a house without having a complete inspection? But how can you tell who's going to do the best job?" To...

  • Page 17
    ... warranty work in our customers' homes. We measure satisfaction after the fact, too. A clear, detailed scorecard is regularly delivered to our contractors so they can understand their performance and know how to make improvements in their delivery of service. AmeriSpec is following through with new...

  • Page 18
    " I hate losing a whole day of work just to get my air conditioner serviced. But who knows when the technician is actually going to show up?" An ARS team, using data and insight from Six Sigma, developed a new process for delivering "Frustration Repair" through scheduling and dispatch that gives ...

  • Page 19
    ..."On Time Know How" by scheduling service calls within a 2-hour window backed by a $50 payment if we miss the time slot. Pilot branches are testing additional features such as faster parts availability, free inspections, and follow-up calls to address other key customer concerns. The AMS staff makes...

  • Page 20
    ...- carpeting, cleaning, furniture - it's all part of making an attractive workplace." ServiceMaster Clean has re-examined every aspect of cleaning and customer interface to build better training, inspection and follow-up. Our Furniture Medic experts provide value after the service by offering expert...

  • Page 21
    ...the customer's requirements, regular inspection reports, and simplified feedback through "Tell ServiceMaster" help raise customer satisfaction. On-site communication with the Furniture Medic customers and after-care tent cards increase the value of our service by ensuring that furniture repairs last...

  • Page 22
    ... Home warranty plans 230 locations 132,000 customers, $42 million customer level revenue Home inspections 65 locations 1.4 million customers, $496 million customer level revenue Residential/commercial plumbing, electrical, heating, ventilation, air conditioning maintenance, repair services...

  • Page 23
    ... of Operations Consolidated Statements of Financial Position Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Auditors Quarterly Cash Dividends and Price Per Share Data Board of Directors Company...

  • Page 24
    ... pay of operating leadership to improvements in safety. 4. Training - Development and training of employees, including the launch of a company-wide branch manager training school. As the Company looks toward 2004 it will maintain a strong focus on top-line sales growth, increased pricing discipline...

  • Page 25
    ... services rendered and products sold increased one percent compared to the prior year and decreased as a percentage of revenue to 68.1 percent in 2003 from 68.5 percent in 2002. This decrease reflects a change in the mix of business as TruGreen ChemLawn, Terminix, and American Home Shield increased...

  • Page 26
    ...* Growth in Pest Control Customers Pest Control Customer Retention Rate Growth in Termite Customers Termite Customer Retention Rate American Home Shield - its marketing approach, with increased expenditures on direct mail and other advertising. A 10 percent decline in sales through the traditional...

  • Page 27
    ... year as termite revenue stabilized, customer retention rates improved and strong cost controls were implemented. Renewal revenues increased, resulting from favorable mix and pricing. Pest control volume increased, driven by improved customer retention and stronger commercial sales. Operating income...

  • Page 28
    ... to increase replacement sales through third-party retail channels, and to increase residential sewer line repairs. In addition,ARS achieved a 98 percent success rate on its new two-hour arrival guarantee in its HVAC service line, which was rolled out in October in certain markets. As part of...

  • Page 29
    ...603 and air conditioning (HVAC) and plumbing businesses of ARS and AMS, increased workers compensation and health * This business was sold on November 30, 2001, consequently the 2001 results reflect eleven months of operations. insurance costs, as well as increased expenditures related to enterprise...

  • Page 30
    ... sales of Management 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...

  • Page 31
    ... 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...

  • Page 32
    ... to the Company's strength in its annual cash provided from operating activities: a solid earnings base, businesses that need relatively little working capital to fund growth in their operations, and significant annual deferred taxes. The tax deferral is expected to remain near its current level for...

  • Page 33
    ... of maturity as a result of a change in credit rating. Management believes that funds generated from operating activities and other existing resources will continue to be adequate to satisfy ongoing working capital needs of the Company. The Company has a committed revolving credit facility for...

  • Page 34
    ... operations represents a cash adjustment to the selling price of the 2001 disposition of the Company's European pest control and property services operations as well as certain other payments. The remaining liabilities primarily represent obligations related to long-term self-insurance claims...

