American Home Shield 2007 Annual Report Download - page 24

In addition to the charges noted above, the Company expects to incur certain other cash expenditures throughout the consolidation
process. These additional expenditures include training of replacement employees, the costs related to headcount overlap during a
transitional training period, and temporary employee staffing, should the need arise. While the estimate of these costs is not yet
final, the Company currently expects that they will total approximately $3 million pretax, with virtually all occurring during the
first ten months of 2007. In connection with the consolidation, the Company expects to realize reductions in travel and rent costs of
approximately $3 million per year, with full realization of these annual savings beginning in 2008. Additionally, savings are
expected to be realized from state and local tax incentives. These incentives are expected to be realized over a period of 8 to 20
years, depending on their type, the net present value of which is comparable to the costs of the consolidation.
Operating and Non-Operating Expenses
Cost of services rendered and products sold increased seven percent compared to the prior year and increased as a percentage of
revenue to 62.6 percent in 2006 from 62.1 percent in 2005. This increase primarily reflects the impact of fuel and other factor cost
increases throughout the enterprise. Selling and administrative expenses increased five percent and decreased as a percentage of
revenue to 27.0 percent from 27.2 percent in 2005. The decrease in selling and administrative expenses as a percentage of revenue
primarily reflects lower functional support costs and improved sales labor efficiency at Terminix.
Interest income increased $6 million reflecting both higher investment income resulting from an increase in the market value of
investments within an employee deferred compensation trust (for which there is a corresponding and offsetting increase in
compensation expense within operating income), as well as higher investment income experienced on 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. Interest expense increased $4 million due to higher debt balances and interest rates.
The effective tax rate for continuing operations was 34 percent in 2006 and 39 percent in 2005. The 2006 effective tax rate is
impacted by the tax benefits related to the restructuring charges, which include a non-recurring credit of approximately $6 million
of non-recurring net operating loss carryforward benefits which became realizable to the Company as a result of its decision to
consolidate its corporate headquarters to Memphis, as well as an approximately $7 million reduction in the 2006 tax expense
resulting from the resolution of state tax items related to a prior non-recurring transaction. The Company expects that its effective
tax rate for 2007 will approximate 39 percent.
Segment Review (2006 vs 2005)
The segment reviews should be read in conjunction with the required footnote disclosures presented in the Notes to the
Consolidated Financial Statements. This disclosure provides a reconciliation of segment operating income to income from
continuing operations before income taxes, with net non-operating expenses as the only reconciling item. The Company's segment
reviews include discussions of capital employed, which is a non-U.S. GAAP measure that is defined as the segment's total assets
less liabilities, exclusive of debt balances. The Company believes this information is useful to investors in helping them compute
return on capital measures and therefore better understand the performance of the Company's segments. The Notes to the
Consolidated Financial Statements also include a reconciliation of segment capital employed to its most comparable U.S. GAAP
measure.
Key Performance Indicators
As of December 31, 2006 2005
TruGreen LawnCare -
Growth in Full Program Contracts 0% 1%
Customer Retention Rate 62.9% 61.2%
Terminix -
Growth in Pest Control Customers 9% (a) 3%
Pest Control Customer Retention Rate 79.5% (a) 77.2%
Growth in Termite Customers 0% 0%
Termite Customer Retention Rate 87.5% 87.2%
American Home Shield -
Growth in Warranty Contracts 2% 6%
Customer Retention Rate 58.2% 57.4%
(a) Pest control customer count growth, excluding the impact of the Safeguard Pest Control acquisition completed at the beginning
of the fourth quarter of 2006, was 5%. The customer retention rate improvement in 2006, excluding the impact of the Safeguard
acquisition added to the customer base, was approximately 170 basis points.
TruGreen LawnCare Segment
The TruGreen LawnCare segment, which includes lawn care services, reported a three percent increase in revenue to $1.05 billion
from $1.02 billion in 2005. Operating income totaled $158 million in 2006 compared to $172 million in 2005.
The growth in revenue reflects increased price realization during the year, as well as increases in supplemental and commercial
services. At year end, customer counts were comparable to 2005 levels, as strong improvements in retention and the impacts of
acquisitions offset a decline in unit sales. Customer retention for the rolling twelve months ended December 31, 2006 increased 170
basis points, a sharp improvement from the declines that existed in the first half of the year. The Company expanded its efforts to
improve customer satisfaction and retention. These efforts included the initiation of a program of lawn quality audits (LQA's),