Health Net Reports Net Income of $77 Million or $.65 Per Diluted Share; Total Health Plan Enrollment Grows Sequentially; Pretax Margin Continues to Expand; G&A Investments on the Rise.LOS ANGELES Los Angeles (lôs ăn`jələs, lŏs, ăn`jəlēz'), city (1990 pop. 3,485,398), seat of Los Angeles co., S Calif.; inc. 1850. -- Health Net, Inc. (NYSE NYSE See: New York Stock Exchange :HNT HNT Hostage Negotiation Team ) today announced 2006 second quarter net income per diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. share of $.65 compared with net income per diluted share of $.47 in the second quarter of 2005, an increase of 38.3 percent. This comparison includes the effect of a $16,237,000 pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern charge, or $.08 per diluted share after tax, for one-time one-time adj. 1. or one·time a. Occurring or undertaken only once: a one-time winner in 1995. b. litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. and severance The act of dividing, or the state of being divided. The term severance has unique meanings in different branches of the law. Courts use the term in both civil and criminal litigation in two ways: first, when dividing a lawsuit into two or more parts, and second, when related expenses reported in the second quarter of 2005. Excluding the second quarter 2005 after tax charge of $.08 per diluted share, earnings per diluted share for the second quarter of 2005 would have been $.55, resulting in a year-over-year increase in earnings per diluted share of approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. 18 percent compared to the $.65 earned in the second quarter of 2006. Management believes this comparison is a more accurate reflection of the change in the company's operating performance between the two periods. Key highlights of Health Net's second quarter 2006 results included: --Total health plan enrollment at June June: see month. 30, 2006 was approximately 3.4 million, an increase of 22,000 compared with the first quarter of 2006. This represents Health Net's first sequential One after the other in some consecutive order such as by name or number. health plan enrollment increase in more than two years. These results exclude the company's 288,000 Medicare Medicare, national health insurance program in the United States for persons aged 65 and over and the disabled. It was established in 1965 with passage of the Social Security Amendments and is now run by the Centers for Medicare and Medicaid Services. Part D prescription drug prescription drug Prescription medication Pharmacology An FDA-approved drug which must, by federal law or regulation, be dispensed only pursuant to a prescription–eg, finished dose form and active ingredients subject to the provisos of the Federal Food, Drug, plan (PDP (1) (Plasma Display Panel) See plasma display. (2) (Policy Decision Point) See COPS and XACML. (3) (Programmed Data P ) members. --Medicare Part D PDP enrollment also grew in the second quarter of 2006, increasing by 33,000 to 288,000 members at June 30, 2006. --Health Net's health plan medical care ratio (MCR MCR My Chemical Romance (band) MCR Minimum Capital Requirement MCR Minimum Cell Rate MCR Middle Common Room (UK universities) MCR Multivariate Curve Resolution ) improved by 130 basis points, reaching 83.3 percent in the second quarter of 2006 compared with 84.6 percent in the second quarter of 2005. This improvement was, in part, attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to an approximately 10 percent gain in the commercial gross margin on a per member per month (PMPM PMPM Per Member Per Month PMPM Pilgrim Monument and Provincetown Museum (Massachusetts) ) basis for the second quarter of 2006 compared to the second quarter of 2005. --The company's pretax margin was 3.9 percent in the second quarter of 2006, a 100 basis point improvement over the second quarter of 2005. --Pretax income contribution from the Government contracts segment increased by approximately 18 percent compared to the second quarter of 2005. --At the end of the second quarter of 2006, Health Net began a series of transactions related to the redemption The liberation of an estate in real property from a mortgage. Redemption is the process by which land that has been mortgaged or pledged is bought back or reclaimed. It is accomplished through a payment of the debt owed or a fulfillment of the other conditions. of the company's $400 million of Senior Notes due 2011. Health Net expects to complete the redemption of the Senior Notes in the third quarter of 2006. The company intends to record an $80 million pretax financing charge in its third quarter ending September September: see month. 30, 2006, related to the redemption. "We are pleased to see that our progress continues with all parts of our diverse businesses showing strength. It is especially gratifying grat·i·fy tr.v. grat·i·fied, grat·i·fy·ing, grat·i·fies 1. To please or satisfy: His achievement gratified his father. See Synonyms at please. 2. to report a turnaround Turnaround A situation where a company that has had poor performance for an extended period of time experiences a positive reversal. Notes: A speculator may profit from a turnaround if he or she accurately anticipates the improvement of a poorly performing company. in our health plan enrollment and we are on track to meet our full-year expectations," said Jay Gellert Jay Gellert (born 1956 in New York City, New York) is the current CEO and President of Health Net, Inc. , president and chief executive officer of Health Net. "The year-over-year improvement in the health plan MCR shows that we have started to add commercial enrollment in certain markets while maintaining our pricing discipline. "Our strength allows us to invest in our businesses, as we did in the second quarter and as we plan to do for the balance of the year. We see excellent potential in commercial, Medicare and other government programs, and in our behavioral health Behavioral health was first used in the 1980's to name the combination of the fields mental health and substance abuse. As an example, an organization serving both mental health and substance abuse clients might refer to its practice as behavioral health or unit. We are poised to take advantage of all these opportunities to continue to build our company," Gellert Gellert (or Killhart) is a name shared by several people (and a dog):