  • Page 35
    ...and insured layers of excess insurance coverage above those limits. Accruals for selfinsurance losses and warranty claims in the American Home Shield business are made based on the Company's claims experience and actuarial projections. Current activity could differ causing a change in estimates. The...

  • Page 36
    Management Discussion and Analysis of Financial Condition and Results of Operations Revenues from lawn care, pest control, liquid and fumigation termite applications, as well as heating/air conditioning and plumbing services are recognized as the services are provided. Revenues from landscaping ...

  • Page 37
    ... operations Cumulative effect of accounting change Diluted earnings (loss) per share Shares used to compute basic earnings per share Shares used to compute diluted earnings per share Shares outstanding, net of treasury shares Cash dividends per share Share price range: High price Low price Financial...

  • Page 38
    ... the third quarter of 2003, the Company recorded a non-cash impairment charge associated with goodwill and intangible assets at its American Residential Services, American Mechanical Services and TruGreen LandCare business units of $481 million pre-tax ($383 million after-tax). The impact on diluted...

  • Page 39
    ... and cash equivalents Marketable securities Receivables, less allowances of $26,220 and $27,616, respectively Inventories Prepaid expenses and other assets Deferred customer acquisition costs Deferred taxes and income taxes receivable Assets of discontinued operations Total Current Assets Property...

  • Page 40
    ... of reclassification amounts (net of tax) relating to comprehensive income: 2003 Unrealized holding gains (losses) arising in period Less: (Gains) losses realized Net unrealized gains (losses) on securities See accompanying Notes to the Consolidated Financial Statements. $ $ 9,335 (2,313) 7,022...

  • Page 41
    ... Business acquisitions, net of cash acquired Proceeds from business sales Notes receivable, financial investments and securities Net Cash Provided from (Used for) Investing Activities Cash Flows from Financing Activities: Net payments of debt Shareholders' dividends Purchase of ServiceMaster stock...

  • Page 42
    ...and insured layers of excess insurance coverage above those limits. Accruals for selfinsurance losses and warranty claims in the American Home Shield business are made based on the Company's claims experience and actuarial projections. Current activity could differ causing a change in estimates. The...

  • Page 43
    ... financial statements for all periods. The Company had $420 million and $397 million of deferred revenues at December 31, 2003 and 2002, respectively, which consist primarily of payments received for annual contracts relating to home warranty, termite baiting and lawn care services. The revenue...

  • Page 44
    ... of FASB Statement No. 123", provides alternative methods of transitioning to the fair-value based method of accounting for employee stock options as compensation expense. The Company is using the "prospective method" of SFAS 148 and is expensing the fair value of new employee option grants awarded...

  • Page 45
    ..., Terminix, American Home Shield, ARS/AMS and Other Operations. In accordance with Statement of Financial Accounting Standards No. 131, the Company's reportable segments are strategic business units that offer different services. The TruGreen segment provides residential and commercial lawn care and...

  • Page 46
    ...termite and pest control services to residential and commercial U.S. customers. The American Home Shield segment provides home warranties to consumers that cover heating, ventilation, air conditioning (HVAC), plumbing and other home systems and appliances. This segment also includes home inspection...

  • Page 47
    Notes to Consolidated Financial Statements B u s i n e s s S e g m e n t Ta b l e (In thousands) 2003 % Change 2002 % Change 2001 Operating Revenue: TruGreen Terminix American Home Shield ARS/AMS Other Operations Total Operating Revenue Operating Income (Loss): $ 1,347,400 945,258 450,264 673,...

  • Page 48
    ... the "Acquisi(In thousands) 2003 tions" and "Dispositions" notes in the Notes to Consolidated Financial Statements for information relating to goodwill acquired and amounts impaired. % Change 2002 % Change 2001 TruGreen Terminix American Home Shield ARS/AMS Other Operations Total $ 652,534 622...

  • Page 49
    Notes to Consolidated Financial Statements In accordance with SFAS 142, the following table provides summarized transitional information for the years ended December 31, 2003, 2002 and 2001, with the 2001 informa(In thousands, except p er share data) tion presented on an adjusted basis to reflect ...

