SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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1-16725
(Commission file number)
PRINCIPAL FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 42-1520346
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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711 HIGH STREET, DES MOINES, IOWA 50392
(Address of principal executive offices)
(515) 247-5111
(Registrant's telephone number, including area code)
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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. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
The total number of shares of the registrant's Common Stock, $0.01 par value,
outstanding as of October 28, 2004 was 306,960,217.
PRINCIPAL FINANCIAL GROUP, INC.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Position at
September 30, 2004 (Unaudited) and December 31, 2003..... 3
Unaudited Consolidated Statements of Operations for the
three months and nine months ended September 30, 2004
and 2003................................................. 4
Unaudited Consolidated Statements of Stockholders' Equity
for the nine months ended September 30, 2004 and 2003.... 6
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003............ 7
Notes to Unaudited Consolidated Financial Statements -
September 30, 2004....................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 43
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 96
Item 4. Controls and Procedures....................................... 102
PART II - OTHER INFORMATION
Item 1. Legal proceedings............................................ 102
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.. 103
Item 6. Exhibits..................................................... 104
Signature............................................................. 105
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------------ ------------------
(Unaudited) (Note 1)
(IN MILLIONS)
ASSETS
Fixed maturities, available-for-sale........................................ $ 39,681.6 $ 37,418.4
Fixed maturities, trading................................................... 101.2 102.9
Equity securities, available-for-sale....................................... 797.7 699.2
Mortgage loans.............................................................. 11,548.8 11,251.6
Real estate................................................................. 1,072.7 1,526.1
Policy loans................................................................ 809.7 804.1
Other investments........................................................... 1,223.6 1,412.1
------------------ ------------------
Total investments........................................................ 55,235.3 53,214.4
Cash and cash equivalents................................................... 1,902.5 1,192.5
Accrued investment income................................................... 650.4 656.6
Premiums due and other receivables.......................................... 874.9 714.9
Deferred policy acquisition costs........................................... 1,739.1 1,568.9
Property and equipment...................................................... 431.5 445.2
Goodwill.................................................................... 234.9 175.8
Other intangibles........................................................... 155.7 121.0
Separate account assets..................................................... 47,593.1 43,407.8
Assets of discontinued operations........................................... - 5,425.1
Other assets................................................................ 959.0 832.2
------------------ ------------------
Total assets............................................................. $ 109,776.4 $ 107,754.4
================== ==================
LIABILITIES
Contractholder funds........................................................ $ 31,547.2 $ 28,896.4
Future policy benefits and claims........................................... 15,738.1 15,450.8
Other policyholder funds.................................................... 726.8 709.1
Short-term debt............................................................. 145.4 702.8
Long-term debt.............................................................. 847.2 1,374.3
Income taxes payable........................................................ 729.7 113.9
Deferred income taxes....................................................... 1,119.6 1,198.9
Separate account liabilities................................................ 47,593.1 43,407.8
Liabilities of discontinued operations...................................... - 4,575.3
Other liabilities........................................................... 3,634.9 3,925.5
------------------ ------------------
Total liabilities........................................................ 102,082.0 100,354.8
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share - 2,500.0 million shares
authorized, 378.3 million and 377.4 million shares issued, and 307.0
million and 320.7 million shares outstanding in 2004 and 2003,
respectively............................................................. 3.8 3.8
Additional paid-in capital.................................................. 7,231.1 7,153.2
Retained earnings........................................................... 1,242.5 630.4
Accumulated other comprehensive income...................................... 1,282.2 1,171.3
Treasury stock, at cost (71.3 million and 56.7 million shares in 2004 and
2003, respectively)...................................................... (2,065.2) (1,559.1)
------------------ ------------------
Total stockholders' equity............................................... 7,694.4 7,399.6
------------------ ------------------
Total liabilities and stockholders' equity............................... $ 109,776.4 $ 107,754.4
================== ==================
SEE ACCOMPANYING NOTES.
3
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------------
2004 2003 2004 2003
-------------- ---------------- --------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
REVENUES
Premiums and other considerations.............. $ 923.8 $ 867.8 $2,736.8 $ 2,648.2
Fees and other revenues........................ 363.6 289.3 1,060.4 832.6
Net investment income.......................... 822.5 821.4 2,397.9 2,423.2
Net realized/unrealized capital losses......... (21.3) (6.4) (130.1) (90.6)
-------------- ---------------- --------------- ---------------
Total revenues.............................. 2,088.6 1,972.1 6,065.0 5,813.4
EXPENSES
Benefits, claims and settlement expenses....... 1,238.0 1,174.4 3,645.2 3,554.3
Dividends to policyholders..................... 72.0 78.7 219.7 232.7
Operating expenses............................. 543.3 494.5 1,593.9 1,470.1
-------------- ---------------- --------------- ---------------
Total expenses.............................. 1,853.3 1,747.6 5,458.8 5,257.1
-------------- ---------------- --------------- ---------------
Income from continuing operations before
income taxes................................ 235.3 224.5 606.2 556.3
Income taxes................................... 40.7 55.8 119.3 136.9
-------------- ---------------- --------------- ---------------
Income from continuing operations, net of
related income taxes........................ 194.6 168.7 486.9 419.4
Income from discontinued operations, net of
related income taxes........................ 104.2 19.2 130.9 126.4
-------------- ---------------- --------------- ---------------
Income before cumulative effect of
accounting changes.......................... 298.8 187.9 617.8 545.8
Cumulative effect of accounting changes, net
of related income taxes..................... - (3.4) (5.7) (3.4)
-------------- ---------------- --------------- ---------------
Net income..................................... $ 298.8 $ 184.5 $ 612.1 $ 542.4
============== ================ =============== ===============
4
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2004 2003 2004 2003
--------------- ---------------- --------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
EARNINGS PER COMMON SHARE
Basic earnings per common share:
Income from continuing operations, net of
related income taxes..................... $ 0.62 $ 0.52 $ 1.54 $ 1.28
Income from discontinued operations, net
of related income taxes.................. 0.34 0.06 0.41 0.39
--------------- ---------------- --------------- ----------------
Income before cumulative effect of
accounting changes....................... 0.96 0.58 1.95 1.67
Cumulative effect of accounting changes,
net of related income taxes.............. - (0.01) (0.02) (0.01)
--------------- ---------------- --------------- ----------------
Net income................................. $ 0.96 $ 0.57 $ 1.93 $ 1.66
=============== ================ =============== ================
Diluted earnings per common share:
Income from continuing operations, net of
related income taxes..................... $ 0.62 $ 0.52 $ 1.53 $ 1.28
Income from discontinued operations, net
of related income taxes.................. 0.33 0.06 0.41 0.39
--------------- ---------------- --------------- ----------------
Income before cumulative effect of
accounting changes....................... 0.95 0.58 1.94 1.67
Cumulative effect of accounting changes,
net of related income taxes.............. - (0.01) (0.02) (0.01)
--------------- ---------------- --------------- ----------------
Net income................................. $ 0.95 $ 0.57 $ 1.92 $ 1.66
=============== ================ =============== ================
SEE ACCOMPANYING NOTES.
