PacifiCare Health Systems Announces 1st Quarter 2005 Results

CYPRESS, Calif., April 28 /PRNewswire-FirstCall/ -- PacifiCare Health Systems, Inc. , today announced that reported net income for the first quarter ended March 31, 2005 was $86 million, or $0.89 per diluted share. This compares with reported net income of $67 million, or $0.71 per diluted share, for the first quarter of 2004.

"We are pleased to report first quarter EPS at the high end of our guidance, even after including five million dollars in expenses, or about three cents per diluted share, related to costs incurred in anticipation of the new Medicare Part D opportunities starting in January of 2006. Today we are raising our 2005 full-year EPS guidance to a new range of $3.70 to $3.85," said Chairman and Chief Executive Officer Howard Phanstiel. "Our year-over- year earnings improvement was driven by an increase in senior membership, the acquisition of American Medical Security Group, and strong growth in mail service volume at our pharmacy benefit management company, Prescription Solutions."

Revenue and Membership

First quarter 2005 total operating revenue of $3.4 billion was 16% higher than the same quarter a year ago. Total commercial revenue rose 13%, driven by an 11% increase in fully insured and non-risk ASO membership, including the acquisition of American Medical Security Group (AMS). Senior revenue grew 15% over the first quarter of last year, primarily as the result of a Medicare Advantage premium increase of 9.6% and a 4% rise in membership.

Specialty and Other revenue grew 48% over the first quarter last year, due to increased revenue at the company's pharmacy benefit management, behavioral health and dental and vision subsidiaries. Prescription Solutions' membership unaffiliated with PacifiCare's health plans increased by 128,000 year-over- year, and its revenue rose 44% as a result of higher retail service contract and mail order fulfillment revenues. Unaffiliated membership at PacifiCare Behavioral Health rose by 47%, resulting in a 40% increase in revenue, and total membership at our dental and vision companies grew 44% as a result of the AMS acquisition and strong organic sales.

Health Care Costs

The private sector commercial medical loss ratio (MLR) in the first quarter improved 170 basis points from the prior year, to 81.9%, driven by the acquisition of AMS.

The government sector senior MLR was up 30 basis points year-over-year, to 86.9%, primarily as the result of benefit increases intended to grow Medicare Advantage membership. The first quarter MLR was below the 2005 full-year guidance of 87.5% to 88.5% previously issued by the company.

The consolidated MLR of 84.3% was 80 basis points lower than the first quarter of the prior year.

Selling, General & Administrative Expenses

The SG&A expense ratio of 13.2% in the first quarter of 2005 was 70 basis points higher than the first quarter of 2004, primarily as a result of changes in business mix related to the acquired AMS business.

Other Financial Data

Medical claims and benefits payable (MCBP) totaled approximately $1.2 billion at March 31, 2005, which was an increase of approximately $10 million from the prior quarter. The IBNR component of MCBP increased by approximately $12 million sequentially.

Days claims payable for the first quarter compared to the prior quarter decreased slightly to 38.2 days from 38.3 days. However, after excluding the non-risk, capitated portion of the company's business, as well as other non- claim related liabilities, days claims payable decreased by nine-tenths of one day, to 69.6 days.

Cash flow from operations in the first quarter of 2005 was $128.2 million, or 1.5 times net income.

Conference Call, Webcast and Website Information

PacifiCare will host a conference call and webcast on Thursday, April 28, 2005 at 2:00 PM Pacific time, 5:00 PM Eastern, to discuss this release in further detail. Interested parties can access the live conference by dialing (877) 601-3546, password "PacifiCare". A replay of the call will be available through May 19, 2005 at (866) 403-8762. Additionally, a live webcast of the call will be available at Click on Investor Relations, and then Conference Calls to access the link. In accordance with Regulation G, a reconciliation of GAAP results to any non-GAAP measurements referred to in this release and during the conference call will be posted with the earnings press release on our website.

