American Home Shield 2004 Annual Report Download - page 49

2004 annual report ServiceMaster 47
The table below summarizes the goodwill and intangible asset
balances:
(In thousands) 2004 2003 2002
Goodwill (1) $1,568,044 $1,516,206 $1,919,780
Trade names (1) 204,793 204,793 238,550
Other intangible assets 45,788 35,432 78,284
Accumulated amortization (2) (29,801) (23,772) (59,053)
Net other intangibles 15,987 11,660 19,231
Total $1,788,824 $1,732,659 $2,177,561
(1) Not subject to amortization.
(2) Amortization expense of $6 million, $6 million and $7 million was
recorded in 2004, 2003 and 2002, respectively. Annual amortization
expense of approximately $6 million in 2004 is expected to decline over
the next five years.
Income Taxes
In January 2005, the Company reached a comprehensive
agreement with the IRS regarding its examination of the
Company’s federal income taxes through the year 2002. As
previously disclosed, the Company had not been audited by
the IRS during the period in which it operated as a master limited
partnership (1987 through 1997) or in subsequent years.
Consequently, the examination covered numerous matters,
including the tax consequences resulting from the Company’s
reincorporation in 1997, and the sale of its large Management
Services segment in November 2001. The principal terms of
the agreement were as follows:
1. The agreement affirmed the previously identified step-up in
the tax basis of the Company’s assets which occurred upon
reincorporation. For income tax reporting purposes, this
step-up is generally being amortized and deducted over the
15 year period ending December 31, 2012.
2. The agreement increased taxes and interest due on the 2001
sale of the Company’s Management Services business. This
occurred primarily as a result of changes in the timing of
certain items which were previously netted against the gain
and will now be amortized as additional deductions over the
15 year period ending December 31, 2016.
3. The agreement resolved all other matters in the years
under review.
For 2004, the IRS agreement resulted in a $25 million favorable
timing difference in fourth quarter 2004 tax payments. Pursuant to
the agreement, the Company paid taxes and interest (primarily
in February 2005) to the IRS and various states in the amount of
$133 million ($113 million of increased taxes and $20 million of
interest). Existing financial resources were utilized to fund the
payment and the Company does not believe that the payment
significantly impaired its financial flexibility. Also related to the
agreement, the Company will realize an approximate $45 million
reduction in estimated tax payments for 2005 that would other-
wise have been paid in the second half of 2005. Finally, the agree-
ment resulted in incremental future tax benefits of approximately
$57 million, which will be recovered on the Company’s tax
returns over the 11 year period ending in 2016.
As a result of this agreement, certain deferred tax assets, primarily
related to intangible 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. This resulted in a
non-cash reduction in the Company’s 2004 income tax provision,
thereby increasing 2004 consolidated net income by approxi-
mately $159 million ($150 million related to continuing operations
and $9 million related to discontinued operations).
In the ordinary course, the Company is subject to review by
domestic and foreign taxing authorities, including the IRS. The
Company has been notified by the IRS that it intends to commence
the audits of the Company’s 2003, 2004, and 2005 fiscal years in
the second quarter of 2005.
The reconciliation of income tax computed at the U.S. federal
statutory tax rate to the Company’s effective income tax rate for
continuing operations is as follows:
2004 2003 2002
Tax at U.S. federal
statutory rate 35.0% (35.0%) 35.0%
State and local income taxes
net of U.S. federal benefit 3.6 (0.8) 3.5
Adjustment related to the
IRS agreement (52.9) ——
Net operating loss and
tax credits (0.7) (0.5) (4.1)
Impairment of non-
deductible goodwill —36.9 —
Other 0.5 (1.8) 0.7
Effective rate (14.5%) (1.2%) 35.1%