American Home Shield 2008 Annual Report Download - page 31

Table of Contents
The Company experienced significant increases in its fuel costs in the first nine months of 2008. The Company's fleet, which consumes approximately
28 million gallons of fuel on an annual basis, continued to be negatively impacted by significant increases in oil prices. Historically, the Company has hedged
approximately two-thirds of its estimated annual fuel usage but, through February of 2009, has increased the hedged amount to approximately 85% of
expected usage for 2009. Fuel costs, after the impacts of the hedges, increased $9.8 million for the year ended December 31, 2008 compared to the combined
periods for the year ended December 31, 2007. Based upon the hedges the Company has executed to date for 2009, as well as current Department of Energy
price forecasts, the Company would expect 2009 fuel costs to be consistent with 2008.
Health care costs continued to experience strong inflationary pressures for the year ended December 31, 2008. In total, health care and related costs
increased $9.2 million for the year ended December 31, 2008 as compared to the combined periods for the year ended December 31, 2007. For 2009, the
Company estimates that it will be able to hold its healthcare costs, on a per employee basis, at 2008 levels through the replacement of certain service providers
at favorable rates. We do expect to incur incremental aggregate healthcare costs in 2009 as compared to 2008 as a result of certain provisions of the American
Recovery and Reinvestment Act of 2009, but such incremental costs are not currently expected to be material.
Changes in short term interest rates have had a beneficial impact on the Company's business on both operating income (loss) and non-operating expense
(income) by virtue of the effect on variable rate-based fleet and occupancy leases which was partially offset by the negative effect on investment income.
Short term interest rates have improved the Company's results of operations by approximately $26.5 million pre-tax for the year ended December 31, 2008
compared to the combined periods for the year ended December 31, 2007.
Operating and Non-Operating Expenses
The Company reported cost of services rendered and products sold of $2,024.2 million for the year ended December 31, 2008 compared to
$898.5 million and $1,196.3 million for the Successor period from July 25, 2007 to December 31, 2007 and the Predecessor period from January 1, 2007 to
July 24, 2007, respectively. The year ended December 31, 2008 and the Successor period from July 25, 2007 to December 31, 2007 include an $0.8 million
(non-cash) and $10.1 million (non-cash) decrease, respectively, in cost of services rendered and products sold from recording deferred costs of services at
their fair value in connection with purchase accounting. Excluding the impact of purchase accounting, these costs decreased as a percentage of revenue to
60.5 percent for the year ended December 31, 2008 from 61.6 percent for the combined periods for year ended December 31, 2007. This decrease primarily
reflects the impact of improved labor efficiency at Terminix offset by increases in fuel, fertilizer, healthcare and other factor costs throughout the enterprise.
The Company reported selling and administrative expenses of $843.3 million for the year ended December 31, 2008 compared to $331.1 million and
$530.7 million for the Successor period from July 25, 2007 to December 31, 2007 and the Predecessor period from January 1, 2007 to July 24, 2007,
respectively. The year ended December 31, 2008 and the Successor period from July 25, 2007 to December 31, 2007 include a $14.0 million (non-cash) and
$44.2 million (non-cash) decrease, respectively, in selling and administrative expenses resulting from recording deferred customer acquisition costs at their
fair value in connection with purchase accounting. Excluding the impact of purchase accounting, these costs decreased as a percentage of revenue to
25.6 percent for the year ended December 31, 2008 from 26.5 percent for the combined periods for the year ended December 31, 2007. The decrease in selling
and administrative expenses as a percentage of revenue primarily reflects lower functional support costs, improved sales labor efficiency at TruGreen
LawnCare and Terminix, and lower compensation charges for the Company due primarily
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