5
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCKHOLDERS' OUTSTANDING
STOCK CAPITAL EARNINGS INCOME STOCK EQUITY SHARES
-------------- ------------- ----------- ----------------- ----------- --------------- ------------
(IN MILLIONS) (IN THOUSANDS)
BALANCES AT JANUARY 1, 2003..... $3.8 $7,106.3 $ 29.4 $ 635.8 $(1,118.1) $6,657.2 334,419.3
Shares issued, net of call
options....................... - 14.9 - - - 14.9 578.0
Stock-based compensation........ - 18.0 - - - 18.0
Treasury stock acquired and
sold, net..................... - 3.2 - - (366.0) (362.8) (12,156.3)
Comprehensive income:
Net income.................... - - 542.4 - - 542.4
Net unrealized gains.......... - - - 816.6 - 816.6
Provision for deferred income
taxes....................... - - - (294.7) - (294.7)
Net foreign currency
translation adjustment...... - - - 35.5 - 35.5
Cumulative effect of
accounting change, net of
related income taxes........ - - - 9.2 - 9.2
---------------
Comprehensive income............ 1,109.0
-------------- ------------- ----------- ----------------- ----------- --------------- ------------
BALANCES AT SEPTEMBER 30, 2003.. $3.8 $7,142.4 $ 571.8 $1,202.4 $(1,484.1) $7,436.3 322,841.0
============== ============= =========== ================= =========== =============== ============
BALANCES AT JANUARY 1, 2004..... $3.8 $7,153.2 $ 630.4 $1,171.3 $(1,559.1) $7,399.6 320,667.5
Shares issued................... 36.2 - - - 36.2 850.7
Stock-based compensation and
additional related tax
benefits...................... - 33.3 - - - 33.3
Tax benefits related to
initial public offering....... - 8.4 - - - 8.4
Treasury stock acquired......... - - - - (506.1) (506.1) (14,558.0)
Comprehensive income:
Net income.................... - - 612.1 - - 612.1
Net unrealized gains.......... - - - 142.2 - 142.2
Provision for deferred income
tax benefit................. - - - (26.6) - (26.6)
Net foreign currency
translation adjustment, net
of related income taxes..... - - - (7.2) - (7.2)
Minimum pension liability, net
of related income taxes..... - - - 2.5 - 2.5
---------------
Comprehensive income............ 723.0
-------------- ------------- ----------- ----------------- ----------- --------------- ------------
BALANCES AT SEPTEMBER 30, 2004.. $3.8 $7,231.1 $1,242.5 $1,282.2 $(2,065.2) $7,694.4 306,960.2
============== ============= =========== ================= =========== =============== ============
SEE ACCOMPANYING NOTES.
6
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
2004 2003
------------------ ----------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net income............................................ $ 612.1 $ 542.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Income from discontinued operations, net of
related income taxes........................... (130.9) (126.4)
Cumulative effect of accounting changes,
net of related income taxes.................... 5.7 3.4
Amortization of deferred policy acquisition costs. 151.6 139.6
Additions to deferred policy acquisition costs.... (338.9) (253.0)
Accrued investment income......................... 6.2 21.7
Premiums due and other receivables................ 6.9 4.0
Contractholder and policyholder liabilities
and dividends.................................. 1,247.7 1,366.2
Current and deferred income taxes................. 496.7 246.7
Net realized/unrealized capital losses............ 130.1 90.6
Depreciation and amortization expense............. 82.8 78.6
Mortgage loans held for sale, acquired or
originated..................................... (728.9) (716.7)
Mortgage loans held for sale, sold or repaid, net
of gain........................................ 711.1 738.9
Real estate acquired through operating activities. (25.9) (22.9)
Real estate sold through operating activities..... 60.9 4.4
Stock-based compensation.......................... 30.9 16.2
Other............................................. (323.0) (9.4)
----------------- ----------------
Net adjustments....................................... 1,383.0 1,581.9
----------------- ----------------
Net cash provided by operating activities............. 1,995.1 2,124.3
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases......................................... (7,531.1) (7,406.5)
Sales............................................. 1,548.5 1,653.7
Maturities........................................ 3,788.6 4,002.0
Mortgage loans acquired or originated................. (1,652.9) (1,725.4)
Mortgage loans sold or repaid......................... 1,340.4 929.0
Real estate acquired.................................. (205.8) (198.0)
Real estate sold...................................... 233.4 57.0
Net change in property and equipment.................. (35.0) (15.6)
Net proceeds from sales of subsidiaries............... 819.7 33.6
Purchases of interest in subsidiaries, net of
cash acquired..................................... (106.2) (95.4)
Net change in other investments....................... 7.5 27.0
----------------- ----------------
Net cash used in investing activities................. (1,792.9) (2,738.6)
7
PRINCIPAL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
2004 2003
----------------- ----------------
(IN MILLIONS)
FINANCING ACTIVITIES
Issuance of common stock, net of call options........ 22.4 14.9
Acquisition of treasury stock........................ (506.1) (378.0)
Proceeds from financing element derivatives.......... 104.6 114.2
Payments for financing element derivatives........... (62.3) (85.1)
Issuance of long-term debt........................... 8.6 4.4
Principal repayments of long-term debt............... (442.3) (84.4)
Net repayments of short-term borrowings.............. (430.2) (9.0)
Investment contract deposits......................... 5,841.6 7,039.5
Investment contract withdrawals...................... (4,004.9) (6,310.7)
Net increase (decrease) in banking operation
deposits.......................................... (23.6) 197.3
----------------- ----------------
Net cash provided by financing activities............ 507.8 503.1
----------------- ----------------
Net increase (decrease) in cash and cash equivalents. 710.0 (111.2)
Cash and cash equivalents at beginning of period..... 1,192.5 727.8
----------------- ----------------
Cash and cash equivalents at end of period........... $ 1,902.5 $ 616.6
================= ================
SEE ACCOMPANYING NOTES.
8
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Principal
Financial Group, Inc. ("PFG"), its majority-owned subsidiaries and, subsequent
to September 30, 2003, its consolidated variable interest entities ("VIE"), have
been prepared in conformity with accounting principles generally accepted in the
U.S. ("U.S. GAAP") for interim financial statements and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months and
nine months ended September 30, 2004, are not necessarily indicative of the
results that may be expected for the year ended December 31, 2004. These interim
unaudited consolidated financial statements should be read in conjunction with
our annual audited financial statements as of December 31, 2003, included in our
Form 10-K for the year ended December 31, 2003, filed with the United States
Securities and Exchange Commission ("SEC"). The accompanying consolidated
statement of financial position at December 31, 2003, has been derived from the
audited consolidated statement of financial position but does not include all of
the information and footnotes required by U.S. GAAP for complete financial
statements.
Reclassifications have been made to the December 31, 2003, and September 30,
2003, financial statements to conform to the September 30, 2004, presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin ("SAB") 105,
APPLICATION OF ACCOUNTING PRINCIPLES TO LOAN COMMITMENTS ("SAB 105"), in which
the SEC Staff expressed their view that the fair value of recorded loan
commitments, including interest rate lock commitments ("IRLCs"), that are
required to follow derivative accounting under Statement of Financial Accounting
Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, should not consider the expected future cash flows related to the
associated servicing of the loan. We record IRLCs at zero value at date of
issuance with subsequent gains or losses measured by changes in market interest
rates. Therefore, this SAB did not have a material impact on our consolidated
financial statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus
on Issue 03-1, THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS
APPLICATION TO CERTAIN INVESTMENTS ("EITF 03-1"). EITF 03-1 provides accounting
guidance regarding the determination of when an impairment of debt and
marketable equity securities and investments accounted for under the cost method
should be considered other-than-temporary and recognized in income. This EITF
was originally effective for the period beginning July 1, 2004. However, on
September 30, 2004, the Financial Accounting Standards Board (the "FASB") issued
FASB Staff Position ("FSP") EITF 03-1-1 delaying the effective date for the
accounting and measurement provisions of EITF 03-1 until further clarification
can be provided. In September 2004, the FASB also issued a proposed FSP
providing this additional clarification. The comment period for this proposed
FSP ends October 29, 2004, with the FASB expecting to issue the final FSP in
November 2004. Due to the uncertainties that still exist with this guidance, we
are unable to estimate the impact EITF 03-1 will have to our consolidated
financial statements.
On December 24, 2003, the FASB issued FASB Interpretation No. 46 (Revised 2003):
CONSOLIDATION OF VARIABLE INTEREST ENTITIES ("FIN 46R"), to clarify some of the
provisions of FIN 46 and to exempt certain entities from its requirements. We
adopted FIN 46R effective January 1, 2004, which did not have a material impact
on our consolidated financial statements.
9
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On July 7, 2003, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 03-1, ACCOUNTING AND REPORTING BY INSURANCE
ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE
ACCOUNTS ("SOP 03-1"). This SOP addresses an insurance enterprise's accounting
for certain fixed and variable contract features not covered by other
authoritative accounting guidance. We adopted SOP 03-1 effective January 1,
2004, and recorded a cumulative effect of accounting change of $(5.7) million,
which is net of income tax benefits of $3.0 million. The accounting change
impacted our Life and Health Insurance, U.S. Asset Management and Accumulation
and International Asset Management and Accumulation segments.