Revenues Health Net's total revenues increased 8.2 percent in the second quarter of 2006 to $3,266,122,000 from $3,019,857,000 in the second quarter of 2005. Health plan revenues increased 9.7 percent to $2,622,848,000 in the second quarter of 2006 compared to $2,390,679,000 in the second quarter of 2005. In the second quarter of 2006, Health Net's Government contracts revenue rose less than 1 percent from the second quarter of 2005, increasing by $4,901,000 to $615,557,000. "Health plan revenues reflect our ongoing pricing discipline, improved commercial enrollment trends and approximately $74 million of premiums from our Universal Care acquisition," said Buddy Piszel, executive vice president and chief financial officer of Health Net. Commercial premium yields PMPM increased 7.5 percent in the second quarter of 2006 compared to the second quarter of 2005. "We continue to track to our full year target of an approximate ap·prox·i·mate v. To bring together, as cut edges of tissue. adj. 1. Relating to the contact surfaces, either proximal or distal, of two adjacent teeth; proximate. 2. Close together. 8 percent increase in commercial yields, including the impact of our Universal Care acquisition," noted Piszel. Total health plan enrollment increased by approximately 22,000 members in the second quarter of 2006 compared to the first quarter of 2006. Over the same period, Medicaid Medicaid, national health insurance program in the United States for low-income persons; established in 1965 with passage of the Social Security Amendments and now run by the Centers for Medicare and Medicaid Services. enrollment increased by approximately 15,000 members and Medicare Risk enrollment grew by nearly 7,000 members. Commercial enrollment, including both at-risk at-risk adj. Being endangered, as from exposure to disease or from a lack of parental or familial guidance and proper health care: efforts to make the vaccine available to at-risk groups of children. and Administrative Services Only (ASO ASO arteriosclerosis obliterans. ASO 1 Administrative services organization, see there 2 Allele-specific–oligonucleotide hybridization 3 Anti-streptolysin O, see there ) membership, was unchanged in the second quarter of 2006 compared to the first quarter of 2006. California California (kăl'ĭfôr`nyə), most populous state in the United States, located in the Far West; bordered by Oregon (N), Nevada and, across the Colorado River, Arizona (E), Mexico (S), and the Pacific Ocean (W). commercial enrollment climbed by 8,000 members over the same period. "Our focus on broker relationships, renewed re·new v. re·newed, re·new·ing, re·news v.tr. 1. To make new or as if new again; restore: renewed the antique chair. 2. advertising and product innovations are having the intended effect," said Piszel. "In fact, new commercial members added by all health plans in the second quarter of 2006 were almost two and one-half times higher than in the second quarter of 2005," Piszel explained. "We are committed to making the necessary investments to support growth." Health Care Costs The health plan MCR improved to 83.3 percent in the second quarter of 2006 from 84.6 percent in the second quarter of 2005. Commercial health care costs rose by 6.9 percent PMPM between the second quarters of 2005 and 2006. "The trend a year ago was 9.3 percent and we continue to see commercial trends that are better than expected. We now believe the year-over-year trend will be at the low end of our previous expectations," Piszel stated. The Government contracts cost ratio of 94.2 percent in the second quarter of 2006 represented a 90 basis point improvement compared with the second quarter of 2005. "We are very proud of the work we do for TRICARE beneficiaries. This quarter, we saw the impact of our cost containment cost containment, n the features of a dental benefits program or of the administration of the program designed to reduce or eliminate certain charges to the plan. efforts and increasing stability in the program," Piszel added. Administrative Expenses In the second quarter of 2006, total general, administrative and depreciation expenses increased by $55,829,000 to $300,019,000 compared to $244,190,000 in the second quarter of 2005. The increase was due to spending for Medicare and other marketing activities, incremental costs Costs which are additional costs to the Service appropriations that would not have been incurred absent support of the contingency operation. See also financial management. associated with the Universal Care acquisition, new business bid costs at our behavioral health subsidiary, and the impact of expensing stock options. Total general, administrative and depreciation expenses increased by $4,438,000 in the second quarter of 2006 compared to the $295,581,000 recorded in the first quarter of 2006. "In addition to approximately $2.2 million in one-time expenses to complete the Universal Care transition, and approximately $2.5 million in one-time costs for a substantial new government bid in our behavioral health unit, second quarter administrative expenses included approximately $10 million of new investments in advertising, market research, products and additional staff, among others," Piszel commented. "This led to higher administrative expenses that we expect to continue. Therefore, we expect the administrative expense ratio to stay above 11 percent for the balance of the year. We believe these investments will lead to continuing profitable future growth." Debt Refinancing Refinancing An extension and/or increase in amount of existing debt. On June 23, 2006, the company began a series of transactions related to the redemption of its $400 million of Senior Notes due 2011, including the execution of a bridge loan facility and a term loan credit facility. These facilities provided Health Net with an aggregate of $500 million of gross proceeds. Health Net used the net proceeds Net Proceeds The amount received after all costs are deducted from the sale of a piece of property or security. Notes: In the case of an investor selling a security, net proceeds represent the proceeds from the sale minus any trading costs (i.e. commissions). from the bridge loan and the term loan to purchase U.S. Treasury securities U.S. Treasury securities Interest-bearing obligations if the U.S. government issued by the U.S. Department of the Treasury as a means of borrowing money to meet government expenditures not covered by tax revenues. , which were pledged pledge n. 1. A solemn binding promise to do, give, or refrain from doing something: signed a pledge never to reveal the secret; a pledge of money to a charity. 