LOUISVILLE, Ky., Oct. 31 /PRNewswire-FirstCall/ -- Humana Inc. today reported $0.30 in diluted earnings per common share (EPS) for the quarter ended September 30, 2005 (3Q05) compared to EPS of $0.52 for the quarter ended September 30, 2004 (3Q04). Results for 3Q05 include $0.27 per share in expenses resulting from the settlement of the company's multi- district class action litigation and $0.03 per share for expenses associated with Hurricane Katrina. Excluding these expenses, non-GAAP 3Q05 results of $0.60 per share increased 15 percent over the prior year's quarter.
"Humana's third quarter produced robust expansion of our current Medicare membership with on-track performance in our higher-margin areas of commercial focus - ASO, individual and consumer plans," said Michael B. McCallister, president and chief executive officer of Humana. "The third quarter also produced significant progress in our preparations for the unprecedented Medicare opportunity in 2006 and 2007."
The company's previous EPS guidance for the year ending December 31, 2005 (FY05) of $2.23 to $2.25 has been updated to include expenses of $0.37 per share for the 3Q05 litigation settlement and costs associated with Hurricane Katrina during the second half of the year. Accordingly, the company now anticipates FY05 EPS in the range of $1.86 to $1.88.
The company continues to expect EPS for the year ending December 31, 2006 (FY06) of at least $2.70, which includes approximately $0.10 per share resulting from expensing stock options in connection with new accounting rules to be implemented on January 1, 2006. The company anticipates restating FY05 during 2006 to facilitate comparability for this accounting change. The estimated options expense restatement impact on FY05 EPS is expected to be approximately $0.08 per share.
Compared to our estimate of FY05 EPS of $1.86 to $1.88, this FY06 earnings guidance represents an increase in EPS in excess of 40 percent. Compared to our non-GAAP estimate of FY05 EPS of $2.09 to $2.11, and adjusting for the estimated $0.08 per share impact on FY05 for stock options accounting, this FY06 guidance represents an increase in non-GAAP EPS of over 30 percent.
This news release includes reconciliations of GAAP to non-GAAP financial measures on both a historical and projected basis as well as management's explanation for the use of non-GAAP financial metrics. See the "GAAP to non- GAAP Reconciliations" section within this news release.
Settlement of Class Action Litigation
On October 18, 2005, the company announced it had reached an agreement to settle a nationwide class action suit that has been pending in U.S. District Court in Miami for more than six years. The agreement has received preliminary approval from U.S. District Judge Federico Moreno, with final approval anticipated in the first quarter of 2006.
Pursuant to the settlement, Humana has agreed to pay $40 million to the plaintiffs. In addition, the company has agreed to pay up to $18 million in legal fees to be determined by the court. Humana's 3Q05 financial results include pretax expenses of $71.9 million ($44.8 million after tax or $0.27 per share) in connection with the settlement and other related litigation costs.
Hurricane Katrina
During the third quarter of 2005, certain of Humana's operations were affected by the impact of Hurricane Katrina. Given the unusually harsh circumstances associated with this storm, it is also anticipated to impact results for the fourth quarter of 2005. Expenses related to Hurricane Katrina primarily stem from the company's efforts, in close cooperation with Departments of Insurance in the affected states, to help our members by offering participating-provider benefits at non-participating providers, paying claims for members who are unable at this time to meet their premium obligations and similar measures.
The company recorded $6.7 million in pretax expenses ($4.2 million after taxes or $0.03 per share) in hurricane-related medical and administrative costs during 3Q05 and anticipates recording an additional approximately $20 million pretax (approximately $12.5 million after taxes or $0.07 per share) in the fourth quarter of 2005. Expenses related to Hurricane Katrina are not expected to significantly impact results for FY06.
Consolidated Results Summary
The Company has included certain non-GAAP financial measures in its summary of financial results below. See the "GAAP to non-GAAP Reconciliations" section of this news release.
