UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-16095
Aetna Inc.
Pennsylvania
|
23-2229683 | |||
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.) | |||
151 Farmington Avenue, Hartford, CT
|
06156 | |||
(Address of principal executive offices)
|
(Zip Code) | |||
Registrant’s telephone number, including area code
|
(860) 273-0123 | |||
Former name, former address and former fiscal year, if changed since last report:
N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). þ Yes o No
There were 290,445,584 shares of voting common stock with a par value of $.01 outstanding at March 31, 2005.
Table of Contents
Part I Financial Information
Item 1. Financial Statements
Consolidated Statements of Income
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| (Millions, except per common share data) | 2005 | 2004 | ||||||
Revenue: |
||||||||
Health care premiums |
$ | 4,053.5 | $ | 3,557.8 | ||||
Other premiums |
498.5 | 442.7 | ||||||
Administrative services contract fees |
568.9 | 512.2 | ||||||
Net investment income |
291.2 | 271.5 | ||||||
Other income * |
10.4 | 11.0 | ||||||
Net realized capital gains |
4.4 | 26.1 | ||||||
Total revenue |
5,426.9 | 4,821.3 | ||||||
Benefits and expenses: |
||||||||
Health care costs ** |
3,048.5 | 2,741.8 | ||||||
Current and future benefits |
615.3 | 547.0 | ||||||
Operating expenses: |
||||||||
Selling expenses |
203.0 | 163.6 | ||||||
General and administrative expenses |
859.8 | 820.1 | ||||||
Interest expense |
27.2 | 25.5 | ||||||
Amortization of other acquired intangible assets |
10.7 | 12.7 | ||||||
Total benefits and expenses |
4,764.5 | 4,310.7 | ||||||
Income from continuing operations before income taxes
(benefits) |
662.4 | 510.6 | ||||||
Income taxes (benefits): |
||||||||
Current |
182.6 | 194.0 | ||||||
Deferred |
55.8 | (9.2 | ) | |||||
Total income taxes |
238.4 | 184.8 | ||||||
Income from continuing operations |
424.0 | 325.8 | ||||||
Discontinued operations, net of tax (Note 16) |
— | 40.0 | ||||||
Net income |
$ | 424.0 | $ | 365.8 | ||||
Earnings per common share: |
||||||||
Basic: |
||||||||
Income from continuing operations |
$ | 1.45 | $ | 1.06 | ||||
Discontinued operations, net of tax |
— | .13 | ||||||
Net income |
$ | 1.45 | $ | 1.19 | ||||
Diluted: |
||||||||
Income from continuing operations |
$ | 1.39 | $ | 1.02 | ||||
Discontinued operations, net of tax |
— | .12 | ||||||
Net income |
$ | 1.39 | $ | 1.14 | ||||
| * Other income includes co-payment revenue and plan sponsor reimbursements related to the Company’s mail order pharmacy of $4.1 million and $4.3 million (net of pharmaceutical and processing costs of $199.1 million and $134.1 million) for the three months ended March 31, 2005 and 2004, respectively. |
| ** Health care costs have been reduced by fully insured member co-payment revenue related to the Company’s mail order pharmacy of $17.1 million and $13.6 million for the three months ended March 31, 2005 and 2004, respectively. |
Refer to accompanying Condensed Notes to Consolidated Financial Statements.
