American Home Shield 2007 Annual Report Download - page 32

some market-based variability in the timing and amount of investment returns realized from year to year.
The effective tax rate for continuing operations was a 39 percent tax expense in 2005 and a 17 percent tax benefit in 2004. The
comparison of the effective tax rate is impacted by the Company's agreement with the IRS, which resulted in a $150 million non-
cash reduction in the 2004 income tax provision for continuing operations.
Segment Review (2005 vs 2004)
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, 2005 2004
TruGreen LawnCare -
Growth in Full Program Contracts 1% 8%
Customer Retention Rate 61.2% 62.2%
Terminix -
Growth in Pest Control Customers 3% 7%
Pest Control Customer Retention Rate 77.2% 78.1%
Growth in Termite Customers 0% 0%
Termite Customer Retention Rate 87.2% 87.9%
American Home Shield -
Growth in Warranty Contracts 6% 5%
Customer Retention Rate 57.4% 55.2%
TruGreen LawnCare Segment
The TruGreen LawnCare segment reported revenue for 2005 in excess of $1 billion for the first time in its history. A four percent
increase in revenue to $1.02 billion in 2005 from $981 million in 2004, was achieved in spite of continued declines in telemarketing
sales and challenging weather conditions throughout much of the country. Summer drought conditions dominated several key
regions, adversely impacting both production and customer retention.
The four percent growth in revenue was supported by a two percent improvement in price realization, growth in supplemental
residential services (e.g., seeding and aeration) and commercial services, as well as a one percent increase in customer counts. The
improvement in pricing resulted from disciplined efforts to reduce discounting on new sales and strategically targeted price
increases to the existing customer base. Unit sales increased approximately one percent from 2004 levels, as the Company
continues to successfully diversify its sales channels through increased emphasis on neighborhood selling, direct mail and other
efforts. Expansion of these new sales channels have helped offset continued declines in telemarketing sales, which have been
adversely impacted by "do-not-call" restrictions. Sales from neighborhood programs more than tripled to almost 300,000 customers
in 2005, while sales from direct mail efforts increased 14 percent. The shift away from telemarketing sales impacted the relative
timing of customer sales.
TruGreen LawnCare's total customer retention rate decreased 100 basis points in 2005, reflecting a sharp drop in the Canadian
operations and a nominal decrease in the U.S. The Company believes the circumstances in Canada were unique, and included the
combination of five acquired brands into one at the beginning of the 2005 year, as well as tightened application regulations in
certain markets. Despite the decrease in 2005, overall retention rates have increased 350 basis points over the last four years taken
as a whole.
Operating income totaled $172 million in 2005 compared to $176 million in 2004. The operating income comparison was adversely
impacted by the $4 million non-recurring pre-tax gain in 2004 from the sale of a support facility. Incremental profits from increased
revenues and reduced safety-related costs were offset primarily by the impacts of higher fuel and fertilizer costs and the first time
absorption of approximately $3 million of first quarter seasonal losses in the Canadian operations which were acquired in April
2004.
Capital employed in the TruGreen LawnCare segment increased two percent, primarily reflecting the impact of acquisitions.
TruGreen LandCare Segment
The TruGreen LandCare segment reported a three percent increase in revenue to $453 million in 2005 from $439 million in 2004
and operating income of $4 million in 2005 compared to an operating loss of ($4) million in 2004.
Base contract maintenance revenue increased two percent despite a modest decline in customer retention. Enhancement revenue
(e.g., add-on services such as seasonal flower plantings, mulching, etc.), which represents approximately one-third of LandCare's