American Home Shield 2005 Annual Report Download

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1
SERVICEMASTER 2005 ANNUAL REPORT
customer

Table of contents

  • Page 1
    1 customer SERVICEMASTER 2005 ANNUAL REPORT

  • Page 2
    ... and landscape maintenance, termite and pest control, home warranty, disaster restoration, cleaning, furniture repair, plumbing, heating and air conditioning services. These services are provided through a network of over 5,500 company-owned locations and franchise licenses, operating under leading...

  • Page 3
    each new customer is an opportunity to build a relationship. each existing customer is a relationship to be nurtured. each interaction is a chance to fulfill their specific needs. we will serve them. 1 customer at a time. P. 1 SERVICEMASTER 2005 ANNUAL REPORT

  • Page 4
    ... customer satisfaction, sales force development, geographical expansion, and safety in the workplace. * Customer level revenue represents the combined revenue of the Company's direct operations and the estimated revenue of its independent franchisees and licensees. SERVICEMASTER 2005 ANNUAL REPORT...

  • Page 5
    your lawn means more.

  • Page 6
    ultimate protection from pests and termites.

  • Page 7
    ... at every management level in the business he now leads. Also in 2005, Rick Ascolese became President of TruGreen LandCare. Rick was Executive Vice President of American Home Shield, before moving to LandCare as Chief Operating Officer in 2004. These executive appointments demonstrate our ability...

  • Page 8
    ... to sell American Residential Services (ARS) and American Mechanical Services (AMS). They have strong management teams and their teams have made good progress in key initiatives that will make the businesses even better. We have said that we would grow systematically stronger. In 2005 we engaged...

  • Page 9
    on time. know how.

  • Page 10
    taking the hassle out of home repair.

  • Page 11
    ... 39,000 employees. Each of these transformational programs were developed through the active participation of our top 250 leaders - who were aggressively tasked with doing more than driving 2005's revenues and earnings growth. We are leading with an aligned team that moves with speed, ï¬,exibility...

  • Page 12
    ... it. Adding these to an aligned leadership team excites us and makes us confident about our future. Jonathan P. Ward, Chairman & CEO (left), Ernest J. Mrozek, President & CFO J o n a t h a n P. Wa rd C h a i r m a n a n d C h i e f E x e c u t i v e O ff i c e r SERVICEMASTER 2005 ANNUAL REPORT...

  • Page 13
    $ financial data

  • Page 14
    ... from operating activities for 2005 included a net tax payment of $86 million, while 2004 included a $25 million reduction of tax payments. (2) The Company intends to sell its American Residential Services (ARS) and American Mechanical Services (AMS) companies so it can concentrate resources on its...

  • Page 15
    ... Statements of Cash Flows Notes to the Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Quarterly Operating Results Quarterly Cash Dividends and Price Per Share Data Management Certifications Corporate Information P. 1 3 SERVICEMASTER 2005 ANNUAL REPORT

  • Page 16
    ... related to businesses held pending sale and discontinued operations ($.03 per diluted share). See the "Income Taxes" note in the Notes to the Consolidated Financial Statements. (3) The Company intends to sell its American Residential Services (ARS) and American Mechanical Services (AMS) companies...

  • Page 17
    ... to its business portfolio. (1) The Company intends to sell American Residential Services (ARS) and American Mechanical Services (AMS). These are businesses, in large markets, with strong management teams. These companies are making good progress on key initiatives that will make them even better in...

  • Page 18
    ... claim costs at American Home Shield due to hotter weather conditions, a $10 million unfavorable adjustment recorded by Terminix to correct the estimation of prior year damage claim reserves, a $4 million gain that TruGreen ChemLawn realized in the third quarter of 2004 from the sale of a support...

  • Page 19
    ...model at American Home Shield, and there will always be some market-based variability in the timing and amount of investment returns realized from year to year. The effective tax rate for continuing operations was a 39 percent tax expense in 2005 and a 17 percent tax benefit in 2004. The comparison...

  • Page 20
    ... of acquisitions, offset in part by a modest decline in retention. Two positive developments meaningfully impacted Terminix's 2005 results. In March, the Company introduced a new bait option which utilizes an active termiticide from day one, and provides meaningful labor and material cost advantages...

  • Page 21
    ... the subsequent twelve-month contract period, increased seven percent in 2005. A solid increase in customer renewals, which are American Home Shield's largest source of revenue, was supported by a larger base of renewable customers and an overall improved customer retention rate. The improvement in...