Page 1
Consolidated Balance Sheets
| As of March 31, | As of December 31, | |||||||
| (Millions, except share data) | 2005 | 2004 | ||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 930.0 | $ | 1,396.0 | ||||
Investment securities |
13,950.2 | 14,242.6 | ||||||
Other investments |
57.3 | 57.7 | ||||||
Premiums receivable, net |
305.8 | 256.1 | ||||||
Other receivables, net |
456.1 | 314.0 | ||||||
Accrued investment income |
193.5 | 198.6 | ||||||
Collateral received under securities loan agreements |
1,126.6 | 1,173.8 | ||||||
Loaned securities |
1,103.6 | 1,150.1 | ||||||
Income taxes receivable |
155.1 | 226.8 | ||||||
Deferred income taxes |
209.5 | 196.0 | ||||||
Other current assets |
399.6 | 304.5 | ||||||
Total current assets |
18,887.3 | 19,516.2 | ||||||
Long-term investments |
1,736.5 | 1,718.1 | ||||||
Mortgage loans |
1,436.8 | 1,348.2 | ||||||
Investment real estate |
269.7 | 274.8 | ||||||
Reinsurance recoverables |
1,165.1 | 1,173.0 | ||||||
Goodwill |
3,810.6 | 3,687.8 | ||||||
Other acquired intangible assets, net |
532.3 | 460.3 | ||||||
Property and equipment, net |
233.7 | 233.6 | ||||||
Deferred income taxes |
312.6 | 300.0 | ||||||
Other long-term assets |
416.6 | 405.9 | ||||||
Separate Accounts assets |
13,246.5 | 13,015.8 | ||||||
Total assets |
$ | 42,047.7 | $ | 42,133.7 | ||||
Liabilities and shareholders’ equity |
||||||||
Current liabilities: |
||||||||
Health care costs payable |
$ | 1,885.0 | $ | 1,927.1 | ||||
Future policy benefits |
833.6 | 837.6 | ||||||
Unpaid claims |
736.7 | 707.7 | ||||||
Unearned premiums |
141.2 | 121.8 | ||||||
Policyholders’ funds |
640.8 | 672.5 | ||||||
Collateral payable under securities loan agreements |
1,126.6 | 1,173.8 | ||||||
Current portion of long-term debt |
449.7 | — | ||||||
Accrued expenses and other current liabilities |
1,561.3 | 1,570.8 | ||||||
Total current liabilities |
7,374.9 | 7,011.3 | ||||||
Future policy benefits |
7,839.9 | 7,859.5 | ||||||
Unpaid claims |
1,098.7 | 1,081.5 | ||||||
Policyholders’ funds |
1,442.2 | 1,453.1 | ||||||
Long-term debt, less current portion |
1,151.7 | 1,609.7 | ||||||
Other long-term liabilities |
854.7 | 1,021.4 | ||||||
Separate Accounts liabilities |
13,246.5 | 13,015.8 | ||||||
Total liabilities |
33,008.6 | 33,052.3 | ||||||
Commitments and contingencies (Note 13) |
||||||||
Shareholders’ equity: |
||||||||
Common stock and additional paid-in capital ($.01 par value,
1,455,534,038 shares authorized, 290,445,584 shares issued and
outstanding in 2005 and $.01 par value, 732,492,499 shares
authorized, 293,005,672 shares issued and outstanding in 2004) |
2,721.3 | 3,076.5 | ||||||
Retained earnings |
6,970.4 | 6,546.4 | ||||||
Accumulated other comprehensive loss |
(652.6 | ) | (541.5 | ) | ||||
Total shareholders’ equity |
9,039.1 | 9,081.4 | ||||||
Total liabilities and shareholders’ equity |
$ | 42,047.7 | $ | 42,133.7 | ||||
Refer to accompanying Condensed Notes to Consolidated Financial Statements.
Page 2
Consolidated Statements of Shareholders’ Equity
| Number of | Common | Accumulated | ||||||||||||||||||||||
| Common | Stock and | Other | Total | |||||||||||||||||||||
| (Millions, except per share data) | Stock Shares | Additional | Retained | Comprehensive | Shareholders’ | Comprehensive | ||||||||||||||||||
| Three Months Ended March 31, 2005 | Outstanding | Paid-in Capital | Earnings | Income (Loss) | Equity | Income | ||||||||||||||||||
Balance at December 31, 2004 |
293,005,672 | $ | 3,076.5 | $ | 6,546.4 | $ | (541.5 | ) | $ | 9,081.4 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
— | — | 424.0 | — | 424.0 | $ | 424.0 | |||||||||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||
Net unrealized losses on
securities (1) |
— | — | — | (110.8 | ) | (110.8 | ) | |||||||||||||||||
Net foreign currency losses |
— | — | — | (.2 | ) | (.2 | ) | |||||||||||||||||
Net derivative losses (1) |
— | — | — | (.1 | ) | (.1 | ) | |||||||||||||||||
Other comprehensive loss |
— | — | — | (111.1 | ) | (111.1 | ) | (111.1 | ) | |||||||||||||||
