CYPRESS, Calif., Nov. 3 /PRNewswire-FirstCall/ -- PacifiCare Health Systems, Inc. , today announced that reported net income for the third quarter ended September 30, 2004 was $88 million, or $0.94 per diluted share. This compares with reported net income of $67 million, or $0.86 per diluted share, for the third quarter of 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.
“The strength of the third quarter’s earnings is evident by the fact that we exceeded analyst’s expectations even after including $10 million of pretax severance and software charges in SG&A,” said Chairman and Chief Executive Officer Howard Phanstiel. “Additionally, as a result of the company’s stock repurchase program, we now expect a lower average outstanding share count for 2004 and are increasing our full-year EPS guidance from $3.07 to $3.17 to a range of $3.15 to $3.20.”
Revenue and Membership
Third quarter 2004 total revenue of $3.1 billion was 13% higher than the same quarter a year ago. Commercial revenue rose 12%, driven by premium increases of 8.4% per member per month (PMPM) and a 4% growth in membership. Senior revenue grew 11% over the third quarter of last year as the result of a premium increase of 9.3% PMPM and a 2% rise in membership.
Specialty and Other revenue grew 42% over the third quarter last year, primarily due to increased 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 595,000 or 12% year-over- year, and a focused marketing initiative resulting in a year-over-year increase in the mail order prescription fulfillment rate from 22.9% to 26.8%.
Health Care Costs
The third quarter consolidated medical loss ratio (MLR) of 84.1% increased 50 basis points from the third quarter of 2003, but improved by 100 basis points sequentially.
The year-over-year increase in the consolidated MLR was driven by a 50 basis point rise in the private sector commercial MLR to 83.5%, and a 30 basis point rise in the government sector senior MLR, to 84.9%.
On a year-to-date basis, the consolidated MLR of 84.7% was 60 basis points higher than the previous year’s MLR of 84.1%. However, consolidated MLR through nine months in 2003 included the benefit of favorable prior period developments equal to 70 basis points.
The private sector commercial MLR was down 20 basis points, to 83.8%, and the government sector MLR was up 150 basis points to 85.9%, on a year-to-date basis when compared to 2003. However, the favorable prior period developments through three quarters in 2003 benefited the private sector commercial MLR by 50 basis points and the government sector MLR by 90 basis points.
Selling, General & Administrative Expenses
The SG&A expense ratio of 13% for the third quarter of 2004 decreased by 40 basis points year-over-year, reflecting the growth in membership and revenue. The ratio increased 70 basis points from the prior quarter primarily due to approximately $10 million in charges taken in the third quarter for the write-off of software and severance costs related to the elimination of 241 positions as a result of business process improvements, as well as accruals for performance related compensation.
Other Financial Data
Medical claims and benefits payable (MCBP) totaled approximately $1.1 billion at September 30, 2004, approximately $14 million lower than the prior quarter. The IBNR component of MCBP decreased by approximately $6 million sequentially, primarily as the result of the normal seasonal decrease in medical expenses related to the senior business.
Days claims payable for the third quarter compared to the prior quarter decreased slightly to 38.5 days from 38.7 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 from 70 days to 70.9 days.
Cash flow from operations in the third quarter of 2004 was $186.7 million, or more than two times net income.
Conference Call, Webcast and Website Information
PacifiCare will host a conference call and webcast on Wednesday, November 3, 2004 at 11:00 AM Pacific time, 2:00 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 November 25, 2004 at (866) 507-6377. 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 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, full year 2004 expectations related to earnings, medical loss ratios, and the adequacy of reserves for claims. 