  • Page 22
    ... can concentrate resources on its main growth businesses. The Company has retained an investment banking firm to serve as its financial advisor in this process. The ARS/AMS operations provide heating, ventilation, air conditioning (HVAC), plumbing and electrical installation and repair services and...

  • Page 23
    ...part of the business model at American Home Shield, and there will always be some market-based variability in the timing and amount of investment returns realized from year to year. The comparison of the effective tax rate is impacted by the 2004 reduction in the tax provision related to the Company...

  • Page 24
    ... to increase the average price realized for each of the two treatment alternatives, thus helping to offset the adverse, short-term revenue and profit impacts of the mix shift. The mix of new termite sales ("termite completions"), which represent about a quarter of Terminix's total revenue, moved...

  • Page 25
    ... in home listings in high warranty usage states like California and Texas. And consumer sales, which are the smallest but fastest-growing channel, experienced very strong double-digit growth, reflecting an increased level of direct-mail solicitations. American Home Shield's total new contract sales...

  • Page 26
    ... payments related to the IRS agreement, as well as the repayment of $137 million of public debt that matured in April 2005. Approximately $348 million of the cash and short and long-term marketable securities balance is effectively required to support regulatory requirements at American Home Shield...

  • Page 27
    .... Deferred revenue increased, reflecting growth in warranty contracts written at American Home Shield, partially offset by lower levels of deferred revenue at Terminix associated with the new termite bait product and the increased mix of liquid applications. P. 2 5 SERVICEMASTER 2005 ANNUAL REPORT

  • Page 28
    ... primarily represent payables and other current liabilities at the businesses held pending sale and obligations related to long-term self-insurance claims. Critical Accounting Policies and Estimates The preparation of the financial statements requires management to make certain estimates and...

  • Page 29
    ...business to manage certain market risks, with a policy of matching positions and limiting the terms of contracts to relatively short durations. The effect of derivative financial instrument transactions is not material to the Company's financial statements. P. 2 7 SERVICEMASTER 2005 ANNUAL REPORT

  • Page 30
    ... information about the Company's fixed rate debt as of December 31, 2005 (after considering the effect of the interest rate swap agreements), including the principal cash payments and related weighted-average interest rates by expected maturity dates. The fair value of the Company's fixed rate...

  • Page 31
    ...over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting...

  • Page 32
    ... related to businesses held pending sale and discontinued operations ($.03 per diluted share). See the "Income Taxes" note in the Notes to the Consolidated Financial Statements. (3) The Company intends to sell its American Residential Services (ARS) and American Mechanical Services (AMS) companies...

  • Page 33
    ...: Accounts payable Accrued liabilities: Payroll and related expenses Self-insured claims and related expenses Income taxes payable Other Deferred revenue Liabilities of businesses held pending sale and discontinued operations Current portion of long-term debt Total Current Liabilities Long-Term Debt...

  • Page 34
    ...fication amounts (net of tax) relating to comprehensive income: 2005 2004 2003 Unrealized holding gains arising in period Less: Gains realized Net unrealized gains (losses) on securities See accompanying Notes to the Consolidated Financial Statements. $ $ 2,749 (4,937) (2,188) $ $ 4,647...

  • Page 35
    ... assets Accounts payable Deferred revenue Accrued liabilities Other, net Net Cash Provided from Operating Activities Cash Flows from Investing Activities: Property additions Sale of equipment and other assets Business acquisitions, net of cash acquired Proceeds from business sales Notes receivable...

  • Page 36
    ... of excess insurance coverage above those limits. Accruals for self-insurance losses and warranty claims in the American Home Shield business are made based on the Company's claims experience and actuarial projections. Current activity could differ causing a change in estimates. The Company has...

  • Page 37
    ..., as well as home warranty services, are frequently sold through annual contracts for a one-time, upfront payment. Direct costs of these contracts (service costs for termite contracts and claim costs for warranty contracts) are expensed as incurred. The Company recognizes revenue over the life of...

  • Page 38
    ... course of business to manage certain market risks, with a policy of matching positions and limiting the terms of contracts to relatively short durations. The effect of derivative financial instrument transactions is not material to the Company's consolidated financial statements. In accordance...

  • Page 39
    ...value of new employee option grants awarded subsequent to 2002. In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)). This Statement replaces SFAS 123, "Accounting for StockBased Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued...