EPS: - 3Q05 EPS of $0.30 compares to $0.52 for 3Q04. Excluding the $0.30 in litigation and hurricane-related expenses during 3Q05, non-GAAP results for the quarter of $0.60 per share increased $0.08 or 15 percent, primarily driven by increases in Medicare membership and improved Medicare underwriting results. - 3Q05 EPS varied from the company's prior expectations due to the receipt of Medicare risk adjustment payments originally anticipated during the fourth quarter and an acceleration in the timing of Medicare investment spending. - EPS for the nine months ended September 30, 2005 (YTD05) of $1.48 compares to $1.43 in EPS for the nine months ended September 30, 2004 (YTD04). Excluding the expenses of $0.30 per share in litigation and hurricane expenses during 3Q05 and the $0.14 per share tax benefit from the realization of a gain contingency in the first quarter 2005, non- GAAP per share results of $1.64 per share increased $0.21 or 15 percent. Improved earnings from the company's Government Segment drove the increase. - The company now anticipates EPS for the quarter ending December 31, 2005 (4Q05) to be in the range of $0.38 to $0.40. Excluding anticipated expenses of approximately $0.07 per share related to Hurricane Katrina, the company's 4Q05 non-GAAP estimate would range from $0.45 to $0.47 per share. Additional factors affecting the updated EPS projection for 4Q05 include (1) a change in the timing between 3Q05 and 4Q05 for both the receipt of Medicare risk adjustment revenue and Medicare investment spending, (2) revised expectations for Commercial Segment performance, and (3) updated projections for Government Segment earnings. Other components of earnings: - 3Q05 consolidated revenues rose 20 percent to $3.82 billion from $3.18 billion in 3Q04, with total premium and administrative services fees also up 20 percent compared to the prior year's quarter. - YTD05 consolidated revenues were up 9 percent to $10.76 billion versus $9.89 billion for YTD04. Continued increases in membership in the company's higher-premium Medicare plans more than offset reduced revenues from its Commercial Segment membership. - The company's medical expense ratio (medical expenses as a percent of premium revenue or MER) of 83.4 percent increased 70 basis points from an MER of 82.7 in 3Q04. Excluding the 20 basis point increase to the MER associated with the hurricane, the related consolidated non-GAAP ratio of 83.2 percent rose 50 basis points - the combined effect of an unusually low MER in 3Q04 associated with the TRICARE contract transition during that period and less favorable results for the Commercial Segment. - The company's consolidated selling, general, & administrative (SG&A) expense ratio (SG&A expenses as a percent of premiums plus administrative services fees or SG&A expense ratio) increased to 16.2 percent for 3Q05 from 14.6 percent in 3Q04. Excluding litigation and hurricane expenses during 3Q05, the related non-GAAP ratio of 14.2 percent declined 40 basis points from 3Q04 as operational leverage from higher Medicare membership more than offset expenses during 3Q05 to prepare for 2006 Medicare opportunities. Government Segment Results Summary
The Company has included certain non-GAAP financial measures in its summary of pretax financial results below. See the "GAAP to non-GAAP Reconciliations" section of this news release.