2. a. as collateral collateral (kəlăt`ərəl), something of value given or pledged as security for payment of a loan. Collateral consists usually of financial instruments, such as stocks, bonds, and negotiable paper, rather than physical goods, although to secure the Senior Notes and will provide sufficient funds to make all of the remaining principal and interest payments on the Senior Notes. As a result of the company's pledge A Bailment or delivery of Personal Property to a creditor as security for a debt or for the performance of an act. Sometimes called bailment, pledges are a form of security to assure that a person will repay a debt or perform an act under contract. of the collateral to secure the Senior Notes, Moody's Investors Service Moody's Investors Service A leading global credit rating, research and risk analysis firm. Moody's Investors Service A leading firm engaged in credit rating, risk analysis, and research of fixed-income securities and their issuers. and Standard & Poor's Ratings Services Ratings Service A company, such as Moody's or Standard & Poor's, that rates various debt and preferred stock issues for safety of payment of principal, interest, or dividends. upgraded the company's Senior Notes to investment grade. Balance Sheet Highlights Cash and investments as of June 30, 2006 were $2,208,508,000 compared with $2,226,610,000 as of March 31, 2006. Reserves for claims and other settlements decreased by $10,143,000 to $976,382,000 at June 30, 2006 from $986,525,000 at March 31, 2006. Days claims payable (DCP DCP - definitional constraint programming ) declined by 2.3 days to 40.9 days in the second quarter of 2006, from 43.2 days in the first quarter of 2006, and declined by 9.0 days compared with 49.9 days in the second quarter of 2005. These amounts include the effects of provider settlements, capitation CAPITATION. A poll tax; an imposition which is yearly laid on each person according to his estate and ability. 2. The Constitution of the United States provides that "no capitation, or other direct tax, shall be laid, unless in proportion to the census, or payments and Medicare Part D. DCP, excluding provider settlements, capitation payments and the impact of Medicare Part D expenses, declined by 7.5 days to 52.8 days in the second quarter of 2006, compared to 60.3 days in the second quarter of 2005. DCP declined by 5.3 days compared to the first quarter of 2006 (see note (b) to the company's Notes to Condensed con·dense v. con·densed, con·dens·ing, con·dens·es v.tr. 1. To reduce the volume or compass of. 2. To make more concise; abridge or shorten. 3. Physics a. Consolidated con·sol·i·date v. con·sol·i·dat·ed, con·sol·i·dat·ing, con·sol·i·dates v.tr. 1. To unite into one system or whole; combine: Statements of Operations in the attached tables). The company employs an average claims reserves methodology in calculating DCP. Period-end adjusted reserves at the end of the second quarter of 2006 were essentially equal to the period-end adjusted reserves at the end of the first quarter of 2006. However, average adjusted reserves at the end of the second quarter of 2006 were approximately $31.8 million less than the average adjusted reserves at the end of the first quarter of 2006 due to the high level of paid claims in the first quarter of 2006. The majority of the DCP change, approximately 3 days, can be attributed to this fact. The remaining DCP reduction is comprised of 1 day due to the impact of Universal Care membership, and approximately 1.5 days due to the annual second quarter shared risk settlement payment and other factors. "We know that there are a number of important factors to consider on the issue of reserves generally," Piszel continued. "We have been paying claims faster. Our inventories have been getting progressively smaller and younger over the past several quarters, and our paid claims in the first half of this year were $145 million higher than in the second half of last year." In the second quarter of 2006, the company announced that it would redeem redeem v. to buy back, as when an owner who had mortgaged his/her real property pays off the debt. The term also refers to paying the amount due and all charges after a foreclosure (due to failure to make payments when due) has begun. its outstanding Senior Notes. Due to the nature of the redemption-related transactions, the company is carrying both the old debt and the new debt incurred in connection with the redemption on its June 30 balance sheet. By the end of the third quarter of 2006, only the new debt will remain and the company expects that its debt-to-total capital ratio will be approximately 20 percent. The debt-to-total capital ratio at June 30, 2006 was 33.0 percent. Interest expense increased in the second quarter of 2006 by $2,906,000 compared with the second quarter of 2005 due to higher market interest rates. Cash Flow Operating cash flow Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. was negative $6,933,000 in the second quarter of 2006 compared to negative operating cash flow of $10,720,000 in the second quarter of 2005. Operating cash flow was less than net income in the second quarter of 2006 due to a build-up build·up also build-up n. 1. The act or process of amassing or increasing: a military buildup; a buildup of tension during the strike. 2. of Medicare Part D and risk-adjuster receivables Receivables An asset designation applicable to all debts, unsettled transactions or other monetary obligations owed to a company by its debtors or customers. Receivables are recorded by a company's accountants and reported on the balance sheet, and they and include all debts owed of approximately $50 million, payments to settle provider disputes of approximately $16 million, and other timing events of approximately $16 million, including Health Net's annual second quarter shared risk settlement payment. "As we look to the balance of the year, we expect operating cash flow to be strong. We anticipate that cash flow for the full year will be approximately 1.1 times net income, excluding provider settlement payments and the payment made in conjunction conjunction, in astronomy conjunction, in astronomy, alignment of two celestial bodies as seen from the earth. Conjunction of the moon and the planets is often determined by reference to the sun. with the MDL MDL - (Originally "Muddle"). C. Reeve, Carl Hewitt and Gerald Sussman, Dynamic Modeling Group, MIT ca. 1971. Intended as a successor to Lisp, and a possible base for Planner-70. Basically LISP 1.5 with data