American Home Shield 2003 Annual Report Download - page 24

22    ServiceMaster
Results of Operations
Consolidated Review
ServiceMaster (“the Company”) faced challenging weather
and economic conditions 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 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 contributed to improved results in the second
half of the year.
Going into 2004, the Company is focused on four key areas
across the enterprise:
1. Brand Development and Delivery – Continued
development and delivery of clear and distinctive brand
propositions derived from listening to the customer, which
will involve changing, aligning and refining the Company’s
offerings to be more valuable to its customers. This includes
enhancing the visible results of lawn care services at
TruGreen through the use of more effective weed control;
providing customers with greater choice in the type and
timing of services provided by Terminix; and providing
guaranteed on-time technician arrival within a two-hour
window at American Residential Services (ARS).
2. Enhancing Service Capabilities – Use of technology and
Six Sigma to improve the customer service capabilities and effi-
ciency of the organization, especially relating to the branches.
3. Compliance and Safety – Continued focus on compliance
and safety initiatives which includes adding professional
safety and loss-prevention managers in the field; increasing
employee communication and training; improving the
Company’s measurement and tracking systems; and tying a
portion of incentive pay of operating leadership to improve-
ments 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,
continued improvements in customer retention and
employee satisfaction and improving margins in TruGreen
LandCare, ARS and American Mechanical Services (AMS).
The Company expects its profit growth in 2004 to be partially
offset by higher safety and insurance-related costs and a
return to a more normal level of incentive compensation.
These factors, combined with the current economic and
employment outlook, lead the Company to expect revenue
growth to be in the mid-single digits in 2004 with earnings
per share growing slightly faster. Earnings per share growth is
typically faster than revenue growth due to the Company’s
ability to leverage its cost base on the incremental volume.
The Company expects to experience continued pressure
from insurance costs, which grew by approximately $.03 per
share in 2003 and are expected to increase approximately
another $.03 per share in 2004. In addition, there was a
reduced level of incentive compensation earned during the
year for senior, and to a lesser degree, middle management of
the Company in 2003. The impact of potentially funding the
total amount that could be earned in 2004 based on
improved operating results could result in approximately
$.05 - $.06 per share of incremental expense. This impact
however, should be offset by the effect of the cost reduction
initiatives implemented in late 2003.
2003 Compared with 2002
Revenue for 2003 was $3.6 billion, two percent above 2002.
The Company reported a net loss from continuing opera-
tions in 2003 of ($222) million and a loss from discontinued
operations of ($3) million. The net loss of ($225) million in
2003 compared with net income of $157 million in 2002.
Diluted earnings per share was a ($.76) loss in 2003 and $.51
in 2002.
Diluted earnings per share from continuing operations was a
loss of ($.75) in 2003 compared with $.51 in 2002. The diluted
earnings per share for 2003 includes a non-cash goodwill
and intangible assets impairment charge of $1.30 per share
($481 million pre-tax, $383 million after-tax). Operating
income for 2003 was a loss of ($166) million, compared with
income of $335 million in 2002. The 2003 results include the
$481 million non-cash impairment charge. The net change
in operating income reflects strong growth at American
Home Shield and ServiceMaster Clean and increased profits
in TruGreen’s lawn care operations and Terminix, offset by
the impact of the impairment charge, reduced profitability
in TruGreen’s landscaping operations as well as at AMS.
There was also increased spending at the headquarters level.
The diluted earnings per share from continuing operations
amount of $.51 in 2002 includes $.03 of expense relating to
the early extinguishment of debt. This was previously
reported as an extraordinary item in 2002 and not part of
income from continuing operations. In 2003, the Company
adopted a new accounting standard which required the 2002
expense to be reclassified into continuing operations as
interest expense.
Management Discussion and Analysis of
Financial Condition and Results of Operations