Health Net Reports Third Quarter 2004 Net Income of $.64 Per Diluted Share; Commercial Premium Increases and Administrative Ratio Decline Drive Sequential Earnings Improvement.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 2004 third 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 $.64 compared with a net loss of $.02 per diluted share in the third quarter of 2003 and earnings of $.36 per diluted share in the second quarter of 2004. Included in the results for the third quarter of 2004 is the full effect of a $5,172,000 pretax pre·tax adj. Existing before tax deductions: pretax income. pretax adj [profit] → vor (Abzug der) Steuern charge, or approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. $.03 per diluted share after tax, for 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 and related benefits associated with the workforce reduction begun in the second quarter of 2004 and $400,000 of additional loss on the 2001 sale of the company's Florida Florida, state, United States Florida (flôr`ĭdə, flŏr`–), state in the extreme SE United States. A long, low peninsula between the Atlantic Ocean (E) and the Gulf of Mexico (W), Florida is bordered by Georgia and health plan as a result of final settlements on this sale. Health Net reported net income of $71,855,000 in the third quarter of 2004 compared to a net loss of $2,238,000 in the third quarter of 2003 and net income of $41,366,000 in the second quarter of 2004. The net loss in the third quarter of 2003 included an after-tax af·ter-tax also af·ter·tax adj. Relating to or being that which remains after payment, especially of income taxes: after-tax profits. loss on disposition Act of disposing; transferring to the care or possession of another. The parting with, alienation of, or giving up of property. The final settlement of a matter and, with reference to decisions announced by a court, a judge's ruling is commonly referred to as disposition, regardless of of discontinued operations Discontinued operations Divisions of a business that have been sold or written off and that no longer are maintained by the business. of $89,050,000 reflecting the settlement of 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. arising in connection with Health Net's 1998 sale of its workers' compensation workers' compensation, payment by employers for some part of the cost of injuries, or in some cases of occupational diseases, received by employees in the course of their work. business. Excluding this settlement, net income for the third quarter of 2004 was $14,957,000 lower than the third quarter of 2003. The year-over-year decline in net income excluding the settlement was primarily the result of higher than expected medical care ratios (MCRs) and, to a lesser extent, enrollment declines. The expected sequential One after the other in some consecutive order such as by name or number. improvement in net income from the second quarter of 2004 to the third quarter of 2004 resulted primarily from a lower MCR MCR My Chemical Romance (band) MCR Minimum Capital Requirement MCR Minimum Cell Rate MCR Middle Common Room (UK universities) MCR Multivariate Curve Resolution . "We believe we are headed in the right direction as our pricing actions and health care cost initiatives help build momentum toward 2005," 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. "We are pleased with our progress as our earnings performance continues to improve from the first quarter of 2004 and is tracking to our expectations." Positive developments for the third quarter of 2004 included: --Health Net's MCR was 84.5 percent, a 150 basis point improvement from the second quarter of 2004, though it rose by 230 basis points compared with the third quarter of 2003; --Commercial revenue per member per month (PMPM PMPM Per Member Per Month PMPM Pilgrim Monument and Provincetown Museum (Massachusetts) ) increased by more than $5 in the third quarter of 2004 compared to the second quarter of 2004, consistent with the company's expectations; --General and administrative (G&A) costs continued to reflect the company's ongoing focus on tightly managing these expenses and adjusting to the enrollment declines; and --Cash flow from operations of $84,552,000 exceeded net income plus depreciation and amortization for the third quarter of 2004. Revenues Health Net's total revenues rose 4.2 percent in the third quarter of 2004 to $2,935,233,000 from $2,816,723,000 in the third quarter of 2003. Health plan services revenue climbed 4.0 percent to $2,393,160,000 in the third quarter of 2004 compared to $2,300,807,000 in the third quarter of 2003. Health plan services revenue gains were the result of higher commercial and 