Health Net 2006 Annual Report Download - page 65

2004 Charges
In order to enhance efficiency and reduce administrative costs, we commenced, in 2004, an involuntary
workforce reduction of approximately 500 positions, which included reductions resulting from an intensified
performance review process, throughout many of our functional groups and divisions, most notably in the
Northeast. The workforce reduction was substantially completed by June 30, 2005 and all of the $25.3 million of
severance and related benefit costs recorded in 2004 had been paid out by December 31, 2005. We used available
cash to fund these payments. See Note 14 to the consolidated financial statements for additional information
regarding severance and related benefit costs.
We recorded a $3.0 million pretax impairment on internally developed software and purchased computer
hardware that were rendered obsolete as a result of changes to our operations and systems consolidation process.
We also recorded a pretax $2.9 million impairment on investments in other companies in the fourth quarter of
2004.
We recorded a $1.7 million pretax charge for lease termination expenses associated with the exit of certain
properties as part of the transition from our old TRICARE contracts to the TRICARE contract for the North
Region.
See Note 14 to our consolidated financial statements for further information on severance and related
benefit costs, asset impairments and lease termination costs.
Net Gain on Sales of Businesses and Properties
2004 Sales
We recognized a net pretax gain of $1.2 million related to the sales of our Florida health plan, our two
subacute subsidiaries and our dental and vision subsidiaries. See Note 3 to our consolidated financial statements
for further information on these sales.
Income Tax Provision
Our income tax expense and the effective income tax rate for the years ended December 31, 2006, 2005 and
2004 are as follows:
2006 2005 2004
(Dollars in millions)
Income tax expense .......................................... $149.5 $146.5 $24.8
Effective tax rate ............................................ 31.2% 38.9% 36.8%
The effective income tax rate differs from the statutory federal tax rate of 35.0% in each year due primarily
to state income taxes, tax-exempt investment income and business divestitures. The effective income tax rate
decreased from 2005 to 2006 primarily due to tax benefits associated with the sale of the subsidiary that formerly
held our Pennsylvania health plan and certain of its affiliates. We recognized an approximate $32 million tax
benefit related to this sale in the year ended December 31, 2006. Our state tax rate decreased primarily as a result
of beneficial tax elections and an increased proportion of income earned by subsidiaries that are assessed
premium rather than income tax. The effective income tax rate increased from 2004 to 2005 primarily due to the
reduction in the impact of the tax benefits associated with tax return examination settlements and an increase in
state taxes due to change in the business mix.
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