American Home Shield 2003 Annual Report Download - page 31

ServiceMaster    29
American Home Shield Segment
The American Home Shield segment reported a 15 percent
increase in revenue to $424 million from $369 million in
2001 and operating income growth of 84 percent to $48 million
compared to $26 million (proforma) in 2001. Revenue
growth reflected increases in all sales channels,complemented
by improved customer retention. Operating margins
improved as the segment benefited from strong volume
growth, improved management of service costs and reduced
incidence of claims resulting, in part, from less extreme
weather trends.
Capital employed increased 21 percent reflecting the volume
growth in the business resulting in an increased level of
required regulatory investments.
ARS/AMS Segment
The ARS/AMS segment reported revenue of $719 million, a
decrease of 12 percent compared with $820 million in 2001.
Operating income decreased 65 percent to $17 million,
compared with $49 million (proforma) in the prior year.
Industry wide there is a growing trend 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.Margins declined
in part due to higher marketing and insurance costs. In
addition, lower revenue led to reduced leverage of the fixed
cost structure.ARS and AMS continued their efforts towards
a comprehensive rebuilding of marketing and sales strategies
and hired a marketing leader as well as expanded the sales
force and sales training. Management realigned its field
operating structure to narrow the span of control.
Capital employed decreased eight percent,reflecting improved
working capital management from a reduction in accounts
receivable days sales outstanding.
Other Operations Segment
The Other Operations segment reported segment revenues
of $149 million in 2002 compared with $158 million in 2001.
The segment reported an operating loss of $23 million
compared with a loss of $342 million (proforma) in 2001.
The 2001 results include a charge of $345 million related
primarily to goodwill and asset impairments and other items.
The 2002 results reflected growth in profit from the franchise
businesses,offset by higher costs related to enterprise initiatives
and lower profits from trade name licensing. Revenues from
the franchise operations decreased by one percent. Service-
Master Clean revenue in 2001 included direct management
of a significant disaster restoration project at the Pentagon,
which was, in part, offset in 2002 by growth in the remaining
franchise disaster restoration business and acquisitions at
Merry Maids. Operating margin improvement in the fran-
chise operations reflected the impact of prior year work at
the Pentagon which was at a lower margin and higher fee
income, offset in part by an increased mix of direct owned
branches at Merry Maids,which carry lower margins than the
base franchise business. Total initial and recurring franchise
fees (excluding trade name license agreements) represented
11 percent and 10 percent of consolidated operating income
before impairment charges in 2002 and 2001, 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.
Operating income in the Other Operations segment included
income from license agreements for the use of Company-
owned trade names in certain markets. In the third quarter of
2002,the Company sold its Terminix operations in the United
Kingdom and entered into a two year licensing agreement
with the buyer for the use of the Terminix trade name in the
United Kingdom. This agreement was valued at $6 million
and accordingly, a like amount was allocated from the purchase
price. In the fourth quarter of 2001, the Company sold its
Management Services business unit and the Company
entered into a three-year licensing agreement with ARA-
MARK for the use of the ServiceMaster trade name in certain
markets. This agreement was valued at $15 million and
accordingly, a like amount was allocated from the purchase
price. The Company recorded the license fee income in the
fourth quarter of 2001 related to this agreement.
The Other Operations segment increased expenditures in
2002 on technology and major operational initiatives to
improve operating efficiency and build greater customer and
employee satisfaction.
Capital employed in this segment included the discontinued
operations and therefore is significantly reduced from the
prior year, reflecting the divestitures of businesses.
2003 Financial Position and Liquidity
Cash Flows from Operating Activities
Net cash provided from operating activities was $284 million
in 2003 compared to $374 million in 2002. The majority of
the difference was experienced in the first quarter and was
largely attributed to the timing of customer prepayments
and the timing of insurance, incentive compensation and
vendor payments, with an increased level of payments in
2003 compared to 2002. TruGreen ChemLawn typically
receives prepayments from certain customers for the full
season in the first and fourth quarters. In preparation for the
Management Discussion and Analysis of
Financial Condition and Results of Operations