American Home Shield 2005 Annual Report Download - page 18

SERVICEMASTER 2005 ANNUAL REPORT P.16
2005 Compared with 2004
Revenue from continuing operations for 2005 was $3.2
billion, a six percent increase over 2004. Most of the
revenue growth was organic, with every business segment
achieving increases over 2004 levels.
The Company reported income from continuing operations
in 2005 of $181 million and income from businesses held
pending sale and discontinued operations of $18 million.
Total net income was $199 million in 2005 compared with
$331 million in 2004. The 2004 total included a $159 million
nonrecurring reduction in the tax provision and correspon-
ding increase in net income resulting from the agreement
with the IRS. Diluted earnings per share were $.67 in 2005
compared with $1.11 in 2004.
Diluted earnings per share from continuing operations were
$.61 in 2005 compared with $1.06 in 2004. As more fully
discussed below, the diluted earnings per share from
continuing operations for 2004 include a $.49 per share
($150 million) non-cash reduction in the tax provision
resulting from the Company’s agreement with the IRS.
Operating income for 2005 increased five percent to $340
million, compared with $324 million in 2004. The increase
in operating income primarily reflects solid profit growth at
Terminix supported by improved labor and material cost
efficiencies, improved profitability in the TruGreen
LandCare operations, and reduced safety-related costs
throughout the enterprise. These factors were offset in part
by higher fuel costs, increased 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 facility, as
well as the first time inclusion of approximately $3 million of
seasonal operating losses in the Canadian operations
acquired by TruGreen ChemLawn in April 2004.
As previously disclosed, the Company has experienced both
positive and negative trending in some of its key factor costs.
The Company’s large fleet continues to be negatively
impacted by significant increases in oil prices, which have
also adversely impacted fertilizer costs at TruGreen
ChemLawn. Although the Company hedges approximately
two-thirds of its estimated annual fuel usage, even net of the
hedges, fuel costs of continuing operations increased
approximately $13 million in 2005. Oil prices remain high,
and the Company currently estimates that its continuing
operations will absorb approximately $.02 per share of
incremental fuel costs in 2006. As previously discussed,
GPS and routing and scheduling technologies that the
Company has been implementing will tighten routes and
reduce drive time and fuel consumption. Health care costs
continue to experience strong inflationary pressures, and this
is expected to continue. The Company will also be making
an additional investment in employee health care benefits of
approximately $.01 per share in 2006, as part of its efforts to
further enhance its position as an employer of choice.
On the positive side, the Company continues to experience
very favorable results from its efforts to reduce safety-related
costs, which include workers compensation, auto and
general liability claims. In 2005, the Company achieved a
four percent reduction in vehicle collisions and a double
digit decline in lost employee work day cases. Total costs
from continuing operations, including the income state-
ment effects of favorable trending of prior year claims, were
down almost $10 million for the year. The Company has set
a goal of $12 to $15 million of additional savings from
continuing operations over the next two to three years.
Tax Agreement
In January 2005, the Company reached a comprehensive
agreement with the Internal Revenue Service (IRS) regarding
its examination of the Company’s federal income taxes
through the year 2002. As a result of this agreement, the
Company recorded in its 2004 financial statements certain
deferred tax assets which had previously not been recorded
due to uncertainties associated with the complexity of the
matters under review and the extended period of time effec-
tively covered by the examination. This resulted in a non-
cash reduction in the Company’s 2004 income tax
provision, thereby increasing 2004 consolidated net income
by approximately $159 million ($150 million, or $.49 per
diluted share, related to continuing operations and $9 million,
or $.03 per diluted share, related to businesses held pending
sale and discontinued operations). Related to the IRS
agreement, the Company realized tax savings of $25 million
in 2004, made tax payments in early 2005 totaling $131
million and realized a $45 million reduction in estimated tax
payments in the third and fourth quarters of 2005.
Additionally, this agreement resulted in a deferred tax annuity
totaling $57 million that will be realized through 2016.
Operating and Non-Operating Expenses
Cost of services rendered and products sold increased five
percent compared to the prior year and decreased as a
percentage of revenue to 62.1 percent in 2005 from 62.6
percent in 2004. This decrease reflects improved labor and
materials management at TruGreen LandCare and
improvements in safety-related costs throughout the enter-
prise. Selling and administrative expenses increased eight
percent and increased as a percentage of revenue to 27.2
percent from 26.7 percent in 2004. The increase in selling
and administrative expenses primarily reflects investments
to increase market penetration and improve customer
retention and other strategic initiatives.
Management Discussion and Analysis of Financial Condition and Results of Operations