types and arrays. settlement," Piszel added. Outlook Health Net believes that its earnings per diluted share for the full year 2006 will be between $3.00 and $3.05. The company historically experiences earnings distribution of approximately 45 percent in the first half of the year and approximately 55 percent in the second half of the year. The company previously reported that it expects its 2006 earnings distribution to be more weighted to the second half of the year due to the anticipated impact of the Universal Care acquisition and the concentration of earnings from Medicare Part D expected to occur in the third and fourth quarters of 2006. In the third quarter of 2006, the company expects to record an approximately $33 million tax benefit, which is expected to have a positive impact on 2006 earnings of approximately $.28 per diluted share. The tax benefit results from the realization (specification) realization - A UML semantic relationship between a classifier that specifies a contract and another classifier that guarantees to carry it out. [Handout by Mr. David Gillibrand]. of capital losses following the sale of several inactive in·ac·tive adj. 1. Not active or tending to be active. 2. a. Not functioning or operating; out of use: inactive machinery. b. subsidiaries. This benefit is not included in the guidance above. The company intends to record an approximately $80 million pretax financing charge in the third quarter of 2006, related to redemption of its $400 million of Senior Notes due 2011. The impact of this charge also is not included in the guidance above. Conference Call As previously announced, Health Net will discuss the company's second quarter results during a conference call scheduled on Thursday Thursday: see week. , August 3, 2006, at approximately 11:00 a.m. Eastern Time. To listen to the call, please dial 888-569-5033, code 7700481. A live webcast and replay of the conference call also will be available at www.healthnet.com. The conference call webcast is open to all interested parties. A replay of the conference call will be available from August 3, 2006 through August 7, 2006, by dialing 888-203-1112, code 7700481. Anyone listening to the company's conference call will be presumed to have read Health Net's Annual Report on Form 10-K Form 10-K A report required by the SEC from exchange-listed companies that provides for annual disclosure of certain financial information. Form 10-K See 10-K. for the year ended December December: see month. 31, 2005, quarterly report on Form 10-Q Form 10-Q See 10-Q. for the first quarter ended March 31, 2006, and other reports filed by the company from time to time with the Securities and Exchange Commission. About Health Net Health Net, Inc. is among the nation's largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company's HMO HMO health maintenance organization. HMO n. A corporation that is financed by insurance premiums and has member physicians and professional staff who provide curative and preventive medicine within certain financial, , POS (1) See point of sale and packet over SONET. (2) "Parent over shoulder." See digispeak. POS - point of sale , insured The person who obtains or is otherwise covered by insurance on his or her health, life, or property. The insured in a policy is not limited to the insured named in the policy but applies to anyone who is insured under the policy. insured n. PPO PPO abbr. preferred provider organization PPO Managed care Preferred provider organization, see there Infectious disease Pleuropneumonia-like organism, see there and government contracts subsidiaries provide health benefits to approximately 6.6 million individuals in 27 states and the District of Columbia District of Columbia, federal district (2000 pop. 572,059, a 5.7% decrease in population since the 1990 census), 69 sq mi (179 sq km), on the east bank of the Potomac River, coextensive with the city of Washington, D.C. (the capital of the United States). through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs Veterans Affairs is a term of the business that deals with the relation between a government and its veteran communities, usually administered by the designated government agency. programs. Health Net's behavioral health subsidiary, MHN MHN Men's Health Network MHN Mental Health Nursing MHN Mental Health Net MHN Main Hoon Na (Hindi movie) MHN Mullen, Nebraska (airport code) , provides mental health benefits to approximately 7.3 million individuals in all 50 states. The company's subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination coordination /co·or·di·na·tion/ (ko-or?di-na´shun) the harmonious functioning of interrelated organs and parts. co·or·di·na·tion n. 1. The harmonious adjustment or interaction of parts. for multi-region employers and administrative services for medical groups and self-funded benefits programs. For more information on Health Net, Inc., please visit the company's Web site at www.healthnet.com. Cautionary Statements This release contains forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended a·mend v. a·mend·ed, a·mend·ing, a·mends v.tr. 1. To change for the better; improve: amended the earlier proposal so as to make it more comprehensive. 2. , and Section 27A of the Securities Act of 1933, as amended, that involve a number of risks and uncertainties. All statements, other than statements of historical information provided herein, may be deemed to be forward-looking statements. These statements are based on management's analysis, judgment, belief and expectation only as of the date hereof here·of adv. Of this. hereof Adverb Formal or law of or concerning this Adv. 1. hereof - of or concerning this; "the twigs hereof are physic" , and are subject to uncertainty and changes in circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or . Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "may," "should," "could," "estimate," "intend" and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to, among other things, rising health care costs, negative prior period claims reserve developments, trends in medical care ratios, issues relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc provider contracts, litigation costs, operational issues, health care reform and general business conditions. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the "Risk Factors" section included within the company's most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q filed with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date of this release.
