American Home Shield 2005 Annual Report Download - page 27

P. 2 5 SERVICEMASTER 2005 ANNUAL REPORT
The Company is party to a number of debt agreements
which require it to maintain certain financial and other
covenants, including limitations on indebtedness (debt
cannot exceed 3.25 times EBITDA, as defined) and interest
coverage ratio (EBITDA needs to exceed four times interest
expense). In addition, under certain circumstances, the
agreements may limit the Company’s ability to pay divi-
dends and repurchase shares of common stock. These
limitations are not expected to be an inhibiting factor in the
Company’s future dividend and share repurchase plans.
Failure by the Company to maintain these covenants could
result in the acceleration of the maturity of the debt. At
December 31, 2005, and throughout the year, the
Company was in compliance with the covenants and,
based on its operating outlook for 2006, expects to be able
to maintain compliance in the future. The Company does
not have any debt agreements that contain put rights or
provide for acceleration of maturity as a result of a change
in credit rating.
The Company maintains operating lease facilities with
banks totaling $68 million which provide for the acquisition
and development of branch properties to be leased by the
Company. At December 31, 2005, there was approximately
$68 million funded under these facilities. Approximately
$15 million of these leases have been included on the
balance sheet as assets with related debt as of December
31, 2005 and 2004. The remaining funded balances are
treated as operating leases. Approximately $15 million of
the available facility expires in January 2008 and the
remaining $53 million expires in September 2009. The
Company has guaranteed the residual value of the proper-
ties under the leases up to 82 percent of the fair market
value at the commencement of the lease. At December 31,
2005, the Company’s residual value guarantee related to
the leased assets totaled $56 million for which the
Company has recorded the estimated fair value of this
guarantee (approximately $0.9 million) in the Consolidated
Statements of Financial Position.
The majority of the Company’s fleet and some equipment is
leased through operating leases. The lease terms are non-
cancelable for the first twelve month term, and then are
month-to-month, cancelable at the Company’s option.
There are residual value guarantees (ranging from 70
percent to 87 percent depending on the agreement) on
these vehicles and equipment, which historically have not
resulted in significant net payments to the lessors. At
December 31, 2005, there were approximately $259 million
of residual value guarantees relating to the Company’s fleet
and equipment leases. The fair value of the assets under
the leases is expected to fully mitigate the Company’s
obligations under the agreements. At December 31, 2005
the Company has recorded the estimated fair value of this
guarantee (approximately $0.4 million) in the Consolidated
Statements of Financial Position.
The following table presents the Company’s contractual
obligations and commitments:
(In millions) Total < 1 Yr 2-3 Yrs 4-5 Yrs > 5 Yrs
Debt balances* $ 658 $ 19 $ 88 $ 192 $ 359
Non-cancelable
operating leases 277 80 113 58 26
Purchase obligations:
Telecommunications 57 26 31 — —
Supply agreements
and other 45 27 16 2 —
Other long-term liabilities:*
Insurance claims 211 93 65 18 35
Businesses held
pending sale and
discontinued
operations 16 6 6 2 2
Other 39 2 6 5 26
Total Amount $ 1,303 $ 253 $ 325 $ 277 $ 448
* These items are reported in the Consolidated Statements of Financial Position.
Not included in the table above are deferred income tax
liabilities and the related interest payments on the
Company’s long-term debt. Deferred income tax liabilities
totaled $113 million and are discussed in the Notes to the
Consolidated Financial Statements. The majority of the
Company’s debt is fixed rate debt. Therefore, the Company
has calculated the expected interest payments on debt
outstanding as of December 31, 2005 to be approximately
$49 million, $47 million, $43 million, $37 million, $27 million
and $445 million in 2006, 2007, 2008, 2009, 2010, and
thereafter, respectively.
Financial Position - Continuing Operations
Receivables increased from prior year levels, reflecting a
higher amount of credit sales at American Home Shield and
an increased level of fourth quarter snow-removal receiv-
ables at TruGreen LandCare. Inventory levels increased
reflecting a new vendor relationship at Terminix, as well as
general business growth. Deferred customer acquisition
costs were consistent with prior year levels. The Company
capitalizes sales commissions and other direct contract
acquisition costs relating to termite baiting and pest con-
tracts, as well as home warranty agreements. These costs
vary with and are directly related to a new sale. Property
and equipment declined slightly. The Company does not
have any material capital commitments at this time.
The increase in accounts payable reflects a lengthening of
payment terms resulting from improvements in the
Company’s processes. The decrease in income taxes
payable at December 31, 2005 primarily reflects the
February 2005 federal tax payment related to the IRS
agreement. Deferred revenue increased, reflecting growth
in warranty contracts written at American Home Shield,
partially offset by lower levels of deferred revenue at
Terminix associated with the new termite bait product and
the increased mix of liquid applications.
Management Discussion and Analysis of Financial Condition and Results of Operations