American Home Shield 2004 Annual Report Download - page 50

48 ServiceMaster 2004 annual report
notes to the consolidated financial statements
The effective tax rate for discontinued operations reflected a
benefit of 288.1%, 39.5% and 32.4%, in 2004, 2003 and 2002,
respectively. In 2004, the difference between these rates and the
federal statutory tax rate of 35% reflects the impact of the IRS
agreement, state taxes, net of federal benefit, and permanent items.
Income tax expense from continuing operations is as follows:
(In thousands) 2004
Current Deferred Total
U.S. federal $ 134,047 $ (155,901) $ (21,854)
State and local 11,139 (30,250) (19,111)
$ 145,186 $ (186,151) $ (40,965)
2003
Current Deferred Total
U.S. federal $ 9,820 $ (8,963) $ 857
State and local (1,618) (1,901) (3,519)
$ 8,202 $ (10,864) $ (2,662)
2002
Current Deferred Total
U.S. federal $ 26,668 $ 48,998 $ 75,666
State and local (1,121) 10,393 9,272
$ 25,547 $ 59,391 $ 84,938
Deferred income tax expense results from timing differences in the
recognition of income and expense for income tax and financial
reporting purposes. Deferred income tax balances reflect the net
tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and
income tax purposes. The deferred tax asset primarily reflects
the impact of future tax deductions related to the Company’s
accruals and net operating losses. Management believes that,
based upon its history of profitable operations, it is probable
that its deferred tax assets will be realized, primarily from the
generation of future taxable income. The deferred tax liability is
primarily attributable to the basis differences related to intangible
assets. The Company records its deferred tax items based on the
estimated value of the tax basis. In 2002, the Company adopted
SFAS 142 which eliminated the requirement to record in the
financial statements amortization expense related to goodwill
and intangible assets with indefinite lives. The Company is able
to continue to amortize the intangible assets for tax purposes
which yields an average annual tax benefit of approximately $57
million through 2012. Subsequent to 2012, the benefit from the
step-up in tax basis from reincorporation will be fully amortized.
Accounting standards require that the Company recognize
deferred taxes relating to the differences between the financial
reporting and tax basis of the assets. As the annual tax benefit
from the amortization expense is realized, the deferred tax liability
increases reflecting the declining tax basis compared to the
non-amortized book basis. Significant components of the
Company’s deferred tax balances are as follows:
(In thousands) 2004 2003
Deferred tax assets (liabilities):
Current:
Prepaid expenses $ (11,300) $ (8,900)
Receivables allowances 15,700 10,300
Accrued insurance expenses 22,900 11,400
Net operating loss and tax credit
carryforwards 40,640 34,600
Other accrued expenses 40,840 39,100
Total current asset 108,780 86,500
Long-Term:
Intangible assets (1) (88,500) (263,000)
Accrued insurance expenses 3,600 21,000
Net operating loss and tax credit
carryforwards 10,100 —
Other long-term obligations (13,300) (34,000)
Total long-term liability (88,100) (276,000)
Net deferred tax asset (liability) $ 20,680 $ (189,500)
(1) The deferred tax liability relates primarily to the difference in the tax versus
book basis of intangible assets. The majority of this liability does not represent
expected future cash payments until a business unit of the Company is sold.
At December 31, 2004, the Company had tax effected federal
and state operating loss carryforwards of approximately $46
million, expiring at various dates up to 2023. The Company also
had federal and state tax credit carryforwards of approximately
$4 million which expire at various dates up to 2024.
In 2004, total tax payments were $13 million. In 2003, the
Company received net tax refunds of $1 million. Total tax pay-
ments in 2002 were $27 million.
Acquisitions
Acquisitions have been accounted for using the purchase method
and, accordingly, the results of operations of the acquired
businesses have been included in the Company’s consolidated
financial statements since their dates of acquisition. The assets and
liabilities of these businesses were recorded in the financial state-
ments at their estimated fair values as of the acquisition dates.