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 approximately 3 million health plan members and approximately 10 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 INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except per-share amounts) 2004 2003 2004 2003 Revenue: Commercial $1,419,140 $1,264,072 $4,219,045 $3,733,378 Senior 1,480,778 1,334,318 4,332,078 4,059,687 Specialty and other 181,199 127,577 501,891 363,912 Net investment income 24,509 16,200 64,183 55,019 Total operating revenue 3,105,626 2,742,167 9,117,197 8,211,996 Expenses: Health care services and other: Commercial 1,192,632 1,056,512 3,559,411 3,156,147 Senior 1,257,631 1,130,124 3,730,703 3,427,000 Specialty and other 101,678 66,019 276,170 191,767 Total health care services and other 2,551,941 2,252,655 7,566,284 6,774,914 Selling, general and administrative expenses 401,050 364,257 1,142,525 1,041,100 Operating income 152,635 125,255 408,388 395,982 Interest expense, net (10,182) (16,924) (31,852) (56,884) Income before income taxes 142,453 108,331 376,536 339,098 Provision for income taxes 54,285 40,841 145,343 127,840 Net income $88,168 $67,490 $231,193 $211,258 Weighted average common shares outstanding used to calculate basic earnings per share (1) 83,691 73,850 84,296 72,936 Basic earnings per share (1) $1.05 $0.91 $2.74 $2.90 Weighted average common shares and equivalents outstanding used to calculate diluted earnings per share (1) 94,492 78,420 95,416 76,486 Diluted earnings per share (1) $0.94 $0.86 $2.44 $2.76 (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 84.1% 83.6% 84.7% 84.1% Private -- Commercial 83.5% 83.0% 83.8% 84.0% Private -- Senior 69.5% 65.1% 72.4% 66.8% Private -- Consolidated 83.2% 82.7% 83.6% 83.7% Government -- Senior 84.9% 84.6% 85.9% 84.4% Government -- Consolidated 84.9% 84.6% 85.9% 84.4% Selling, general and administrative expenses as a percentage of operating revenue (excluding net investment income) 13.0% 13.4% 12.6% 12.8% Operating income as a percentage of operating revenue 4.9% 4.6% 4.5% 4.8% Effective tax rate 38.1% 37.7% 38.6% 37.7% PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, (In thousands) 2004 2003 (1) 2004 2003 (1) Operating activities: Net income $88,168 $67,490 $231,193 $211,258 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 12,686 11,768 37,407 34,465 Deferred income taxes (1,122) (18,414) 32,899 (12,119) Stock-based compensation expense 7,445 4,886 27,822 13,135 Tax benefit realized upon exercise of stock-based compensation 2,618 3,045 15,982 7,708 Amortization of intangible assets 4,946 5,430 14,839 16,477 Amortization of notes receivable from sale of fixed assets (1,421) (1,424) (4,172) (4,188) Amortization of capitalized loan fees 1,077 1,280 3,232 6,376 Loss on disposal of property, plant and equipment 2,325 15,665 2,749 18,345 Provision for doubtful accounts 1,601 702 425 3,479 Amortization of discount on 10 3/4% senior notes 71 109 213 327 Employer benefit plan contributions in treasury stock -- -- -- 1,363 Changes in assets and liabilities: Receivables, net 9,645 18,584 (41,555) (283) Prepaid expenses and other assets 11,930 302 1,087 (29,923) Medical claims and benefits payable (14,100) (21,600) 39,100 (6,200) Accounts payable and accrued liabilities: Payments for Office of Personnel Management settlement, net of amounts received -- -- -- (10,000) Accrued taxes 7,075 12,237 (971) 36,390 Other changes in accounts payable and accrued liabilities 49,677 8,039 27,909 30,427 Unearned premium revenue 4,084 (13,629) (394,223) (417,998) Net cash flows provided by (used in) operating activities $186,705 $94,470 $(6,064) $(100,961) Investing activities: Purchase of marketable securities, net $(131,561) $(34,243) $(242,546) $(136,617) Purchase of property, plant and equipment (17,815) (13,946) (45,087) (37,047) Sale (purchase) of marketable securities -- restricted 2,632 (704) 29,495 17,637 Proceeds from the sale of property, plant and equipment -- -- -- 21 Net cash flows used in investing activities $(146,744) $(48,893) $(258,138) $(156,006) Financing activities: Purchase and retirement of common stock $(62,409) $-- $(102,951) $-- Proceeds from issuance of common stock 12,130 9,801 43,206 22,966 Payments on software financing agreement (1,462) (1,108) (5,515) (3,295) Principal payments on long-term debt (417) (38) (1,365) (150,585) Proceeds from borrowings of long-term debt -- -- -- 150,000 Loan fees -- -- -- (6,949) Use of restricted cash collateral for payment of FHP senior notes -- 43,250 -- 43,250 Principal payments on FHP senior notes -- (43,250) -- (43,250) Net cash flows provided by (used in) financing activities $(52,158) $8,655 $(66,625) $12,137 Net increase (decrease) in cash and equivalents $(12,197) $54,232 $(330,827) $(244,830) Beginning cash and equivalents 879,792 652,627 1,198,422 951,689 Ending cash and equivalents $867,595 $706,859 $867,595 $706,859 (1) Presentation changes have been made to September 30, 2003 to conform to the 2004 presentation. PACIFICARE HEALTH SYSTEMS, INC. BALANCE SHEET DATA (Unaudited) September 30, December 31, September 30, (in thousands) 2004 2003 2003 Assets: Cash, equivalents and marketable securities $2,454,200 $2,558,142 $2,042,058 Receivables, net 303,945 265,943 290,892 Property, plant and equipment, net 152,920 149,407 146,807 Goodwill and intangible assets, net 1,189,373 1,204,212 1,209,643 Other assets 371,544 441,600 404,077 Total assets $4,471,982 $4,619,304 $4,093,477 Liabilities and equity: Total medical claims and benefits payable $1,066,600 $1,027,500 $1,038,300 Current portion of long-term