American Home Shield 2005 Annual Report Download - page 42

SERVICEMASTER 2005 ANNUAL REPORT P.40
Notes to the Consolidated Financial Statements
SERVICEMASTER 2005 ANNUAL REPORT
The combined franchise operations of ServiceMaster
Clean and Merry Maids comprised approximately 5% of
the consolidated revenue in 2005, 2004, and 2003. These
operations comprised approximately 11%, 11%, and 12%
of consolidated operating income (excluding the 2003
impairment charge) before headquarter overhead for 2005,
2004, and 2003, 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) 2005 2004 2003
TruGreen ChemLawn $ 700,029 $ 681,954 $ 652,534
Terminix 661,166 643,567 622,351
American Home Shield (1) 85,526 72,085 72,085
Other Operations 101,349 114,267 113,065
Total $ 1,548,070 $ 1,511,873 $ 1,460,035
(1) In the second quarter of 2005, approximately $13 million of enterprise goodwill was
reclassified to the American Home Shield segment from the Other Operations segment.
Goodwill and Intangible Assets
In accordance with SFAS 142, “Goodwill and Other
Intangible Assets”, the Company discontinued the amorti-
zation 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 at its TruGreen LandCare business unit.
This charge, which is included in the results of continuing
operations for 2003, totaled $189 million pre-tax, $156
million after-tax, and $0.53 per diluted share. The impairment
charge reported in continuing operations included a portion
of goodwill that was not deductible for tax purposes, resulting
in a tax benefit of $33 million, or only approximately 17
percent of the pre-tax impairment charge of $189 million.
Also in the third quarter of 2003, the Company recorded a
non-cash impairment charge associated with the goodwill
and intangible assets at its ARS and AMS operations.
These businesses are now being held pending sale,
accordingly, the financial results for the ARS and AMS
operations, as well as the impairment charge related to
these operations ($292 million pre-tax, $227 million after-tax),
have been classified to the financial statement caption
“businesses held pending sale and discontinued operations”
for all periods.
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 that were added during 2004 relate to tuck-in acqui-
sitions completed by Terminix and TruGreen ChemLawn.
The increase in goodwill and intangible assets in 2005
relates to tuck-in acquisitions completed throughout the
year by Terminix and TruGreen ChemLawn, as well as the
acquisition of a distributorship by ServiceMaster Clean in
the third quarter.
The table below summarizes the goodwill and intangible
asset balances:
(In thousands) 2005 2004 2003
Goodwill (1) $ 1,548,070 $ 1,511,873 $ 1,460,035
Trade names (1) 215,493 204,793 204,793
Other intangible assets 49,981 45,679 35,323
Accumulated amortization (35,131) (29,677) (23,671)
Net other intangibles 14,850 16,002 11,652
Total $ 1,778,413 $ 1,732,668 $ 1,676,480
(1) Not subject to amortization.
(2) Amortization expense of $5 million, $6 million and $6 million was recorded in 2005,
2004 and 2003, respectively. Annual amortization expense of $5 million in 2005 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
significant 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. Pursuant to the agreement, the Company paid taxes
and interest (primarily in February 2005) to the IRS and
various states in the amount of $131 million ($112 million of
increased taxes and $19 million of interest). These payments
represented only one part of a four part agreement with the
IRS, which also included: tax savings of $25 million that
were realized in 2004; a reduction of $45 million in the esti-
mated tax payments made during the second half of 2005
and a deferred tax asset totaling $57 million that will be realized
through 2016.