Humana 2004 Annual Report Download - page 44

SG&A Expense
The consolidated SG&A expense ratio decreased 50 basis points in 2003 primarily because of a decrease in
severance and related employee benefit costs of $29.0 million, the absence of 2002 expenses of $30.1 million
associated with a contingent contractual provider dispute and other items, offset by an increase in building
impairments of $14.8 million.
Increased operating efficiency led to the consolidation of seven service centers into four and an enterprise-
wide workforce reduction affecting administrative expenses in both 2003 and 2002 by recording expenses for
severance and related employee benefit costs and building impairments. Severance and related employee benefit
costs, more fully described in Note 11 to the consolidated financial statements, amounted to $11.2 million in
2003 and $40.2 million in 2002. The 2002 severance amount primarily related to the service center consolidation.
Building impairments, more fully described in Note 5 to the consolidated financial statements, amounted to $17.2
million in 2003 and $2.4 million in 2002.
During 2002, we recorded $30.1 million of administrative expenses for a contingent contractual provider
dispute and other items associated with our 1997 acquisition of Physician Corporation of America, or PCA. The
$30.1 million of expenses in 2002 resulted from three issues. First, on January 28, 2003, we settled a dispute with
a provider for $8.3 million primarily regarding old claims of PCA subsidiaries dating prior to Humana’s 1997
acquisition. Second, during the fourth quarter of 2002, as a December 2, 2002 trial date approached, efforts
intensified to reach settlement of an old PCA shareholder dispute for periods prior to Humana’s 1997 acquisition
of PCA. As a result, we accrued $15.7 million because the loss was probable and the amount could be reasonably
estimated. We reversed $1.8 million of this reserve when the final settlement was paid during the third quarter of
2003. Third, in connection with an agreement reached in November 2002, we partially wrote-off a note
receivable of $6.1 million from the purchaser of our workers’ compensation business which was sold in 2000.
The agreement with the purchaser resulted when a significant customer contract was terminated in the fourth
quarter of 2002. We acquired the workers’ compensation business in connection with the 1997 PCA acquisition.
The Commercial and Government segments’ SG&A expense ratios likewise were impacted by the same
items described previously.
Depreciation and amortization was $126.8 million in 2003, an increase of $6.1 million, or 5.0%, from
$120.7 million in 2002. The increase results from accelerated depreciation of software in 2003 of $13.5 million,
as more fully described in Note 5 to the consolidated financial statements, partially offset by lower amortization
related to other intangible assets as costs associated with the government contract acquired with the TRICARE 2
and 5 transaction became fully amortized in the second quarter of 2003.
Interest Expense
Interest expense was $17.4 million in 2003, an increase of $0.1 million from $17.3 million in 2002. This
increase primarily resulted from higher average outstanding debt due to the issuance of $300 million senior notes
in August 2003 offset by lower interest rates.
Income Taxes
Our effective tax rate in 2003 of 33.6% increased 1.6% compared to the 32% effective tax rate in 2002. The
increase in the effective tax rate primarily resulted from a lower proportion of tax-exempt investment income to
pretax income. During 2002, the Internal Revenue Service completed their audit of all open years prior to 2000
which resulted in a favorable adjustment to the estimated accrual for income taxes of approximately $32.6
million. This was offset by an increase of approximately $24.5 million in the capital loss valuation allowance
after we reevaluated probable capital gain realization in the allowable carryforward period based upon our capital
gain experience beginning in 2000 and consideration of alternative tax planning strategies. See Note 8 to the
consolidated financial statements for a complete reconciliation of the federal statutory rate to the effective tax
rate.
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