Health Net, Inc.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except per share and ratio data)
Second Third Fourth
Quarter Quarter Quarter
Ended Ended Ended
June September December
30, 30, 31,
REVENUES: 2005 2005 2005
----------- ----------- -----------
Health plan services
premiums $2,390,679 $2,398,100 $2,367,057
Government contracts 610,656 639,626 560,491
Net investment income 17,213 19,536 20,239
Other income 1,309 1,511 2,371
----------- ----------- -----------
Total revenues 3,019,857 3,058,773 2,950,158
----------- ----------- -----------
EXPENSES:
Health plan services 2,023,174 2,000,661 1,952,309
Government contracts 580,685 614,794 535,800
General and administrative 233,723 241,847 266,043
Selling 56,082 55,000 53,200
Depreciation 10,467 4,007 4,220
Amortization 861 861 861
Interest 10,543 11,789 11,690
----------- ----------- -----------
2,915,535 2,928,959 2,824,123
Litigation and severance
related costs 16,237 (a) - -
----------- ----------- -----------
Total expenses 2,931,772 2,928,959 2,824,123
----------- ----------- -----------
Income from operations before
income taxes 88,085 129,814 126,035
Income tax provision 34,522 51,609 49,366
----------- ----------- -----------
Net income $53,563 $78,205 $76,669
=========== =========== ===========
Basic earnings per share $0.48 $0.69 $0.67
Diluted earnings per share $0.47 $0.67 $0.65
Weighted average shares
outstanding:
Basic 112,451 113,371 114,276
Diluted 114,851 116,543 117,902
Pretax margin (Income from
operations before income
taxes / Total revenues) 2.9% 4.2% 4.3%
Health plan services MCR 84.6% 83.4% 82.5%
Government contracts cost
ratio 95.1% 96.1% 95.6%
Administrative ratio
((G&A+Dep) / (HP serv rev +
Other income)) 10.2% 10.2% 11.4%
Selling costs ratio (Selling
costs / HP serv rev) 2.3% 2.3% 2.2%
Days claims payable (b) 49.9 48.8 49.4
Days claims payable -
adjusted (b) 60.3 61.1 63.5
Effective tax rate 39.2% 39.8% 39.2%
Health plan services premiums
PMPM $235.03 $240.10 $241.13
Health plan services costs
PMPM $198.90 $200.31 $198.88
First Second
Quarter Quarter
Ended Ended
March 31, June 30,
REVENUES: 2006 2006
----------- -----------
Health plan services
premiums $2,546,130 $2,622,848
Government contracts 615,897 615,557
Net investment income 23,359 26,256
Other income 1,244 1,461
----------- -----------
Total revenues 3,186,630 3,266,122
----------- -----------
EXPENSES:
Health plan services 2,108,712 2,185,641
Government contracts 587,980 580,052
General and administrative 290,823 295,064
Selling 56,611 59,630
Depreciation 4,758 4,955
Amortization 591 1,275
Interest 12,226 13,449
----------- -----------
3,061,701 3,140,066
Litigation and severance
related costs - -
----------- -----------
Total expenses 3,061,701 3,140,066
----------- -----------
Income from operations before
income taxes 124,929 126,056
Income tax provision 48,336 49,023
----------- -----------
Net income $76,593 $77,033
=========== ===========
Basic earnings per share $0.67 $0.67
Diluted earnings per share $0.65 $0.65
Weighted average shares
outstanding:
Basic 114,594 115,213
Diluted 118,398 118,305
Pretax margin (Income from operations
before income taxes / Total revenues) 3.9% 3.9%
Health plan services MCR 82.8% 83.3%
Government contracts cost
ratio 95.5% 94.2%
Administrative ratio ((G&A+Dep) / (HP
serv rev + Other income)) 11.6% 11.4%
Selling costs ratio (Selling
costs / HP serv rev) 2.2% 2.3%
Days claims payable (b) 43.2 40.9
Days claims payable - adjusted (b) 58.1 52.8
Effective tax rate 38.7% 38.9%
Health plan services premiums
PMPM $246.89 $243.96
Health plan services costs
PMPM $204.48 $203.29
Health Net, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except ratio data)
June September December
30, 30, 31,
2005 2005 2005
----------- ----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $939,057 $1,027,848 $742,485
Investments - available for
sale 1,060,936 1,150,738 1,363,818
Premiums receivable, net 119,776 127,020 132,019
Amounts receivable under
government contracts 139,540 122,295 122,796
Incurred but not reported
(IBNR) health care costs
receivable under TRICARE
North contract 184,214 263,329 265,517
Other receivables 89,437 85,873 79,572
Deferred taxes 100,277 110,445 93,899
Restricted assets for senior
notes redemption - - -
Other assets 118,904 107,618 111,512
----------- ----------- -----------
Total current assets 2,752,141 2,995,166 2,911,618
Property and equipment, net 103,314 112,218 125,773
Goodwill, net 723,595 723,595 723,595
Other intangible assets, net 20,132 19,271 18,409
Deferred taxes 26,941 29,527 31,060
Other noncurrent assets 148,647 143,555 130,267
----------- ----------- -----------
Total Assets $3,774,770 $4,023,332 $3,940,722
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Reserves for claims and other
settlements $1,065,465 $1,057,848 $1,040,171