A provision of SOP 03-1 relates to the classification of contracts and
calculation of an additional liability for contracts that contain significant
insurance features. The adoption of the guidance requires the recognition of a
liability in addition to the contract account value in cases where the insurance
benefit feature results in gains in early years followed by losses in later
years. The accrual and release of the additional liability also impacts the
amortization of deferred policy acquisition costs ("DPAC"). As of January 1,
2004, we increased future policyholder benefits due to our no lapse guarantee
feature of our universal life and variable universal life products within our
Life and Health Insurance segment and for variable annuities with guaranteed
minimum death benefits in our U.S. Asset Management and Accumulation segment.
This resulted in an after-tax cumulative effect of $(0.9) million in the Life
and Health Insurance segment and $(1.5) million in the U.S. Asset Management and
Accumulation segment.
We also had an after-tax cumulative effect related to an equity method
investment within our International Asset Management and Accumulation segment of
$(3.3) million, net of income taxes, as of January 1, 2004, for select deferred
annuity products, which include guaranteed annuitization purchase rates. The
guidance requires contracts which provide for potential benefits in addition to
the account balance that are payable only upon annuitization to establish an
additional liability if the present value of the annuitized benefits exceed the
expected account balance at the expected annuitization date.
In addition, the guidance clarifies the accounting and classification for sales
inducements. Although the valuation impacts were immaterial, we reclassified
$37.6 million of sales inducements from DPAC to other assets effective January
1, 2004.
SEPARATE ACCOUNTS
At September 30, 2004 and December 31, 2003, the separate accounts included a
separate account valued at $736.7 million and $833.9 million, respectively,
which primarily includes shares of our stock that were allocated and issued to
eligible participants of qualified employee benefit plans administered by us as
part of the policy credits issued under the demutualization. These shares are
included in both basic and diluted earnings per share calculations. The separate
account shares are recorded at fair value and are reported as separate account
assets and separate account liabilities in the consolidated statement of
financial position. Changes in fair value of the separate account shares are
reflected in both the separate account assets and separate account liabilities.
STOCK-BASED COMPENSATION
At September 30, 2004, we have four stock-based compensation plans. We applied
the fair value method to all stock-based awards granted subsequent to January 1,
2002. For stock-based awards granted prior to this date, we used the intrinsic
value method.
10
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Awards under our plans vest over periods ranging from one year to three years.
Therefore, the cost related to stock-based compensation included in the
determination of net income for the three months ended and nine months ended
September 30, 2004, is less than that which would have been recognized if the
fair value based method had been applied to all awards since the inception of
our stock-based compensation plans. Had compensation expense for our stock
option awards and employees' purchase rights been determined based upon fair
values at the grant dates for awards under the plans in accordance with SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, our net income and earnings per
share would have been reduced to the pro forma amounts indicated below. For the
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
2004 2003 2004 2003
---------------- -------------- --------------- --------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Net income, as reported....................... $ 298.8 $ 184.5 $ 612.1 $542.4
Add: Stock-based compensation expense
included in reported net income, net
of related tax effects...................... 7.5 5.1 20.1 14.2
Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects......................... 8.3 5.9 22.6 16.7
--------------- -------------- --------------- --------------
Pro forma net income.......................... $ 298.0 $ 183.7 $ 609.6 $539.9
=============== ============== =============== ==============
Basic earnings per share:
As reported................................. $ 0.96 $ 0.57 $ 1.93 $ 1.66
Pro forma................................... 0.96 0.57 1.92 1.65
Diluted earnings per share:
As reported................................. $ 0.95 $ 0.57 $ 1.92 $ 1.66
Pro forma................................... 0.95 0.57 1.92 1.65
2. DISCONTINUED OPERATIONS
PRINCIPAL INTERNATIONAL ARGENTINA S.A.
On June 28, 2004, we entered into a definitive agreement for the sale of all the
stock of Principal International Argentina S.A. ("Argentina"), our subsidiary in
Argentina, and its wholly owned subsidiaries, Principal Life Compania de
Seguros, S.A. and Principal Retiro Compania de Seguros de Retiro, S.A. We closed
the transaction on July 2, 2004.
Our operations in Argentina qualify for discontinued operations treatment under
SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
("SFAS 144"), therefore, the results of operations have been removed from our
results of continuing operations and cash flows for all periods presented. The
results of operations for Argentina are reported as other after-tax adjustments
in our International Asset Management and Accumulation segment.
11
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
2. DISCONTINUED OPERATIONS (CONTINUED)
Selected financial information for the discontinued operations of Argentina is
as follows:
AS OF
----------------------------------
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------------ ---------------
(IN MILLIONS)
ASSETS
Total investments............................ $ - $31.3
All other assets............................. - 10.9
------------------ ---------------
Total assets............................... $ - $42.2
================== ===============
LIABILITIES
Policyholder liabilities..................... $ - $31.1
All other liabilities........................ - 2.1
------------------ ---------------
Total liabilities.......................... $ - $33.2
================== ===============
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- ----------- ------------ ------------
(IN MILLIONS)
Total revenues.............................. $ - $ 2.3 $ 5.8 $ 8.0
============= =========== ============ ============
Income (loss) from discontinued
operations:
Income (loss) before income taxes......... $ - $ 0.8 $ 0.3 $ (1.8)
Income taxes.............................. - 0.2 0.1 0.2
------------- ----------- ------------ ------------
Income (loss) from discontinued
operations, net of related income
taxes.................................. - 0.6 0.2 (2.0)
Income on disposal of discontinued
operations, net of related income
taxes.................................. 10.1 - 10.1 -
------------- ----------- ------------ ------------
Net income (loss) .......................... $ 10.1 $ 0.6 $10.3 $ (2.0)
============= =========== ============ ============
PRINCIPAL RESIDENTIAL MORTGAGE, INC.
On May 11, 2004, we entered into a definitive agreement for the sale of
Principal Residential Mortgage, Inc. ("Principal Residential Mortgage") to
CitiMortgage, Inc. We closed the sale on July 1, 2004.
Our Mortgage Banking segment, which includes Principal Residential Mortgage, is
accounted for as a discontinued operation, under SFAS 144 and therefore, the
results of operations (excluding corporate overhead) have been removed from our
results of continuing operations, cash flows, and segment operating earnings for
all periods presented. Corporate overhead allocated to our Mortgage Banking
segment does not qualify for discontinued operations treatment under SFAS 144
and was included in our results of continuing operations and segment operating
earnings prior to July 1, 2004.
12
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
2. DISCONTINUED OPERATIONS (CONTINUED)
Selected financial information for the discontinued operations of our Mortgage
Banking segment is as follows:
AS OF
-------------------------------------
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------------ ------------------
(IN MILLIONS)
ASSETS
Mortgage loans.......................... $ - $2,256.5
Mortgage loan servicing rights.......... - 1,951.9
Cash and cash equivalents............... - 674.6
All other assets........................ - 675.8
------------------ ------------------
Total assets.......................... $ - $5,558.8
================== ==================
LIABILITIES
Short-term debt......................... $ - $1,450.9
Long-term debt.......................... - 1,393.0
All other liabilities................... - 2,242.8
------------------ ------------------
Total liabilities..................... $ - $5,086.7
================== ==================
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- -----------------------------
2004 2003 2004 2003
------------- ----------- ------------ -------------
(IN MILLIONS)
Total revenues............................... $ - $238.5 $ 446.1 $1,095.5
============= =========== ============ =============
Loss from continuing operations, net of .
related income taxes (corporate
overhead) ................................ $ - $ (5.0) $ (10.3) $ (13.4)
Income from discontinued
operations:
Income before income taxes................ - 5.1 48.3 175.6
Income taxes.............................. - 1.5 18.3 66.2
------------- ----------- ------------ -------------
Income from discontinued
operations, net of related income
taxes................................... - 3.6 30.0 109.4
Income on disposal of discontinued
operations, net of related income taxes. 94.1 - 94.1 -
Cumulative effect of accounting change, net
of related income taxes................... - (10.0) - (10.0)
------------- ----------- ------------ -------------
Net income (loss) ........................... $ 94.1 $(11.4) $ 113.8 $ 86.0
============= =========== ============ =============
13
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
2. DISCONTINUED OPERATIONS (CONTINUED)
Our U.S. Asset Management and Accumulation segment held $804.8 million of
residential mortgage banking escrow deposits (reported as other liabilities) as
of December 31, 2003. The balance of banking escrow deposits were transferred as
a result of the sale. U.S. Asset Management and Accumulation total revenues from
this arrangement reclassified to discontinued operations for the three months
ended September 30, 2003, were $7.1 million. Revenues reclassified to
discontinued operations, for the nine months ended September 30, 2004 and 2003,
were $(5.6) million and $20.2 million, respectively. Income (loss) from
discontinued operations net of related income taxes, for the three months ended
September 30, 2003, was $2.6 million. Income (loss) from discontinued
operations, net of related income taxes, for the nine months ended September 30,
2004 and 2003, was $(3.5) million and $7.7 million, respectively.