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. premium yields across the company's health plans. In the third quarter of 2004, the overall premium yield PMPM, including commercial, Medicare and Medicaid Medicare and Medicaid U.S. government programs in effect since 1966. Medicare covers most people 65 or older and those with long-term disabilities. Part A, a hospital insurance plan, also pays for home health visits and hospice care. enrollment, rose 7.7 percent compared to the same period in 2003. Commercial premium yields were up by 8.7 percent year-over-year and 2.5 percent in the third quarter of 2004 compared to the second quarter of 2004. "Commercial 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. yield trends are very encouraging. Last quarter we projected that these yields would increase by more than $5 PMPM and they did," said Buddy Piszel, executive vice president and chief financial officer of Health Net. "Enrollment is declining, but that must be viewed against our primary goal of improved margins. The pricing discipline drove substantial sequential margin improvement." Commercial enrollment, including both at-risk 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 down 3.3 percent in the third quarter of 2004 compared with the second quarter of 2004. Oregon Oregon, city, United States Oregon, city (1990 pop. 18,334), Lucas co., NW Ohio, a suburb adjacent to Toledo, on Lake Erie; inc. 1958. It is a port with railroad-owned and -operated docks. The city has industries producing oil, chemicals, and metal products. commercial enrollment increased by nearly 5,400 members in the third quarter of 2004 compared to the second quarter of 2004, a 4.2 percent gain. In 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). , the addition of Kern Kern, river, 155 mi (249 km) long, rising in the S Sierra Nevada Mts., E Calif., and flowing south, then southwest to a reservoir in the extreme southern part of the San Joaquin valley. The river has Isabella Dam as its chief facility. County contributed to the growth in 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 of 32,820 members in the third quarter of 2004 compared to the second quarter of 2004. "The company initiated pricing actions earlier in 2004 to improve gross margin, and this quarter we realized that goal. This disciplined pricing has resulted in enrollment losses in California that are greater than we planned. However, bolstering margin even at the expense of enrollment losses is the right thing to do. The Northeast “Northeastern” redirects here. For the Boston college, see Northeastern University, Boston. Northeast or north east is the ordinal direction halfway between north and east. It is the opposite of southwest. See boxing the compass. also experienced significant PMPM revenue gains in the quarter. Commercial enrollment declines are a direct result of pricing increases designed to cull out Verb 1. cull out - select desirable parts from a group or list; "cull out the interesting letters from the poet's correspondence"; "winnow the finalists from the long list of applicants" winnow less profitable accounts, especially in New Jersey, and improve margins," Piszel added. In the third quarter of 2004, Health Net's Government contracts revenue rose 9.0 percent from the third quarter of 2003, reaching $525,783,000. This increase was due in part to the overlap o·ver·lap n. 1. A part or portion of a structure that extends or projects over another. 2. The suturing of one layer of tissue above or under another layer to provide additional strength, often used in dental surgery. v. of the new TRICARE North region contract being fully implemented and the continued provision of services under the old TRICARE Region 6 contract in third quarter of 2004. "We completed the transition from the old TRICARE contract on October October: see month. 31 and now solely operate in the TRICARE North region. We are proud to be providing support for the families of our troops in these 23 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). ," Piszel noted. Other income decreased by $14,323,000 in the third quarter of 2004 compared to the third quarter of 2003, primarily due to lower revenue resulting from the sale of the company's Employer Services division in the third quarter of 2003. In the third quarter of 2004, net investment income was $14,750,000, a decrease of $3,027,000 from the third quarter of 2003. The decrease is largely attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to one-time one-time adj. 1. or one·time a. Occurring or undertaken only once: a one-time winner in 1995. b. gains on sale of investments totaling $3,000,000 in the third quarter of 2003. Net investment income in the third