Health care and other costs
payable under government
contracts 131,909 62,778 62,536
IBNR health care costs payable
under TRICARE North contract 184,214 263,329 265,517
Unearned premiums 97,038 218,527 106,586
Bridge loan - - -
Senior notes payable - - -
Accounts payable and other
liabilities 385,995 404,362 364,266
----------- ----------- -----------
Total current liabilities 1,864,621 2,006,844 1,839,076
Senior notes payable 400,659 391,106 387,954
Term loan - - -
Other noncurrent liabilities 116,824 123,376 124,617
----------- ----------- -----------
Total Liabilities 2,382,104 2,521,326 2,351,647
----------- ----------- -----------
Stockholders' Equity
Common stock and additional
paid-in capital 861,595 899,400 911,672
Treasury common stock, at cost (632,926) (633,153) (633,375)
Retained earnings 1,169,291 1,247,496 1,324,165
Accumulated other comprehensive
loss (5,294) (11,737) (13,387)
----------- ----------- -----------
Total Stockholders' Equity 1,392,666 1,502,006 1,589,075
----------- ----------- -----------
$3,774,770 $4,023,332 $3,940,722
=========== =========== ===========
Debt-to-Total Capital Ratio 22.3% 20.7% 19.6%
March 31, June 30,
2006 2006
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $870,224 $825,925
Investments - available for sale 1,356,386 1,382,583
Premiums receivable, net 171,977 229,133
Amounts receivable under government
contracts 143,625 135,433
Incurred but not reported (IBNR) health
care costs receivable under TRICARE
North contract 295,800 318,827
Other receivables 84,414 116,258
Deferred taxes 99,866 57,141
Restricted assets for senior notes
redemption - 499,557
Other assets 147,600 159,662
----------- -----------
Total current assets 3,169,892 3,724,519
Property and equipment, net 136,727 144,436
Goodwill, net 751,949 751,949
Other intangible assets, net 47,062 45,532
Deferred taxes 46,560 48,574
Other noncurrent assets 137,645 132,186
----------- -----------
Total Assets $4,289,835 $4,847,196
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Reserves for claims and other settlements $986,525 $976,382
Health care and other costs payable under
government contracts 62,529 60,325
IBNR health care costs payable under
TRICARE North contract 295,800 318,827
Unearned premiums 324,063 338,611
Bridge loan - 200,000
Senior notes payable - 376,052
Accounts payable and other liabilities 434,605 389,130
----------- -----------
Total current liabilities 2,103,522 2,659,327
Senior notes payable 379,983 -
Term loan - 300,000
Other noncurrent liabilities 129,507 108,222
----------- -----------
Total Liabilities 2,613,012 3,067,549
----------- -----------
Stockholders' Equity
Common stock and additional paid-in
capital 932,254 967,265
Treasury common stock, at cost (636,252) (640,623)
Retained earnings 1,400,758 1,477,791
Accumulated other comprehensive loss (19,937) (24,786)
----------- -----------
Total Stockholders' Equity 1,676,823 1,779,647
----------- -----------
$4,289,835 $4,847,196
=========== ===========
Debt-to-Total Capital Ratio 18.5% 33.0%
Health Net, Inc.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
Second Third Fourth
Quarter Quarter Quarter
Ended Ended Ended
June September December
30, 30, 31,
2005 2005 2005
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $53,563 $78,205 $76,669
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Amortization and depreciation 11,328 4,868 5,081
Share-based compensation expense - - -
Other changes 3,100 3,229 3,032
Changes in assets and liabilities,
net of the effects of dispositions:
Premiums receivable and unearned
premiums (14,556) 114,245 (116,940)
Other receivables, deferred taxes
and other assets (14,336) 4,901 18,476
Amounts receivable/payable under
government contracts (1,754) (51,886) (743)
Reserves for claims and other
settlements (89,826) (7,617) (17,677)
Accounts payable and other
liabilities 41,761 28,826 (35,706)
--------------------------------
Net cash provided by (used in)
operating activities (10,720) 174,771 (67,808)
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments 184,483 13,283 179,102
Maturities of investments 38,653 20,215 41,037
Purchases of investments (143,776) (126,917) (437,250)
Proceeds from sale of property and
equipment 79,395 417 -
Purchases of property and equipment (7,441) (13,242) (17,738)
Cash received from sale (paid for
acquisition) of businesses - - -
Sales and purchases of restricted
investments and other 13,460 (8,840) 9,093
--------------------------------
Net cash (used in) provided by
investing activities 164,774 (115,084) (225,756)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock
options and employee stock purchases 19,161 29,331 8,423
Repurchases of common stock - (227) (222)
Excess tax benefits from share-based
compensation - - -
Borrowings under term and bridge loan
