American Home Shield 2005 Annual Report Download - page 24

SERVICEMASTER 2005 ANNUAL REPORT P.22
TruGreen LandCare Segment
The TruGreen LandCare segment reported revenue of
$439 million in 2004, comparable to 2003 levels. The seg-
ment reported an operating loss of ($4) million, compared
with an operating loss of ($196) million in 2003. During the
third quarter of 2003, the Company recorded a non-cash
impairment charge of $189 million pre-tax, relating to
goodwill and intangible assets of its TruGreen LandCare
operations. For a further discussion of the impairment
charge see the “Goodwill and Intangible Assets” section in
the Notes to Consolidated Financial Statements. The
increase in segment operating income reflects the impact
of the 2003 impairment charge as well as a reduced level of
operating losses experienced in 2004.
Revenue was consistent with 2003 levels, reflecting a
stronger volume of enhancement sales (e.g., add-on services
such as seasonal flower plantings, mulching, etc.) and a
comparable level of base contract maintenance revenue,
offset by the effects of branch consolidations and closures
that were completed in late 2003 and early 2004. Excluding
the impact of branch consolidations, revenue increased
two percent. The growth in enhancement revenue reflects
the impact of focused sales efforts and an improving economy.
The level of operating loss improved, reflecting the favor-
able grow-over effects of the 2003 impairment charge, an
increased level of enhancement sales, and an improve-
ment in materials expense. These items were offset in part
by a weather-related reduction in high-margin snow
removal revenue and higher variable incentive compensation
and fuel costs.
Capital employed decreased 23 percent, reflecting
improved working capital management supported by a
program to reduce underutilized equipment.
Terminix Segment
The Terminix segment reported a five percent increase
in revenue to $997 million from $945 million in 2003 and
operating income of $133 million compared to $131 million,
a one percent increase.
Entering 2004, Terminix was making significant changes to
its operating model with the implementation of a dual service
offering for termites and the migration in pest control from
monthly to quarterly service frequency. With the improved
efficacy of liquid termite treatments, the Company began
providing consumers with the choice of receiving termite
services through baiting systems or liquid treatments. As
previously disclosed, with this enhanced termite offering,
the Company anticipated and did experience a shift in the
mix of its termite customer base from bait to liquid. While
the estimated lifetime values of these two types of offerings
are comparable, the earnings cycles are different with liquid
customers having less first year revenues and profits but
more profitability in subsequent years. By offering con-
sumers a choice in treatments, Terminix was able to
increase the average price realized for each of the two
treatment alternatives, thus helping to offset the adverse,
short-term revenue and profit impacts of the mix shift. The
mix of new termite sales (“termite completions”), which
represent about a quarter of Terminix’s total revenue,
moved from approximately 80 percent bait and 20 percent
liquid at the end of 2003 to approximately 45 percent bait
and 55 percent liquid at the end of 2004. As a result, overall
termite completion revenue increased only modestly in
2004, even though the Company achieved solid double-
digit unit growth in sales and improved price realization for
each treatment alternative viewed discreetly.
Termite renewal revenues experienced strong growth,
supported by improved pricing. Pest control revenue
increased modestly as high single-digit growth in customer
counts, attributable in part to a 100 basis point improvement
in retention, was partially offset by the unfavorable impact
to revenues from the increased number of customers
receiving quarterly service visits versus monthly service visits.
The Company believes this shift has had a positive impact
on improving customer satisfaction and has already caused
and should continue to lead to improved labor efficiencies.
Operating income grew modestly as the projected termite
mix shift did have a negative effect on first year gross profit.
Operating income was also adversely impacted by higher
insurance, fuel, and bad debt costs, as well as the costs
associated with a procedural change in the branches to
ensure that termite renewal reinspections occur before the
actual renewal payments are due. In 2004, the Company
recorded a final adjustment to reflect positive trending in
damage claim costs associated with the Sears termite
customer base acquired several years ago. This resulted in
an $8 million reduction in expense in 2004, compared with
a $13 million reduction in 2003. In the fourth quarter of
2003, Terminix corrected its method of recognizing renewal
revenue from certain customers who have prepaid. A
cumulative adjustment was recorded reducing fourth quarter
2003 revenue by $9 million and operating income by
$7 million.
Capital employed in the Terminix segment increased six
percent, primarily reflecting acquisitions.
Management Discussion and Analysis of Financial Condition and Results of Operations