American Home Shield 2007 Annual Report Download - page 21

Item 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Results of Operations
Consolidated Review of 2006 and Outlook for 2007
ServiceMaster (the "Company") is encouraged by its strong finish to 2006. For the year, the Company achieved revenue and
earnings growth despite an unusual combination of challenges it faced during the year. These challenges included a very weak
termite swarm, a significant softening in home resales, rapid increases in fuel, health care and interest costs, and the impact on
American Home Shield's claims costs of new energy efficiency legislation. The Company overcame these challenges with steady
and significant gains in customer retention, continued sharp improvement in the development of prior year safety claims, and
savings from Project Accelerate and other cost control initiatives.
The Company is encouraged by improvement in certain key fundamentals of its businesses. Customer retention, a top priority
across the company, improved in every business unit. In 2006, the Company expanded its sales channels, with 600,000 customer
contracts coming from direct mail. The Company gained over 100,000 customers from leads generated from the Internet. American
Home Shield launched its new business partnership with Realogy, the world's largest real estate brokerage firm, which includes the
Coldwell Banker, Century 21 and ERA brands. In addition, the Company successfully divested American Residential Services and
American Mechanical Services, to concentrate its resources and management focus on a stronger portfolio of services.
On November 28, 2006, the Company announced that its Board of Directors has decided to explore strategic alternatives designed
to maximize value for shareholders. The Board has retained Morgan Stanley and Goldman Sachs as its financial advisors and Sidley
Austin as its legal advisor to facilitate the process. There can be no assurance that any particular alternative will be pursued or any
transaction will occur, or on what terms.
The Company's plan for 2007 focuses on four key areas:
(1) The Company's relationships with customers – The Company is taking action to decrease churn and increase customer retention.
TruGreen LawnCare will continue to rollout additional Lawn Quality Audits (LQA's) to increase customer satisfaction and
retention. The Company has already seen promising results from this new initiative. Not only is the Company reducing its reliance
on telemarketing, but it is significantly reshaping and repositioning its phone sales to focus on re-engaging both former and existing
customers.
(2) The Company's relationships with associates – The Company is taking action to improve the recruitment, training and retention
of its associates. TruGreen LandCare's TruPotential branch manager training program strives to ensure that the Company will have
a consistent level of skilled managers across its branches. American Home Shield's new Customer Service Center Application
equips its associates with the tools and information they need to serve their customers in a way which is both efficient and more
satisfying to the customer on the phone.
(3) Innovation – The Company is emphasizing a genuine service culture to delight its customers and build lasting relationships. The
Company believes that the LQA's at TruGreen LawnCare are a significant innovation in customer engagement. In addition, the
Company believes that Terminix's introduction of a new Inspection and Protection Plan is a cost-effective approach that will attract
a wide base of new customers, answering their needs in an innovative new way.
(4) Integration and leverage – The Company is redeploying its people and assets to create new opportunities and more effective
ways of doing business. To further utilize the talents of its senior management team, the Company created two Group President
positions. Katrina Helmkamp oversees the Company's branch businesses: TruGreen LawnCare, TruGreen LandCare, and Terminix.
Scott Cromie oversees the Company's franchise and virtual businesses: American Home Shield, ServiceMaster Clean, Merry Maids
and InStar. The first proof of the power of this integration is the Company's plan to pilot new shared facilities for TruGreen
LawnCare and Terminix pest control branches. The Company believes this concept will generate operational savings and the
opportunity to cross-sell services.
In 2007, the Company will stay focused on increasing the retention of its customers and its associates, to ensure that it can
consistently deliver a satisfying service experience. The Company will reinvest in the business, particularly in areas that will drive
sales and satisfaction. During the Company's off-season first quarter, incremental investments will be made in people and sales and
marketing programs, which the Company believes will contribute to stronger sales and profits later in the year. The Company
believes that improving momentum in key fundamentals of its businesses, combined with solid execution of its business plan,
should enable it to deliver mid to high single-digit revenue growth in 2007. The Company expects 2007 earnings per share, before
restructuring charges, to be in the range of $.67 to $.68. Based on the actions the Company is taking in 2007 and plans to take in the
future, the Company's target is to achieve high single-digit revenue growth, and earnings per share growth progressively increasing
to the mid-teen level by 2009, with cash from operations growing and continuing to substantially exceed net income.
2006 Compared with 2005
Revenue from continuing operations for 2006 was $3.4 billion, a six percent increase over 2005. Approximately four percent of the
increase in revenue resulted from acquisitions, primarily InStar Services Group (InStar), which was acquired at the end of February
2006.
The Company reported income from continuing operations in 2006 of $187 million and a loss from discontinued operations of
($17) million. Net income (i.e., from both continuing operations and discontinued operations) was $170 million in 2006 compared
with $199 million in 2005, and total diluted earnings per share were $.58 in 2006 compared with $.67 in 2005.