American Home Shield 2004 Annual Report Download - page 48

46 ServiceMaster 2004 annual report
The combined franchise operations of ServiceMaster Clean and
Merry Maids comprised approximately 4% of the consolidated
revenue in 2004, 2003, and 2002. These operations comprised
approximately 11%, 11%, and 10% of the consolidated operating
income (without the 2003 impairment charge) before headquarter
overheads for 2004, 2003, and 2002, respectively.
The following table summarizes the segment goodwill that is not
amortized. See the “Acquisitions” note and the “Goodwill and
Intangible Assets” note in the Notes to Consolidated Financial
Statements for information relating to goodwill acquired and
amounts impaired, respectively.
(In thousands) 2004 % Change 2003 % Change 2002
TruGreen $ 681,954 5% $ 652,534 (16%) $ 780,043
Terminix 643,567 3 622,351 1 618,055
American Home Shield 72,085 - 72,085 - 72,085
ARS/AMS 56,171 - 56,171 (83) 337,491
Other Operations 114,267 1 113,065 1 112,106
Total $ 1,568,044 3% $ 1,516,206 (21%) $ 1,919,780
Goodwill and Intangible Assets
In accordance with SFAS 142, “Goodwill and Other Intangible
Assets”, the Company discontinued the amortization of goodwill
and indefinite lived intangible assets effective January 1, 2002.
Goodwill and intangible assets that are not amortized are subject
to assessment for impairment by applying a fair-value based test
on an annual basis or more frequently if circumstances indicate
a potential impairment. The Company completed its annual
assessment of impairment as of October 1.
In the third quarter of 2003, the Company recorded a non-cash
impairment charge associated with the goodwill and intangible
assets of its ARS, AMS and TruGreen LandCare business units of
$481 million pre-tax, $383 million net of tax, or $1.30 per diluted
share. The pre-tax charge consisted of $224 million at American
Residential Services, $68 million at American Mechanical Services
and $189 million at TruGreen LandCare. The impairment charge
included a portion of goodwill that was not deductible for tax
purposes, resulting in a tax benefit of $98 million or only approxi-
mately 20 percent of the pre-tax charge amount.
Throughout the first half of 2003, management believed that
the significant declines in the operating results of these businesses
were due to temporary conditions and that the operations, with
an anticipated good summer season, would show ongoing
improvement which would support the amount of goodwill
and intangible assets on the balance sheet. The Company had
discussed such events and trends in its press releases and periodic
filings with the Securities and Exchange Commission. In the
third quarter of 2003, the results did not improve. In addition,
the Company identified certain branch closures at ARS and
announced the sale of its utility line clearing operations at
TruGreen LandCare. The lack of a good 2003 summer season,
combined with declining profitability in the base businesses, led
management to conclude that the businesses were unlikely to
meet the previous projections which had supported the carrying
value. A valuation was performed during the third quarter of
2003 which incorporated third quarter 2003 performance. The
fair value of the reporting units was determined primarily by
utilizing a discounted cash flow methodology. The Company
used an independent valuation firm to confirm the Company’s
assessment of the fair value of its reporting units. Based on
the evaluation, it was determined that the fair values of the
ARS, AMS, and TruGreen LandCare reporting units were less
than their carrying values. As a result, in the third quarter of
2003, the Company reassessed the fair value of the assets and
liabilities of these units and recorded a non-cash impairment
charge of $481 million pre-tax, $383 million net of tax, to reduce
the carrying value of the intangible assets to $56 million, their
estimated fair value.
In April 2004, TruGreen ChemLawn acquired the assets of
Greenspace Limited, Canada’s largest professional lawn care
service company. Intangible assets recorded were less than
$16 million. The balance of goodwill and intangible assets and
liabilities that was added during 2004 relate to tuck-in acquisi-
tions completed by Terminix and TruGreen ChemLawn.
notes to the consolidated financial statements