Total comprehensive income |
$ | 312.9 | ||||||||||||||||||||||
Common shares issued for
benefit plans |
5,190,872 | 206.4 | — | — | 206.4 | |||||||||||||||||||
Repurchases of common shares |
(7,750,960 | ) | (561.6 | ) | — | — | (561.6 | ) | ||||||||||||||||
Balance at March 31, 2005 |
290,445,584 | $ | 2,721.3 | $ | 6,970.4 | $ | (652.6 | ) | $ | 9,039.1 | ||||||||||||||
Three Months Ended March 31, 2004 |
||||||||||||||||||||||||
Balance at December 31, 2003 |
305,156,502 | $ | 4,024.8 | $ | 4,307.2 | $ | (408.0 | ) | $ | 7,924.0 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
— | — | 365.8 | — | 365.8 | $ | 365.8 | |||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Net unrealized gains on securities
(1) |
— | — | — | 72.3 | 72.3 | |||||||||||||||||||
Net foreign currency losses |
— | — | — | (.1 | ) | (.1 | ) | |||||||||||||||||
Net derivative gains (1) |
— | — | — | .2 | .2 | |||||||||||||||||||
Other comprehensive income |
— | — | — | 72.4 | 72.4 | 72.4 | ||||||||||||||||||
Total comprehensive income |
$ | 438.2 | ||||||||||||||||||||||
Common shares issued for
benefit plans |
9,660,858 | 232.3 | — | — | 232.3 | |||||||||||||||||||
Repurchases of common shares |
(9,957,200 | ) | (419.2 | ) | — | — | (419.2 | ) | ||||||||||||||||
Balance at March 31, 2004 |
304,860,160 | $ | 3,837.9 | $ | 4,673.0 | $ | (335.6 | ) | $ | 8,175.3 | ||||||||||||||
| (1) | Net of reclassification adjustments (Refer to Note 8). |
Refer to accompanying Condensed Notes to Consolidated Financial Statements.
Page 3
Consolidated Statements of Cash Flows
| For the Three Months | ||||||||
| Ended March 31, | ||||||||
| (Millions) | 2005 | 2004 | ||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 424.0 | $ | 365.8 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Discontinued operations |
— | (40.0 | ) | |||||
Amortization of other acquired intangible assets |
10.7 | 12.7 | ||||||
Depreciation and other amortization |
34.4 | 35.1 | ||||||
Amortization of net investment premium |
10.3 | 11.8 | ||||||
Net realized capital gains |
(4.4 | ) | (26.1 | ) | ||||
Changes in assets and liabilities: |
||||||||
Decrease in accrued investment income |
5.1 | .1 | ||||||
Increase in premiums due and other receivables |
(80.8 | ) | (28.7 | ) | ||||
Net change in income taxes |
213.1 | 205.5 | ||||||
Net change in other assets and other liabilities |
(436.2 | ) | (438.5 | ) | ||||
Net increase (decrease) in health care and insurance liabilities |
2.6 | (26.5 | ) | |||||
Other, net |
(34.3 | ) | (11.8 | ) | ||||
Net cash provided by operating activities |
144.5 | 59.4 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from sales and investment maturities of: |
||||||||
Debt securities available for sale |
2,287.1 | 2,501.3 | ||||||
Other investments |
308.7 | 855.9 | ||||||
Cost of investments in: |
||||||||
Debt securities available for sale |
(2,238.6 | ) | (2,691.4 | ) | ||||
Other investments |
(266.7 | ) | (1,046.8 | ) | ||||
Increase in property, equipment and software |
(47.1 | ) | (34.2 | ) | ||||
Cash used for acquisitions, net of cash acquired |
(241.7 | ) | — | |||||
Net cash used for investing activities |
(198.3 | ) | (415.2 | ) | ||||
Cash flows from financing activities: |
||||||||
Deposits and interest credited for investment contracts |
9.0 | 15.0 | ||||||
Withdrawals of investment contracts |
(11.7 | ) | (171.2 | ) | ||||
Common shares issued under benefit plans |
118.7 | 140.4 | ||||||
Common shares repurchased |
(528.2 | ) | (363.8 | ) | ||||
Other, net |
— | 10.0 | ||||||
Net cash used for financing activities |
(412.2 | ) | (369.6 | ) | ||||
Net decrease in cash and cash equivalents |
(466.0 | ) | (725.4 | ) | ||||
Cash and cash equivalents, beginning of period |
1,396.0 | 1,433.4 | ||||||
Cash and cash equivalents, end of period |
$ | 930.0 | $ | 708.0 | ||||
Supplemental cash flow information: |
||||||||
Interest paid |
$ | 44.1 | $ | 42.2 | ||||
Income taxes paid (refunded) |
25.0 | (19.0 | ) | |||||
Refer to accompanying Condensed Notes to Consolidated Financial Statements.
