CYPRESS, Calif., July 29 /PRNewswire-FirstCall/ -- PacifiCare Health Systems, Inc. , today announced that reported net income for the second quarter ended June 30, 2004 was $76 million, or $0.80 per diluted share. This compares with reported net income of $73 million, or $0.96 per diluted share, for the second quarter of last year. Results in the second quarter of last year included $14 million ($8.7 million net of tax, or $0.11 per diluted share) in favorable changes in estimates for health care costs for 2002 and prior periods. Second quarter 2004 EPS includes a $0.21 per share impact of approximately 20 million additional shares of stock included in the calculation of diluted weighted average shares outstanding, as compared to the second quarter last year. All EPS and share numbers in this release have been adjusted to reflect the 2-for-1 stock split that was effective January 20, 2004.
"Overall, second quarter performance was in line with our expectations, and was highlighted by continuing, measured growth in commercial membership and profitability," said Chairman and Chief Executive Officer Howard Phanstiel. "Additionally, our specialty companies continued to show significant growth. At the same time, the SG&A ratio decreased, as a result of leveraging our SG&A costs against our membership and revenue growth."
Revenue and Membership
Second quarter 2004 total revenue of $3 billion was 12% higher than the same quarter a year ago. Commercial revenue rose 14%, driven by premium increases of 9% per member per month (PMPM) and a 5% growth in membership. Senior revenue grew 6% over the second quarter of last year as the result of a premium increase of 6% PMPM and a 1% drop in membership.
Additionally, commercial risk membership rose by 29,000, or 1%, compared with the previous quarter.
Specialty and Other revenue grew 43% over the second quarter last year, primarily due to a 53% increase in revenue at the company's pharmacy benefit management subsidiary, Prescription Solutions. This revenue growth was driven by an increase in total membership, which rose by 516,000 or 10% year-over- year, and a focused marketing initiative resulting in a year-over-year increase in the mail order prescription fulfillment rate from 20.8% to 26.2%.
Health Care Costs
The second quarter consolidated medical loss ratio (MLR) of 85.1% increased 130 basis points from the second quarter of 2003, but was flat sequentially.
This increase in the consolidated MLR was driven mainly by a 260 basis point rise in the government sector senior MLR, to 86.4%, compared with the second quarter of last year. This includes the effect of the recent passage of new Medicare legislation requiring that 100% of the increased funding for the Medicare+Choice program in 2004 be passed through to members and providers in the form of increased member benefits and provider payments.
Additionally, the Medicare+Choice and commercial MLRs in the second quarter of last year included a total of $14 million in favorable changes in estimates of health care costs mentioned above.
The private sector commercial MLR was 84.3% in the second quarter, which was 20 basis points higher year-over-year. On a year-to-date basis the commercial MLR was better by 60 basis points, at 83.9%.
Selling, General & Administrative Expenses
The SG&A expense ratio of 12.3% for the second quarter of 2004 decreased by 40 basis points year-over-year, and decreased 20 basis points from the prior quarter, reflecting the growth in membership and revenue.
Other Financial Data
Medical claims and benefits payable (MCBP) totaled approximately $1.1 billion at June 30, 2004, approximately $24 million lower than the prior quarter. The IBNR component of MCBP increased by approximately $18 million sequentially in connection with higher commercial membership, but this was partially offset by a $15 million reduction primarily related to the timing of pharmacy claim payments during the quarter. Additionally, the non-IBNR components of MCBP decreased by approximately $14.8 million related mainly to payments for capitation and other annual provider settlements, $7.5 million in legal settlements, and $4.6 million in reductions to provider insolvency reserves.
As a result of the payments related to the items discussed above, days claims payable for the second quarter compared to the prior quarter decreased to 38.7 days from 40.6 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 increased half of one day to 70 days as a result of the increase in IBNR disclosed above.
Cash flow from operations in the second quarter of 2004 was $25.3 million, reflecting the seasonal impact of items including the $15 million in capitation payments and other annual provider settlements mentioned above, as well as a semi-annual interest payment of $10 million net of appropriate interest accruals. Second quarter cash flows were also affected by the $14.8 million attributable to pharmacy claims and the $7.5 million in legal settlements mentioned above, as well as the amortization of approximately $16 million in unearned premiums previously received from the Centers for Medicare and Medicaid Services (CMS) in connection with the recently passed Medicare Modernization Act. "We generally expect seasonally lower cash flows from operations during the second quarter each year due to the timing of various payments," said Gregory W. Scott, Executive Vice President and Chief Financial Officer. "Year-to-date cash flows through June 30th are consistent with the prior year, reflecting this quarterly trend."
