American Home Shield 2003 Annual Report Download - page 50

48    ServiceMaster
Notes to Consolidated Financial Statements
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:
2003 2002 2001
Tax at U.S. federal
statutory rate (35.0%) 35.0% (35.0%)
State and local income
taxes net of U.S. federal
benefit (0.8) 3.5 0.9
Net operating loss and
tax credits (0.5) (4.1) (1.8)
Impairment of non-
deductible goodwill 36.9 –39.9
Non-deductible
amortization expense ––2.4
Other (1.8) 0.7 2.7
Effective rate (1.2%) 35.1% 9.1%
The effective tax rate for discontinued operations reflected a
benefit of 39.5% and 32.4%, in 2003 and 2002, respectively,
and a 44.6% provision in 2001. 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 2003 and 2001, and permanent items, primarily
amortization expense in 2001.
Income tax expense from continuing operations is as follows:
2003
(In thousands) Current Deferred Total
U.S. federal $ 9,820 $ (8,963) $ 857
State and local (1,618) (1,901) (3,519)
$ 8,202 $ (10,864) $ (2,662)
2002
Current Deferred Total
U.S. federal $ 26,668 $ 48,998 $ 75,666
State and local (1,121) 10,393 9,272
$ 25,547 $ 59,391 $ 84,938
2001
Current Deferred Total
U.S. federal $ 33,489 $ (21,635) $ 11,854
State and local 7,027 (4,589) 2,438
$ 40,516 $ (26,224) $ 14,292
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 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
is primarily attributable to the basis differences related to
intangible assets. The Company records its deferred tax items
based on the estimated ultimate value of the tax basis. In
2002, the Company adopted SFAS 142 which eliminated the
requirement to record in the financial statements amortiza-
tion expense related to goodwill and intangible assets with
indefinite lives. The Company is able to continue to amortize
the intangible assets for tax purposes which yields an annual
tax benefit of approximately $50 million.Accounting stan-
dards require that the Company recognize deferred taxes
relating to the differences between the financial reporting
and tax basis of the assets. As the annual tax benefit from the
amortization expense is realized, the deferred tax liability
increases reflecting the declining tax basis compared to the
non-amortized book basis. Significant components of the
Company’s deferred tax balances are as follows:
(In thousands) 2003 2002
Deferred tax assets (liabilities):
Current:
Prepaid expenses and other $ (8,900) $ (4,500)
Receivables allowances 10,300 11,400
Accrued insurance and
related expenses 11,400 16,800
Other accrued expenses 73,700 92,500
Total current asset 86,500 116,200
Long-Term:
Long-term assets(1) (257,600) (302,700)
Insurance expenses 21,000 26,800
Other long-term obligations (39,400) (36,600)
Total long-term liability (276,000) (312,500)
Net deferred tax liability $ (189,500) $ (196,300)
(1) The deferred tax liability relates primarily to the difference in the tax versus book
basis of intangible assets as well as related tax reserves. The majority of this liability
does not represent expected future cash payments until a business unit of the
Company is sold.
At December 31, 2003, the Company had tax effected federal
net operating loss carryforwards of approximately $26 million,
expiring at various dates up to 2023. The Company also had
tax credit carryforwards of $4 million which expire at various
dates up to 2023 and tax effected federal capital loss carryfor-
wards of $1 million, expiring in 2007.