Pretax results: - Government Segment pretax earnings were $89.5 million in 3Q05 compared to $88.8 million in 3Q04. Excluding $34.9 million of litigation and hurricane expenses in 3Q05, non-GAAP pretax income for the segment of $124.4 million improved year over year by $35.6 million or 40 percent as a result of higher Medicare membership and the resulting operational leverage. Enrollment: - Medicare Advantage membership reached 503,100 at September 30, 2005, an increase of 131,800 (35 percent) from September 30, 2004 and 28,800 (6 percent) from June 30, 2005. The company's expanded participation in various Medicare programs and markets during the quarter combined with the company's increased marketing efforts for these programs led to the higher membership level. - Medicare Advantage geographic expansions are anticipated to continue to contribute to organic enrollment growth, with projected membership in the range of 540,000 to 550,000 by the end of FY05. - As expected, TRICARE membership of 2,874,400 at September 30, 2005 was essentially unchanged from June 30, 2005. The company also anticipates no material change in TRICARE membership for the remainder of 2005. Revenues: - Medicare Advantage premiums of $1.30 billion in 3Q05 increased 59 percent compared to $814.6 million in 3Q04, the result of substantially higher enrollment and increases in per-member premiums. - Medicare Advantage premiums per member increased 20 percent year over year during 3Q05 due primarily to higher per-member standard reimbursement rates from the government, the company's diligence in demonstrating the risk profile of its membership and the acquisition of CarePlus Health Plans of Florida in February 2005. Per-member premiums for FY05 are now projected to increase in the range of 12 to 14 percent. - TRICARE premiums and administrative services fees during 3Q05 of $667.8 million reflect a full quarter under the South Region contract. Related revenues for the prior year's quarter of $405.0 million reflected the contract transition taking effect during that period. - For 2005, the company anticipates TRICARE premiums and administrative services fees to approximate $2.5 billion as the company experiences a full year under the new South Region contract. Medical Expenses: - The Government Segment MER increased 90 basis points to 82.5 percent in 3Q05 compared to 81.6 percent in the prior year's quarter, driven by an unusually low MER in 3Q04 associated with TRICARE contract transition timing. - Medicare Advantage medical costs per member continue to be expected to increase in the range of 9 to 11 percent for FY05. SG&A Expenses: - The Government Segment's SG&A expense ratio for 3Q05 of 13.2 percent was 70 basis points higher than that for 3Q04 of 12.5 percent. Excluding expenses related to the litigation settlement and Hurricane Katrina, the related non-GAAP ratio of 11.5 percent declined 100 basis points, as planned expenses to prepare for 2006 Medicare opportunities were more than offset by operational leverage associated with higher Medicare membership. Commercial Segment Results Summary
The Company has included certain non-GAAP financial measures in its summary of pretax financial results below. See the "GAAP to non-GAAP Reconciliations" section of this news release.
Pretax results: - Results for the Commercial Segment during 3Q05 reflect a pretax loss of $18.1 million compared to pretax income of $38.7 million in 3Q04. Excluding $43.7 million of litigation and hurricane expenses in 3Q05, non-GAAP pretax income for the segment of $25.6 million declined $13.1 million compared to 3Q04. Commercial segment operating earnings were negatively affected year over year by continued medical membership attrition driven by the pricing environment in the 2 to 300 case-size accounts and an increase in the segment's MER. Enrollment: - Commercial Segment medical membership of 3,177,900 at September 30, 2005 decreased approximately 1 percent or 21,800 from June 30, 2005, driven by a decrease in fully-insured accounts. - The company's HumanaOne product demonstrated continued growth during 3Q05, increasing individual medical membership by 6 percent sequentially with a year-to-date growth rate of 21 percent. As expected, September 30, 2005 ASO membership of 1,170,500 and consumer- choice membership of 350,600 were essentially unchanged from June 30, 2005. On a year-to-date basis, ASO membership grew 15 percent while consumer-choice membership increased 43 percent. Revenues: - Premiums and administrative services fees for the Commercial Segment decreased 7 percent to $1.67 billion in 3Q05 compared to $1.79 billion in the prior year's quarter, as an increase in administrative services fees resulting from a 15 percent increase in ASO membership were more than offset by lower premiums due to declines in at-risk enrollment. - Commercial Segment medical premiums for fully insured groups increased approximately 7 percent on a per-member basis during 3Q05. The company anticipates FY05 commercial premiums for fully insured group membership to increase in the range of 7 to 9 percent on a per-member basis. Medical Expenses: - In 3Q05, the Commercial Segment MER of 84.4 percent was 80 basis points higher than the 3Q04 MER of 83.6 percent. Excluding the 30 basis point increase in the MER from Hurricane Katrina, the related non-GAAP ratio of 84.1 percent rose 50 basis points reflecting higher inpatient utilization trends in its commercial portfolio. - Per-member medical costs for commercial fully insured group accounts are now forecasted to rise in the range of 7 to 9 percent for FY05. SG&A Expenses: - The Commercial Segment SG&A expense ratio of 20.0 percent for 3Q05 compares to 16.3 percent in 3Q04. Excluding litigation and hurricane- related expenses, the related non-GAAP ratio of 17.7 percent increased 140 basis points, the result of lower average fully-insured medical enrollment and a significantly higher percentage of ASO business in 3Q05 than in the prior year. Cash Flows from Operations
Cash flows provided by operations for 3Q05 of $591.0 million compared to $303.5 million cash flows provided by operations in 3Q04. The company also evaluates operating cash flows on a non-GAAP basis, as described in the "GAAP to non-GAAP Reconciliations" section of this news release.