Conference Call, Webcast and Website Information
PacifiCare will host a conference call and webcast on Thursday, July 29, 2004 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 (800) 857-9879, password "PacifiCare". A replay of the call will be available through August 20, 2004 at (866) 400-9640. Additionally, a live webcast of the call will be available at http://www.pacificare.com/. Click on About PacifiCare, Investor Relations, and then Conference Calls to access the link. In accordance with Regulation G, a reconciliation of GAAP results to 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 and Gregory Scott, 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 effects of the new Medicare legislation, the success of the company's new commercial products and related increases in commercial membership, seasonal cash flow patterns, and statements related to 2004 earnings guidance. 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 membership 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 financial problems or bankruptcy, provider contracts oversight relations and other matters, unexpected increases in competition, new regulations or laws relating to capitation, Medicare reimbursements, benefit mandates, service, utilization management, provider contracts and similar matters, inability of proposed new portfolio offerings to improve membership and profitability, the inability to comply with existing bank covenants, and earnings dilution caused by potential conversion of the company's convertible debt into common stock. 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 9 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 and medical management through its wholly owned subsidiary, Prescription Solutions. More information on PacifiCare Health Systems is available at http://www.pacificare.com/.
PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, Three Months Ended Six Months Ended except per-share June 30, June 30, amounts) 2004 2003 2004 2003 Revenue: Commercial $1,413,587 $1,237,190 $2,799,905 $2,469,306 Senior 1,441,187 1,355,621 2,851,300 2,725,369 Specialty and other 170,845 119,592 320,692 236,335 Net investment income 21,829 17,831 39,674 38,819 Total operating revenue 3,047,448 2,730,234 6,011,571 5,469,829 Expenses: Health care services and other: Commercial 1,198,216 1,046,962 2,366,779 2,099,635 Senior 1,248,111 1,135,320 2,473,072 2,296,876 Specialty and other 93,420 64,214 174,492 125,748 Total health care services and other 2,539,747 2,246,496 5,014,343 4,522,259 Selling, general and administrative expenses 372,423 345,612 741,475 676,843 Operating income 135,278 138,126 255,753 270,727 Interest expense, net (10,853) (20,410) (21,670) (39,960) Income before income taxes 124,425 117,716 234,083 230,767 Provision for income taxes 48,401 44,718 91,058 86,999 Net income $76,024 $72,998 $143,025 $143,768 Weighted average common shares outstanding used to calculate basic earnings per share (1) 84,933 72,854 84,602 72,472 Basic earnings per share (1) $0.90 $1.00 $1.69 $1.98 Weighted average common shares and equivalents outstanding used to calculate diluted earnings per share (1) 96,132 76,040 95,849 75,107 Diluted earnings per share (1) $0.80 $0.96 $1.51 $1.91 (1) All applicable per share amounts reflect the retroactive effect of the two-for-one common stock split in the form of a stock dividend that was effective January 20, 2004 OPERATING STATISTICS Medical loss ratio: Consolidated 85.1% 83.8% 85.1% 84.3% Private - Commercial 84.3% 84.1% 83.9% 84.5% Private - Senior 64.9% 72.5% 73.8% 67.8% Private - Consolidated 83.9% 83.9% 83.8% 84.3% Government - Senior 86.4% 83.7% 86.5% 84.4% Government - Consolidated 86.4% 83.7% 86.5% 84.4% Selling, general and administrative expenses as a percentage of operating revenue (excluding net investment income) 12.3% 12.7% 12.4% 12.5% Operating income as a percentage of operating revenue 4.4% 5.1% 4.3% 5.0% Effective tax rate 38.9% 38.0% 38.9% 37.7% PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2004 2003 (1) 2004 2003 (1) Operating activities: Net income $76,024 $72,998 $143,025 $143,768 Adjustments to reconcile net income to net cash used in operating activities: Deferred income taxes 31,806 3,775 34,021 6,295 Depreciation and amortization 12,705 11,437 24,721 22,697 Stock-based compensation expense 10,925 5,091 20,377 8,249 Tax benefit realized upon exercise of stock-based compensation 3,553 4,427 13,364 4,663 Amortization of intangible assets 4,947 5,481 9,893 11,047 Amortization of notes receivable from sale of fixed assets (1,391) (1,396) (2,751) (2,764) Amortization of capitalized loan fees 1,078 3,874 2,155 5,096 Provision (recovery) for doubtful accounts 44 513 (1,176) 2,777 Loss on disposal of property, plant and equipment 219 140 424 2,680 Amortization of discount on 10 3/4% senior notes 71 109 142 218 Employer benefit plan contributions in treasury stock -- -- -- 1,363 Changes in assets and liabilities: Receivables, net (3,827) 14,652 (51,200) (18,867) Prepaid expenses and other assets 1,772 5,481 (10,843) (30,225) Medical claims and benefits payable (23,800) (40,800) 53,200 15,400 Accounts payable and accrued liabilities: Payments for Office of Personnel Management settlement, net of amounts received -- (10,000) -- (10,000) Accrued taxes (40,286) (20,106) (8,046) 24,153 Other changes in accounts payable and accrued liabilities (32,053) 8,021 (21,768) 22,388 Unearned premium revenue (16,525) (2,076) (398,307) (404,369) Net cash flows (used in) provided by operating activities $25,262 $61,621 $(192,769) $(195,431) Investing activities: Purchase of marketable securities, net $(52,296) $(144,324) $(110,985) $(102,374) Purchase of property, plant and equipment (13,031) (13,124) (27,272) (23,101) Sale (Purchase) of marketable securities - restricted (2,327) 21,485 26,863 18,341 Proceeds from the sale of property, plant and equipment -- 6 -- 21 Net cash flows used in investing activities $(67,654) $(135,957) $(111,394) $(107,113) Financing activities: Purchase and retirement of common stock $(38,030) $-- $(40,542) $-- Proceeds from issuance of common stock 9,830 10,267 31,076 13,165 Payments on software financing agreement (1,448) (1,098) (4,053) (2,187) Principal payments on long-term debt (457) (130,347) (948) (150,547) Proceeds from borrowings of long-term debt -- 150,000 -- 150,000 Loan fees -- (6,949) -- (6,949) Net cash flows (used in) provided by financing activities $(30,105) $21,873 $(14,467) $3,482 Net decrease in cash and equivalents $(72,497) $(52,463) $(318,630) $(299,062) Beginning cash and equivalents 952,289 705,090 1,198,422 951,689 Ending cash and equivalents $879,792 $652,627 $879,792 $652,627 (1) Presentation changes have been made to June 30, 2003 to conform to the 2004 presentation. PACIFICARE HEALTH SYSTEMS, INC. BALANCE SHEET DATA (Unaudited) June 30, December 31, June 30, (in thousands) 2004 2003 2003 Assets: Cash, equivalents and marketable securities $2,316,405 $2,558,142 $2,005,027 Receivables, net 313,770 265,943 308,634 Property, plant and equipment, net 151,534 149,407 159,418 Goodwill and intangible assets, net 1,194,319 1,204,212 1,215,073 Other assets 395,003 441,600 384,029 Total assets $4,371,031 $4,619,304 $4,072,181 Liabilities and equity: Total medical claims and benefits payable $1,080,700 $1,027,500 $1,059,900 Current portion of long-term debt 6,142 7,496 48,355 Long-term debt 609,195 612,700 788,188 Other liabilities 673,823 1,120,071 664,322 Total stockholders' equity 2,001,171 1,851,537 1,511,416 Total liabilities and equity $4,371,031 $4,619,304 $4,072,181 MEMBERSHIP DATA June 30, December 31, June 30, 2004 2003 2003 Commercial: HMO 1,963,000 1,994,800 2,016,300 PPO and indemnity 279,500 183,500 120,100 Employer self-funded 27,500 24,600 26,600 2,270,000 2,202,900 2,163,000 Senior: M+C 689,600 682,300 695,900 Medicare Supplement 32,800 26,900 25,600 722,400 709,200 721,500 Total membership 2,992,400 2,912,100 2,884,500 Pharmacy benefit management (A) 5,545,100 4,983,500 5,028,800 Behavioral health (B) 3,752,600 3,660,100 3,755,600 Dental and vision (B) 809,000 719,600 697,700 (A) Pharmacy benefit management PacifiCare membership represents members that are in our commercial, M+C or Medicare Supplement plans. 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 PacifiCare membership represents members in our commercial, M+C and Medicare Supplement that are also enrolled in our behavioral health, dental and/or vision plans. PacifiCare Health Systems, Inc. Reconciliation of Non-GAAP Measures (Unaudited) Non-GAAP Measures We utilize certain non-GAAP measures to evaluate our performance and consider these measures important indicators of our success. These measures should not be considered an alternative to measurements required by accounting principles generally accepted in the United States of America. In addition, our non-GAAP measures may not be comparable to similar measures reported by other companies. Medical Loss Ratio Premiums and Health Care Services and Other Expenses The following sets forth a reconciliation of premium revenues and health care services expenses used in the calculation of our medical loss ratio