3. FEDERAL INCOME TAXES
The effective income tax rate on income from continuing operations for the three
months and nine months ended September 30, 2004, and 2003, is lower than the
prevailing corporate federal income tax rate primarily due to income tax
deductions allowed for corporate dividends received and interest exclusion from
taxable income. The effective income tax rate for the three months and nine
months ended September 30, 2004, was also reduced due to tax credits on our
investment in a synthetic fuel production facility. In addition, the effective
income tax rate for the nine months ended September 30, 2004, was also reduced
due to a tax benefit associated with the sale of a foreign investment.
4. EMPLOYEE AND AGENT BENEFITS
COMPONENTS OF NET PERIODIC BENEFIT COST (INCOME):
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------------------- ----------------------------
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- -------------- ------------- --------------
(IN MILLIONS)
Service cost.......................... $ 12.8 $ 12.3 $ 2.3 $ 3.1
Interest cost......................... 18.3 16.7 3.9 4.5
Expected return on plan assets........ (21.5) (18.7) (6.8) (6.4)
Amortization of prior service
cost (benefit)...................... 0.4 0.4 (0.8) (0.8)
Amortization of transition asset...... - (0.1) - -
Recognized net actuarial loss......... 4.1 4.4 0.1 0.6
Effect of special events (1).......... (12.0) - (5.4) -
------------- -------------- ------------- --------------
Net periodic benefit cost (income).... $ 2.1 $ 15.0 $(6.7) $ 1.0
============= ============== ============= ==============
- ------------------------
(1) For the three months ended September 30, 2004, the effect of special events
reflects the gain on curtailment of $13.8 million and loss on contractual
termination benefits of $1.8 million, related to pension benefits and a
gain on curtailment of $5.4 million, related to other postretirement
benefits. The gain on curtailment and loss on contractual termination
benefits are reflected in the discontinued operations as a result of the
Principal Residential Mortgage sale and are further discussed below.
14
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
4. EMPLOYEE AND AGENT BENEFITS (CONTINUED)
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------------------- ----------------------------
FOR THE NINE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------- -------------- ------------- --------------
(IN MILLIONS)
Service cost.......................... $ 38.4 $ 36.8 $ 6.8 $ 9.2
Interest cost......................... 55.0 50.2 11.6 13.4
Expected return on plan assets........ (64.6) (56.1) (20.5) (19.3)
Amortization of prior service
cost (benefit)...................... 1.3 1.2 (2.1) (2.4)
Amortization of transition asset...... (0.1) (0.4) - -
Recognized net actuarial loss......... 12.2 13.4 0.5 2.1
Effect of special events (1).......... (12.0) - (5.4) -
------------- -------------- ------------- --------------
Net periodic benefit cost (income).... $ 30.2 $ 45.1 $(9.1) $ 3.0
============= ============== ============= ==============
- -----------------------
(1) For the nine months ended September 30, 2004, effect of special events
reflects the gain on curtailment of $13.8 million and loss on contractual
termination benefits of $1.8 million, related to pension benefits and a
gain on curtailment of $5.4 million, related to other postretirement
benefits. The gain on curtailment and loss on contractual termination
benefits are reflected in the discontinued operations as a result of the
Principal Residential Mortgage sale and are further discussed below.
IMPACT OF PRINCIPAL RESIDENTIAL MORTGAGE DIVESTITURE
On May 11, 2004, we entered into a definitive agreement for the sale of
Principal Residential Mortgage to CitiMortgage, Inc. We closed the sale on July
1, 2004. The sale resulted in curtailment and termination accounting recognition
under SFAS No. 88, EMPLOYERS' ACCOUNTING FOR SETTLEMENTS AND CURTAILMENTS OF
DEFINED BENEFIT PENSION PLANS AND FOR TERMINATION BENEFITS ("SFAS 88"), for the
home office plans that provided pension benefits to the Principal Residential
Mortgage participants. The effect of the curtailment and contractual termination
benefits is reflected in the discontinued operations of Principal Residential
Mortgage.
The sale of Principal Residential Mortgage also resulted in a curtailment under
SFAS No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS ("SFAS 106"), for the home office plans that provided retiree health
and life insurance benefits to the Principal Residential Mortgage participants.
The effects of the curtailment is reflected in the discontinued operations of
Principal Residential Mortgage.
The home office pension plans were remeasured as of July 1, 2004. The
assumptions used to determine the benefit obligations as of July 1, 2004, for
the home office pension plans were a discount rate of 6.5%, a weighted rate of
compensation increase of 5.0%, and an expected long-term return on plan assets
of 8.5%. These same assumptions were used to develop the net periodic pension
benefit cost for the fourth quarter of 2004 for the home office pension plans.
We use an October 1 measurement date, which results in a three-month lag between
the measurement date and the fiscal year-end. Therefore, the July 1, 2004,
remeasurement would first affect the net periodic pension benefit cost within
continuing operations in fourth quarter of 2004.
15
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
4. EMPLOYEE AND AGENT BENEFITS (CONTINUED)
The home office retiree health and life insurance benefit plans were remeasured
as of July 1, 2004. The assumptions used to determine the benefit obligations as
of July 1, 2004, for the home office retiree health and life insurance plans
were a discount rate of 6.5%, a weighted rate of compensation increase of 5.0%,
a weighted average expected long-term return on plan assets of 7.3%, and a
health care cost initial trend rate of 12.0% decreasing to an ultimate rate of
5.0% in the year 2011. These same assumptions were used to develop the net
periodic other postretirement benefit cost for the fourth quarter of 2004 for
the home office retiree health and life insurance plans. The July 1, 2004,
remeasurement would first affect the net periodic other postretirement benefit
cost within continuing operations in fourth quarter of 2004.
CONTRIBUTIONS
We anticipate contributing $1.4 million in 2004 to fund our other postretirement
benefit plans. We contributed approximately $0.5 million and $0.9 million during
the three months ended and nine months ended September 30, 2004, respectively.
Our funding policy for the qualified pension plan is to fund the plan annually
in an amount at least equal to the minimum annual contribution required under
ERISA and, generally, not greater than the maximum amount that can be deducted
for federal income tax purposes. We are not required to fund a minimum annual
contribution under ERISA for the qualified pension plan. However, it is possible
that we may fund the plans in 2004 in the range of $30 million to $50 million
for both the qualified and nonqualified plans. During the three months ended and
nine months ended September 30, 2004, $10.5 million and $21.0 million have been
contributed to the nonqualified plans, respectively.
REVERSAL OF THE ADDITIONAL MINIMUM LIABILITY
After remeasuring the pension plan as of July 1, 2004, we no longer have the
need to record an additional minimum liability, as the assets now exceed the
accumulated benefit obligation under the qualified plan and the accrued pension
cost for the nonqualified plans exceeds the minimum liability. As a result, we
reversed the minimum liability of $3.9 million (less the tax impact of $1.4
million), originally recorded during 2003, through other comprehensive income
during the third quarter of 2004.