Risk Factors Regarding Forward-Looking Statements

The statements in this news release, including those made by Howard Phanstiel that are not historical facts are forward-looking statements within the meaning of the Federal securities laws, and may involve a number of risks and uncertainties. Such forward-looking statements include, but are not limited to the company's expectations regarding the Medicare program, and earnings for the full-year 2005. Important factors that could cause results to differ materially from those expected by management include, but are not limited to, failure to implement programs to achieve expected Medicare or commercial membership, or revenue or earnings targets, as a result of premiums or benefit adjustments; inability to execute cost control strategies, including medical management programs; actual medical claims differing from current estimates; inability to maintain required capital levels at the company's regulated subsidiaries; inability to maintain profitability and growth at the company's specialty businesses; provider contractual or financial problems or bankruptcy; unexpected increases in competition; new regulations or laws relating to capitation; Medicare reimbursements, benefit mandates, service, utilization management, provider contracts and similar matters; and the inability to comply with existing bank covenants. Additional information on factors, risks, and uncertainties that could potentially affect our financial results may be found in documents filed with the Securities and Exchange Commission.

PacifiCare Health Systems is one of the nation's largest consumer health organizations with more than 3 million health plan members and approximately 11 million specialty plan members nationwide. PacifiCare offers individuals, employers and Medicare beneficiaries a variety of consumer-driven health care and life insurance products. Currently, more than 99 percent of PacifiCare's commercial health plan members are enrolled in plans that have received Excellent Accreditation by the National Committee for Quality Assurance (NCQA). PacifiCare's specialty operations include behavioral health, dental and vision, and complete pharmacy benefit management through its wholly owned subsidiary, Prescription Solutions. More information on PacifiCare Health Systems is available at

PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended March 31, (In thousands, except per share amounts) 2005 2004 Revenue: Commercial $1,566,332 $1,386,318 Senior 1,619,705 1,410,113 Specialty and other 221,694 149,847 Net investment income 27,892 17,845 Total operating revenue 3,435,623 2,964,123 Expenses: Health care services and other: Commercial 1,288,400 1,168,563 Senior 1,408,941 1,224,961 Specialty and other 132,332 81,072 Total health care services and other 2,829,673 2,474,596 Selling, general and administrative expenses 449,131 369,052 Operating income 156,819 120,475 Interest expense, net (16,777) (10,817) Income before income taxes 140,042 109,658 Provision for income taxes 54,336 42,657 Net income $85,706 $67,001 Weighted average common shares outstanding used to calculate basic earnings per share 85,888 84,271 Basic earnings per share $1.00 $0.80 Weighted average common shares and equivalents outstanding used to calculate diluted earnings per share 97,074 95,463 Diluted earnings per share $0.89 $0.71 OPERATING STATISTICS Medical loss ratio: Consolidated 84.3% 85.1% Private - Commercial 81.9% 83.6% Private - Senior 82.9% 83.1% Private - Consolidated 81.9% 83.6% Government - Senior 86.9% 86.6% Government - Consolidated 86.9% 86.6% Selling, general and administrative expenses as a percentage of operating revenue (excluding net investment income) 13.2% 12.5% Operating income as a percentage of operating revenue 4.6% 4.1% Effective tax rate 38.8% 38.9% PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, (In thousands) 2005 2004 (1) Operating activities: Net income $85,706 $67,001 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 15,133 12,016 Tax benefit realized for stock option exercises 12,273 9,811 Deferred income taxes 11,066 2,215 Stock-based compensation expense 7,064 9,452 Amortization of intangible assets 5,581 4,946 Amortization of notes receivable from sale of fixed assets (1,296) (1,360) Recovery of doubtful accounts (1,293) (1,220) Amortization of capitalized loan fees 1,034 1,077 Loss on disposal of property, plant and equipment and other 309 205 Amortization of discount on 10 3/4% senior notes 71 71 Changes in assets and liabilities: Receivables, net (13,972) (47,373) Prepaid expenses and other assets (4,216) (12,615) Medical claims and benefits payable 9,900 77,000 Accounts payable and accrued liabilities: Accrued taxes 17,838 32,240 Other changes in accounts payable and accrued liabilities (22,586) 10,285 Unearned premium revenue 5,572 (381,782) Net cash flows provided by (used in) operating activities 128,184 (218,031) Investing activities: Purchase of marketable securities, net (99,683) (58,689) Purchase of property, plant and equipment (15,003) (14,241) Acquisitions net of cash acquired (7,357) -- Sale (purchase) of marketable securities - restricted (532) 29,190 Net cash flows used in investing activities (122,575) (43,740) Financing activities: Purchase and retirement of common stock (12,671) (2,512) Proceeds from issuance of common stock 10,692 21,246 Principal payments on long-term debt (8,713) (491) Payments on software financing agreements (1,356) (2,605) Net cash flows provided by (used in) financing activities (12,048) 15,638 Net decrease in cash and equivalents (6,439) (246,133) Beginning cash and equivalents 824,104 1,198,422 Ending cash and equivalents $817,665 $952,289 (1) Presentation changes have been made to March 31, 2004 to conform to the 2005 presentation. PACIFICARE HEALTH SYSTEMS, INC. BALANCE SHEET DATA (Unaudited) March 31, December 31, March 31, (In thousands) 2005 2004 2004 Assets: Cash, equivalents and marketable securities $2,824,839 $2,760,869 $2,380,435 Receivables, net 333,923 317,362 315,896 Property, plant and equipment, net 226,155 226,594 151,427 Goodwill and intangible assets, net 1,496,516 1,505,799 1,199,266 Other assets 410,623 416,293 420,340 Total assets $5,292,056 $5,226,917 $4,467,364 Liabilities and stockholders' equity: Total medical claims and benefits payable $1,202,300 $1,192,400 $1,104,500 Current portion of long-term debt 36,349 37,534 6,232 Long-term debt 1,042,707 1,051,520 610,939 Other liabilities 734,611 757,025 778,288 Total stockholders' equity 2,276,089 2,188,438 1,967,405 Total liabilities and stockholders' equity $5,292,056 $5,226,917 $4,467,364 MEMBERSHIP DATA March 31, December 31, March 31, 2005 2004 2004 Commercial: HMO 1,780,600 1,927,900 1,973,100 PPO 595,500 582,500 240,000 Employer self-funded 105,700 82,600 26,900 2,481,800 2,593,000 2,240,000 Senior: Medicare Advantage 716,100 704,700 689,000 Medicare Supplement 38,100 36,200 30,400 CMS Disease Management 3,700 2,500 -- 757,900 743,400 719,400 Total membership 3,239,700 3,336,400 2,959,400 Pharmacy benefit management (A) 5,486,000 5,588,700 5,385,300 Behavioral health (B) 4,602,800 3,813,600 3,789,600 Dental and vision (B) 1,165,500 1,040,500 807,800 (A) Pharmacy benefit management membership includes PacifiCare members that are in our Commercial, Medicare Advantage, Medicare Supplement or CMS Disease Management plans, excluding members covered under other PBM contracts. All of these members either have a prescription drug benefit or are able to purchase their prescriptions utilizing our retail network contracts or our mail service. (B) Behavioral health, dental and vision membership includes PacifiCare members in our Commercial, Medicare Advantage or Medicare Supplement plans that are also enrolled in our behavioral health, dental and/or vision plans. 2005 Guidance at April 28, 2005 Commercial Membership Growth 5%-6% Medicare Advantage Ending Members 743,000 Revenue Increase 17.5%-18.5% MLRs Consolidated 84%-85% Private Commercial 81%-82% Private Senior 73%-74% Government Senior 87.5%-88.5% Gross Margins Commercial 18%-19% Senior 11.5%-12.5% Specialty and Other 38%-39% EBITDA $750 - $775 million CFFO $500 - $525 million Free Cash Flow $320 - $335 million SG&A Ratio 12.75%-13.25% Depreciation/Amortization $89 million Capital Expenditures $130 - $135 million Net Income $365 - $380 million Average Outstanding Shares 98.8 million EPS, Full Year* $3.70 - $3.85 EPS, 2nd Quarter $0.92 - $0.97 Tax Rate 38.8% *Includes $0.01-$0.02 related to Pacific Life operations.

PacifiCare Health Systems, Inc.

CONTACT: Tyler Mason, Media Relations, +1-714-226-3530,, or Dan Yarbrough, Investor Relations, +1-714-226-3540,, both of PacifiCare Health Systems, Inc.

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