CYPRESS, Calif., Feb. 3 /PRNewswire-FirstCall/ -- PacifiCare Health Systems, Inc. , today announced that reported net income for the fourth quarter ended December 31, 2004 was $72 million, or $0.76 per diluted share. This compares with reported net income of $31.5 million, or $0.36 per diluted share, for the fourth quarter of the prior year. Results in the fourth quarter of 2004 included $4.2 million ($2.6 million, net of tax, or $0.03 per diluted share) in costs related to refinancing the company’s credit facility in connection with the acquisition of American Medical Security Group (AMS). Results in the fourth quarter of 2003 included $28 million ($17.5 million net of tax, or $0.19 per diluted share) in costs related to the redemption of $175 million of debt. For the full year 2004, reported net income was $303 million, or $3.20 per diluted share, compared with $243 million, or $2.89 per diluted share in 2003. All EPS and share numbers in this release reflect the 2-for-1 stock split that was effective January 20, 2004.
“We are pleased to report full-year 2004 EPS at the high end of our guidance, even after including over four million dollars in fourth quarter expenses, or about three cents per diluted share, related to the refinancing of our credit facility,” said Chairman and Chief Executive Officer Howard Phanstiel. “During the year we re-established Medicare Advantage membership growth as well as annual commercial membership growth for the first time since 2000, and we’re very excited about the two acquisitions we’ve announced that will further expand our membership, geographic presence, and product distribution capabilities.”
Revenue and Membership
Fourth quarter 2004 total operating revenue of $3.2 billion was 13% higher than the same quarter a year ago. Commercial revenue rose 12%, driven by a combination of premium increases and organic membership growth, as well as the inclusion of AMS membership and revenues for 19 days in the quarter. Senior revenue grew 11% over the fourth quarter of last year, primarily as the result of a Medicare Advantage premium increase and a 5% rise in membership. For the full-year 2004, total operating revenue rose 12% year-over-year.
Specialty and Other revenue grew 41% over the fourth quarter last year, primarily due to increased revenue at the company’s pharmacy benefit management (PBM) subsidiary, Prescription Solutions. This revenue growth was driven by an increase in total membership of 605,000, or 12%, year-over-year. Additionally, a focused marketing initiative resulted in 32% year-over-year growth in mail order revenue and an increase in the mail order fulfillment rate to 26%. On a full-year basis, both mail order revenue at Prescription Solutions and total Specialty and Other revenue increased 39% from 2003.
Health Care Costs
The private sector commercial medical loss ratio (MLR) in the fourth quarter decreased 130 basis points from the prior year, to 82.9%. On a full-year basis, the private sector commercial MLR decreased 50 basis points compared with 2003, to 83.5%.
The government sector senior MLR was up 320 basis points in the fourth quarter, to 86.6%, and was up 190 basis points for the full year 2004, to 86.1%, as compared to the respective periods in the prior year. The government sector MLR, which includes the company’s Medicare Advantage membership, was higher in 2004 compared to the prior year as a result of provisions in the Medicare Modernization Act requiring that all incremental premium increases be paid out in the form of increased member benefits or provider reimbursements.
Driven by the increase in the government sector loss ratio, the consolidated MLR of 84.5% was 90 basis points higher than the fourth quarter of the prior year. On a full-year basis, the consolidated MLR rose by 70 basis points from 2003, to 84.7%.
Selling, General & Administrative Expenses
The SG&A expense ratio of 13.4% in the fourth quarter of 2004 was 140 basis points lower than the fourth quarter of 2003. On a full-year basis, the ratio was down 50 basis points from the prior year, to 12.8%. The reduction in the ratio was driven primarily by the increase in total revenue, which created the ability to leverage fixed costs.
Other Financial Data
Medical claims and benefits payable (MCBP) totaled approximately $1.2 billion at December 31, 2004, which was an increase of approximately $126 million from the prior quarter. The IBNR component of MCBP increased by approximately $116 million sequentially, primarily as a result of the addition of $87 million related to the AMS acquisition.
Excluding the impact of the AMS acquisition, days claims payable for the fourth quarter compared to the prior quarter decreased slightly to 38.3 days from 38.5 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 four-tenths of one day, to 70.5 days.
Cash flow from operations in the fourth quarter of 2004 was $34.2 million. It was impacted primarily by the timing of cash receipts on receivables at our PBM subsidiary and corresponding payments to our PBM customers.