EXPECTED IMPACT OF MEDICARE PRESCRIPTION DRUG, IMPROVEMENT AND MODERNIZATION ACT
OF 2003
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. This Act introduces a
prescription drug benefit under Medicare (Medicare Part D), as well as a federal
subsidy to sponsors of retiree prescription drug benefit plans that are deemed
to be actuarially equivalent to the Medicare Part D program. On May 19, 2004,
the FASB issued Staff Position No. 106-2, ACCOUNTING AND DISCLOSURE REQUIREMENTS
RELATED TO THE MEDICARE PRESCRIPTION DRUG MODERNIZATION ACT OF 2003 ("FSP
106-2"). FSP 106-2 provides guidance on the accounting for the effects of the
Act. In accordance with the deferral provision of FSP 106-2, we elected not to
incorporate the prescription drug subsidies into our calculation prior to July
1, 2004, as we had not yet determined that the benefits provided by the plan
were actuarially equivalent to Medicare. After both the issuance of FSP 106-2
and our decision to defer, the Centers of Medicare and Medicaid Services ("CMS")
issued proposed regulations on July 26, 2004, that provided guidance on the
definition of actuarially equivalent retiree prescription drug coverage. These
regulations aided in our determination during the third quarter, 2004 that the
majority of our retiree prescription drug benefit coverage is actuarially
equivalent. As a result, we remeasured our accumulated benefit obligation to
incorporate the impact of the Act. This resulted in a reduction to the
16
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
4. EMPLOYEE AND AGENT BENEFITS (CONTINUED)
accumulated benefit obligation of $22.4 million. The remeasurement will result
in a reduction of the net periodic postretirement benefit cost of $0.7 million
within continuing operations in the fourth quarter of 2004 since we use a
three-month lag between our measurement date and fiscal year end.
The effect of the subsidy on the measurement of net periodic postretirement
costs for the fourth quarter 2004 is amortization of actuarial experience gain
of $0.1 million, a decrease in service cost of $0.2 million, and a decrease in
interest cost of $0.4 million.
Assumptions used in the calculation of the decrease in the accumulated benefit
obligation include:
o A federal subsidy of $418 and $522 (in 2006 dollars) per home office and
agent/manager participants, respectively, beginning in 2006,
o The subsidy will increase with the assumed health care trend rate after
2006,
o Receipt of reimbursements from Medicare in the same year that we pay our
drug claims, and
o No changes in retiree participation rates.
17
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is as follows (in millions):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
2004 2003 2004 2003
-------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS):
Net income............................... $ 298.8 $ 184.5 $ 612.1 $ 542.4
Net change in unrealized gains and
losses on fixed maturities,
available-for-sale..................... 906.0 (464.9) 132.6 920.3
Net change in unrealized gains and
losses on equity securities,
available-for-sale..................... 4.0 (6.1) (6.5) 7.9
Net change in unrealized gains and
losses on equity method subsidiaries
and minority interest adjustments...... (15.4) 11.9 (23.5) 6.6
Adjustments for assumed changes in
amortization patterns:
Deferred policy acquisition costs...... (66.4) 60.2 13.9 (78.7)
Sales inducements...................... (5.3) - (2.2) -
Unearned revenue reserves.............. 2.2 (6.5) (2.6) (0.4)
Net change in unrealized gains and
losses on derivative instruments....... 3.7 36.8 42.7 54.9
Adjustments to unrealized gains and
losses for Closed Block
policyholder dividend obligation....... (90.4) 38.2 (12.2) (94.0)
Provision for deferred income tax
benefit (expense)...................... (255.5) 103.7 (26.6) (294.7)
Change in net foreign currency
translation adjustment, net of
related income taxes................... 35.7 (0.7) (7.2) 35.5
Change in minimum pension liability,
net of related income taxes............ 2.5 - 2.5 -
Cumulative effect of accounting change,
net of related income taxes............ - 9.2 - 9.2
-------------- ------------- ------------- -------------
Comprehensive income (loss).............. $ 819.9 $ (33.7) $ 723.0 $1,109.0
============== ============= ============= =============
18
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
6. DEBT
LONG-TERM DEBT
The components of long-term debt as of September 30, 2004 and December 31, 2003,
were as follows (in millions):
AS OF AS OF
SEPTEMBER 30, DECEMBER 31
2004 2003
------------------- -------------------
7.95% notes payable, due 2004....................................... $ - $ 200.0
8.2% notes payable, due 2009........................................ 464.1 464.0
7.875% surplus notes payable, due 2024.............................. - 199.0
8% surplus notes payable, due 2044.................................. 99.2 99.2
Nonrecourse mortgages and notes payable............................. 216.2 340.7
Other mortgages and notes payable................................... 67.7 71.4
------------------- -------------------
Total long-term debt................................................ $ 847.2 $ 1,374.3
=================== ===================
The amounts included above are net of the discount and direct costs associated
with issuing these notes, which are being amortized to expense over their
respective terms using the interest method.
On March 10, 1994, our subsidiary, Principal Life Insurance Company ("Principal
Life") issued $300.0 million of surplus notes, including $200.0 million due
March 1, 2024, at a 7.875% annual interest rate and the remaining $100.0 million
due March 1, 2044, at an 8% annual interest rate. After receiving approval from
the Commissioner of Insurance of the State of Iowa (the "Commissioner"), the
surplus notes due March 1, 2024, were optionally redeemed by Principal Life on
March 1, 2004, in whole at a redemption price of approximately 103.6% of par.
Total cash paid for the surplus note redemption on March 1, 2004, was $207.2
million.
7. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS
LITIGATION
We are regularly involved in litigation, both as a defendant and as a plaintiff
but primarily as a defendant. Litigation naming us as a defendant ordinarily
arises out of our business operations as a provider of asset management and
accumulation products and services, and life, health and disability insurance.
Some of the lawsuits are class actions, or purport to be, and some include
claims for punitive damages. In addition, regulatory bodies, such as state
insurance departments, the SEC, the National Association of Securities Dealers,
Inc., the Department of Labor and other regulatory bodies regularly make
inquiries and conduct examinations or investigations concerning our compliance
with, among other things, insurance laws, securities laws, ERISA and laws
governing the activities of broker-dealers.
In October of 2004, several lawsuits were filed against other insurance
companies and insurance brokers alleging improper conduct relating to the
payment and non-disclosure of contingent compensation and bid-rigging activity.
Several of these suits were filed as purported class actions. No lawsuits have
been filed against us relating to these issues. We have been monitoring the
regulatory and legal issues raised by these lawsuits.
While the outcome of any pending or future litigation cannot be predicted,
management does not believe that any pending litigation will have a material
adverse effect on our business, financial position or net income. The outcome of
litigation is always uncertain, and unforeseen results can occur. It is possible
that such outcomes could materially affect net income in a particular quarter or
annual period.
19
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
7. CONTINGENCIES, GUARANTEES AND INDEMNIFICATIONS (CONTINUED)
GUARANTEES AND INDEMNIFICATIONS
In the normal course of business, we have provided guarantees to third parties
primarily related to a former subsidiary, joint ventures and industrial revenue
bonds. These agreements generally expire from 2004 through 2019. The maximum
exposure under these agreements as of September 30, 2004, was approximately
$197.0 million; however, we believe the likelihood is remote that material
payments will be required and therefore have not accrued for a liability on our
consolidated statements of financial position. Should we be required to perform
under these guarantees, we generally could recover a portion of the loss from
third parties through recourse provisions included in agreements with such
parties, the sale of assets held as collateral that can be liquidated in the
event that performance is required under the guarantees or other recourse
generally available to us, minimizing the impact to net income. The fair value
of such guarantees issued after January 1, 2003, were determined to be
insignificant.
In connection with the 2002 sale of BT Financial Group, we agreed to indemnify
the purchaser, Westpac Banking Corporation ("Westpac"), for among other things,
the costs associated with potential late filings made by BT Financial Group in
New Zealand prior to Westpac's ownership, up to a maximum of A$250.0 million
Australian dollars (approximately U.S. $180.0 million as of September 30, 2004).
