American Home Shield 2007 Annual Report Download - page 64

Notes to the Consolidated Financial Statements
The Other Operations and Headquarters segment includes the operations of InStar, ServiceMaster Clean and Merry Maids, as well
as the Company's headquarters function. During 2006, InStar (acquired February 28, 2006) reported revenue of $96 million and
operating income, net of first-year acquisition-related amortization costs, of $2 million. The ServiceMaster Clean and Merry Maids
franchise operations reported combined revenue of $189 million, $169 million and $156 million in 2006, 2005 and 2004,
respectively and combined operating income of $55 million, $51 million and $47 million in 2006, 2005 and 2004, respectively.
The following table summarizes the segment goodwill that is not amortized. See the "Acquisitions" note and the "Goodwill and
Intangible Assets" note in the Notes to Consolidated Financial Statements for information relating to goodwill acquired and
amounts impaired, respectively.
(In thousands) 2006(1) 2005 2004
TruGreen LawnCare $ 740,249 $ 700,029 $ 681,954
Terminix 705,870 661,166 643,567
American Home Shield 86,918 85,526 72,085
Other Operations & Headquarters 115,221 101,349 114,267
Total $ 1,648,258 $ 1,548,070 $ 1,511,873
(1) In the fourth quarter of 2006, $20 million of enterprise goodwill was reclassified to the TruGreen LawnCare, Terminix, and
American Home Shield segments from the Other Operations and Headquarters segment.
Goodwill and Intangible Assets
In accordance with SFAS 142, "Goodwill and Other Intangible Assets", the Company discontinued the amortization of goodwill
and indefinite lived intangible assets effective January 1, 2002. Goodwill and intangible assets that are not amortized are subject to
assessment for impairment by applying a fair-value based test on an annual basis or more frequently if circumstances indicate a
potential impairment. For the 2006 goodwill and trade name impairment review, the Company carried forward the valuations for all
reporting units, except InStar which was purchased during the first quarter of 2006.
In February 2006, the Company acquired InStar, a leading provider of commercial disaster response and reconstruction services for
approximately $85 million in cash. The results of InStar's operations have been included in the Company's consolidated financial
statements since the acquisition date. The purchase price was allocated to the underlying net assets acquired, consisting primarily of
trade receivables, project costs in excess of billings and accounts payable and accrued expenses. In addition, the Company allocated
$20 million to customer relationships, project backlog and other intangible assets that have a weighted-average useful life of
approximately five years. The Company recorded $31 million of goodwill. In determining this preliminary allocation of purchase
price, the Company utilized the services of third-party valuation experts. The allocation of purchase price is substantially complete.
Pending receipt of additional information regarding the fair value of certain pre-acquisition contingencies, the Company expects to
finalize the purchase price allocation during the first quarter of 2007. The remaining increase in goodwill and intangible assets for
2006 relates to the acquisition of Safeguard Pest Control and other tuck-in acquisitions primarily at Terminix and TruGreen
LawnCare.
The increase in goodwill and intangible assets in 2005 relates to tuck-in acquisitions completed throughout the year by Terminix
and TruGreen LawnCare, as well as the acquisition of a distributorship by ServiceMaster Clean in the third quarter.
In April 2004, TruGreen LawnCare acquired the assets of Greenspace Limited, Canada's largest professional lawn care service
company. Intangible assets recorded were less than $16 million. The balance of goodwill and intangible assets that were added
during 2004 relate to tuck-in acquisitions completed by Terminix and TruGreen LawnCare.
The table below summarizes the goodwill and intangible asset balances:
(In thousands) 2006 2005 2004
Goodwill (1) $ 1,648,258 $ 1,548,070 $ 1,511,873
Trade names(1) 215,493 215,493 204,793
Other intangible assets 80,098 49,981 45,679
Accumulated amortization (46,374) (35,131) (29,677)
Net other intangibles 33,724 14,850 16,002
Total $ 1,897,475 $ 1,778,413 $ 1,732,668
(1) Not subject to amortization.
(2) Amortization expense of $11 million, $5 million and $6 million was recorded in 2006, 2005 and 2004, respectively. For the
existing intangible assets, the Company anticipates amortization expense of $10 million in 2007 declining ratably to approximately
$2 million of amortization expense in 2011.
Income Taxes