  • Page 40
    ... Terminix segment provides termite and pest control services to residential and commercial customers. The American Home Shield segment provides home warranties to consumers that cover HVAC, plumbing and other home systems and appliances. This segment also includes home inspection services provided...

  • Page 41
    ... these assets are reported below operating income in non-operating income/expense. In order to facilitate the comparison of return on invested capital for the American Home Shield segment, the Company has also presented capital employed for this segment excluding cash and marketable securities. The...

  • Page 42
    ...to Consolidated Financial Statements for information relating to goodwill acquired and amounts impaired, respectively. (In thousands) 2005 2004 2003 In April 2004, TruGreen ChemLawn acquired the assets of Greenspace Limited, Canada's largest professional lawn care service company. Intangible assets...

  • Page 43
    ... average annual cash tax benefits, however, the cash tax benefits in the year of divestiture will increase such that the aggregate tax benefits are unchanged. Accounting standards require that the Company recognize deferred taxes relating to the differences between the financial reporting and tax...

  • Page 44
    ... can concentrate resources on its main growth businesses. The Company has retained an investment banking firm to serve as its financial advisor in this process. The ARS/AMS operations provide heating, ventilation, air conditioning (HVAC), plumbing and electrical installation and repair services and...

  • Page 45
    ...million non-cash reduction in the tax provision of businesses held pending sale and discontinued operations related to a comprehensive agreement with the IRS regarding its examination of the Company's federal income taxes through the year 2002. Financial Position: 2005 2004 Current assets Long-term...

  • Page 46
    ... auto and general liability risks. The Company has self-insured retention limits and insured layers of excess insurance coverage above such selfinsured retention limits. Accruals for self-insurance losses, termite damage claims in the Terminix business and warranty claims in the American Home Shield...

  • Page 47
    ... 2010 (average rate of 7.9 percent). In April 2005, $137 million of the Company's public debt matured and was paid. The Company's next significant debt maturity is not until 2007. Cash and Marketable Securities The aggregate market value of the Company's short-term and long-term investments in debt...

  • Page 48
    ...of the grant using a lattice-based option valuation model. Prior to 2005, the Company used the Black-Scholes option pricing model. This change was made in order to provide a better estimate of fair value, as the lattice-based model reflects the impact of stock price changes on exercise behavior, and...

  • Page 49
    ... Financial Statements Under the lattice-based model, expected volatilities are based on a term structure of implied volatilities from traded options on the Company's stock and historical volatility of the Company's stock. The Company uses historical data to estimate option exercise and employee...

  • Page 50
    ...The weighted average common shares for the diluted earnings per share calculation includes the incremental effect related to outstanding options and stock appreciation rights (SARS) whose market price is in excess of the grant price. Shares potentially issuable under convertible securities have been...

  • Page 51
    ... 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United...

  • Page 52
    ... Reporting" section in the Significant Accounting Policies, for interim (In thousands, except per share data) accounting purposes, TruGreen ChemLawn and other business segments of the Company incur pre-season advertising costs. In addition, TruGreen ChemLawn incurs costs related to annual repairs...

  • Page 53
    ... by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual. The Company has also filed, as exhibits to its Annual Report on Form 10-K for the year ended December 31, 2005, the certifications of its Chief Executive Officer and Chief Financial Officer required by Section 302 of the...

  • Page 54
    ... J. Cromie Katrina L. Helmkamp Chairman and Chief Executive Officer Ernest J. Mrozek Group President and Chief Executive Officer American Home Shield Mitchell T. Engel President, Terminix International Michael M. Isakson President and Chief Financial Officer Steve C. Preston Chief Marketing...

  • Page 55
    ... of Management and International Business Georgia State University Atlanta, Georgia Chairman and Chief Executive Officer McLennan Company Park Ridge, Illinois President and Chief Executive Officer Park Nicollet Health Services Minneapolis, Minnesota P. 5 3 SERVICEMASTER 2005 ANNUAL REPORT

  • Page 56
    ... Lacey Road Suite 600 Downers Grove, Illinois 60515 630-663-2000 Fax: 630-663-2001 The ServiceMaster Company 901-820-8400 American Mechanical Services Memphis, Tennessee Carroll, Iowa Santa Rosa, California LaGrange, Georgia Independent Auditors: 301-206-5070 American Home Shield 901-537-8000...

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    T H E S E R V I C E M A S T E R C O M PA N Y 3250 LACEY ROAD, SUITE 600 DOWNERS GROVE, ILLINOIS 60515 W W W. S V M . C O M