American Home Shield 2006 Annual Report Download - page 37

liabilities of the reporting unit have not changed significantly since the most recent fair value calculation, the most recent fair value
calculation resulted in an amount that exceeded the carrying amount of the reporting unit by a substantial margin, and based on the
facts and circumstances of events that have occurred since the last fair value determination, the likelihood that a current fair value
calculation would result in an impairment would be remote. For the 2005 goodwill and trade name impairment review, the
Company carried forward the valuations for all reporting units except ARS. A valuation analysis performed for ARS indicated no
impairment issue.
Revenue from lawn care, pest control, liquid and fumigation termite applications, as well as heating/air conditioning and plumbing
services are recognized as the services are provided. Revenue from landscaping services are recognized as they are earned based
upon monthly contract arrangements or when services are performed for non-contractual arrangements. Revenue from the
Company's commercial installation contracts, primarily relating to HVAC and electrical installations are recognized on the
percentage of completion method in the ratio that total incurred costs bear to total estimated costs. The Company eradicates termites
through the use of baiting stations, as well as through non-baiting methods (e.g., fumigation or liquid treatments). Termite services
using baiting stations, as well as home warranty services, frequently are sold through annual contracts for a one-time, upfront
payment. Direct costs of these contracts (service costs for termite contracts and claim costs for warranty contracts) are expensed as
incurred. The Company recognizes revenue over the life of these contracts in proportion to the expected direct costs. Revenue from
trade name licensing arrangements is recognized when earned. Franchised revenue consists principally of monthly fee revenue,
which is recognized when the related customer level revenue is reported by the franchisee and collectibility is assured. Franchise
revenue also includes initial fees resulting from the sale of franchises. These fees are fixed and are recognized as revenue when
collectibility is assured and all material services or conditions relating to the sale have been substantially performed.
Customer acquisition costs, which are incremental and direct costs of obtaining a customer, are deferred and amortized over the life
of the related contract in proportion to revenue recognized. These costs include sales commissions and direct selling costs which
can be shown to have resulted in a successful sale.
Newly Issued Accounting Statements and Positions
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
123 (revised 2004), "Share-Based Payment" (SFAS 123(R)). This Statement replaces SFAS 123, "Accounting for Stock-Based
Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS 123(R) requires that
stock options and share grants be recorded at fair value and this value is recognized as compensation expense over the vesting
period. The Statement requires that compensation expense be recorded for newly issued awards as well as the unvested portion of
previously issued awards that remain outstanding as of the effective date of this Statement. The provisions of this Statement become
effective beginning with the Company's 2006 fiscal year (January 1, 2006). The Company had previously disclosed that it had
expected to restate prior periods as if this Statement were in effect for all periods. As permitted by this Statement, the Company will
instead prospectively apply the provisions of this Statement effective January 1, 2006. The Company currently estimates that the
adoption of this Statement will reduce earnings per share in 2006 by approximately $.01.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The economy and its impact on discretionary consumer spending, labor wages, fuel prices, home re-sales, unemployment rates,
insurance costs and medical inflation rates could be significant to future operating earnings.
The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company has entered
into specific financial arrangements, primarily fuel hedges, 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 is not material to the Company's financial statements.
In December 2003 and January 2004, the Company entered into interest rate swap agreements with a total notional amount of $165
million. Under the terms of these agreements, the Company pays a floating rate of interest (based on a specified spread over six-
month LIBOR) on the notional amount and the Company receives a fixed rate of interest at 7.88 percent on the notional amount.
The impact of these swap transactions was to convert $165 million of the Company's debt from a fixed rate of 7.88 percent to a
variable rate based on LIBOR (7.5 percent average rate during 2005).
The Company generally maintains the majority of its debt at fixed rates. After considering the effect of the interest rate swap
agreements, approximately 74 percent of total recorded debt at December 31, 2005 was at a fixed rate.
The following table summarizes information about the Company's fixed rate debt as of December 31, 2005 (after considering the
effect of the interest rate swap agreements), including the principal cash payments and related weighted-average interest rates by
expected maturity dates. The fair value of the Company's fixed rate debt was approximately $491 million at December 31, 2005.
Expected Maturity Date
(In millions) 2006 2007 2008 2009 2010 There
after Total
Fixed rate debt $ 19 $ 61 $ 12 $ 25 $ 8 $ 359 $ 484
Avg. rate 5.7% 7.1% 7.1% 7.8% 7.9% 7.5% 7.4%
With respect to other obligations, the payments on the approximately $68 million of funding outstanding under the Company's real
estate operating lease facilities as well as its fleet and equipment operating leases (approximately $259 million in residual value
guarantee) are tied to floating interest rates. The Company's exposure to interest expense based on floating rates is partially offset
by floating rate investment income earned on cash and marketable securities. The Company believes its overall exposure to