Conference Call, Webcast and Website Information
PacifiCare will host a conference call and webcast on Thursday, February 3, 2005 at 6:00 AM Pacific time, 9:00 AM 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 February 24, 2005 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 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, expectation for commercial membership growth and the anticipated benefits from acquisitions announced in 2004. 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 acquisition strategies, including membership growth and product distribution expansion, 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 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 benefit 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 Year Ended (In thousands, except December 31, December 31, per-share amounts) 2004 2003 2004 2003 Revenue: Commercial $1,467,328 $1,309,879 $5,686,373 $5,043,257 Senior 1,478,169 1,335,578 5,810,247 5,395,265 Specialty and other 189,476 134,756 691,367 498,668 Net investment income 24,634 16,302 88,817 71,321 Total operating revenue 3,159,607 2,796,515 12,276,804 11,008,511 Expenses: Health care services and other: Commercial 1,227,419 1,114,182 4,786,830 4,270,329 Senior 1,277,149 1,113,301 5,007,852 4,540,301 Specialty and other 102,927 63,397 379,097 255,164 Total health care services and other 2,607,495 2,290,880 10,173,779 9,065,794 Selling, general and administrative expenses 418,722 411,442 1,561,247 1,452,542 Operating income 133,390 94,193 541,778 490,175 Interest expense, net (16,189) (43,647) (48,041) (100,531) Income before income taxes 117,201 50,546 493,737 389,644 Provision for income taxes 45,240 19,056 190,583 146,896 Net income $71,961 $31,490 $303,154 $242,748 Weighted average common shares outstanding used to calculate basic earnings per share (1) 84,136 78,752 84,256 74,409 Basic earnings per share (1) $0.86 $0.40 $3.60 $3.26 Weighted average common shares and equivalents outstanding used to calculate diluted earnings per share (1) 95,517 90,147 95,490 84,771 Diluted earnings per share (1)(2) $0.76 $0.36 $3.20 $2.89 (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 (2) The diluted earnings per share for the year ended December 31, 2003 has been restated for the retroactive impact of Emerging Issues Task Force, or EITF, Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings Per Share, that was effective beginning in Q4 2004. The diluted earnings per share and weighted average common shares and equivalents outstanding previously reported at December 31, 2003 were $3.04 and 79,963, respectively. OPERATING STATISTICS Medical loss ratio: Consolidated 84.5% 83.6% 84.7% 84.0% Private -- Commercial 82.9% 84.2% 83.5% 84.0% Private -- Senior 65.5% 54.2% 70.6% 63.4% Private -- Consolidated 82.6% 83.8% 83.3% 83.7% Government -- Senior 86.6% 83.4% 86.1% 84.2% Government -- Consolidated 86.6% 83.4% 86.1% 84.2% Selling, general and administrative expenses as a percentage of operating revenue (excluding net investment income) 13.4% 14.8% 12.8% 13.3% Operating income as a percentage of operating revenue 4.2% 3.4% 4.4% 4.5% Effective tax rate 38.6% 37.7% 38.6% 37.7% PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended Year Ended December 31, December 31, (In thousands) 2004 2003 (1) 2004 2003 (1) Operating activities: Net income $71,961 $31,490 $303,154 $242,748 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 13,096 10,248 50,503 44,713 Stock based compensation expense 5,645 5,957 33,467 19,092 Deferred income taxes (2,025) (33,969) 30,874 (46,088) Tax benefit realized upon exercise of stock-based compensation 13,645 10,130 29,627 17,838 Amortization of intangible assets 4,947 5,431 19,786 21,908 Amortization of capitalized loan fees 5,132 1,105 8,364 7,481 Amortization of notes receivable from sale of fixed assets (1,454) (1,453) (5,626) (5,641) (Gain) loss on disposal of property, plant and equipment (271) 3,983 2,478 22,328 Provision for doubtful accounts 1,179 6,792 1,604 10,271 Expenses related to bond redemption -- 28,155 -- 28,155 Amortization of discount on 10 3/4% senior notes 71 97 284 424 