agreements
Net Medicare Part D deposits
(payments) - - -
--------------------------------
Net cash provided by financing
activities 19,161 29,104 8,201
--------------------------------
Net increase (decrease) in cash and
cash equivalents 173,215 88,791 (285,363)
Cash and cash equivalents, beginning
of period 765,842 939,057 1,027,848
--------------------------------
Cash and cash equivalents, end of
period $939,057 $1,027,848 $742,485
================================
First Second
Quarter Quarter
Ended Ended
March 31, June 30,
2006 2006
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $76,593 $77,033
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Amortization and depreciation 5,349 6,230
Share-based compensation expense 4,435 5,195
Other changes 4,344 4,002
Changes in assets and liabilities,
net of the effects of dispositions:
Premiums receivable and unearned
premiums 177,519 (42,608)
Other receivables, deferred taxes
and other assets (41,899) (107)
Amounts receivable/payable under
government contracts (20,836) 5,988
Reserves for claims and other
settlements (53,647) (10,143)
Accounts payable and other
liabilities 34,046 (52,523)
----------------------
Net cash provided by (used in)
operating activities 185,904 (6,933)
----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments 228,995 44,374
Maturities of investments 15,770 30,248
Purchases of investments (252,973) (110,683)
Proceeds from sale of property and
equipment - -
Purchases of property and equipment (15,730) (12,679)
Cash received from sale (paid for
acquisition) of businesses (73,100) (494)
Sales and purchases of restricted
investments and other (9,027) (496,943)
----------------------
Net cash (used in) provided by
investing activities (106,065) (546,177)
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock
options and employee stock purchases 10,380 20,895
Repurchases of common stock (1,724) (1,107)
Excess tax benefits from share-based
compensation 3,099 2,221
Borrowings under term and bridge loan
agreements 497,334
Net Medicare Part D deposits
(payments) 36,145 (10,532)
----------------------
Net cash provided by financing
activities 47,900 508,811
----------------------
Net increase (decrease) in cash and
cash equivalents 127,739 (44,299)
Cash and cash equivalents, beginning
of period 742,485 870,224
----------------------
Cash and cash equivalents, end of
period $870,224 $825,925
======================
Health Net, Inc.
Notes to Condensed Consolidated Statements of Operations
Notes:
(a) Pretax $15.9 million charge representing total estimated legal
defense costs associated with the AmCareco case, and $0.3 million
for severance and related benefit costs related to our workforce
reduction announced in May 2004.
(b) Management believes that days claims payable (excluding
capitation, provider settlements and Medicare Part D), a non-GAAP
financial measure, provides useful information to investors
because, in excluding those health care costs for which no or
minimal reserves are maintained, it is a more accurate reflection
of days claims payable calculated from claims-based reserves than
is days claims payable, which does not exclude such costs. This
non-GAAP financial information should be considered in addition
to, not as a substitute for, financial information prepared in
accordance with GAAP. The following table provides a
reconciliation of the differences between days claims payable
(excluding capitation, provider settlements and Medicare Part D)
and days claims payable, the most directly comparable financial
measure calculated and presented in accordance with GAAP:
Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006
---------------------------------------------
(Dollars in millions)
Reserve for Claims
and Other
Settlements $1,065.5 $1,057.8 $1,040.2 $986.5 $976.4
Less: Capitation
Payable, Provider
Settlements and
Medicare Part D ($132.8) ($105.2) ($95.4) ($120.5) ($110.3)
---------------------------------------------
Adjusted Reserve for
Claims and Other
Settlements $932.7 $952.6 $944.8 $866.0 $866.1
(1)Average Reserve for
Claims and Other
Settlements $1,110.4 $1,061.7 $1,049.0 $1,013.3 $981.5
(2)Average Adjusted
Reserve for Claims
and Other Settlements $959.1 $942.7 $948.7 $905.4 $866.1
(3)Health Plan Services
Cost $2,023.2 $2,000.7 $1,952.3 $2,108.7 $2,185.6
Less: Capitation
Payments, Provider
Settlements and
Medicare Part D ($576.4) ($580.8) ($578.5) ($705.9) ($692.6)
---------------------------------------------
(4)Adjusted Health Plan
Services Cost $1,446.8 $1,419.9 $1,373.8 $1,402.8 $1,493.0
(5)Number of Days in
Period 91 92 92 90 91
= (1) / (3) x (5) Days
Claims Payable 49.9 48.8 49.4 43.2 40.9
= (2) / (4) x (5) Days
Claims Payable (Excl.
Capitation, Provider
Settlements and
Medicare Part D) 60.3 61.1 63.5 58.1 52.8
HEALTH NET, INC.