Page 4
Condensed Notes to Consolidated Financial Statements
1. Organization
The accompanying consolidated financial statements include Aetna Inc. (a Pennsylvania corporation) (“Aetna”) and its subsidiaries (collectively, the “Company”). The Company’s operations include three business segments: Health Care, Group Insurance and Large Case Pensions. Health Care consists of health and dental plans offered on both a risk basis (where the Company assumes all or a majority of the risk for medical and dental care costs) and an employer-funded basis (where the plan sponsor under an administrative services contract (“ASC”) assumes all or a majority of this risk). Medical plans include point-of-service (“POS”), health maintenance organization (“HMO”), preferred provider organization (“PPO”) and indemnity benefit (“Indemnity”) products. Health plans also include Health Savings Accounts (“HSA”) and Aetna HealthFund®, consumer-directed plans that combine traditional POS or PPO and/or dental coverage, subject to a deductible, with an accumulating benefit account (which may be funded by the plan sponsor or member in the case of HSAs). The Group Insurance segment includes group life insurance products offered on a risk basis, as well as group disability and long-term care insurance products offered on both a risk and an employer-funded basis. Large Case Pensions manages a variety of retirement products (including pension and annuity products) primarily for defined benefit and defined contribution plans. These products provide a variety of funding and benefit payment distribution options and other services. The Large Case Pensions segment includes certain discontinued products. (Refer to Note 15 for additional information.)
On February 9, 2005, the Board declared a two-for-one stock split of the Company’s common stock effected in the form of a 100% common stock dividend. All shareholders of record on February 25, 2005 received one additional share of common stock for each share held on that date. The additional shares of common stock were distributed to shareholders of record in the form of a stock dividend on March 11, 2005. All share and per share amounts in the accompanying consolidated financial statements and related notes have been adjusted to reflect the stock split for all periods presented.
These interim statements necessarily rely heavily on estimates, including assumptions as to annualized tax rates. In the opinion of management, all adjustments necessary for a fair statement of results for the interim periods have been made. All such adjustments are of a normal, recurring nature. The accompanying consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes presented in Aetna’s 2004 Annual Report on Form 10-K (the “2004 Annual Report”). Certain financial information that is normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), but that is not required for interim reporting purposes, has been condensed or omitted.
2. Summary of Significant Accounting Policies
Principles of
Consolidation
These unaudited consolidated financial statements have been prepared in accordance with GAAP and
include the accounts of Aetna and subsidiaries that the Company controls. All significant
intercompany balances have been eliminated in consolidation.
Page 5
Future Application of Accounting Standard
Accounting for Share-Based Payment
In December 2004, the Financial Accounting Standards Board (the “FASB”) issued Statement of
Financial Accounting Standards (“FAS”) No. 123 Revised, “Share-Based Payment” (“FAS 123-R”). FAS
123-R requires companies to charge the fair value of all share-based payment awards (including
stock options), issued to employees and non-employees, to expense. The provisions of this standard
require the fair value to be calculated using a valuation model (such as the Black-Scholes or
binomial-lattice models). The provisions of this standard are effective for all new share-based
arrangements entered into in the first quarter of 2006, as well as the fair value of the unvested
portion of existing arrangements as of January 1, 2006. The estimated fair value of the unvested
portion of existing arrangements as of January 1, 2006 is expected to be approximately $27 million,
of which approximately $15 million will be expensed in 2006 in addition to the fair value of any
future grants.
Stock-Based Compensation
At March 31, 2005, the Company had various stock-based employee incentive plans, which are
described more fully in Note 13 to the consolidated financial statements presented in the 2004
Annual Report. The Company uses the intrinsic value method of accounting for stock-based awards
granted to employees. Accordingly, compensation cost is not recognized when the exercise price of
an employee stock option equals or exceeds the fair value of the stock on the date the option is
granted. The following table illustrates the pro forma net income and pro forma earnings per
common share as if the Company had applied the fair value based method of accounting to all awards
of stock-based employee compensation for the three months ended March 31, 2005 and 2004. The
Company uses a modified Black-Scholes option pricing model to estimate fair value.
