American Home Shield 2007 Annual Report Download - page 30

Operating income from discontinued operations in 2005 includes approximately $11 million related to the favorable conclusion of
certain obligations related to international pest control businesses sold in prior years.
The components of income (loss), net of income taxes of discontinued operations for 2006 and 2005 are as follows:
(In thousands) 2006 2005
Operating income $ 14,314 $ 30,355
Impairment charge (42,000) —
Pretax income (loss) (27,686) 30,355
Provision (benefit) for income taxes (11,312) 11,991
(Loss) on sale, net of tax (495) —
Income (loss) from discontinued operations $ (16,869) $ 18,364
2005 Compared with 2004
Revenue from continuing operations for 2005 was $3.2 billion, a six percent increase over 2004. Most of the revenue growth was
organic, with every business segment achieving increases over 2004 levels.
The Company reported income from continuing operations in 2005 of $181 million and income from businesses held pending sale
and discontinued operations of $18 million. Total net income was $199 million in 2005 compared with $331 million in 2004. The
2004 total included a $159 million nonrecurring reduction in the tax provision and corresponding increase in net income resulting
from the agreement with the IRS. Diluted earnings per share were $.67 in 2005 compared with $1.11 in 2004.
Diluted earnings per share from continuing operations were $.61 in 2005 compared with $1.06 in 2004. As more fully discussed
below, the diluted earnings per share from continuing operations for 2004 include a $.49 per share ($150 million) non-cash
reduction in the tax provision resulting from the Company's agreement with the IRS.
Operating income for 2005 increased five percent to $340 million, compared with $324 million in 2004. The increase in operating
income primarily reflects solid profit growth at Terminix supported by improved labor and material cost efficiencies, improved
profitability in the TruGreen LandCare operations, and reduced safety-related costs throughout the enterprise. These factors were
offset in part by higher fuel costs, increased claim costs at American Home Shield due to hotter weather conditions, a $10 million
unfavorable adjustment recorded by Terminix to correct the estimation of prior year damage claim reserves, a $4 million gain that
TruGreen LawnCare realized in the third quarter of 2004 from the sale of a support facility, (no similar gain was realized in 2005),
as well as the first time inclusion of approximately $3 million of seasonal operating losses in the Canadian operations acquired by
TruGreen LawnCare in April 2004.
The Company has experienced both positive and negative trending in some of its key factor costs. The Company's large fleet was
negatively impacted by significant increases in oil prices, which also adversely impacted fertilizer costs at TruGreen LawnCare.
Although the Company hedges approximately two-thirds of its estimated annual fuel usage, even net of the hedges, fuel costs of
continuing operations increased approximately $13 million in 2005. Additionally, health care costs continued to experience strong
inflationary pressures during 2005.
On the positive side, the Company experienced very favorable results from its efforts to reduce safety-related costs, which include
workers compensation, auto and general liability claims. In 2005, the Company achieved a four percent reduction in vehicle
collisions and a double digit decline in lost employee work day cases. Total costs from continuing operations, including the income
statement effects of favorable trending of prior year claims, were down almost $10 million for the year.
Tax Agreement
In January 2005, the Company reached a comprehensive agreement with the Internal Revenue Service (IRS) regarding its
examination of the Company's federal income taxes through the year 2002. As a result of this agreement, the Company recorded in
its 2004 financial statements certain deferred tax assets which had previously not been recorded due to uncertainties associated with
the complexity of the matters under review and the extended period of time effectively covered by the examination. This resulted in
a non-cash reduction in the Company's 2004 income tax provision, thereby increasing 2004 consolidated net income by
approximately $159 million ($150 million, or $.49 per diluted share, related to continuing operations and $9 million, or $.03 per
diluted share, related to businesses held pending sale and discontinued operations). Related to the IRS agreement, the Company
realized tax savings of $25 million in 2004, made tax payments in early 2005 totaling $131 million and realized a $45 million
reduction in estimated tax payments in the third and fourth quarters of 2005. Additionally, this agreement resulted in a deferred tax
annuity totaling $57 million that will be realized through 2016.
Operating and Non-Operating Expenses
Cost of services rendered and products sold increased five percent compared to the prior year and decreased as a percentage of
revenue to 62.1 percent in 2005 from 62.6 percent in 2004. This decrease reflects improved labor and materials management at
TruGreen LandCare and improvements in safety-related costs throughout the enterprise. Selling and administrative expenses
increased eight percent and increased as a percentage of revenue to 27.2 percent in 2005 from 26.7 percent in 2004. The increase in
selling and administrative expenses primarily reflects investments to increase market penetration and improve customer retention
and other strategic initiatives.