to the revenue and health care services and other expenses (which is the closest GAAP financial measure) as shown on the consolidated statements of operations: Three Months Ended Six Months Ended (In millions) June 30, June 30, 2004 2003 2004 2003 Commercial: Commercial revenue $1,413.6 $1,237.2 $2,799.9 $2,469.3 Net effect of specialty premiums, administrative service fee revenue and eliminations 76.2 66.8 151.8 135.5 Consolidated commercial premiums $1,489.8 $1,304.0 $2,951.7 $2,604.8 Commercial health care services and other expenses $1,198.2 $1,047.0 $2,366.8 $2,099.6 Net effect of specialty health care services and other expenses and eliminations 57.0 49.1 111.2 101.2 Consolidated health care services expenses related to consolidated commercial premiums $1,255.2 $1,096.1 $2,478.0 $2,200.8 Senior: Senior revenue $1,441.2 $1,355.6 $2,851.3 $2,725.4 Net effect of specialty premiums, administrative service fee revenue and eliminations 6.5 (0.7) 9.5 (1.5) Consolidated senior premiums $1,447.7 $1,354.9 $2,860.8 $2,723.9 Senior health care services and other expenses $1,248.1 $1,135.3 $2,473.1 $2,296.9 Net effect of specialty health care services and other expenses and eliminations (3.0) (2.9) (4.9) (5.2) Consolidated health care services expenses related to consolidated senior premiums $1,245.1 $1,132.4 $2,468.2 $2,291.7 PacifiCare Health Systems, Inc. Reconciliation of Non-GAAP Measures (Unaudited) Non-GAAP Measures - Continued Diluted EPS Impact of Increase in Weighted Average Shares Outstanding For the quarter ended June 30, 2004, our diluted EPS was impacted by the increase in weighted average shares outstanding from the same period in the prior year. The increase in weighted average shares outstanding was primarily due to the issuance of new shares in connection with our November 2003 equity offering and the inclusion of our convertible debt due to the satisfaction of the market price during the quarter ended March 31, 2004. The diluted EPS impact of this increase in weighted average shares outstanding is computed as the difference in reported diluted EPS for the quarter ended June 30, 2004 and diluted EPS for the quarter ended June 30, 2004 adjusted using the weighted average shares outstanding as of June 30, 2003. We believe this metric is useful to investors as it provides transparency to the earnings pattern. Three Months Ended (amounts in millions, except per share amounts) June 30, 2004 Net income, as reported $76.0 Adjustment for interest expense avoided on convertible debentures, net of tax 0.6 Net income, as adjusted for interest expense avoided on convertible debentures $76.6 Net income, as adjusted for interest expense avoided on convertible debentures $76.6 Diluted weighted average shares outstanding - June 30, 2003 76.0 Diluted earnings per share calculated using the weighted average shares outstanding for the quarter ended June 30, 2003 $1.01 Diluted earnings per share, as reported $0.80 Diluted earnings per share calculated using the weighted average shares outstanding for the quarter ended June 30, 2003 1.01 Impact on diluted earnings per share of the increase in weighted average shares outstanding $(0.21) Diluted Earnings Per Share ("EPS") Impact of Positive Prior Period Changes in Estimate Related to 2002 and Prior Periods For the quarter ended June 30, 2003, our net income, as reported, included the impact of positive prior period changes in estimates related to 2002 and prior periods. The diluted earnings per share impact of the positive prior period changes in estimates related to 2002 and prior periods is computed as positive changes in estimates for health care costs related to 2002 and prior periods, net of related income taxes, divided by the weighted average shares of common stock and equivalents outstanding used to calculate diluted earnings per share. There was no comparable activity for the quarter ended June 30, 2004. We believe this measure is useful to investors as it provides transparency to the earnings pattern. Three Months Ended (amounts in millions, except per share amounts) June 30, 2003 Positive changes in estimates for health care costs related to 2002 and prior periods, net of tax $8.7 Weighted average common shares outstanding, diluted 76.0 Diluted earnings per share impact of positive prior period changes in estimates related to 2002 and prior periods $0.11
PacifiCare Health Systems, Inc.CONTACT: Tyler Mason, Media Relations, +1-714-226-3530, or SuzanneShirley, Investor Relations, +1-714-226-3470, both of PacifiCare HealthSystems, Inc.
Web site: http://www.pacificare.com/