| (Millions, except per common share data) | 2005 | 2004 | ||||||
Net income, as reported |
$ | 424.0 | $ | 365.8 | ||||
Add: Stock-based employee compensation
expense included in reported net income,
net of related taxes |
8.1 | 4.1 | ||||||
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards,
net of related taxes |
(42.8 | ) | (20.0 | ) | ||||
Pro forma net income |
$ | 389.3 | $ | 349.9 | ||||
Earnings per common share: |
||||||||
Basic – as reported |
$ | 1.45 | $ | 1.19 | ||||
Basic – pro forma |
1.33 | 1.14 | ||||||
Diluted – as reported |
1.39 | 1.14 | ||||||
Diluted – pro forma |
1.27 | 1.09 | ||||||
3. Acquisition
In August 2004, the Company announced that it had agreed to acquire Strategic Resource Company (“SRC”), a privately held administrator of group limited benefit products for part-time and hourly workers. The Company closed this transaction in January 2005. For approximately $252 million, financed through available cash, Aetna acquired 100% of the stock of SRC and reinsured the insurance contracts administered by SRC. Approximately $72 million of the purchase price is held in escrow pending resolution of certain future events. In the first quarter of 2005, the Company recorded approximately $82 million of intangible assets (primarily customer lists) and goodwill of approximately $123 million, which represents the purchase price in excess of the fair value of the net assets acquired, associated with this acquisition.
Page 6
4. Earnings Per Common Share
A reconciliation of the numerator and denominator of the basic and diluted earnings per common share (“EPS”) for the three months ended March 31, 2005 and 2004 is as follows:
| Income | Shares | Per Common | ||||||||||
| (Millions, except EPS data) | (Numerator) | (Denominator) | Share Amount | |||||||||
2005 |
||||||||||||
Basic EPS: |
||||||||||||
Income from continuing operations |
$ | 424.0 | 293.3 | $ | 1.45 | |||||||
Effect of dilutive securities: |
||||||||||||
Stock options and other |
12.7 | |||||||||||
Diluted EPS: |
||||||||||||
Income from continuing operations and
assumed conversions |
$ | 424.0 | 306.0 | $ | 1.39 | |||||||
2004 |
||||||||||||
Basic EPS: |
||||||||||||
Income from continuing operations |
$ | 325.8 | 307.8 | $ | 1.06 | |||||||
Effect of dilutive securities: |
||||||||||||
Stock options and other (1) |
13.0 | |||||||||||
Diluted EPS: |
||||||||||||
Income from continuing operations and
assumed conversions |
$ | 325.8 | 320.8 | $ | 1.02 | |||||||
| (1) | Options to purchase common shares for the three months ended March 31, 2004 of 3.8 million shares (with exercise prices ranging from $38.75 to $44.63) were not included in the calculation of diluted earnings per common share because the options’ exercise prices were greater than the average market price of common shares during such period. |
5. Operating Expenses
| (Millions) | 2005 | 2004 | ||||||
Selling expenses |
$ | 203.0 | $ | 163.6 | ||||
General and administrative expenses: |
||||||||
Salaries and related benefits |
539.2 | 508.4 | (1) | |||||
Other general and administrative expenses |
320.6 | 311.7 | ||||||
Total general and administrative expenses |
859.8 | 820.1 | ||||||
Total
operating expenses |
$ | 1,062.8 | $ | 983.7 | ||||
| (1) | Salaries and related benefits for the three months ended March 31, 2004 include a curtailment benefit of $31.8 million related to the elimination of the dental subsidy for all retirees. |
6. Other Acquired Intangible Assets
| Accumulated | Amortization | |||||||||||||||
| (Millions) | Cost | Amortization | Net Balance | Period (Years) | ||||||||||||
March 31, 2005 |
||||||||||||||||
Other acquired intangible assets: |
||||||||||||||||
Provider networks |
$ | 680.2 | $ | 232.2 | $ | 448.0 | 20 – 25 | |||||||||
Customer lists |
998.0 | 920.6 | 77.4 | 5 – 9 | ||||||||||||
Other |
7.4 | .5 | 6.9 | 3 – 5 | ||||||||||||
Total other acquired intangible
assets |
$ | 1,685.6 | $ | 1,153.3 | $ | 532.3 | ||||||||||
December 31, 2004 |
||||||||||||||||
Other acquired intangible assets: |
||||||||||||||||
Provider networks |
$ | 679.9 | $ | 225.1 | $ | 454.8 | 20 – 25 | |||||||||
Customer lists |
919.0 | 917.5 | 1.5 | 5 – 7 | ||||||||||||
Other |
4.0 | — | 4.0 | 3 – 5 | ||||||||||||
Total other acquired intangible
assets |
$ | 1,602.9 | $ | 1,142.6 | $ | 460.3 | ||||||||||
Page 7