American Home Shield 2003 Annual Report Download - page 28

26    ServiceMaster
Capital employed increased 34 percent reflecting a higher
level of investments due to the growth in the business and
improved market performance of the investments. The
calculation of capital employed for the American Home
Shield segment includes approximately $221 million and
$172 million of cash, short-term and long-term securities at
December 31, 2003 and 2002, respectively. The interest and
realized gains/losses on these investments are reported as
non-operating income/expense.
ARS/AMS Segment
The ARS/AMS segment primarily provides HVAC and
plumbing installation and repair services under the ARS
Service Express, Rescue Rooter, and American Mechanical
Services (for large commercial accounts) brand names. The
segment reported revenue of $674 million, a decrease of six
percent compared to $719 million in 2002. The segment
reported an operating loss of ($282) million compared with
operating income of $17 million in 2002. During the third
quarter of 2003, the Company recorded a non-cash impair-
ment charge of $292 million pre-tax relating to goodwill and
intangible assets of its ARS/AMS segment. For a further
discussion on the impairment charge see the “Goodwill
and Intangible Assets”section in the Notes to Consolidated
Financial Statements.
Within ARS Service Express, revenue declined five percent,
primarily reflecting an industry-wide reduction in plumbing
service calls and the effects of discontinued branches. HVAC
replacement sales from ongoing operations were up slightly,
despite less favorable temperatures and the weak economy.
The Company is encouraged by its progress with specific
initiatives 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 its
efforts to offset the revenue shortfalls it has been experiencing
and to improve profitability, ARS has strengthened its
management team and industry experience at all levels,
emphasized higher margin sales, tightened control over
indirect costs and overheads, and sold or closed 12 under-
performing branches or service lines. Those operations had
$35 million in revenues in 2002 and $20 million prior to their
closure in 2003. Operating profits at ARS Service Express,
declined due to the third-quarter impairment charge as well
as a decrease of $.7 million from operations. These results,
however, include incremental shutdown costs and operating
losses prior to disposition of approximately $1.8 million.
AMS’revenues decreased nine percent, reflecting reduced
levels of project work due to depressed conditions in the
commercial construction industry. The project backlog
increased substantially by year-end, but bid pricing remains
very competitive with longer lead-times for projects to start.
Capital employed in the ARS/AMS segment declined reflecting
the impact of the impairment charge.
Other Operations Segment
The Other Operations segment includes the Company’s
ServiceMaster Clean and Merry Maids operations as well as
its headquarters functions. Revenue in this segment
increased two percent to $152 million in 2003 compared
with $149 million in the prior year. The combined Service-
Master Clean and Merry Maids franchise operations reported
revenue growth of eight percent, driven primarily by continued
excellent results in disaster restoration services. The impact
of the franchise operations revenue growth was partially
offset by $6 million of licensing fees recorded in the third
quarter of 2002 related to the Company’s former Terminix
United Kingdom operations.
The segment reported an operating loss of ($40) million
in 2003 compared with a loss of ($23) million in 2002.
Continued strong growth in operating income of Service-
Master Clean was more than offset by higher costs at the
headquarters level related to insurance, marketing and
compliance,and the effect of the $6 million of non-recurring
licensing fee income earned in 2002,as well as the compensa-
tion expense related to a deferred compensation trust.
Accounting standards require that appreciation on invest-
ments in a deferred compensation trust be reflected as
compensation expense in computing operating income,
with a corresponding amount of investment income included
in non-operating income/expense.
Total initial and recurring franchise fees (excluding trade
name license agreements) represented 2.6 percent of consol-
idated revenue in both 2003 and 2002, respectively, and
related franchise operating expenses were 1.6 percent and 1.7
percent of consolidated operating expenses in 2003 and
2002, respectively. Total franchise fee income (excluding the
aforementioned trade name license agreements) comprised
13 percent and 11 percent of consolidated operating income
before impairment charges in 2003 and 2002, 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 consolidated financial statements for all periods.
Management Discussion and Analysis of
Financial Condition and Results of Operations