American Home Shield 2006 Annual Report Download - page 27

securities in 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 comparison of the effective tax rate is impacted by the 2004 reduction in the tax provision related to the Company's agreement
with the IRS, as well as the impairment charge recorded in 2003. The effective tax rate for continuing operations reflects a benefit
of 17 percent in 2004 and a 105 percent tax expense in 2003. As previously discussed, the agreement with the IRS resulted in a
$150 million non-cash reduction in the 2004 income tax provision for continuing operations. The impairment charge reported in
continuing operations for 2003 included a portion of goodwill that was not deductible for tax purposes, resulting in a tax benefit of
$33 million, or only approximately 17 percent of the pre-tax impairment charge of $189 million.
Segment Review (2004 vs. 2003)
Key Performance Indicators
As of December 31, 2004 2003
TruGreen ChemLawn -
Growth in Full Program Contracts 8% 4%
Customer Retention Rate 62.2% 59.5%
Terminix -
Growth in Pest Control Customers 7% 2%
Pest Control Customer Retention Rate 78.1% 77.1%
Growth in Termite Customers 0% -2%
Termite Customer Retention Rate 87.9% 88.1%
American Home Shield -
Growth in Warranty Contracts 5% 5%
Customer Retention Rate 55.2% 55.1%
TruGreen ChemLawn Segment
The TruGreen ChemLawn segment reported revenue of $981 million in 2004, eight percent above 2003. Operating income was
$176 million in 2004 compared to $162 million in 2003. Included in the 2004 results was a $4 million pre-tax gain from the sale of
a support facility.
The growth in revenue was supported by an eight percent increase in customer counts, with five percent of that growth from organic
sources and three percent from acquisitions. The organic customer count growth reflected continued significant improvement in
customer retention, partially offset by a modest decline in new sales. The customer retention improvement of 270 basis points in
2004 was geographically broad-based, resulting from programs implemented to improve customer communications and problem
resolution, initiatives to produce more visible results, focused incentive compensation structures at all levels, and more favorable
weather conditions. Since 2001, the retention rate has improved by 450 basis points, reflecting management's concerted focus on
customer satisfaction.
Management is encouraged with the progress TruGreen ChemLawn has made in diversifying its marketing model, further reducing
its reliance on telemarketing. Overall, new sales in 2004 were down less than two percent, reflecting a decline in telemarketing
sales as a result of new restrictions, including implementation of the National Do Not Call registry, offset by a substantial increase
in sales from new channels such as neighborhood sales efforts and direct mail. In April 2004, TruGreen ChemLawn acquired the
assets of Greenspace Services Limited ("Greenspace"), Canada's largest professional lawn care service company.
Operating income increased nine percent, with approximately three percent of the increase related to the $4 million gain realized
from the sale of a support facility in the third quarter. Operating income margins improved slightly, reflecting the impact of the
support facility gain, partially offset by increased fuel and chemical costs as well as increased variable incentive compensation
costs.
Capital employed increased two percent, reflecting acquisitions, offset in part by improved working capital management.
TruGreen LandCare Segment
The TruGreen LandCare segment reported revenue of $439 million in 2004, comparable to 2003 levels. The segment 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 favorable grow-over effects of the 2003 impairment charge, an