As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 5/04/06  Principal Financial Group Inc     10-Q        3/31/06    8:4.5M                                   Merrill Corp-MD/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report Pursuant to Sections 13 or 15(D)   HTML   2.21M 
 2: EX-10.12    Material Contract                                   HTML    185K 
 3: EX-10.13    Material Contract                                   HTML    283K 
 4: EX-12       Statement re: Computation of Ratios                 HTML     67K 
 5: EX-31.1     Certification per Sarbanes-Oxley Act (Section 302)  HTML     14K 
 6: EX-31.2     Certification per Sarbanes-Oxley Act (Section 302)  HTML     14K 
 7: EX-32.1     Certification per Sarbanes-Oxley Act (Section 906)  HTML      9K 
 8: EX-32.2     Certification per Sarbanes-Oxley Act (Section 906)  HTML      9K 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

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)

 

711 High Street, Des Moines, Iowa 50392

(Address of principal executive offices)

 

(515) 247-5111

(Registrant’s telephone number, including area code)

 

 

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  ý   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer       ý   Accelerated Filer           o            Non-accelerated Filer          o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No  ý

 

The total number of shares of the registrant’s Common Stock, $0.01 par value, outstanding as of April 26, 2006 was 276,975,346.

 

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements (continued)

March 31, 2006

(Unaudited)

 

1. Nature of Operations and Significant Accounting Policies (continued)

 

On February 16, 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140 (“SFAS 155”), which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) and SFAS 140. SFAS 155 (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarifies which interest-only and principal-only strips are not subject to the requirements of SFAS 133, (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (5) amends SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006. At adoption, the fair value election may also be applied to hybrid financial instruments that have been bifurcated under SFAS 133 prior to adoption of this Statement. Any changes resulting from the adoption of this Statement should be recognized as a cumulative effect adjustment to beginning retained earnings. We are currently evaluating the impact this guidance will have on our consolidated financial statements.

 

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R requires all share-based payments to employees to be recognized at fair value in the financial statements. SFAS 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”), supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure - an Amendment of FASB Statement No. 123 and amends SFAS No. 95, Statement of Cash Flows. On April 14, 2005, the SEC approved a new rule delaying the effective date of SFAS 123R to annual periods that begin after June 15, 2005. Accordingly, we adopted SFAS 123R effective January 1, 2006 using the modified-prospective method.

 

It is appropriate to recognize compensation cost either immediately for stock awards granted to retirement eligible employees, or over the period from the grant date to the date retirement eligibility is achieved, if retirement eligibility is expected to occur during the nominal vesting period. Our approach was to follow the widespread practice of recognizing compensation cost over the explicit service period (up to the date of actual retirement). For any awards that are granted after our adoption of SFAS 123R on January 1, 2006, we recognize compensation cost through the period that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. If we had applied the nonsubstantive vesting provisions of SFAS 123R to awards granted prior to January 1, 2006, our consolidated financial statements would not have been materially impacted.

 

SFAS 123R requires that the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. While the company cannot estimate what those amounts will be in the future, (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized for the three months ended March 31, 2006, for such excess tax deductions, was $0.6 million.

 

Under the modified-prospective method, any excess income tax deduction realized for awards accounted for under SFAS 123R (regardless of the type of award or the jurisdiction in which the tax benefit is generated) is eligible to absorb write-offs of deferred income tax assets for any awards accounted for under SFAS 123R. SFAS 123R does not require separate pools of excess income tax benefits for separate types of awards, rather the excess income tax benefits of employee and nonemployee awards may be combined in a single pool of excess tax benefits. Our policy is to pool the employee and nonemployee awards together in this manner. Deferred income tax asset write-offs resulting from deficient deductions on employee awards may be offset against previous excess income tax benefits arising from nonemployee awards, and vice versa.

 

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Principal Financial Group, Inc.

