American Home Shield 2002 Annual Report Download - page 44

Interim Reporting: TruGreen ChemLawn has significant
seasonality to its business. In the winter and early
spring, this business sells a series of lawn applications
to customers which are rendered primarily in March
through October. The Company incurs incremental selling
expenses at the beginning of the year that directly
relate to successful sales in which the revenues will be
recognized in later quarters. This business also defers,
on an interim basis, pre-season advertising costs and
annual repairs and maintenance procedures that are
performed in the first quarter. These costs are deferred
and recognized in proportion to the contract revenue
over the production season, and are not deferred beyond
the calendar year-end.
Advertising: As discussed in the “Interim Reporting”
note above, TruGreen’s pre-season advertising costs are
deferred and recognized in proportion to the contract
revenue over the year. These costs are not deferred
beyond the calendar year-end. Beginning in 2002, the
cost of direct-response advertising at Terminix is capi-
talized and amortized over its expected period of future
benefits. This direct-response advertising consists
primarily of direct-mail promotions, for which the cost
is capitalized and amortized over the one-year customer
contract life. At December 31, 2002, approximately $1.3
million of direct response advertising costs were
deferred and recorded in prepaid expenses. For all other
advertising, the Company expenses the cost of advertising
the first time the advertising takes place.
Inventory Valuation: Inventories are valued at the
lower of cost (first-in, first-out basis) or market. Inventory
costs include material, labor, and related overhead and
handling costs. Raw materials represent less than one
percent of the inventory value at December 31, 2002.
The remaining inventory is finished goods to be used on
the customers’ premises or sold to franchisees.
Depreciation and Amortization: Buildings and equipment
used in the business are stated at cost and depreciated
over their estimated useful lives using the straight-line
method for financial reporting purposes. The estimated
useful lives for building and improvements range from
10 to 40 years, while the estimated useful lives for
equipment range from three to 10 years. Leasehold
improvements relating to leased facilities are depreciated
over the remaining life of the lease. Technology equip-
ment as well as software and development have an
estimated useful life of three to seven years. Intangible
assets consist primarily of goodwill ($1.9 billion), trade
names ($239 million) and other intangible assets ($19
million). As required by SFAS 142 beginning in 2002,
goodwill is not subject to amortization and intangible
assets with indefinite useful lives are not amortized
until their useful lives are determined to be no longer
indefinite. Goodwill and intangible assets that are not
subject to amortization are subject to at least an annual
assessment for impairment by applying a fair-value
based test. Estimated fair value is determined for each
reporting unit by utilizing the expected present value
of the future cash flows of the units. The Company
completed its initial assessment of goodwill impairment
in the second quarter of 2002. The Company has also
completed its annual assessment of impairment as of
October 1. These assessments concluded that there were
no impairment issues. The Company performs impair-
ment testing on an annual basis and may test for
impairment on a more frequent basis if management
believes events have occurred or circumstances have
changed resulting in a reporting unit’s fair value being
reduced below its book value. Intangible assets with
finite lives ($19 million and $23 million at December 31,
2002 and 2001, respectively) are amortized on a
straight-line basis over their estimated useful lives.
As discussed in the “Portfolio Review and Dispositions
in 2001” Note to the Consolidated Financial Statements,
in the course of completing its portfolio review, the
Company recorded impairment charges in 2001 related
to goodwill of TruGreen LandCare and the United Kingdom
Terminix operations. The Company computed the
impairment of the associated goodwill by utilizing a
discounted cash flow methodology, in which the present
value of the future expected cash flows of the businesses,
were compared to the book values. The impairment losses
recorded were the excess of the book values over the
discounted cash flows.
As required by SFAS 144 “Accounting for the Impairment
or Disposal of Long-Lived Assets”, the Company’s long-
lived assets, including fixed assets and intangible
assets (other than goodwill), are tested for recoverability
whenever events or changes in circumstances indicate
that their carrying amounts may not be recoverable.
No recovery problems have been indicated by these com-
parisons. Based on these reviews, when the undiscounted
future cash flows from the asset are less than the carrying
amount of the asset, an impairment loss is recognized
based on the asset’s fair value, and the carrying amount
of the asset is reduced accordingly.
Fair Value of Financial Instruments and Credit Risk:
The carrying amounts of cash and cash equivalents,
receivables, accounts payable, and accrued liabilities
approximate fair value because of the short maturity of
these instruments. The carrying amounts of long-term
receivables approximate fair value as the effective rates
for these instruments are comparable to market rates at
year-end. The carrying amount of marketable and long-
term securities also approximate fair value as unrealized
gains and losses on investments accounted for at market
value are reported net-of-tax as a component of accumulated
comprehensive income (loss). The carrying amount of
debt is $835 million and $1.2 billion and the estimated
fair value is approximately $880 million and $1.1 billion
at December 31, 2002 and 2001, respectively. The esti-
mated fair value of debt is based upon borrowing rates
currently available to the Company for long-term
borrowings with similar terms and maturities.
40 ServiceMaster
Notes to Consolidated Financial Statements