American Home Shield 2007 Annual Report Download - page 44

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services are recognized as they are earned based upon monthly contract arrangements or when services are performed for non-
contractual arrangements. 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. Those costs bear a direct relationship to the fulfillment of the Company's
obligations under the contracts and are representative of the relative value provided to the customer (proportional performance
method). Home warranty contract revenue is recognized based on the expected emergence of total claim costs. The Company
regularly reviews its estimates of direct costs for its termite bait and home warranty contracts and adjusts the estimates when
appropriate. Revenues from the Company's commercial disaster response and reconstruction projects are recognized using the
percentage of completion method in the ratio that total incurred costs bear to total estimated costs. Revenue from trade name
licensing arrangements is recognized when earned. Franchise 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.
Newly Issued Accounting Statements and Positions
In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 "Accounting for Uncertain Tax
Positions" (FIN 48). FIN 48 provides guidance on the accounting for and disclosure of tax positions accounted for in accordance
with SFAS 109. FIN 48 requires that the effects of a tax position be initially recognized when it is "more likely than not" (which is
defined as a greater than 50 percent chance) that the position will be sustained upon examination by the taxing authorities. In
addition, FIN 48 requires additional disclosures regarding tax positions. FIN 48 is effective beginning January 1, 2007. The
Company does not expect the adoption of this Statement to have a material effect on these Consolidated Financial Statements.
In September 2006, the Financial Accounting Standards Board issued SFAS 157, "Fair Value Measurement". This Statement
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and
expands disclosures about fair value measurements. There are no new fair value measurements required. This Statement is effective
for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact
of this Statement to the Company's consolidated financial position, results of operations and cash flows; however, the Company
does not expect the adoption of this Statement to have a material effect on these Consolidated Financial Statements.
In February 2007, the Financial Accounting Standards Board issued SFAS 159, "The Fair Value Option for Financial Assets and
Financial Liabilities". This Statement permits entities to choose to measure at fair value many financial instruments and certain
other items such as investments, debt and derivative instruments. This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of this Statement on its
Consolidated Financial Statements.
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 (9.1 percent average rate during 2006).
The Company generally maintains the majority of its debt at fixed rates. After considering the effect of the interest rate swap
agreements, approximately 70 percent of total recorded debt at December 31, 2006 was at a fixed rate.
The following table summarizes information about the Company's fixed rate debt as of December 31, 2006 (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 $448 million at December 31, 2006.
Expected Maturity Date
(In millions) 2007 2008 2009 2010 2011 There
after Total
Fixed rate debt $ 70 $ 13 $ 27 $ 11 $ 8 $ 356 $ 485
Avg. rate 6.5% 7.3% 7.2% 6.7% 6.8% 7.5% 7.3%
The Company believes its exposure to interest rate fluctuations, when viewed on both a gross and net basis, is not material to its
overall results of operations. On a gross basis, the Company's adverse exposure to rising interest rates principally relates to interest
payments on floating rate debt ($205 million at December 31, 2006, after considering
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