Notes to Consolidated Financial Statements (continued)

March 31, 2006

(Unaudited)

 

1. Nature of Operations and Significant Accounting Policies (continued)

 

This Statement did not have a material impact on our consolidated financial statements as we began expensing all stock options using a fair-value based method effective for the year beginning January 1, 2002. In addition, any stock options granted prior to January 1, 2002 were fully vested at the time of adoption of SFAS 123R. We use the Black-Scholes formula to estimate the value of stock options granted to employees. We applied the prospective method of transition as prescribed by SFAS 123 when we elected to begin expensing stock-based compensation in 2002. The cumulative effect of the change in accounting principle as a result of adopting this Statement is immaterial. Therefore, the pre-tax cumulative effect of the change in accounting principle is reflected in operating expenses.

 

Separate Accounts

 

As of March 31, 2006 and December 31, 2005, the separate accounts include a separate account valued at $713.1 million and $726.6 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 our 2001 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 statements of financial position. Changes in fair value of the separate account shares are reflected in both the separate account assets and separate account liabilities and do not impact our results of operations.

 

2. Federal Income Taxes

 

The effective income tax rate on income from continuing operations for the three months ended March 31, 2006 is lower than the prevailing corporate federal income tax rate primarily due to income tax deductions allowed for corporate dividends received, a favorable court ruling on a contested Internal Revenue Service issue for 1991 and later years, and interest exclusion from taxable income. The effective income tax rate on income from continuing operations for the three months ended March 31, 2005 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.

 

3. Employee and Agent Benefits

 

Effective January 1, 2006, we made changes to our retirement program, including the Principal Select Saving Plan (“401(k)”), the Principal Pension Plan (“Pension Plan”) and the corresponding nonqualified plans. The qualified and nonqualified pension plans’ changes include a reduction to the traditional and cash balance formulas, a change in the early retirement factors, and the removal of the cost of living adjustments for traditional benefits earned after January 1, 2006. The qualified and nonqualified 401(k) plans’ company match increased from 50% of a 6% deferral to 75% of an 8% deferral. The Pension Plan changes reduced the Pension Plan expense in 2006, while the 401(k) changes increased the 401(k) expense.

 

10

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements (continued)

March 31, 2006

(Unaudited)

 

3. Employee and Agent Benefits (continued)

 

Components of net periodic benefit cost (income):

 

		Pension benefits						Other postretirement benefits
		For the three months ended March 31,						For the three months ended March 31,
		2006			2005			2006			2005
		(in millions)
Service cost		$	11.7		$	12.4		$	2.4		$	2.5
Interest cost		20.4			19.4			4.0			4.2
Expected return on plan assets		(26.3		)	(24.1		)	(8.1		)	(7.3		)
Amortization of prior service cost (benefit)		(2.2		)	0.4			(0.6		)	(0.6		)
Recognized net actuarial loss		5.1			4.1			—			0.1
Net periodic benefit cost		$	8.7		$	12.2		$	(2.3	)	$	(1.1	)

 

Contributions

 

We anticipate contributing $0.4 million in 2006 to fund our other postretirement benefit plans. We contributed $0.1 million during the three months ended March 31, 2006.

 

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 the Employee Retirement Income Security Act (“ERISA”) and, generally, not greater than the maximum amount that can be deducted for federal income tax purposes. The minimum annual contribution for 2006 will be zero so we will not be required to fund the qualified pension plan during 2006. However, it is possible that we may fund the qualified and nonqualified plans in 2006 in the range of $10.0 million to $50.0 million. During the three months ended March 31, 2006, no contributions were made to the plans.

 

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Principal Financial Group, Inc.

Notes to Consolidated Financial Statements (continued)

March 31, 2006

(Unaudited)

 

4. Contingencies, Guarantees and Indemnifications (continued)

 

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 or financial position. 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.

 

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 2005 through 2019. The maximum exposure under these agreements as of March 31, 2006, was approximately $174.0 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, therefore, such guarantees would not result in a material adverse effect on our business or financial position. It is possible that such outcomes could materially affect net income in a particular quarter or annual period. The fair value of such guarantees is not material.