New Zealand securities regulations allow Australian issuers to issue their
securities in New Zealand provided that certain documents are appropriately
filed with the New Zealand Registrar of Companies. Specifically, the regulations
required that any amendments to constitutions and compliance plans be filed in
New Zealand. In April 2003, the New Zealand Securities Commission opined that
such late filings would result in certain New Zealand investors having a right
to the return of their investment plus interest at 10% per annum from the date
of investment. We view these potential late filings as a technical matter as we
believe investors received the information that is required to be provided
directly to them. This technical issue affected many in the industry. On April
15, 2004, the New Zealand government enacted legislation that will provide
issuers, including BT Financial Group, the opportunity for retroactive relief
from such late filing violations. The law allows issuers to apply for judicial
validation of non-compliant issuances resulting from late filings. The law
further provides that judicial relief is mandatory and unconditional unless an
investor was materially prejudiced by the late filing. A related judicial action
is pending. Although we cannot predict the outcome of this matter or reasonably
estimate losses, we do not believe that it would result in a material adverse
effect on our business or financial position. It is possible, however, that it
could have a material adverse effect on net income in a particular quarter or
annual period.
We are also subject to various other indemnification obligations issued in
conjunction with certain transactions, primarily the sale of BT Financial Group,
Principal Residential Mortgage, and other divestitures, acquisitions and
financing transactions whose terms range in duration and often are not
explicitly defined. Certain portions of these indemnifications may be capped,
while other portions are not subject to such limitations; therefore, the overall
maximum amount of the obligation under the indemnifications cannot be reasonably
estimated. While we are unable to estimate with certainty the ultimate legal and
financial liability with respect to these indemnifications, we believe the
likelihood is remote that material payments would be required under such
indemnifications and therefore such indemnifications would not result in a
material adverse effect on our business, financial position or net income. We
have accrued for the fair value of such indemnifications issued after January 1,
2003.
8. SEGMENT INFORMATION
We provide financial products and services through the following segments: U.S.
Asset Management and Accumulation, International Asset Management and
Accumulation and Life and Health Insurance. In addition, there is a Mortgage
20
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
8. SEGMENT INFORMATION (CONTINUED)
Banking (discontinued operations) and Corporate and Other segment. The segments
are managed and reported separately because they provide different products and
services, have different strategies or have different markets and distribution
channels.
The U.S. Asset Management and Accumulation segment provides retirement and
related financial products and services primarily to businesses, their employees
and other individuals and provides asset management services to our asset
accumulation business, the life and health insurance operations, the Corporate
and Other segment and third-party clients.
The International Asset Management and Accumulation segment offers retirement
products and services, annuities, long-term mutual funds and life insurance
through subsidiaries in Chile, Mexico, and Hong Kong and joint ventures in
Brazil, India, Japan and Malaysia. On June 28, 2004, we entered into a
definitive agreement for the sale of all the stock of our Argentine companies,
described further in Note 2. Consequently, the results of operations for
Argentina are reported as other after-tax adjustments for all periods presented.
The Life and Health insurance segment provides individual life insurance, group
health insurance and specialty benefits, which consists of group dental and
vision insurance, individual and group disability insurance, and group life
insurance, throughout the U.S.
On May 11, 2004, we entered into a definitive agreement for the sale of
Principal Residential Mortgage to CitiMortgage, Inc. We closed the sale on July
1, 2004. Our Mortgage Banking segment, which includes Principal Residential
Mortgage, is accounted for as a discontinued operation under SFAS 144 and,
therefore, the results of operations (excluding corporate overhead) have been
removed from our results of continuing operations, cash flows, and segment
operating earnings for all periods presented. Corporate overhead allocated to
our Mortgage Banking segment does not qualify for discontinued operations
treatment under SFAS 144 and was included in our results of continuing
operations and segment operating earnings prior to July 1, 2004. See Note 2 for
further explanation.
The Corporate and Other segment manages the assets representing capital that has
not been allocated to any other segment. Financial results of the Corporate and
Other segment primarily reflect our financing activities (including interest
expense), income on capital not allocated to other segments, intersegment
eliminations, income tax risks and certain income, expenses and other after-tax
adjustments not allocated to the segments based on the nature of such items.
Management uses segment operating earnings for goal setting, determining
employee compensation, and evaluating performance on a basis comparable to that
used by securities analysts. We determine segment operating earnings by
adjusting U.S. GAAP net income for net realized/unrealized capital gains and
losses, as adjusted, and other after-tax adjustments which management believes
are not indicative of overall operating trends. Net realized/unrealized capital
gains and losses, as adjusted, are net of income taxes, related changes in the
amortization pattern of deferred policy acquisition and sales inducement costs,
recognition of front-end fee revenues for sales charges on pension products and
services, net realized capital gains and losses distributed, minority interest
capital gains and losses and certain market value adjustments to fee revenues.
Segment operating revenues exclude net realized/unrealized capital gains and
their impact on recognition of front-end fee revenues and certain market value
adjustments to fee revenues. While these items may be significant components in
understanding and assessing the consolidated financial performance, management
believes the presentation of segment operating earnings enhances the
understanding of our results of operations by highlighting earnings attributable
to the normal, ongoing operations of the business. The accounting policies of
the segments are consistent with the accounting policies for the consolidated
financial statements, with the exception of income tax allocation. The Corporate
and Other segment functions to absorb the risk inherent in interpreting and
applying tax law. The segments are allocated tax adjustments consistent with the
positions we took on our tax returns.
21
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
8. SEGMENT INFORMATION (CONTINUED)
The Corporate and Other segment results reflect any differences between the tax
returns and the estimated resolution of any disputes.
The following tables summarize selected financial information on a continuing
basis by segment and reconcile segment totals to those reported in the
consolidated financial statements:
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
2004 2003
---------------------- ---------------------
(IN MILLIONS)
ASSETS:
U.S. Asset Management and Accumulation ............... $ 90,264.3 $ 83,904.8
International Asset Management and Accumulation....... 3,375.5 3,011.4
Life and Health Insurance............................. 12,899.4 12,171.8
Mortgage Banking...................................... - 5,558.8
Corporate and Other .................................. 3,237.2 3,107.6
---------------------- ---------------------
Total consolidated assets........................... $ 109,776.4 $107,754.4
====================== =====================
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- -------------
(IN MILLIONS)
OPERATING REVENUES BY SEGMENT:
U.S. Asset Management and Accumulation.... $ 931.3 $ 864.8 $ 2,731.4 $2,606.7
International Asset Management and
Accumulation........................... 136.0 98.3 371.3 279.0
Life and Health Insurance................. 1,051.8 995.7 3,117.8 3,009.8
Corporate and Other....................... (7.3) 18.9 (17.6) 19.9
-------------- -------------- -------------- -------------
Total segment operating revenues........ 2,111.8 1,977.7 6,202.9 5,915.4
Net realized/unrealized capital losses,
including recognition of front-end fee
revenues and certain market value
adjustments to fee revenues............. (23.2) (5.6) (137.9) (102.0)
-------------- -------------- -------------- -------------
Total revenue per consolidated
statements of operations............. $ 2,088.6 $1,972.1 $ 6,065.0 $5,813.4
============== ============== ============== =============
22
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
8. SEGMENT INFORMATION (CONTINUED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
(IN MILLIONS)
OPERATING EARNINGS (LOSS) BY SEGMENT:
U.S. Asset Management and Accumulation ... $ 123.5 $ 107.9 $ 364.7 $ 308.5
International Asset Management and
Accumulation............................ 10.9 7.8 28.8 26.3
Life and Health Insurance................. 71.6 52.8 203.3 174.8
Mortgage Banking.......................... - (5.0) (10.3) (13.4)
Corporate and Other ...................... (0.8) 3.8 (21.4) (11.6)
-------------- -------------- -------------- --------------
Total segment operating earnings........ 205.2 167.3 565.1 484.6
Net realized/unrealized capital gains
(losses), as adjusted................... (10.6) 1.4 (78.2) (65.2)
Other after-tax adjustments (1)........... 104.2 15.8 125.2 123.0
-------------- -------------- -------------- --------------
Net income per consolidated statements
of operations......................... $ 298.8 $ 184.5 $ 612.1 $ 542.4
============== ============== ============== ==============
- --------------------------
(1) For the three months ended September 30, 2004, other after-tax adjustments
of $104.2 million included the positive effect of the estimated gain on
disposal of Principal Residential Mortgage ($94.1 million) and the
estimated gain on disposal of our Argentine companies ($10.1 million).