Medical Covered Lives at June 30, 2006
(in Thousands)
Commercial - Large Commercial - Commercial Risk
Group(a) Small Group & Subtotal
Individual
-------------------- ----------------- -------------------
6/06 3/06 6/05 6/06 3/06 6/05 6/06 3/06 6/05
------ ------ ------ ----- ----- ----- ------ ------ -----
Arizona 72 71 66 47 47 52 119 118 119
California 1,063 1,055 1,104 422 421 413 1,485 1,477 1,517
Connecticut 156 161 181 31 28 35 187 189 216
New Jersey 47 47 67 58 64 90 105 110 157
New York 120 117 121 96 98 104 216 215 224
Oregon 99 101 102 37 37 35 136 138 138
------ ------ ------ ----- ----- ----- ------ ------ -----
Total 1,557 1,552 1,642 691 694 729 2,248 2,247 2,371
====== ====== ====== ===== ===== ===== ====== ====== =====
Year over
Year (5)% (5)% (5)%
Sequential 0% (0)% 0%
------ ------ ------ ----- ----- ----- ------ ------ -----
ASO Commercial Subtotal
----- ----- ----- --------------------
6/06 3/06 6/05 6/06 3/06 6/05
----- ----- ----- ------ ------ ------
Arizona - - - 119 118 119
California 5 6 7 1,490 1,482 1,524
Connecticut 69 70 69 256 259 285
New Jersey 20 20 18 125 130 176
New York 17 17 21 233 232 245
Oregon - - 1 136 138 138
----- ----- ----- ------ ------ ------
Total 111 113 116 2,359 2,360 2,487
===== ===== ===== ====== ====== ======
Year over Year (4)% (5)%
Sequential (2)% (0)%
----- ----- ----- ------ ------ ------
Medicare Risk Medicaid Health Plan Total
-------------------- ----------------- -------------------
6/06 3/06 6/05 6/06 3/06 6/05 6/06 3/06 6/05
------ ------ ------ ----- ----- ----- ------ ------ -----
Arizona 35 33 31 - - - 154 151 150
California 104 103 93 726 713 700 2,320 2,298 2,316
Connecticut 32 29 27 87 87 94 375 375 406
New Jersey - - - 47 45 42 172 175 217
New York 7 7 6 - - - 240 239 251
Oregon 19 18 14 - - - 155 157 153
------ ------ ------ ----- ----- ----- ------ ------ -----
Total 197 190 171 860 845 836 3,416 3,394 3,493
====== ====== ====== ===== ===== ===== ====== ====== =====
Year over
Year 15% 3% (2)%
Sequential 4% 2% 1%
------ ------ ------ ----- ----- ----- ------ ------ -----
------ ------ ------
6/06 3/06 6/05
------ ------ ------
Medicare PDP
(Stand-
Alone) 288 255 -
------ ------ ------
6/06 3/06 6/05
------ ------ ------
TRICARE
North
Contract(b) 2,932 2,941 2,946
(a) Commercial Large Group includes Medicare Supplement
(b) Includes Tricare eligible for which we have health care risk, and
those for which we provide Administrative Services Only (ASO),
primarily active duty
Health Net, Inc.
Reconciliation of Reserves for Claims
and Other Settlements
(In millions)
Health Plan Services
--------------------------------
YTD 6/2006 Year 2005 Year 2004
---------- ---------- ----------
Reserve for claims (a), beginning of
period $768.7 $794.6 $777.1
Incurred claims related to:
Current Year 2,601.3 5,130.4 5,048.3
Prior Years (c) (75.7) (114.5) 8.7
---------- ---------- ----------
Total Incurred (b) 2,525.6 5,015.9 5,057.0
Paid claims related to:
Current Year 1,959.0 4,401.3 4,286.9
Prior Years 642.5 640.5 752.6
---------- ---------- ----------
Total Paid (b) 2,601.5 5,041.8 5,039.5
Reserve for claims (a), end of period 692.8 768.7 794.6
Add:
Claims Payable 178.1 177.2 288.3
Other (d) 105.5 94.3 86.4
---------- ---------- ----------
Reserves for claims and other
settlements, end of period $976.4 $1,040.2 $1,169.3
========== ========== ==========
(a) Consists of incurred but not reported claims and received but
unprocessed claims and reserves for loss adjustment expenses.
(b) Includes medical claims only. Capitation, pharmacy and other
payments including provider settlements are not included.
(c) This line represents the change in reserves attributable to the
difference between the original estimate of incurred claims for
prior years and the revised estimate. In developing the revised
estimate, there have been no changes in the approach used to
determine the key actuarial assumptions, which are the completion
factor and medical cost trend. Claims liabilities are estimated
under actuarial standards of practice and generally accepted
accounting principles. The majority of the reserve balance held
at each quarter-end is associated with the most recent months'
incurred services because these are the services for which the
fewest claims have been paid. The majority of the adjustments to
reserves relate to variables and uncertainties associated with
actuarial assumptions. The degree of uncertainty in the
estimates of incurred claims is greater for the most recent
months' incurred services. Revised estimates for prior years are
determined in each quarter based on the most recent updates of
paid claims for prior years.
(d) Includes accrued capitation, shared risk settlements, provider
incentives and other reserve items.
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