quarter of 2004 increased by $932,000 compared to the second quarter of 2004. Health Care Costs Overall PMPM health plan health care costs rose by 10.8 percent in the third quarter of 2004 compared with the third quarter of 2003. Overall PMPM health care costs declined by 30 basis points in the third quarter of 2004 as compared to the second quarter of 2004. "The experience in the third quarter compared to the second quarter indicates that cost trends are developing as expected and consistent with our gross margin expectations," Piszel explained. "Physician and pharmacy pharmacy, art of compounding and dispensing drugs and medication. The term is also applied to an establishment used for such purposes. Until modern times medication was prepared and dispensed by the physician himself. In the 18th cent. cost growth is stable, and hospital cost trends declined on a sequential basis." The Government contracts cost ratio improved by 90 basis points to 95.4 percent for the third quarter of 2004 compared to the third quarter of 2003. This improvement is due in part to lower bid price adjustment and change order activity in the third quarter of 2003 that negatively affected the cost ratio in that period. Administrative Expenses In the third quarter of 2004, total general, administrative and depreciation expenses were $217,674,000. This included $5,900,000 of recoveries associated with the 2001 sale of the company's Florida health plan. Excluding this one-time benefit, G&A plus depreciation for the third quarter of 2004 would have been $223,574,000, resulting in an administrative ratio of 9.3 percent, 150 basis points better than what the company reported in the third quarter of 2003. The administrative ratio was lower in the third quarter of 2004 as compared to the third quarter of 2003 primarily due to continuing efficiency improvements and the divestiture The breakup of AT&T. By federal court order, AT&T divested itself on January 1, 1984 of its 23 operating companies, which became known as the Regional Bell Operating Companies (RBOCs). of the company's Employer Services division in October 2003. The company recorded $5,172,000 in the third quarter of 2004 for severance and related benefits expenses. "Health Net will record approximately $3 million in severance-related expenses associated with the workforce reduction in the fourth quarter of 2004," Piszel stated. Health Net's selling expenses decreased by $2,152,000 to $60,410,000 in the third quarter of 2004 compared with $62,562,000 in the same period in 2003, consistent with the decline in Small Group and Individual enrollment. The selling costs ratio was 2.5 percent for the third quarter of 2004, compared with 2.7 percent in the same period last year. The Health Net One project is on target and is approximately 75 percent complete, progressing toward the goal of putting Health Net's health plans on a single operating platform by mid- mid- pref. Middle: midbrain. 2005. The California and Oregon divisions' claims conversions will occur in July July: see month. or August of 2005 to accommodate the July 1 account renewals. Balance Sheet Highlights Cash and investments as of September September: see month. 30, 2004 were $1,705,872,000 compared with $1,620,787,000 as of June June: see month. 30, 2004. The TRICARE receivable increased by $7,375,000 from the end of the second quarter of 2004 to $136,335,000 as of September 30, 2004, consistent with expectations surrounding sur·round tr.v. sur·round·ed, sur·round·ing, sur·rounds 1. To extend on all sides of simultaneously; encircle. 2. To enclose or confine on all sides so as to bar escape or outside communication. n. the contract transitions. Beginning with the third quarter of 2004, a new asset line and a new liability line related to the TRICARE contract for the North region are included on the balance sheet. The two new accounts offset each other and represent the non-cash impact of the incurred but not reported Incurred but not reported (IBNR) is a term in common use in general insurance. When a policy of general insurance is written it will typically cover a 12 month period from inception of the policy. (IBNR IBNR Incurred But Not Reported IBNR Interesting But Not Relevant ) estimates of health care costs for the new TRICARE contract. Debt increased by $17,530,000 from June 30, 2004 to $401,750,000 as of September 30, 2004, primarily due to the mark-to-market Mark-to-market Adjustment of the book value or collateral value of a security to reflect current market value. adjustment of the interest rate swap Interest Rate Swap A deal between banks or companies where borrowers switch floating-rate loans for fixed rate loans in another country. These can be