American Home Shield 2003 Annual Report Download - page 35

ServiceMaster    33
The Company has several debt and lease agreements where
the interest rate or rent payable under the agreements auto-
matically adjusts based on changes in the Company’s credit
ratings. While the Company is not currently expecting a
change in its credit ratings, based on amounts outstanding at
December 31, 2003, a one rating category improvement in
the Company’s credit ratings would reduce annual expense by
approximately $0.7 million. A one rating category reduction
in the Company’s credit ratings would increase expense on
an annualized basis by approximately $1.4 million.
The following table summarizes information about the
Company’s fixed rate debt as of December 31,2003,including
the principal cash payments and related weighted-average
interest rates by expected maturity dates. The fair value of the
Company’s fixed rate debt was approximately $862 million
at December 31,2003.
Expected Maturity Date
There-
(In millions) 2004 2005 2006 2007 2008 after Total
Fixed rate
debt $ 28 $151 $ 12 $ 60 $ 8 $540 $799
Avg. rate 4.8% 8.3% 6.0% 6.7% 6.1% 7.7% 7.6%
As previously discussed, the Company has entered into
interest rate swap agreements, the impact of which was to
convert $165 million of the Company’s 2009 maturity debt
from a fixed rate of 7.88% to a variable rate based on LIBOR.
Critical Accounting Policies and Estimates
The preparation of the financial statements requires man-
agement to make certain estimates and assumptions required
under generally accepted accounting principles which may
differ from actual results.The more significant areas requiring
the use of management estimates relate to the allowance for
receivables, accruals for self-insured retention limits related
to medical, workers compensation, auto and general liability
insurance claims, accruals for home warranty claims, the
possible outcomes of outstanding litigation, accruals for
income tax liabilities as well as deferred tax accounts, useful
lives for depreciation and amortization expense and the
valuation of tangible and intangible assets. In 2003, there
have been no changes in the significant areas that require
estimates or in the methodologies which underlie these
estimates. As discussed in the “Goodwill and Intangible
Assets”note to the consolidated financial statements, in the
third quarter of 2003, the Company recorded a charge to reduce
the carrying value of its goodwill and intangible assets.
The allowance for receivables is developed based on several
factors including overall customer credit quality, historical
write-off experience and specific account analyses that
project the ultimate collectibility of the outstanding balance.
As such, these factors may change over time causing the
reserve level to vary.
The Company carries insurance policies on insurable risks at
levels which it believes to be appropriate, including workers’
compensation,auto and general liability risks. The Company
has self-insured retention limits and insured layers of excess
insurance coverage above those limits. Accruals for self-
insurance losses and warranty claims in the American Home
Shield business are made based on the Company’s claims
experience and actuarial projections. Current activity could
differ causing a change in estimates. The Company has
certain liabilities with respect to existing or potential claims,
lawsuits, and other proceedings. The Company accrues for
these liabilities when it is probable that future costs will be
incurred and such costs can be reasonably estimated. Any
resulting adjustments, which could be material, are recorded
in the period identified.
The Company records deferred income tax balances based
on the net tax effects of temporary differences between the
carrying value of assets and liabilities for financial reporting
purposes and income tax purposes. There are significant
amortizable intangible assets for tax reporting purposes (not
for financial reporting purposes) which arose as a result of the
Company’s reincorporation from partnership to corporate
form in 1997. The Company records its deferred tax items
based on the estimated ultimate value of the tax basis. The
Company’s tax estimates are adjusted when required to
reflect changes based on factors such as changes in tax laws,
results of tax authority reviews and statutory limitations. In
the event that actual results differ from these estimates, the
Company would reflect those changes in the period that the
difference is identified.
Fixed assets, and intangible assets with finite lives, are depre-
ciated and amortized on a straight-line basis over their esti-
mated useful lives. These lives are based on the Company’s
previous experience for similar assets, the potential market
obsolescence and other industry and business data. The
Company also periodically reviews the assets for impairment
and a loss would be recorded if and when the Company
determined that the book value of the asset exceeded its fair
value. Changes in the estimated useful lives or in asset values
would cause the Company to adjust its book value or future
expense accordingly. The Company also reviews its goodwill
and trade names at least once a year for impairment. An
impairment loss would be recorded if and when the Company
determines that the expected present value of the future cash
flows deemed to be derived from the asset is less than its
corresponding book value.
Management Discussion and Analysis of
Financial Condition and Results of Operations