Non-GAAP cash flows provided by operations declined to $206.3 million in 3Q05 from $303.5 million in 3Q04 due to the collection of substantial TRICARE bid price adjustment receivables in 3Q04.
The company continues to anticipate that cash flows from operations for FY05 will be in the range of $625 million to $675 million driven by expected higher earnings.
Balance Sheet
At September 30, 2005, cash and investment securities comprised 52 percent of the company's total assets compared to 51 percent at June 30, 2005. Debt as a percent of total capitalization (debt plus stockholders' equity) decreased 670 basis points to 20.8 percent from 27.5 percent at June 30, 2005 as the company paid down certain of its outstanding debt obligations during the quarter.
Conference Call & Virtual Slide Presentation
Humana will host a conference call, as well as a virtual slide presentation, at 9:00 a.m. eastern time today to discuss its financial results for the quarter and the company's expectations for future earnings.
A live virtual presentation (audio with slides) may be accessed via Humana's Investor Relations page at www.humana.com. The company suggests web participants sign on approximately 15 minutes in advance of the call. The company also suggests web participants visit the site well in advance of the call to run a system test and to download any free software needed to view the presentation.
All parties interested in the audio-only portion of the conference call are invited to dial 888-625-7430. No password is required. The company suggests participants dial in approximately ten minutes in advance of the call. For those unable to participate in the live event, the virtual presentation archive will be available in the Presentations section of the Investor Relations page at www.humana.com.
Cautionary Statement
This news release contains forward-looking statements. The forward- looking statements herein are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be significantly impacted by certain risks and uncertainties described in the company's Form 10-K for the year ended December 31, 2004 and its Form 10-Qs for the quarters ended March 31, 2005 and June 30, 2005, as filed by Humana with the Securities and Exchange Commission.
About Humana
Humana Inc., headquartered in Louisville, Ky., is one of the nation's largest publicly traded health benefits companies, with approximately 7 million medical members. Humana offers a diversified portfolio of health insurance products and related services - through traditional and consumer- choice plans - to employer groups, government-sponsored plans, and individuals.
Over its 44-year history, Humana has consistently seized opportunities to meet changing customer needs. Today, the company is a leader in consumer engagement, providing guidance that leads to lower costs and a better health plan experience throughout its diversified customer portfolio.