  • Page 50
    ...yields an annual Non-deductible amortization expense - - 2.4 tax benefit of approximately $50 million. Accounting stanOther (1.8) 0.7 2.7 dards require that the Company recognize deferred taxes Effective rate (1.2%) 35.1% 9.1% relating to the differences between the financial reporting and tax basis...

  • Page 51
    ... cash payments due over nine years totaling $25 million. Approximately $122 million of goodwill was recorded related to this acquisition. During 2001, the Company acquired several small companies, primarily in the pest control and heating/air conditioning and plumbing businesses. The purchase price...

  • Page 52
    ...In the fourth quarter of 2002, the purchaser of the Company's European pest control and property services operations made a claim for a purchase price adjustment (relating to the 2001 sale), relating to an alleged breach of certain conditions in the purchase agreement. In the course of responding to...

  • Page 53
    ... at Dec. 31, 2003 has self-insured retention limits and insured layers of excess insurance coverage above such self-insured retention limits. Accruals for self-insurance losses and warranty claims in the American Home Shield business are made based on the Company's claims experience and actuarial...

  • Page 54
    ... to the Consolidated Financial Statements. The Company has partially guaranteed a loan by a third party bank to an employee totaling $13.7 million, which is fully secured as of December 31, 2003 and 2002 by employee owned shares of the Company. Payments by the Company related to this note are not...

  • Page 55
    Notes to Consolidated Financial Statements insurance programs. If the surety bonds are not renewed, the Company expects to replace them with letters of credit issued under its bank credit facility. In December 2003 and January 2004, the Company entered into interest rate swap agreements with a ...

  • Page 56
    Notes to Consolidated Financial Statements Receivable Sales Shareholders' Equity As of December 31, 2003, there were 44.9 million Company shares available for issuance upon the exercise of employee stock options outstanding and future grants. Stock options are issued at a price not less than the ...

  • Page 57
    ...Financial Statements Prior to 2003, the Company accounted for employee share options under the intrinsic method of Accounting Principles Board Opinion 25, as permitted under GAAP. Accordingly, no compensation cost had been recognized in the accompanying financial statements in 2002 and 2001 related...

  • Page 58
    ... as expense in proportion to the related revenues. Full year results are not affected. In the fourth quarter of 2003, the Company corrected its historical method of recognizing renewal revenue from certain Terminix and American Home Shield customers who have prepaid. This adjustment reduced...

  • Page 59
    Notes to Consolidated Financial Statements (In thousands, except p er share data) 2003 Chg 2002 (1) Chg 2001 (1) Continuing Operations: Operating Revenue: First Quarter Second Quarter Third Quarter Fourth Quarter Gross Profit: First Quarter Second Quarter Third Quarter Fourth Quarter Income (Loss...

  • Page 60
    ...and 2002, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these...

  • Page 61
    ... 0.10 0.10 0.10 0.10 0.40 $ $ $ The following table sets forth the quarterly prices of ServiceMaster's common stock, as reported on the New York Stock Exchange Composite Transactions: 2003 2002 2001 Price Per Share: First Quarter Second Quarter Third Quarter Fourth Quarter $ High 11.41 10.95...

  • Page 62
    ... Banco Popular North America Rosemont, Illinois Executive Vice President and Head of North America Operations Popular, Inc. San Juan, Puerto Rico Chairman North American Management Corporation Boston, Massachusetts Dean J. Mack Robinson College of Business Georgia State University Atlanta, Georgia...

  • Page 63
    ... Soderquist Retired Senior Vice President and Chief Financial Officer Allstate Insurance Lake Forest, Illinois Chairman and Chief Executive Officer McLennan Company Park Ridge, Illinois D a l l e n W. P e t e r s o n Senior Vice President Arrow Electronics, Inc. Melville, New York Former Senior...

  • Page 64
    ...and Chief Operating Officer American Home Shield M i t c h e l l T. E n g e l Senior Vice President and General Counsel Er nest J. Mrozek Senior Vice President for Human Resources David M. Slott Senior Vice President Corporate Communications A l b e r t T. C a n t u Chief Marketing Officer James...

  • Page 65

  • Page 66
    The Ser v iceMaster Company 3250 Lace y Ro ad, Suite 600 Dow ners Grove, Illinois 60515