American Home Shield 2005 Annual Report Download - page 20

SERVICEMASTER 2005 ANNUAL REPORT P.18
Operating income totaled $172 million in 2005 compared
to $176 million in 2004. The operating income comparison
was adversely impacted by the $4 million pre-tax gain in
2004 from the sale of a support facility. Incremental profits
from increased revenues and reduced safety-related costs
were offset primarily by the impacts of higher fuel and fertilizer
costs and the first time absorption of approximately $3
million of first quarter seasonal losses in the Canadian
operations which were acquired in April 2004.
Capital employed in the TruGreen ChemLawn segment
increased two percent, primarily reflecting the impact of
acquisitions.
TruGreen LandCare Segment
The TruGreen LandCare segment, which includes land-
scape maintenance services, reported a three percent
increase in revenue to $453 million from $439 million in
2004 and operating income of $4 million compared to an
operating loss of ($4) million in 2004.
Base contract maintenance revenue increased two per-
cent despite a modest decline in customer retention.
Improving customer retention is a top operational priority.
Management believes it also represents a significant
and achievable opportunity, with current rates at least 10
full percentage points below the Company’s long term
expectations. The Company believes that improvements
in retention will be driven by improved procedures related
to customer communications, landscape inspections, and
problem resolution, combined with more selective targeting
of sales prospects.
Enhancement revenue (e.g., add-on services such as
seasonal flower plantings, mulching, etc.), which represents
approximately one-third of LandCare’s revenue, grew six
percent and was favorably impacted by more consistent
focus throughout the country, as well as hurricane-related
work. The Company believes the investments that it has
made in this business, including the development of a
systematically stronger and larger sales organization that is
better qualified, trained and equipped, will position it well to
realize the substantial growth potential in this business.
Operating results improved by almost $9 million. The
increase in profit was due to improved labor management
techniques, including quicker implementation of reductions
in seasonal workforce in the fourth quarter, improvements
in safety-related costs and the impact of approximately
$1.5 million of branch shut down costs incurred in 2004.
These profit gains were offset in part by higher fuel prices.
Capital employed in the TruGreen LandCare segment
increased one percent.
Terminix Segment
The Terminix segment, which includes termite and pest
control services, achieved a milestone in 2005 by surpassing
$1 billion in revenue. Revenue increased six percent to $1.1
billion from $997 million in 2004 while operating income
increased 10 percent to $146 million compared to $133
million in 2004.
Strong growth in revenue from initial termite applications
(“termite completions”) resulted from a solid increase in
renewable unit sales. The unit growth was achieved
despite a relatively weak termite swarm season, and
reflected benefits derived from investments to increase
market penetration, which included 25 branch splits, and
the expansion of the sales force in under-penetrated terri-
tories. The mix of termite completion sales moved from
approximately 45 percent bait and 55 percent liquid at the
end of 2004 to approximately 30 percent bait and 70
percent liquid at the end of 2005. A relatively modest
additional shift is expected to occur in 2006. The Company
was encouraged by its ability to maintain pricing of both
liquid and bait services, despite the introduction in 2005 of
a new, lower cost liquid perimeter treatment technique.
Solid growth in termite renewal revenues reflected the
impact of improved pricing, offset in part by a slight decline
in customer retention. Solid growth in pest control revenue
primarily reflected the impact 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 over the prior bait offering. Labor efficiencies
were also realized in the liquid option as a result of the new
“perimeter treatment” technique. These efficiencies, along
with solid revenue growth, enabled operating income to
grow 10 percent, despite higher factor costs and the
effects of adjustments to prior year damage claim reserves.
In 2005, Terminix recorded a $10 million unfavorable
correction in estimating prior years’ termite damage claim
reserves. New termite damage claims continue to trend
favorably. In addition, as previously disclosed, Terminix
recorded an unrelated $8 million favorable but non recurring
adjustment in 2004.
Capital employed in the Terminix segment increased three
percent, primarily reflecting the impact of acquisitions.
Management Discussion and Analysis of Financial Condition and Results of Operations