For the three months ended September 30, 2003, other after-tax adjustments
of $15.8 million included the positive effects: (a) a change in the
estimated loss on disposal of BT Financial Group ($12.4 million); (b)
income from discontinued operations related to the sale of Principal
Residential Mortgage ($6.2 million); and (c) income from discontinued
operations related to the sale our Argentine companies ($0.6 million); and
(2) the negative effect of a cumulative effect of accounting change related
to the implementation of FIN 46 ($3.4 million).
For the nine months ended September 30, 2004, other after tax adjustments
of $125.2 million included the positive effects of: (1) discontinued
operations related to the sale of Principal Residential Mortgage ($120.6
million) and (2) discontinued operations related to the sale of our
Argentine companies ($10.3 million); and the negative effect from a
cumulative change in accounting principle related to the implementation of
SOP 03-1 ($5.7 million).
For the nine months ended September 30, 2003, other after-tax adjustments
of $123.0 million (1) included the positive effect of: (a) income from
discontinued operations related to the sale of Principal Residential
Mortgage ($117.1 million) and (b) a change in the estimated loss on
disposal of BT Financial Group ($11.3 million); and (2) the negative
effects of: (a) a cumulative effect of accounting change related to the
implementation of FIN 46 ($3.4 million) and (b) a loss from discontinued
operations related to the sale of our Argentine companies ($2.0 million).
9. STOCKHOLDERS' EQUITY
In May 2004, our board of directors authorized the repurchase of up to $700.0
million of our outstanding common stock. The repurchases will be made in the
open market or through privately negotiated transactions, from time to time,
depending on market conditions.
23
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
10. EARNINGS PER SHARE
The computations of the basic and diluted per share amounts for our continuing
operations were as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
2004 2003 2004 2003
----------------- ---------------- ----------------- ----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Income from continuing
operations, net of related
income taxes............... $ 194.6 $168.7 $486.9 $419.4
================= ================ ================= ================
Weighted-average shares
outstanding:
Basic...................... 311.7 323.5 316.8 327.2
Dilutive effect:
Stock options............ 1.0 0.6 1.0 0.5
Restricted stock units... 0.3 - 0.2 -
----------------- ---------------- ----------------- ----------------
Diluted.................... 313.0 324.1 318.0 327.7
================= ================ ================= ================
Income from continuing
operations per share:
Basic...................... $ 0.62 $ 0.52 $ 1.54 $ 1.28
================= ================ ================= ================
Diluted.................... $ 0.62 $ 0.52 $ 1.53 $ 1.28
================= ================ ================= ================
The calculation of diluted earnings per share for the three months and nine
months ended September 30, 2004 and 2003, excludes the incremental effect
related to certain stock-based compensation grants due to their anti-dilutive
effect.
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Principal Life has established special purpose entities to issue secured
medium-term notes. Under the program, the payment obligations of principal and
interest on the notes are secured by funding agreements issued by Principal
Life. Principal Life's payment obligations on the funding agreements are fully
and unconditionally guaranteed by PFG. All of the outstanding stock of Principal
Life is indirectly owned by PFG and PFG is the only guarantor of the payment
obligations of the funding agreements.
The following tables set forth condensed consolidating financial information of
Principal Life and PFG as of September 30, 2004 and December 31, 2003, and for
the nine months ended September 30, 2004 and 2003.
24
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
SEPTEMBER 30, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- -------------------- ----------------- ---------------
(IN MILLIONS)
ASSETS
Investments, excluding
investment in
unconsolidated entities...... $ - $ 50,809.2 $ 5,420.6 $ (1,179.5) $ 55,050.3
Investment in unconsolidated
entities..................... 7,204.9 335.0 5,624.6 (12,979.5) 185.0
Cash and cash equivalents....... 489.0 640.1 2,081.5 (1,308.1) 1,902.5
Other intangibles............... - 4.1 151.6 - 155.7
Separate account assets......... - 46,856.5 736.6 - 47,593.1
All other assets................ 1.5 4,110.3 960.0 (182.0) 4,889.8
-------------- ---------------- -------------------- ----------------- ---------------
Total assets................. $ 7,695.4 $102,755.2 $ 14,974.9 $(15,649.1) $ 109,776.4
============== ================ ==================== ================= ===============
LIABILITIES
Contractholder funds............ $ - $ 31,710.3 $ 7.1 $ (170.2) $ 31,547.2
Future policy benefits and
claims....................... - 14,182.6 1,555.5 - 15,738.1
Other policyholder funds........ - 723.5 3.3 - 726.8
Short-term debt................. - - 392.2 (246.8) 145.4
Long-term debt.................. - 183.5 898.2 (234.5) 847.2
Income taxes currently
payable...................... - 236.0 604.1 (110.4) 729.7
Deferred income taxes........... - 912.3 222.0 (14.7) 1,119.6
Separate account liabilities.... - 46,856.5 736.6 - 47,593.1
Other liabilities............... 1.0 1,548.5 3,351.0 (1,265.6) 3,634.9
-------------- ---------------- -------------------- ----------------- ---------------
Total liabilities............ 1.0 96,353.2 7,770.0 (2,042.2) 102,082.0
STOCKHOLDERS' EQUITY
Common stock.................... 3.8 2.5 - (2.5) 3.8
Additional paid-in capital...... 7,231.1 5,094.7 6,842.0 (11,936.7) 7,231.1
Retained earnings (deficit)..... 1,242.5 44.0 (919.3) 875.3 1,242.5
Accumulated other
comprehensive income......... 1,282.2 1,260.8 1,282.2 (2,543.0) 1,282.2
Treasury stock, at cost......... (2,065.2) - - - (2,065.2)
-------------- ---------------- -------------------- ----------------- ---------------
Total stockholders' equity... 7,694.4 6,402.0 7,204.9 (13,606.9) 7,694.4
-------------- ---------------- -------------------- ----------------- ---------------
Total liabilities and
stockholders' equity......... $ 7,695.4 $102,755.2 $ 14,974.9 $(15,649.1) $ 109,776.4
============== ================ ==================== ================= ===============
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
25
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- --------------------- -------------- ---------------
(IN MILLIONS)
ASSETS
Investments, excluding
investment in
unconsolidated entities...... $ - $ 48,156.9 $ 6,247.5 $ (1,357.2) $ 53,047.2
Investment in unconsolidated
entities..................... 7,234.0 793.8 5,693.3 (13,553.9) 167.2
Cash and cash equivalents....... 173.8 640.5 684.2 (306.0) 1,192.5
Other intangibles............... - 4.5 116.5 - 121.0
Separate account assets......... - 42,753.4 632.2 22.2 43,407.8
Assets of discontinued
operations................... - - 5,601.1 (176.0) 5,425.1
All other assets................ 1.7 3,825.7 766.6 (200.4) 4,393.6
-------------- ---------------- --------------------- -------------- ---------------
Total assets................. $7,409.5 $ 96,174.8 $ 19,741.4 $(15,571.3) $ 107,754.4
============== ================ ===================== ============== ===============
LIABILITIES
Contractholder funds............ $ - $ 29,040.4 $ 5.8 $ (149.8) $ 28,896.4
Future policy benefits and
claims....................... - 14,025.3 1,425.5 - 15,450.8
Other policyholder funds........ - 706.2 2.9 - 709.1
Short-term debt................. - - 888.8 (186.0) 702.8
Long-term debt.................. - 423.3 1,237.7 (286.7) 1,374.3
Income taxes currently
payable...................... - 160.0 28.2 (74.3) 113.9
Deferred income taxes........... 8.2 974.0 221.8 (5.1) 1,198.9
Separate account liabilities.... - 42,753.4 632.2 22.2 43,407.8
Liabilities of discontinued