debt 6,059 7,496 6,232 Long-term debt 607,470 612,700 787,067 Other liabilities 731,299 1,120,071 669,995 Total stockholders’ equity 2,060,554 1,851,537 1,591,883 Total liabilities and equity $4,471,982 $4,619,304 $4,093,477 MEMBERSHIP DATA (Unaudited) September 30, December 31, September 30, 2004 2003 2003 Commercial: HMO 1,923,700 1,994,800 2,002,400 PPO and indemnity 304,800 183,500 142,600 Employer self-funded 40,700 24,600 24,500 2,269,200 2,202,900 2,169,500 Senior: Medicare Advantage 693,300 682,300 687,200 Medicare Supplement 34,300 26,900 26,200 CMS Disease Management 1,500 -- -- 729,100 709,200 713,400 Total membership 2,998,300 2,912,100 2,882,900 Pharmacy benefit management (A) 5,526,300 4,983,500 4,931,200 Behavioral health (B) 3,762,300 3,660,100 3,792,000 Dental and vision (B) 821,100 719,600 703,200 (A) Pharmacy benefit management membership includes PacifiCare members that are in our Commercial, Medicare Advantage, Medicare Supplement or CMS Disease Management 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 membership includes PacifiCare members in our Commercial, Medicare Advantage or Medicare Supplement plans that 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 income: Three Months Ended Nine Months Ended (In millions) September 30, September 30, 2004 2003 2004 2003 Commercial: Commercial revenue $1,419.1 $1,264.1 $4,219.0 $3,733.4 Net effect of specialty premiums, administrative service fee revenue and eliminations 77.6 69.4 229.4 204.8 Consolidated commercial premiums $1,496.7 $1,333.5 $4,448.4 $3,938.2 Commercial health care services and other expenses $1,192.6 $1,056.5 $3,559.4 $3,156.1 Net effect of specialty health care services and other expenses and eliminations 56.7 50.1 167.9 151.2 Consolidated health care services expenses related to consolidated commercial premiums $1,249.3 $1,106.6 $3,727.3 $3,307.3 Senior: Senior revenue $1,480.8 $1,334.3 $4,332.1 $4,059.7 Net effect of specialty premiums, administrative service fee revenue and eliminations 7.2 2.9 16.7 1.6 Consolidated senior premiums $1,488.0 $1,337.2 $4,348.8 $4,061.3 Senior health care services and other expenses $1,257.6 $1,130.1 $3,730.7 $3,427.0 Net effect of specialty health care services and other expenses and eliminations 1.9 (2.8) (2.9) (7.9) Consolidated health care services expenses related to consolidated senior premiums $1,259.5 $1,127.3 $3,727.8 $3,419.1 PacifiCare Health Systems, Inc. Guidance Metrics (Unaudited) Earnings Per Share for the Year Ending December 31, 2004
Earnings per share guidance for the year ending December 31, 2004 has been increased from a range of $3.07 to $3.17 to a range of $3.15 to $3.20.
Earnings Per Share for the Quarter Ending December 31, 2004
Earnings per share for the quarter ending December 31, 2004 is forecasted to be a range of $0.71 to $0.76.
EBITDA for the Year Ending December 31, 2004
EBITDA for the year ending December 31, 2004 is forecasted to be approximately $600 million.
Free Cash Flow for the Year Ending December 31, 2004
Free cash flow for the year ending December 31, 2004 is forecasted to be approximately $280 million.
Commercial Membership Net Growth for the Year Ending December 31, 2004
Commercial membership net growth guidance for the year ending December 31, 2004 has been revised from a range of 5% to 6% to approximately 4% for the calendar year 2004 as compared to 2003.
Operating Revenue for the Year Ending December 31, 2004
Operating revenue guidance for the year ending December 31, 2004 has been revised from an increase of 12% to a range of 11% to 11.5% for the calendar year 2004 as compared to 2003.
Government Sector MLR for the Year Ending December 31, 2004
The government sector MLR for the year ending December 31, 2004 has been lowered from a forecasted range of 86.5% to 87.5% to a forecasted range of 86.0% to 86.5%.
Medicare Advantage Ending Membership
Medicare Advantage ending membership guidance, including CMS Disease Management members, has been revised as follows:
Period Ending Dec. 31, 2004 Dec. 31, 2005 Ending Membership 704,000 743,000 Government Sector Gross Margin for the Year Ending December 31, 2004
The government sector gross margin guidance for the year ending December 31, 2004 has been revised from a range of 13.0% to 13.5% to a range of 13.5% to 14.0%.
Specialty and Other Gross Margin for the Year Ending December 31, 2004
Specialty and other gross margin guidance for the year ending December 31, 2004 has been revised from a range of 48.5% to 49.5% to a range of 44.5% to 45.5%.
Weighted Average Number of Shares Outstanding (“WANS”) Full year WANS guidance has been revised as follows: Period Ending (in millions) Dec. 31, 2004 Dec. 31, 2005 Full year WANS 95.5 96.7
PacifiCare Health Systems, Inc.
CONTACT: Media Relations, Tyler Mason, +1-714-226-3530, or InvestorRelations, Dan Yarbrough, +1-714-226-3540, both of PacifiCare Health Systems,Inc.
Web site: http://www.pacificare.com/