American Home Shield 2005 Annual Report Download - page 19

P. 1 7 SERVICEMASTER 2005 ANNUAL REPORT
Net interest expense decreased $8 million from 2004,
primarily reflecting lower interest expense resulting from
the repayment of fixed rate debt in April 2005, as well as
higher investment income experienced on the American
Home Shield investment portfolio. It is important to note
that investment returns are an integral 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 effective tax rate for continuing operations was a 39
percent tax expense in 2005 and a 17 percent tax benefit in
2004. The comparison of the effective tax rate is impacted
by the Company’s agreement with the IRS which resulted
in a $150 million non-cash reduction in the 2004 income
tax provision for continuing operations. The Company
expects that its effective tax rate for 2006 will approximate
39 percent.
Segment Review (2005 vs 2004)
The segment reviews should be read in conjunction with
the required footnote disclosures presented in the Notes to
the Consolidated Financial Statements. This disclosure
provides a reconciliation of segment operating income to
income from continuing operations before income taxes,
with net non-operating expenses as the only reconciling
item. The Company’s segment reviews include discussions
of capital employed, which is a non-U.S. GAAP measure
that is defined as the segment’s total assets less liabilities,
exclusive of debt balances. The Company believes this
information is useful to investors in helping them compute
return on capital measures and therefore better understand
the performance of the Company’s segments. The Notes
to the Consolidated Financial Statements also include a
reconciliation of segment capital employed to its most
comparable U.S. GAAP measure.
Key Performance Indicators
As of December 31, 2005 2004
TruGreen ChemLawn –
Growth in Full Program Contracts 1% 8%
Customer Retention Rate 61.2% 62.2%
Terminix –
Growth in Pest Control Customers 3% 7%
Pest Control Customer Retention Rate 77.2% 78.1%
Growth in Termite Customers 0% 0%
Termite Customer Retention Rate 87.2% 87.9%
American Home Shield –
Growth in Warranty Contracts 6% 5%
Customer Retention Rate 57.4% 55.2%
TruGreen ChemLawn Segment
The TruGreen ChemLawn segment, which includes lawn
care services, reported revenue in excess of $1 billion for
the first time in its history. A four percent increase in revenue
to $1.02 billion from $981 million in 2004, was achieved in
spite of continued declines in telemarketing sales and
challenging weather conditions throughout much of the
country. Summer drought conditions dominated several
key regions, adversely impacting both production and
customer retention. Although weather can periodically
impact its business in the short-term, the Company
believes that its own actions over the medium and long-
term will have a much greater impact on the business.
The four percent growth in revenue was supported by a
two percent improvement in price realization, growth in
supplemental residential (e.g., seeding and aeration) and
commercial services, as well as a one percent increase in
customer counts. Management is encouraged by
TruGreen ChemLawn’s efforts to improve price realization.
This improvement resulted from disciplined efforts to
reduce discounting on new sales and strategically targeted
price increases to the existing customer base. Unit sales
increased approximately one percent from last year’s levels,
as the Company continues to successfully diversify its
sales channels through increased emphasis on neighbor-
hood selling, direct mail and other efforts. Expansion of
these new sales channels have helped offset continued
declines in telemarketing sales, which have been adversely
impacted by “do-not-call” restrictions. Sales from neigh-
borhood programs more than tripled to almost 300,000
customers in 2005, while sales from direct mail efforts
increased 14 percent. In 2006, the Company expects that
the proportion of non-telemarketing sales to total sales will
continue to grow. The shift away from telemarketing sales
impacts the relative timing of customer sales. As the
Company continues to develop these new channels, the
timing of customer sales will be more concentrated and
trend more heavily toward the early part of the second
quarter, versus the historical first quarter period where
telemarketing was more heavily concentrated.
TruGreen ChemLawn’s total customer retention rate
decreased 100 basis points in 2005, reflecting a sharp
drop in the Canadian operations and a nominal decrease in
the U.S. The Company believes the circumstances in
Canada are unique, and included the combination of five
acquired brands into one at the beginning of this year, as
well as tightened application regulations in certain markets.
Despite the decrease in 2005, overall retention rates have
increased 350 basis points over the last four years taken as
a whole, and the Company is targeting, and anticipating,
meaningful additional improvement in the future. To capture
that opportunity, the Company has taken comprehensive
steps to improve customer communication and problem
resolution procedures, expand quality assurance processes,
and provide focused incentives at all levels.
Management Discussion and Analysis of Financial Condition and Results of Operations