Employer benefit plan contributions in treasury stock -- -- -- 1,363 Changes in assets and liabilities: Receivables, net (3,302) 19,610 (44,857) 19,327 Prepaid expenses and other assets 66 (3,825) 1,153 (33,748) Medical claims and benefits payable 4,916 (10,800) 44,016 (17,000) Accounts payable and accrued liabilities: Payments for Office of Personnel Management settlement, net of amounts received -- -- -- (10,000) Accrued taxes (19,408) (26,640) (20,379) 9,750 Other changes in accounts payable and accrued liabilities (25,470) 33,854 2,439 64,281 Unearned premium revenue (34,564) 434,926 (428,787) 16,928 Net cash flows provided by operating activities $34,164 $515,091 $28,100 $414,130 Investing activities: Acquisition of AMS, net of cash acquired $(445,886) $-- $(445,886) $-- Purchase of marketable securities, net (78,515) (32,485) (321,061) (169,102) Purchase of property, plant and equipment (27,979) (15,224) (73,066) (52,271) Sale of marketable securities -- restricted 22 2,006 29,517 19,643 Proceeds from the sale of property, plant and equipment 430 9 430 30 Net cash flows used in investing activities $(551,928) $(45,694) $(810,066) $(201,700) Financing activities: Proceeds from borrowings of long-term debt $625,000 $-- $625,000 $150,000 Principal payments on long-term debt (178,226) (744) (179,591) (151,329) Purchase and retirement of common stock (340) (493) (103,291) (493) Proceeds from issuance of common stock 38,581 18,180 81,787 41,146 Loan fees (9,264) -- (9,264) (6,949) Payments on software financing agreement (1,478) (388) (6,993) (3,683) Proceeds from equity offering used for the redemption of $175M of senior notes -- 199,424 -- 199,424 Principal payment on senior note redemption -- (175,000) -- (175,000) Use of restricted cash collateral for payment of FHP senior notes -- -- -- 43,250 Principal payments on FHP senior notes -- -- -- (43,250) Payment of premium to bond holders for senior note redemption -- (18,813) -- (18,813) Net cash flows provided by financing activities $474,273 $22,166 $407,648 $34,303 Net increase (decrease) in cash and equivalents $(43,491) $491,563 $(374,318) $246,733 Beginning cash and equivalents 867,595 706,859 1,198,422 951,689 Ending cash and equivalents $824,104 $1,198,422 $824,104 $1,198,422 (1) Presentation changes have been made to December 31, 2003 to conform to the 2004 presentation. PACIFICARE HEALTH SYSTEMS, INC. BALANCE SHEET DATA (Unaudited) December 31, September 30, December 31, (in thousands) 2004 2004 2003 Assets: Cash, equivalents and marketable securities $2,760,869 $2,454,200 $2,558,142 Receivables, net 317,362 303,945 265,943 Property, plant and equipment, net 226,594 152,920 149,407 Goodwill and intangible assets, net 1,505,799 1,189,373 1,204,212 Other assets 416,293 371,544 441,600 Total assets $5,226,917 $4,471,982 $4,619,304 Liabilities and equity: Total medical claims and benefits payable $1,192,400 $1,066,600 $1,027,500 Current portion of long-term debt 37,534 6,059 7,496 Long-term debt 1,051,520 607,470 612,700 Other liabilities 757,025 731,299 1,120,071 Total stockholders’ equity 2,188,438 2,060,554 1,851,537 Total liabilities and equity $5,226,917 $4,471,982 $4,619,304 MEMBERSHIP DATA (Unaudited) December 31, September 30, December 31, 2004 2004 2003 Commercial: HMO 1,927,900 1,923,700 1,994,800 PPO 582,500 304,800 183,500 Employer self-funded 82,600 40,700 24,600 2,593,000 2,269,200 2,202,900 Senior: Medicare Advantage 704,700 693,300 682,300 Medicare Supplement 36,200 34,300 26,900 CMS Disease Management 2,500 1,500 -- 743,400 729,100 709,200 Total membership 3,336,400 2,998,300 2,912,100 Pharmacy benefit management (A) 5,588,700 5,526,300 4,983,500 Behavioral health (B) 3,813,600 3,762,300 3,660,100 Dental and vision (B) 1,040,500 821,100 719,600 (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 also enrolled in our behavioral health, dental and/or vision plans.
PacifiCare Health Systems, Inc.
CONTACT: Media, Tyler Mason, +1-714-226-3530, tyler.mason@phs.com, orInvestors, Dan Yarbrough, +1-714-226-3540, dan.yarbrough@phs.com, both ofPacifiCare Health Systems, Inc.
Web site: http://www.pacificare.com/