either the same or different currencies. contracts the company uses to hedge against interest rate risk associated with the company's outstanding fixed rate senior notes. This adjustment is offset by a decrease in other noncurrent liabilities Noncurrent liability A liability due in one year. noncurrent liability A liability not due to be paid within one year during the normal course of business. A long-term debt issue is a noncurrent liability. that reflects the mark-to-market value of the swap. Interest expense was $740,000 higher in the third quarter of 2004 compared to the second quarter of 2004. This was due to higher floating interest rates and additional interest expense incurred on the senior notes following the downgrade Downgrade A negative change in the rating of a security. Notes: For example, an analyst may downgrade a stock from strong buy to buy, or a bond rating agency may downgrade a bond from AAA to AA. of the company's senior unsecured debt Unsecured debt Debt that does not identify specific assets that the debtholder is entitled to in case of default. rating by 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. , Inc. in September 2004. Reserves for claims and other settlements decreased by $52,591,000 from the end of the second quarter of 2004 to $990,240,000 as of the end of the third quarter of 2004. The decline in reserves resulted from lower claims inventories and a decline in health plan enrollment. Days claims payable decreased to 46.2 days for the third quarter of 2004 compared with 46.6 days for the second quarter of 2004, and declined by 4.2 days compared to the third quarter of 2003, a direct result of the substantially higher level of paid claims. "The reserve decrease can be attributed to an acceleration acceleration, change in the velocity of a body with respect to time. Since velocity is a vector quantity, involving both magnitude and direction, acceleration is also a vector. In order to produce an acceleration, a force must be applied to the body. of claims payments that reduced our claims inventory and to lower enrollment," Piszel commented. "As we pay claims faster and shorten (audio, compression) Shorten - A form of lossless audio compression. the claims tail, we gain the added benefit of being able to identify emerging cost trends more quickly." Cash Flow Cash flow provided by operations in the third quarter of 2004 amounted to $84,552,000 compared to cash flow provided by operations of $79,648,000 in the third quarter of 2003. As noted in previous releases, cash flow from operations Cash flow from operations A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus noncash expenses for the full year 2004 is expected to be down from prior years due to the effects of the transition to the new TRICARE North contract and substantially higher levels of paid claims. Health Net repurchased 2,171,500 shares of its common stock in the third quarter of 2004 under its stock repurchase Stock repurchase A firm's repurchase of outstanding shares of its common stock. program announced in May 2002. Health Net has repurchased 19,978,655 shares under the stock repurchase program at an average price of $26.86 through September 13, 2004. On September 13, 2004, the company announced that it would not repurchase re·pur·chase tr.v. re·pur·chased, re·pur·chas·ing, re·pur·chas·es To buy (something) again. n. The act of buying something that one previously sold or owned. Noun 1. shares of common stock under the share repurchase Share Repurchase A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. This is usually an indication that the company's management thinks the shares are undervalued. program through the end of 2004. The company will reevaluate Verb 1. reevaluate - revise or renew one's assessment reassess appraise, assess, evaluate, valuate, value, measure - evaluate or estimate the nature, quality, ability, extent, or significance of; "I will have the family jewels appraised by a professional"; its position on share repurchases after the first of the year. Outlook Health Net is conducting a comprehensive review of unresolved Not completed; not finished; not linked together. See resolve. provider and claims issues as part of its efforts to more effectively contract for 2005 and beyond. Additional costs may be incurred and recorded in the fourth quarter of 2004 as part of this review and recontracting effort. Excluding these costs and the expected $2.9 million severance and related benefit expense the company will record in the fourth quarter of 2004, Health Net believes its fourth quarter earnings per diluted share will be between $.68 and $.75. The company is still in the planning process for 2005 and currently expects to issue specific earnings guidance for the full year and first quarter by the end of January January: see month. 