American Home Shield 2003 Annual Report Download - page 26

24    ServiceMaster
Segment Review (2003 vs. 2002)
Key Performance Indicators
As of December 31, 2003 2002
TruGreen ChemLaw n-
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% -%
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 includes lawn care services performed
under the TruGreen ChemLawn brand name and landscape
maintenance services provided under the TruGreen
LandCare brand name. During the third quarter of 2003, the
Company sold the assets and related operational obligations
of the utility line clearing operations 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 reclassified as discontinued operations
and are not included in continuing operations.
The TruGreen segment reported revenues of $1.3 billion in
2003,five percent above the prior year.The segment reported
an operating 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 land-
scaping 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 has been supported by tuck-in acquisi-
tions, and growth in revenue from commercial accounts and
ancillary services (e.g., add-on services such as lawn aeration
and grub control).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. Continued develop-
ment of these other channels will be a critical focus in 2004 as
the Company continues to work through the effects of the
national Do-Not-Call list. Telemarketing is a cost effective
sales channel relative to other channels. Therefore, as a result
of this shift, the Company has experienced an increase in its
marketing costs.
As the Company continues to reduce its dependency on
telemarketing, there will be a change in the timing of when
new customers are obtained. Typically, telemarketing is a
preseason activity that is particularly heavy in January and
February. Therefore, the shift to more non-telemarketing
sales will move the addition of new customers from preseason
activity to sales from direct mail and other channels which
are “in season”. As a result,the Company expects to experience
a slight decline in lawn care customer counts during the first
quarter of 2004,followed by increases in subsequent quarters.
Quality of service initiatives have resulted in the customer
retention rate improving 20 basis points to 59.5 percent
compared to 59.3 percent in 2002.This improvement follows
a 160 basis point increase in retention achieved in 2002.
Customer feedback indicates that cancellations due to quality
issues have decreased relative to the prior year, whereas those
due to economic considerations have increased. The Company
believes 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. Favorable weather in the fourth quarter partially
offset the impact of poor weather in the first quarter of the
year.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
enhancement sales (e.g., add-on services such as seasonal
flower plantings). 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
Management Discussion and Analysis of
Financial Condition and Results of Operations