American Home Shield 2015 Annual Report Download - page 83

Table of Contents
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Restricted Net Assets
There are third-party restrictions on the ability of certain of the Company’s subsidiaries to transfer funds to the Company.
These restrictions are related to regulatory requirements at American Home Shield and to a subsidiary borrowing arrangement at
SMAC. The payment of ordinary and extraordinary dividends by the Company’s home warranty and similar subsidiaries (through
which the Company conducts its American Home Shield business) are subject to significant regulatory restrictions under the laws and
regulations of the states in which they operate. Among other things, such laws and regulations require certain such subsidiaries to
maintain minimum capital and net worth requirements and may limit the amount of ordinary and extraordinary dividends and other
payments that these subsidiaries can pay to the Company. As of December 31, 2015, the total net assets subject to these third-party
restrictions was $169 million. None of the Company’s subsidiaries are obligated to make funds available to the Company through the
payment of dividends.
Financial Instruments and Credit Risk
The Company has entered into specific financial arrangements in the normal course of business to manage certain market
risks, with a policy of matching positions and limiting the terms of contracts to relatively short durations. The effect of derivative
financial instrument transactions could have a material impact on the Company’s financial statements. The Company does not hold or
issue derivative financial instruments for trading or speculative purposes. The Company has historically hedged a significant portion
of its annual fuel consumption. The Company has also historically hedged the interest payments on a portion of its variable rate debt
through the use of interest rate swap agreements. All of the Company’s fuel swap contracts and interest rate swap contracts are
classified as cash flow hedges, and, as such, the hedging instruments are recorded on the consolidated statements of financial position
as either an asset or liability at fair value, with the effective portion of changes in the fair value attributable to the hedged risks
recorded in accumulated other comprehensive income (loss).
Financial instruments, which potentially subject the Company to financial and credit risk, consist principally of investments
and receivables. Investments consist primarily of publicly traded debt, certificates of deposit and common equity securities. The
Company periodically reviews its portfolio of investments to determine whether there has been an other than temporary decline in the
value of the investments from factors such as deterioration in the financial condition of the issuer or the market(s) in which the issuer
competes. The majority of the Company’s receivables and notes receivable have little concentration of credit risk due to the large
number of customers with relatively small balances and their dispersion across geographical areas. The Company maintains an
allowance for losses based upon the expected collectability of receivables. See Note 18 to the consolidated financial statements for
information relating to the fair value of financial instruments.
Stock-Based Compensation
Stock-based compensation expense for stock options is estimated at the grant date based on an award’s fair value as
calculated by the Black-Scholes option-pricing model and is recognized as expense over the requisite service period. The Black-
Scholes model requires various highly judgmental assumptions including expected volatility and option life. If any of the assumptions
used in the Black-Scholes model change significantly, stock-based compensation expense for future grants may differ materially from
that recorded in the current period related to options granted to date. In addition, the Company estimates the expected forfeiture rate
and only recognizes expense for those shares expected to vest. The Company estimates the forfeiture rate based on historical
experience. To the extent the actual forfeiture rate is different from the estimate, stock-based compensation expense is adjusted
accordingly. See Note 17 to the consolidated financial statements for more details.
Income Taxes
The Company and its subsidiaries file consolidated U.S. federal income tax returns. State and local returns are filed both on a
separate company basis and on a combined unitary basis with the Company. Current and deferred income taxes are provided for on a
separate company basis. The Company accounts for income taxes using an asset and liability approach for the expected future tax
consequences of events that have been recognized in the Company’s financial statements or tax returns. Deferred income taxes are
provided to reflect the differences between the tax bases of assets and liabilities and their reported amounts in the financial statements.
Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts expected to be realized. The
Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in its tax
return. The Company recognizes potential interest and penalties related to its uncertain tax positions in income tax expense.
Earnings Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares of
common stock outstanding. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average
number of shares of common stock outstanding during the period, increased to include the number of shares of common stock that
would have been outstanding had potential dilutive shares of common stock been issued. The dilutive effect of stock options and
restricted stock units (“RSUs”) are reflected in diluted net income (loss) per share by applying the treasury stock method. See Note 19
to the consolidated financial statements for more details.
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