2005, once the above-mentioned A`bove´-men`tioned a. 1. Mentioned or named before; aforesaid; mentioned or named earlier in the same text (in written documents). Adj. 1. review is completed and the 2005 plan is finalized See finalization. . "Our initial commercial pricing for 2005 is very encouraging. We believe yields will increase between 10 and 11 percent for the business renewing 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. in the first quarter, approximately 100 basis points ahead of expected health care cost trends," Piszel commented. "We also expect to see some further enrollment contraction contraction, in physics contraction, in physics: see expansion. contraction, in grammar contraction, in writing: see abbreviation. contraction - reduction in 2005 due to our pricing discipline. For the full year, we now believe that commercial enrollment will be down modestly, with us gaining membership in key markets in the second half of the year," he added. Conference Call As previously announced, Health Net will discuss the company's third quarter results during a conference call with investors on Thursday Thursday: see week. , November November: see month. 4, 2004, at approximately 11:00 a.m. EST EST electroshock therapy. EST abbr. electroshock therapy . To listen to the call, please dial 719.457.2679, code 924502. 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. The replay of the conference call will be available following the call on Thursday, November 4, 2004 through Monday Monday: see week. , November 8, 2004, by dialing 719.457.0820, code 924502. 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, 2003, Quarterly Reports on Form 10-Q Form 10-Q See 10-Q. for the first, second and third quarters ended March 31, 2004, June 30, 2004 and September 30, 2004, respectively, and other reports filed by the company from time to time with the Securities and Exchange Commission. Investor Conference Health Net will host its annual investor conference on Thursday, November 11, 2004, at the Millennium millennium [Lat.,=1,000 years], the period of 1,000 years in which, according to some schools of Christian eschatology, Christ will reign again gloriously on earth. Belief in the millennium, based on Rev. 20, has recurred in Christianity since the earliest times. Broadway Broadway, famous thoroughfare in New York City. It extends from Bowling Green near the foot of Manhattan island N to 262d St. in the Bronx. Throughout its length Broadway is chiefly a commercial street. Hotel, 145 West 44th Street, New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of , New York. The conference will begin at approximately 9:00 a.m. EST and conclude no later than 2:00 p.m. EST P.M. also p.m. or p.m. abbr. post meridiem Usage Note: By definition, 12 a.m. . For those unable to attend in person, the conference also will be accessible via Internet Internet Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the webcast and telephone conference call. To join the conference call, dial 719.457.2657 and enter the confirmation code 409235. For the webcast, please go to the Investor Relations Investor relations The process by which the corporation communicates with its investors. section of www.healthnet.com and click on the Investor Conference link. Anyone listening to the company's investor conference webcast or conference call will be presumed to have read Health Net's Annual Report on Form 10-K for the year ended December 31, 2003, Quarterly Reports on Form 10-Q for the first, second and third quarters ended March 31, 2004, June 30, 2004, and September 30, 2004, respectively, 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 7.3 million individuals in 27 states and the District of Columbia through group, individual, Medicare, Medicaid and TRICARE programs. Health Net's subsidiaries also offer managed health care products related to 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 and prescription drugs 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, , 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 Certain matters discussed in this release contain 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 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, trends in medical care ratios, 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 filed with the SEC and the risks discussed in the company's other periodic filings 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)
Third Fourth First
Quarter Quarter Quarter
Ended Ended Ended
September 30, December 31, March 31,
2003 2003 2004
REVENUES: --------------- -------------- --------------