More information regarding Humana is available to investors via the Investor Relations page of the company's web site at http://www.humana.com, including copies of:
- Annual report to stockholders; - Securities and Exchange Commission filings; - Most recent investor conference presentation; - Quarterly earnings news releases; - Replay of most recent earnings release conference call; - Calendar of events (includes upcoming earnings conference call dates, times, and access number, as well as planned interaction with research analysts and institutional investors); - Corporate Governance information GAAP Earnings Guidance Points Humana Inc. - GAAP Earnings Guidance Points For the year ending December 31, 2005 As of October 31, 2005 The Company also projects certain non-GAAP financial measures. See the "GAAP to non-GAAP Reconciliations" section of this news release. Diluted earnings per 4Q05: $0.38 to $0.40, including $0.07 per share common share related to Hurricane Katrina Full Year: $1.86 to $1.88, including $0.27 per share for litigation settlement and related expenses, $0.14 per share income from the realization of a tax gain contingency benefit, and $0.10 per share for Hurricane Katrina expenses Revenues Consolidated: Approximately $14.5 billion Medicare: $4.5 billion to $4.7 billion TRICARE: Approximately $2.5 billion Year-end medical Medicare: 540,000 to 550,000 membership Commercial: Down 1% to 2% excluding loss of 89,000 member account in January 2005 and losses associated with Hurricane Katrina Medicaid: Decline of approximately 20,000 from prior year TRICARE: No material change from prior year Medical underwriting Medicare: Premium yields 12% to 14%; medical trends cost trends 9% to 11% Commercial - group accounts: Premium yields 7% to 9%; medical cost trends 7% to 9% Selling, general & Consolidated: SG&A expense ratio of administrative approximately 15% (including 50 basis points expenses related to litigation and hurricane expenses) Government segment: Includes approximately $80 million of Medicare Advantage investment spending Commercial Segment Approximately $58 million to $68 million pretax income (including approximately $62 million in litigation and hurricane related expenses) Cash flows from $625 million to $675 million operations Capital expenditures $155 million to $165 million Effective tax rate Full year: 27% to 28% 4Q05: 34% to 36% Weighted average shares Approximately 166 million outstanding used to compute diluted earnings per common share Humana Inc. - GAAP Earnings Guidance Points For the year ending December 31, 2006 As of October 31, 2005 Diluted earnings per common At least $2.70, including approximately share $0.10 per share in stock options expense Revenues Consolidated: Over $20 billion Medicare - MA: $8.5 billion to $10.2 billion Medicare - PDP: $1.7 billion to $2.5 billion Commercial: $6.5 billion to $7.0 billion TRICARE: $2.5 billion to $2.9 billion Year-end medical membership Medicare - MA: 900,000 to 1.1 million Medicare - PDP: 1.7 million to 2.2 million Commercial: No material change from prior year TRICARE: No material change from prior year Medicaid: No material change from prior year Medical underwriting trends Medicare: Premium yields in line with medical cost trends Commercial - group accounts: Premium yields in line with medical cost trends; medical cost trends in line with those for FY05 Selling, general & Consolidated: SG&A expense ratio of 12% administrative expenses to 13% Pretax margin percentages Medicare - MA: low to mid single digits Medicare - PDP: low single digits Commercial: Approximately 2% TRICARE: Approximately 3% to 4% Cash flows from operations $725 million to $800 million, including payments related to the 3Q05 litigation settlement Effective tax rate Approximately 35% to 37% Weighted average shares Approximately 168 million outstanding used to compute diluted earnings per common share GAAP to non-GAAP Reconciliations Humana Inc. GAAP to non-GAAP Reconciliations
The company has included certain financial measures that are not in accordance with Generally Accepted Accounting Principles (GAAP) in its summary of financial results and earnings projections within this news release. These non-GAAP financial measures exclude the settlement of a multi-district class action lawsuit and the financial effect of Hurricane Katrina, both of which occurred during 3Q05, as well as the recognition of a Federal income tax gain contingency during the first quarter of 2005. The company believes that these non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful to both management and its investors in analyzing the company's ongoing business and operating performance. Internally, management uses this non-GAAP information as an indicator of business performance, as well as for operational planning and decision making purposes. Non-GAAP financial measures should be considered in addition to, but not a substitute for, or superior to, financial measures prepared in accordance with GAAP. Reconciliations of the related GAAP to non-GAAP financial measures are included below.
