American Home Shield 2005 Annual Report Download - page 21

P. 1 9 SERVICEMASTER 2005 ANNUAL REPORT
American Home Shield Segment
The American Home Shield segment, which provides
home warranties to consumers that cover HVAC, plumbing
and other systems and appliances, reported an eight
percent increase in revenue to $529 million from $487
million in 2004, and operating income of $71 million com-
pared to $72 million in 2004, a decrease of one percent.
New warranty contract sales, which are reported as earned
revenue over 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 retention reflects a
favorable mix in customers renewing as well as a reduced
level of non-renewal contracts due to mortgage refinancings.
American Home Shield’s second largest channel, real
estate sales, showed some improvement in the second half
of the year, but were adversely impacted throughout the
year by weaker home re-sales. Consumer sales, American
Home Shield’s fastest growing channel, experienced
strong double-digit growth driven by expanded and more
successful targeted direct mail programs.
Operating income declined modestly as incremental profits
from increased revenue levels were more than offset by
higher claim costs associated with summer weather that
was much hotter than the generally mild conditions that
prevailed in 2004. This led to a three percent increase in the
rate of service requests, as well as a higher cost per claim,
which had a combined adverse impact on operating
income of approximately $15 million. In addition, the
Company made planned investments in initiatives to
increase market penetration and further improve customer
retention, both of which should enhance long-term growth.
The operating income comparison to last year was posi-
tively impacted by a $5.5 million cumulative negative
adjustment to deferred revenue and operating income that
was reported in the third quarter of 2004.
Capital employed increased 24 percent primarily reflecting
a higher level of cash and marketable securities due to
growth in the business and improved market performance.
Capital employed at American Home Shield which totaled
$208 million and $168 million at December 31, 2005 and
2004, respectively, includes approximately $283 million
and $258 million of cash, short-term and long-term securities
at those dates. The investment income and realized
gains/losses on these assets are reported as non-operating
income/expense.
Other Operations Segment
The Other Operations segment includes the Company’s
ServiceMaster Clean and Merry Maids operations as well
as its headquarters functions. Revenue in this segment
increased eight percent to $177 million in 2005 compared
with $164 million in 2004. On a combined basis, the
ServiceMaster Clean and Merry Maids franchise opera-
tions reported revenue growth of eight percent and a
strong increase in operating income. ServiceMaster Clean
reported continued strong growth in disaster restoration
services along with improved momentum in commercial
cleaning. Merry Maids continued to experience strong
internal revenue growth in its branch operations, along with
improving branch profit margins. The overall segment
operating loss for 2005 was ($53) million compared with
($52) million in 2004. Favorable trending of prior year insurance
claims, as well as a strong increase in profits from the
franchise businesses, were offset by increases in costs of
certain strategic investments.
Total initial and recurring franchise fees represented 3.4
percent and 3.3 percent of consolidated revenue in 2005
and 2004, respectively and direct franchise operating
expenses were 2.1 percent in both 2005 and 2004. Total
franchise fee profits comprised 10.5 percent and 10.3 per-
cent of consolidated operating income before headquarter
overhead in 2005 and 2004, respectively. The portion of
total franchise fee profits related to initial fees received from
the sales of franchises was not material to the Company’s
consolidated financial statements for all periods.
Capital employed in the Other Operations segment
decreased reflecting lower cash balances as the Company
used existing cash resources as well as cash generated
from operations during 2005 to fund the tax payments
related to the IRS agreement and the repayment of $137
million of public debt that matured in April 2005.
Management Discussion and Analysis of Financial Condition and Results of Operations