American Home Shield 2002 Annual Report Download - page 51

ServiceMaster 47
Income Taxes
The reconciliation of income tax computed at the U.S.
federal statutory tax rate to the Company’s effective
income tax rate for continuing operations is as follows:
2002 2001 2000
Tax at U.S.
Federal statutory rate 35.0% (35.0%) 35.0%
State and local income
taxes net of U.S.
federal benefit 3.6 1.4 4.3
Net operating loss and
tax credits (3.7) (1.7) (0.7)
Impairment of non-
deductible goodwill -43.5 -
Non-deductible
amortization expense -2.7 2.5
Other 0.6 2.6 1.7
Effective rate 35.5% 13.5% 42.8%
The effective tax rate for discontinued operations was
39.4%, 44.7%, and 43.9% for 2002, 2001, and 2000,
respectively. The difference between these rates and the
federal statutory tax rate of 35% reflects state taxes, net
of federal benefit, the impairment of non-deductible
goodwill in 2001, and permanent items, primarily
amortization expense in 2001 and 2000. The effective
tax rate for extraordinary items and the cumulative
effect of accounting change was 40.0%, 41.1% and
41.1% for 2002, 2001 and 2000, respectively.
Income tax expense from continuing operations is as
follows:
(In thousands) 2002
Current Deferred Total
U.S. federal $33,718 $48,838 $82,556
State and local 359 10,553 10,912
$34,077 $59,391 $93,468
2001
Current Deferred Total
U.S. federal $38,619 $(22,267) $16,352
State and local 7,174 (3,957) 3,217
$45,793 $(26,224) $19,569
2000
Current Deferred Total
U.S. federal $43,406 $35,217 $78,623
State and local 7,782 6,439 14,221
$51,188 $41,656 $92,844
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. Management believes that, based upon its
lengthy and consistent 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 primarily reflects the basis
differences related to intangible assets. In 2002, the
Company adopted SFAS 142 which eliminated the
requirement to record goodwill amortization expense in
the financial statements. The Company continues to
amortize the intangible assets for tax purposes which
yields an annual tax benefit of approximately $50 million.
The tax benefit is reflected in the Consolidated State-
ment of Financial Position as an increase in the deferred
tax liability. Significant components of the Company’s
deferred tax balances are as follows:
(In thousands) 2002 2001
Deferred tax assets (liabilities):
Current:
Prepaid expenses and other $ (4,500) $ (5,700)
Receivables allowances 11,400 11,100
Accrued insurance and
related expenses 16,800 17,200
Other accrued expenses 92,500 56,600
Total current asset 116,200 79,200
Long-Term:
Long-term assets (1) (302,700) (237,100)
Insurance expenses 26,800 38,800
Other long-term obligations (36,600) (34,700)
Total long-term liability (312,500) (233,000)
Net deferred tax liability $(196,300) $(153,800)
(1) The deferred tax liability relates primarily to the difference in the
tax versus book basis of intangible assets. This liability does not
represent expected future cash payments until a business unit of
the Company is sold.
Total tax payments in 2002 were $27 million. In 2001,
the Company received net tax refunds of $1 million, and
in 2000, the Company made total tax payments of $38
million, net of refunds.
Notes to Consolidated Financial Statements