Health plan services
premiums $2,300,807 $2,295,217 $2,404,355
Government contracts 482,276 464,214 503,948
Net investment income 17,777 14,212 15,201
Other income 15,863 5,989 1,248
--------------- -------------- --------------
Total revenues 2,816,723 2,779,632 2,924,752
--------------- -------------- --------------
EXPENSES:
Health plan services 1,890,408 1,876,274 2,107,087
Government contracts 464,295 448,162 480,905
General and
administrative 236,723 231,814 231,485
Selling 62,562 59,021 63,577
Depreciation 13,561 12,878 9,983
Amortization 669 767 606
Interest 9,763 9,841 8,438
--------------- -------------- --------------
2,677,981 2,638,757 2,902,081
Asset impairments - 16,409 (b) -
Severance and related
benefits - - -
(Gain) loss on sale of
businesses - (18,901)(c) (1,875)(d)
--------------- -------------- --------------
Total expenses 2,677,981 2,636,265 2,900,206
--------------- -------------- --------------
Income from continuing
operations before
income taxes 138,742 143,367 24,546
Income tax provision 51,930 54,018 9,534
--------------- -------------- --------------
Income from continuing
operations 86,812 89,349 15,012
Discontinued operations:
Loss on settlement from
disposition, net of tax (89,050)(a) - -
--------------- -------------- --------------
Net (loss) income $(2,238) $89,349 $15,012
=============== ============== ==============
Basic earnings (loss)
per share:
Income from continuing
operations $0.75 $0.79 $0.13
Loss on settlement from
disposition, net of tax (0.77) - -
--------------- -------------- --------------
Net $(0.02) $0.79 $0.13
=============== ============== ==============
Diluted earnings (loss)
per share:
Income from continuing
operations $0.74 $0.77 $0.13
Loss on settlement from
disposition, net of
tax (0.76) - -
--------------- -------------- --------------
Net $(0.02) $0.77 $0.13
=============== ============== ==============
Weighted average shares
outstanding:
Basic 115,122 113,515 112,600
Diluted 117,827 115,943 114,342
Ratios:
Health plan services MCR 82.2% 81.7% 87.6%
Government contracts
cost ratio 96.3% 96.5% 95.4%
Administrative ratio
((G&A+Dep) / (HP serv
rev + Other income)) 10.8% 10.6% 10.0%
Selling costs ratio
(Selling costs / HP
serv rev) 2.7% 2.6% 2.6%
Days claims payable 50.4 49.4 45.2
Second Third
Quarter Quarter
Ended Ended
June 30, September 30,
REVENUES: 2004 2004
-------------- -------------
Health plan services premiums $2,398,943 2,393,160
Government contracts 504,317 525,783
Net investment income 13,818 14,750
Other income 1,737 1,540
-------------- -------------
Total revenues 2,918,815 2,935,233
-------------- -------------
EXPENSES:
Health plan services 2,062,277 2,022,870
Government contracts 478,927 501,628
General and administrative 214,244 207,187
Selling 59,993 60,410
Depreciation 10,424 10,487
Amortization 606 789
Interest 7,304 8,044
-------------- -------------
2,833,775 2,811,415
Asset impairments - -
Severance and related benefits 17,402 (e) 5,172 (e)
(Gain) loss on sale of businesses - 400 (f)
-------------- -------------
Total expenses 2,851,177 2,816,987
-------------- -------------
Income from continuing operations before
income taxes 67,638 118,246
Income tax provision 26,272 46,391
-------------- -------------
Income from continuing operations 41,366 71,855
Discontinued operations:
Loss on settlement from disposition, net
of tax - -
-------------- -------------
Net (loss) income $41,366 $71,855
============== =============
Basic earnings (loss) per share:
Income from continuing operations $0.37 $0.64
Loss on settlement from disposition, net
of tax - -
-------------- -------------
Net $0.37 $0.64
============== =============
Diluted earnings (loss) per share:
Income from continuing operations $0.36 $0.64
Loss on settlement from disposition, net
of tax - -
-------------- -------------
Net $0.36 $0.64
============== =============
Weighted average shares outstanding:
Basic 112,574 111,440
Diluted 113,460 112,397
Ratios:
Health plan services MCR 86.0% 84.5%
Government contracts cost ratio 95.0% 95.4%
Administrative ratio ((G&A+Dep) / (HP
serv rev + Other income)) 9.4% 9.1%
Selling costs ratio (Selling costs / HP
serv rev) 2.5% 2.5%
Days claims payable 46.6 46.2
Health Net, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except ratio data)
September December March 31,
30, 2003 31, 2003 2004
------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $727,377 $860,871 $684,782
Investments - available for
sale 1,001,840 1,082,789 1,042,021
Premiums receivable, net 137,485 144,968 186,178
Amounts receivable under
government contracts 135,570 90,928 121,037
Incurred but not reported
(IBNR) health care costs
receivable under TRICARE
North contract - - -
Reinsurance and other
