American Home Shield 2004 Annual Report Download - page 35

2004 annual report ServiceMaster 33
Expected Maturity Date
There-
(In millions) 2005 2006 2007 2008 2009 after Total
Fixed rate debt $160 $13 $62 $10 $21 $359 $625
Avg. rate 8.0% 6.4% 7.0% 5.8% 7.9% 7.5% 7.5%
The Company’s next public debt maturity of $138 million is in
April 2005, and is included in the 2005 payments in the above
table. The Company intends to fund this debt payment with
long-term financing under existing credit facilities. Based on
annual projected cash flows, the amount of the borrowing is
expected to be largely repaid by December 31, 2005.
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 percent to a variable rate based on LIBOR. Consequently,
this debt is not included in the fixed rate debt table above.
Critical Accounting Policies
and Estimates
The preparation of the financial statements requires manage-
ment 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 2004, there have been no changes in the significant
areas that require estimates or in the methodologies which
underlie these associated estimates.
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-insur-
ance 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 pro-
ceedings. 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 esti-
mated value of the tax basis. As discussed in the “Income Taxes”
note to the Consolidated Financial Statements, the Company
reached a comprehensive agreement with the Internal Revenue
Service regarding its examination of the Company’s federal
income taxes through the year 2002. As a result of this agreement,
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 were recorded.
The Company adjusts tax estimates when required to reflect
changes based on factors such as changes in tax laws, results of
tax authority reviews and statutory limitations. As occurred this
year when the IRS audit concluded, the Company reflected the
changes from estimated amounts in the period that the need for
adjustment was identified.
Fixed assets, and intangible assets with finite lives, are depreciated
and amortized on a straight-line basis over their estimated useful
lives. These lives are based on the Company’s previous experi-
ence for similar assets, 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 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. As permitted
under SFAS 142, the Company carries forward a reporting unit’s
valuation from the most recent valuation under the following
conditions; the assets and liabilities of the reporting unit have not
changed significantly since the most recent fair value calcula-
tion, the most recent fair value calculation resulted in an amount
that exceeded the carrying amount of the reporting unit by a
substantial margin, and based on the facts and circumstances of
events that have occurred since the last fair value determination,
the likelihood that a current fair value calculation would result