 

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. $179.0 million as of March 31, 2006). 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 require 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 return of their investment plus interest at 10% per annum from the date of investment. This technical issue affected many in the industry.

 

On December 24, 2004, Westpac lodged several warranty and indemnification claims related to the sale of BT Financial Group. The claims aggregated approximately A$50.0 million Australian dollars (approximately U.S. $36.0 million as of March 31, 2006) with the majority of the claims (approximately A$45.0 million Australian dollars, or U.S. $32.0 million as of March 31, 2006) related to fund pricing and accounting issues around a tax asset called future income tax benefit (“FITB”). FITB is an asset used in calculating unit pricing of funds. Westpac claimed that BT Financial Group incorrectly accrued FITB assets in valuing asset portfolios of BT funds in Australia and New Zealand and that, as a result, fund values were overstated.

 

The claims made by Westpac related to both indemnifications were settled and paid by us in 2006. This settlement did not have a material impact on net income.

 

13

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements (continued)

March 31, 2006

(Unaudited)

 

4. Contingencies, Guarantees and Indemnifications (continued)

 

We are also subject to various other indemnification obligations issued in conjunction with certain transactions, primarily the sale of Principal Residential Mortgage, Inc. 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 or financial position. It is possible that such outcomes could materially affect net income in a particular quarter or annual period. The fair value of such indemnifications is not material.

 

5. Stockholders’ Equity

 

Reconciliation of Outstanding Shares

 

		Series A Preferred Stock		Series B Preferred Stock		Common Stock
		(in  millions)
Outstanding shares at January 1, 2005		—		—		300.6
Shares issued		—		—		0.4
Treasury stock acquired		—		—		(4.2	)
Outstanding shares at March 31, 2005		—		—		296.8
Outstanding shares at January 1, 2006		3.0		10.0		280.6
Shares issued		—		—		0.4
Treasury stock acquired		—		—		(3.4	)
Outstanding shares at March 31, 2006		3.0		10.0		277.6

 

14

 

Principal Financial Group, Inc.

Notes to Consolidated Financial Statements (continued)

March 31, 2006

(Unaudited)

 

7. Segment Information (continued)

 

The following tables summarize selected financial information by segment and reconcile segment totals to those reported in the consolidated financial statements:

 

		March 31, 2006			December 31, 2005
		(in millions)
Assets:
U.S. Asset Management and Accumulation		$	108,307.9		$	103,506.1
International Asset Management and Accumulation		6,978.7			6,856.2
Life and Health Insurance		14,090.4			14,080.2
Corporate and Other		2,597.5			2,592.9
Total consolidated assets		$	131,974.5		$	127,035.4

 

		For the three months ended March 31,
		2006			2005
		(in millions)
Operating revenues by segment:
U.S. Asset Management and Accumulation		$	1,049.8		$	957.3
International Asset Management and Accumulation		143.4			132.8
Life and Health Insurance		1,159.6			1,068.6
Corporate and Other		(9.7		)	(10.1		)
Total segment operating revenues		2,343.1			2,148.6
Add:
Net realized/unrealized capital gains (losses), including recognition of front-end fee revenues and certain market value adjustments to fee revenues		48.6			(4.0		)
Subtract:
Operating revenues from discontinued real estate investments		—			0.9
Total revenues per consolidated statements of operations		$	2,391.7		$	2,143.7
Operating earnings (loss) by segment, net of related income taxes:
U.S. Asset Management and Accumulation		$	157.8		$	138.6
International Asset Management and Accumulation		17.6			9.5
Life and Health Insurance		70.4			69.5
Corporate and Other		(5.6		)	(8.4		)
Total segment operating earnings, net of related income taxes		240.2			209.2
Net realized/unrealized capital gains (losses), as adjusted		24.9			(3.7		)
Other after-tax adjustments (1)		20.6			¾
Net income available to common stockholders per consolidated statements of operations		$	285.7		$	205.5

 

(1)                                  In 2006, other after-tax adjustments of $20.6 million included the positive effect of a favorable court ruling on a contested IRS issue.

 

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