FY05 EPS Guidance GAAP Adjustments Non-GAAP Previous FY05 Guidance $2.23 - ($0.14)(a) $2.09 - $2.25 $2.11 3Q05 update: Class action litigation settlement (0.27) 0.27 0.00 Hurricane Katrina: 3Q05 impact (0.03) 0.03 0.00 4Q05 impact (0.07) 0.07 0.00 FY05 Hurricane Katrina impact (0.10) 0.10 0.00 Subtotal 3Q05 changes (0.37) 0.37 0.00 Current FY05 Guidance $1.86 - $0.23 $2.09 - $1.88 $2.11 Adjustments Litigation Hurricane GAAP settlement Katrina Non-GAAP $0.38 - $0.45 - 4Q05 EPS Guidance $0.40 $0.00 $0.07 $0.47 FY05 Commercial Segment $58 million $38 $24 $120 million Pretax Income Guidance to $68 million million million to 130 million (a) Realization of tax gain contingency in the first quarter of 2005. Humana Inc. Dollars in thousands, except per share results GAAP to non-GAAP Reconciliations (continued) For the three months ended September 30, 2005 Pretax Consolidated Consoli- Net of Diluted Commercial Government dated Taxes EPS GAAP income (loss) ($18,053) $89,557 $71,504 $49,944 $0.30 Adjustments to medical expense: Hurricane Katrina 4,543 256 4,799 2,995 0.02 Adjustments to SG&A expense: Class action litigation settlement 38,490 33,360 71,850 44,834 0.27 Hurricane Katrina 627 1,273 1,900 1,186 0.01 Total SG&A expense adjustments 39,117 34,633 73,750 46,020 0.28 Total reconciling items 43,660 34,889 78,549 49,015 0.30 Non-GAAP income $25,607 $124,446 $150,053 $98,959 $0.60 GAAP Medical Expense Ratio 84.4 % 82.5 % 83.4 % Impact of GAAP to non-GAAP reconciling items -0.3 % 0.0 % -0.2 % Non-GAAP Medical Expense Ratio 84.1 % 82.5 % 83.2 % GAAP SG&A Expense Ratio 20.0 % 13.2 % 16.2 % Impact of GAAP to non-GAAP reconciling items -2.3 % -1.7 % -2.0 % Non-GAAP SG&A Expense Ratio 17.7 % 11.5 % 14.2 % For the nine months ended September 30, 2005 Pretax Consolidated Consoli- Net of Diluted Commercial Government dated Taxes EPS GAAP income $56,625 $265,873 $322,498 $243,876 $1.48 Adjustments to medical expense: Hurricane Katrina 4,543 256 4,799 2,995 0.02 Adjustments to SG&A expense: Class action litigation settlement 38,490 33,360 71,850 44,834 0.27 Hurricane Katrina 627 1,273 1,900 1,186 0.01 Total SG&A expense adjustments 39,117 34,633 73,750 46,020 0.28 Adjustments to income taxes: Realization of tax gain contingency (22,800) (0.14) Total reconciling items 43,660 34,889 78,549 26,215 0.16 Non-GAAP income $100,285 $300,762 $401,047 $270,091 $1.64 GAAP Medical Expense Ratio 83.5 % 83.7 % 83.6 % Impact of GAAP to non-GAAP reconciling items -0.1 % 0.0 % 0.0 % Non-GAAP Medical Expense Ratio 83.4 % 83.7 % 83.6 % GAAP SG&A Expense Ratio 18.4 % 11.6 % 14.8 % Impact of GAAP to non-GAAP reconciling items -0.8 % -0.6 % -0.7 % Non-GAAP SG&A Expense Ratio 17.6 % 11.0 % 14.1 % Humana Inc. Dollars in millions GAAP to non-GAAP Reconciliations (continued) The following is a reconciliation of the most directly comparable historical and projected cash flows from operations prepared in accordance with GAAP to the historical and projected non-GAAP financial measures. When reviewing and analyzing Humana's operating cash flows, company management applies the Centers for Medicare and Medicaid Services (CMS) premium payment in each month to match the corresponding disbursements. To do otherwise distorts meaningful analysis of the company's operating cash flow. Therefore, decisions such as management's forecasting and business plans regarding cash flow use this non- GAAP financial measure. Cash Flows from Operations 3Q05 3Q04 YTD05 YTD04 FY05 Actual Actual Actual Actual Expected GAAP cash flows provided by $625 to operations $591.0 $303.5 $872.1 $328.3 $675 Timing of premium payment receipt from CMS (384.7) - (365.0) 211.9 19.8 Non-GAAP cash flows $625 to provided by operations $206.3 $303.5 $507.1 $540.2 $675 Statistical Schedules and Supplementary Informat
