American Home Shield 2005 Annual Report Download - page 22

SERVICEMASTER 2005 ANNUAL REPORT P.20
Businesses Held Pending Sale and Discontinued Operations
The Company intends to sell its American Residential
Services (ARS) and American Mechanical Services (AMS)
companies so it can concentrate resources on its main
growth businesses. The Company has retained an invest-
ment 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 were previously disclosed
as the Company’s ARS/AMS segment. Because the
Company intends to sell these companies, their operating
results are reported within the financial statement caption
“businesses held pending sale and discontinued operations”
for all periods. Revenues from the combined ARS and AMS
businesses increased 11 percent in 2005. Operating
income net of taxes increased by approximately $6 million
in 2005, as sharp improvements in volume and mix of
replacement sales and more favorable weather conditions
offset lower profits from commercial installation projects.
Net income from previously discontinued operations
totaled $5 million in 2005, primarily reflecting the favorable
conclusion of certain obligations related to international
pest control businesses sold in prior years.
In 2004, as a result of the comprehensive IRS agreement
discussed previously, the Company recognized a non-
cash reduction in the tax provision related to discontinued
operations, thereby increasing net income reported under
that caption by $9 million.
Included in the 2003 loss of businesses held pending sale
and discontinued operations was an impairment charge
($292 million pre-tax, $227 million after-tax) associated
with the goodwill and intangible assets of the ARS and
AMS operations.
The components of income (loss), net of income taxes of
businesses held pending sale and discontinued operations
for 2005, 2004 and 2003 are as follows:
(In thousands) 2005 2004 2003
ARS/AMS operating income $ 11,695 $ 5,534 $ 10,023
Headquarter support and
insurance costs previously
allocated to ARS/AMS 10,294 6,714 4,879
ARS/AMS operating income
before previously allocated
expenses 21,989 12,248 14,902
Provision for income taxes 8,687 4,814 7,467
ARS/AMS operating income,
net of tax 13,302 7,434 7,435
Reduction in tax provision
related to IRS agreement —9,465 —
Impairment charge, net of tax —— (226,955)
Other discontinued operations,
net of tax 5,062 (2,295) (2,712)
Income (loss) from businesses
held pending sale and
discontinued operations $ 18,364 $ 14,604 $ (222,232)
2004 Compared with 2003
Revenue from continuing operations for 2004 was $3.1
billion, a six percent increase over 2003, with approximately
five percent of the growth derived from internal sources.
The Company reported income from continuing operations
in 2004 of $317 million and income from businesses held
pending sale and discontinued operations of $15 million.
Total net income of $331 million in 2004 compared with a
net loss of ($225) million in 2003. Diluted earnings per share
were $1.11 in 2004 and a loss of ($.76) in 2003.
Diluted earnings per share from continuing operations were
$1.06 in 2004 compared with a loss of ($.01) in 2003. As
more fully discussed below, the diluted earnings per share
from continuing operations for 2004 included a $.49 per
share ($150 million) non–cash reduction in the tax provision
and the 2003 amount included a non-cash goodwill and
intangible assets impairment charge of $0.53 per diluted
share ($189 million pre-tax, $156 million after-tax).
Operating income for 2004 was $324 million, compared
with $111 million in 2003. The 2003 results include the
$189 million non-cash impairment charge.
The increase in operating income in 2004 reflects the
impact of the 2003 impairment charge, strong profit growth
at American Home Shield and TruGreen ChemLawn, a
reduced level of operating loss in TruGreen LandCare and
improved profits at ServiceMaster Clean and Terminix, as
well as a $4 million gain that TruGreen ChemLawn realized
in the third quarter of 2004 from the sale of a support facility.
2003 Impairment Charge
In the third quarter of 2003, the Company recorded a non-
cash impairment charge associated with the goodwill and
intangible assets at its TruGreen LandCare business unit.
This charge, which is included in the results of continuing
operations for 2003, totaled $189 million pre-tax, $156
million after-tax, and $0.53 per diluted share. Also in the
third quarter of 2003, the Company recorded a non-cash
impairment charge associated with the goodwill and
intangible assets at its ARS and AMS operations. The
Company is currently holding these operations for sale,
accordingly, the financial results for the ARS and AMS
operations, as well as the impairment charge related to
these operations ($292 million pre-tax, $227 million after-tax),
have been reclassified to “businesses held pending sale
and discontinued operations” for all periods.
Management Discussion and Analysis of Financial Condition and Results of Operations