operations................... - - 4,834.1 (258.8) 4,575.3
Other liabilities............... 1.7 1,226.1 3,230.4 (532.7) 3,925.5
-------------- ---------------- --------------------- -------------- ---------------
Total liabilities............ 9.9 89,308.7 12,507.4 (1,471.2) 100,354.8
STOCKHOLDERS' EQUITY
Common stock.................... 3.8 2.5 - (2.5) 3.8
Additional paid-in capital...... 7,153.2 5,052.1 6,796.9 (11,849.0) 7,153.2
Retained earnings (deficit)..... 630.4 594.6 (734.3) 139.7 630.4
Accumulated other comprehensive
income....................... 1,171.3 1,216.9 1,171.4 (2,388.3) 1,171.3
Treasury stock, at cost......... (1,559.1) - - - (1,559.1)
-------------- ---------------- --------------------- -------------- ---------------
Total stockholders' equity... 7,399.6 6,866.1 7,234.0 (14,100.1) 7,399.6
-------------- ---------------- --------------------- -------------- ---------------
Total liabilities and
stockholders' equity......... $7,409.5 $ 96,174.8 $ 19,741.4 $(15,571.3) $ 107,754.4
============== ================ ===================== ============== ===============
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
26
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ----------------- -------------------- -------------- -----------------
(IN MILLIONS)
REVENUES
Premiums and other
considerations................... $ - $ 2,550.2 $ 186.6 $ - $ 2,736.8
Fees and other revenues............. - 760.1 475.3 (175.0) 1,060.4
Net investment income............... 3.0 2,160.4 216.8 17.7 2,397.9
Net realized/unrealized
capital losses................... - (131.4) (4.3) 5.6 (130.1)
-------------- ----------------- -------------------- -------------- -----------------
Total revenues................... 3.0 5,339.3 874.4 (151.7) 6,065.0
EXPENSES
Benefits, claims, and settlement
expenses......................... - 3,389.6 263.5 (7.9) 3,645.2
Dividends to policyholders.......... - 219.7 - - 219.7
Operating expenses.................. 7.8 1,206.8 529.6 (150.3) 1,593.9
-------------- ----------------- -------------------- -------------- -----------------
Total expenses................... 7.8 4,816.1 793.1 (158.2) 5,458.8
-------------- ----------------- -------------------- -------------- -----------------
Income (loss) from continuing
operations before income taxes... (4.8) 523.2 81.3 6.5 606.2
Income taxes (benefits)............. (1.8) 119.2 (0.8) 2.7 119.3
Equity in the net income of
subsidiaries, excluding
discontinued operations and
cumulative effect of
accounting change................ 489.9 175.1 407.8 (1,072.8) -
-------------- ----------------- -------------------- -------------- -----------------
Income from continuing operations,
net of related income taxes...... 486.9 579.1 489.9 (1,069.0) 486.9
Income (loss) from discontinued
operations, net of related income
taxes............................ 130.9 (3.3) 130.9 (127.6) 130.9
-------------- ----------------- -------------------- -------------- -----------------
Income before cumulative effect of
accounting change................ 617.8 575.8 620.8 (1,196.6) 617.8
Cumulative effect of accounting
change, net of related income
taxes............................ (5.7) (2.5) (5.7) 8.2 (5.7)
-------------- ----------------- -------------------- -------------- -----------------
Net income.......................... $ 612.1 $ 573.3 $ 615.1 $(1,188.4) $ 612.1
============== ================= ==================== ============== =================
- --------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
27
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
------------- ------------------ --------------------- ---------------- --------------
(IN MILLIONS)
REVENUES
Premiums and other considerations.. $ - $2,507.2 $ 141.0 $ - $2,648.2
Fees and other revenues............ - 607.1 355.4 (129.9) 832.6
Net investment income.............. 2.6 2,201.0 203.8 15.8 2,423.2
Net realized/unrealized capital
gains (losses).................. - (97.6) 38.9 (31.9) (90.6)
------------- ------------------ --------------------- ---------------- --------------
Total revenues.................. 2.6 5,217.7 739.1 (146.0) 5,813.4
EXPENSES
Benefits, claims, and settlement
expenses........................ - 3,368.8 191.0 (5.5) 3,554.3
Dividends to policyholders......... - 232.7 - - 232.7
Operating expenses................. 7.0 1,144.2 447.9 (129.0) 1,470.1
------------- ------------------ --------------------- ---------------- --------------
Total expenses................... 7.0 4,745.7 638.9 (134.5) 5,257.1
------------- ------------------ --------------------- ---------------- --------------
Income (loss) from continuing
operations before income taxes.. (4.4) 472.0 100.2 (11.5) 556.3
Income taxes (benefits)............ (1.5) 109.6 38.2 (9.4) 136.9
Equity in the net income of
subsidiaries, excluding
discontinued operations......... 422.3 113.0 360.3 (895.6) -
------------- ------------------ --------------------- ---------------- --------------
Income from continuing
operations, net of related
income taxes.................... 419.4 475.4 422.3 (897.7) 419.4
Income (loss) from discontinued
operations, net of related
income taxes.................... 126.4 (4.9) 126.4 (121.5) 126.4
------------- ------------------ --------------------- ---------------- --------------
Income before cumulative effect of
accounting change............... 545.8 470.5 548.7 (1,019.2) 545.8
Cumulative effect of accounting
change, net of related income
taxes........................... (3.4) - (3.4) 3.4 (3.4)
------------- ------------------ --------------------- ---------------- --------------
Net income......................... $ 542.4 $ 470.5 $ 545.3 $(1,015.8) $ 542.4
============= ================== ===================== ================ ==============
- -----------------------
(1) Principal Financial Services, Inc. consolidated, except Principal Life,
which is reported on the equity method.
28
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ----------------- --------------------- --------------- ----------------
(IN MILLIONS)
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities........... $ (1.7) $ 1,505.5 $ 1,831.4 $ (1,340.1) $ 1,995.1
INVESTING ACTIVITIES
Available-for-sale securities:
Purchases...................... - (6,367.0) (972.4) (191.7) (7,531.1)
Sales.......................... - 926.7 621.8 - 1,548.5
Maturities..................... - 3,200.2 588.4 - 3,788.6
Mortgage loans acquired or
originated..................... - (1,632.1) (57.0) 36.2 (1,652.9)
Mortgage loans sold or repaid..... - 1,279.9 144.9 (84.4) 1,340.4
Real estate acquired.............. - (185.0) (20.8) - (205.8)
Real estate sold.................. - 164.0 69.4 - 233.4
Net change in property and
equipment...................... - (28.1) (6.9) - (35.0)
Net proceeds from sale of
subsidiaries................... - - 819.7 - 819.7
Purchases of interest in
subsidiaries, net of cash
acquired....................... - - (106.2) - (106.2)
Dividends received from
unconsolidated entities........ 800.0 206.9 (64.3) (942.6) -
Net change in other investments... 0.6 414.4 (12.8) (394.7) 7.5
-------------- ----------------- --------------------- --------------- ----------------
Net cash provided by (used in)
investing activities........... 800.6 (2,020.1) 1,003.8 (1,577.2) (1,792.9)
29
PRINCIPAL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2004
(UNAUDITED)
11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
PRINCIPAL PRINCIPAL LIFE PRINCIPAL FINANCIAL PRINCIPAL
FINANCIAL INSURANCE SERVICES, INC. AND FINANCIAL
GROUP, INC. COMPANY OTHER SUBSIDIARIES GROUP, INC.
PARENT ONLY ONLY COMBINED (1) ELIMINATIONS CONSOLIDATED
-------------- ---------------- ----------------------- --------------- ----------------
(IN MILLIONS)
FINANCING ACTIVITIES
Issuance of common stock........ 22.4 - - - 22.4
Acquisition of treasury stock... (506.1) - - - (506.1)
Proceeds from financing
element derivatives.......... - 104.6 - - 104.6
Payments for financing element
derivatives.................. - (62.3) - - (62.3)
Issuance of long-term debt...... - 8.4 0.2 - 8.6
Principal repayments of long-
term debt.................... - (249.2) (245.3) 52.2 (442.3)
Net repayments of short-term
borrowings...............