American Home Shield 2003 Annual Report Download - page 29

ServiceMaster    27
Discontinued Operations
During the third quarter of 2003, the Company sold the
assets and related operational obligations of Trees, Inc., the
utility line clearing operations of TruGreen LandCare, for
approximately $20 million in cash. The impact of the sale
was not material to the Company’s Consolidated Financial
Statements for 2003. Earnings per share from continuing
operations were reduced $.01 in 2002 and 2001, respectively,
to reflect the reclassification of the divested utility line clearing
business as discontinued operations.
During the third quarter of 2002, the Company sold its
Terminix operations in the United Kingdom. The impact
of this sale was not material to the consolidated financial
statements.
In 2001 the Company sold its Management Services business
to ARAMARK Corporation for approximately $800 million.
The all-cash transaction closed on November 30, 2001 and
the Company recorded an after-tax gain of $404 million
from this sale. (A division of Management Services was not
sold as part of this transaction and the Company recorded a
$15 million loss upon disposition of this unit). In addition,
the Company exited several non-strategic and under-per-
forming businesses including TruGreen LandCare Con-
struction, Certified Systems Inc. (CSI), and certain Terminix
Europe operations.
The components of discontinued operations are as follows:
(In thousands) 2003 2002 2001
Management
Services income* $ – $ – $ 33,172
Income (loss) from
other discontinued
operations (2,107) 4,531 (67,782)
Gain on sale of
Management Services,
net of losses from
disposition of
other entities (605) (4,840) 323,213
Discontinued
operations $ (2,712) $ (309) $ 288,603
* This business was sold on November 30, 2001, consequently the 2001 results reflect
eleven months of operations.
Results of Operations -
2002 Compared with 2001
Consolidated Review
Revenues for 2002 were $3.5 billion,one percent above 2001.
The Company reported income from continuing operations
in 2002 of $157 million and a loss from discontinued opera-
tions of less than $1 million. Net income was $157 million in
2002 and $116 million in 2001 and diluted earnings per share
were $.51 in 2002 and $.39 in 2001.
Diluted earnings per share from continuing operations was
$.51 in 2002 compared with a loss of ($.58) in 2001. There
were three significant items in 2001 that impact the compa-
rability of the reported amounts with the 2002 figures. First,
diluted earnings per share from continuing operations for
2001 includes a charge of $.94 per share ($345 million pre-tax)
primarily related to goodwill and asset impairments and
other items. Second, as discussed further in the Notes to
Consolidated Financial Statements, SFAS No. 142,“Goodwill
and Other Intangible Assets”, requires that beginning in
2002, goodwill and trade names no longer be amortized.
SFAS 142 does not permit the restatement of 2001 financial
information to reflect the impact of this Statement. The
reduced amortization expense for 2001 is $60 million pre-
tax ($.14 per diluted share equivalent). Third, in the fourth
quarter of 2001, the Company received approximately $740
million of after-tax proceeds, net of expected cash payments
relating to the sale and exit of discontinued businesses.
In the third quarter of 2003, the Company sold its utility line
clearing operations of TruGreen LandCare.As a result, the
2002 and 2001 diluted earnings per share from continuing
operations were reduced $.01, respectively, to reflect the
divested business as discontinued operations. In 2003, the
Company adopted a new accounting standard which required
extraordinary gains/losses from the early extinguishment of
debt to be reclassified into interest expense. The reported
earnings (loss) per share from continuing operations of $.51
in 2002 and ($.58) in 2001 includes $.03 and $.01, respectively,
of expense related to the early extinguishment of debt which
were previously reported as extraordinary items and not part
of income from continuing operations.
In 2002 operating income was $335 million compared to an
operating loss of $30 million in 2001. The 2001 figure
includes a $345 million charge primarily related to goodwill
and asset impairments and other items. Additionally, the
reduced amortization expense under SFAS 142 was $60
million. Operating income margins declined reflecting the
above items and reduced volume in the heating, ventilation
and air conditioning (HVAC) and plumbing businesses of
ARS and AMS, increased workers compensation and health
insurance costs, as well as increased expenditures related to
enterprise-wide initiatives, partially offset by strong growth
at American Home Shield.
Cost of services rendered and products sold were unchanged
compared to the prior year and decreased as a percentage
of revenue to 68.5 percent in 2002 from 69.1 percent in 2001.
This decrease reflects a change in the mix of business as
TruGreen ChemLawn, Terminix, and American Home
Shield increased in size in relationship to the overall business
of the Company. Selling and administrative expenses increased
Management Discussion and Analysis of
Financial Condition and Results of Operations