American Home Shield 2004 Annual Report Download - page 33

2004 annual report ServiceMaster 31
The Company is party to a number of debt agreements which
require it to maintain certain financial and other covenants,
including limitations on indebtedness (debt cannot exceed 3.25
times EBITDA, as defined) and interest coverage ratio (EBITDA
needs to exceed four times interest expense). In addition, under
certain circumstances, the agreements may limit the Company’s
ability to pay dividends and repurchase shares of common
stock. These limitations are not expected to be an inhibiting factor
in the Company’s future dividend and share repurchase plans.
Failure by the Company to maintain these covenants could
result in the acceleration of the maturity of the debt. At December
31, 2004, and throughout the year, the Company was in compliance
with the covenants and based on its operating outlook for 2005
expects to be able to maintain compliance in the future. The
Company does not have any debt agreements that contain put
rights or provide for acceleration of maturity as a result of a
change in credit rating.
The Company maintains operating lease facilities with banks
totaling $68 million which provide for the acquisition and develop-
ment of branch properties to be leased by the Company. At
December 31, 2004, there was approximately $68 million funded
under these facilities. Approximately $15 million of these leases
have been included on the balance sheet as assets with related
debt as of December 31, 2004 (the comparable balances were
$20 million as of December 31, 2003). The balance of the funded
amount is treated as operating leases. During the third quarter
of 2004, the Company replaced an $80 million operating lease
facility that was due to expire in October 2004 with a new five-
year operating lease facility of approximately $53 million expiring
in September 2009. The Company also maintains a $15 million
operating lease facility that expires in January 2008. The Company
has guaranteed the residual value of the properties under the
leases up to 82 percent of the fair market value at the commence-
ment of the lease. At December 31, 2004, the Company’s residual
value guarantee related to the leased assets totaled $56 million
for which the Company has recorded the estimated fair value of
this guarantee (approximately $1.2 million) in the Consolidated
Statements of Financial Position.
The majority of the Company’s fleet and some equipment is
leased through operating leases. The lease terms are non-cancelable
for the first twelve month term, and then are month-to-month,
cancelable at the Company’s option. There are residual value
guarantees (ranging from 70 percent to 87 percent depending
on the agreement) on these vehicles and equipment, which his-
torically have not resulted in significant net payments to the
lessors. At December 31, 2004, there was approximately $260
million of residual value guarantee relating to the Company’s
fleet and equipment leases. The fair value guarantee of the assets
under the leases is expected to fully mitigate the Company’s
obligations under the agreements. Accordingly, no liabilities
have been recorded with respect to the guarantees.
The following table presents the Company’s contractual obligations
and commitments:
(In millions) Total < 1 Yr 2-3 Yrs 4-5 Yrs > 5 Yrs
Debt balances * $ 805 $ 161 $ 75 $ 210 $ 359
Non-cancelable
operating leases 300 79 121 65 35
Purchase
Obligations:
Telecommunications 49 23 26 — —
Supply agreements
and other 44 30 9 5 —
Other long-term
liabilities: *
Insurance claims 188 78 56 21 33
Discontinued
operations 20 10 4 2 4
Other 32 2 6 3 21
Total amount $1,438 $ 383 $ 297 $ 306 $ 452
* These items are reported in the Consolidated Statements of Financial Position.
Not included in the table above are deferred income tax liabilities
and the related interest payments on the Company’s long-term
debt. Deferred income tax liabilities totaled $88 million and are
discussed in the Notes to the Consolidated Financial State-
ments. The majority of the Company’s debt is fixed rate debt.
Therefore, the Company has calculated the expected interest
payments to be approximately $52 million, $47 million, $45
million, $42 million, $36 million and $471 million in 2005, 2006,
2007, 2008, 2009, and 2010 and thereafter, respectively.
Financial Position – Continuing Operations
Receivables increased from prior year levels, reflecting general
business growth. Deferred customer acquisition costs were con-
sistent with prior year levels. The Company capitalizes sales
commissions and other direct contract acquisition costs relating
to termite baiting and pest contracts, as well as home warranty
agreements. These costs vary with and are directly related to a
new sale or contract renewal. Property and equipment increased,
reflecting general business growth as well as increases related to
information and productivity enhancing operating systems.
The Company does not have any material capital commitments
at this time.
Deferred revenue increased, reflecting growth in warranty
contracts written at American Home Shield. Accrued payroll
and related expenses increased from prior year levels, reflecting
an increased level of accruals for 2004 variable compensation as
the Company returned to more normal levels of incentive
earnings. Payments related to the 2004 incentive compensation
accruals were made in the first quarter of 2005. Income taxes
payable at December 31, 2004 primarily reflects the February
2005 federal tax payment related to the IRS agreement.