receivables 127,562 105,074 94,469
Deferred taxes 89,367 43,008 40,827
Other assets 80,963 84,842 92,404
------------------------------------
Total current assets 2,300,164 2,412,480 2,261,718
Property and equipment, net 198,848 190,900 186,700
Goodwill, net 762,066 729,506 723,595
Other intangible assets, net 20,524 19,918 19,313
Deferred taxes 21,289 44,769 41,409
Other noncurrent assets 148,067 151,703 214,894
------------------------------------
Total Assets $3,450,958 $3,549,276 $3,447,629
====================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities
Reserves for claims and other
settlements $990,333 $1,024,550 $1,069,247
Health care and other costs
payable under government
contracts 257,048 256,009 233,331
IBNR health care costs payable
under TRICARE North contract - - -
Unearned premiums 81,682 178,115 95,614
Accounts payable and other
liabilities 435,176 315,031 272,000
------------------------------------
Total current liabilities 1,764,239 1,773,705 1,670,192
Senior notes payable 398,928 398,963 406,603
Other noncurrent liabilities 65,893 82,383 78,958
------------------------------------
Total Liabilities 2,229,060 2,255,051 2,155,753
------------------------------------
Stockholders' Equity
Common stock and additional
paid-in capital 770,514 789,392 794,602
Restricted common stock 5,885 5,885 6,027
Unearned compensation (4,507) (3,995) (3,624)
Treasury common stock, at cost (517,064) (549,102) (577,484)
Retained earnings 962,427 1,051,776 1,066,788
Accumulated other
comprehensive income (loss) 4,643 269 5,567
------------------------------------
Total Stockholders' Equity 1,221,898 1,294,225 1,291,876
------------------------------------
Total Liabilities and
Stockholders' Equity $3,450,958 $3,549,276 $3,447,629
====================================
Debt-to-Total Capital Ratio 24.6% 23.6% 23.9%
June 30, September
2004 30, 2004
-----------------------
ASSETS
Current Assets
Cash and cash equivalents $467,565 $622,903
Investments - available for sale 1,153,222 1,082,969
Premiums receivable, net 151,619 118,201
Amounts receivable under government
contracts 128,960 136,335
Incurred but not reported
(IBNR) health care costs
receivable under TRICARE
North contract - 114,618
Reinsurance and other receivables 93,920 102,494
Deferred taxes 40,652 41,162
Other assets 103,907 99,578
-----------------------
Total current assets 2,139,845 2,318,260
Property and equipment, net 186,570 185,291
Goodwill, net 723,595 723,595
Other intangible assets, net 21,505 22,716
Deferred taxes 41,868 18,327
Other noncurrent assets 282,258 249,912
-----------------------
Total Assets $3,395,641 $3,518,101
=======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Reserves for claims and other settlements $1,042,831 $990,240
Health care and other costs payable under
government contracts 216,816 201,494
IBNR health care costs payable
under TRICARE North contract - 114,618
Unearned premiums 85,894 78,832
Accounts payable and other liabilities 254,453 296,782
-----------------------
Total current liabilities 1,599,994 1,681,966
Senior notes payable 384,220 401,750
Other noncurrent liabilities 95,243 81,657
-----------------------
Total Liabilities 2,079,457 2,165,373
-----------------------
Stockholders' Equity
Common stock and additional paid-in capital 798,432 805,426
Restricted common stock 5,855 6,483
Unearned compensation (3,121) (3,999)
Treasury common stock, at cost (580,634) (632,926)
Retained earnings 1,108,154 1,180,009
Accumulated other comprehensive income
(loss) (12,502) (2,265)
-----------------------
Total Stockholders' Equity 1,316,184 1,352,728
-----------------------
Total Liabilities and Stockholders' Equity $3,395,641 $3,518,101
=======================
Debt-to-Total Capital Ratio 22.6% 22.9%
Health Net, Inc.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
Third Fourth First Second Third
Quarter Quarter Quarter Quarter Quarter
Ended Ended Ended Ended Ended
Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
2003 2003 2004 2004 2004
-------------------------------------------------
CASH FLOWS FROM
OPERATING
ACTIVITIES:
Net (loss) income $(2,238) $89,349 $15,012 $41,366 $71,855
Adjustments to
reconcile net
(loss) income to
net cash provided
by (used in)
operating
activities:
Amortization and
depreciation 14,230 13,645 10,589 11,030 11,276
(Gain) loss on sale
of businesses - (18,901) (1,875) - 400
Asset impairments - 16,409 - - -
Other changes 1,351 270 (898) 1,518 546
Changes in assets
and liabilities,
net of the effects
of dispositions:
Premiums receivable
and unearned
premiums 54,531 87,769 (130,211) 24,839 26,356
Other assets 16,942 27,944 4,718 515 5,140
Amounts
receivable/payable
under government
contracts (22,475) 43,603 (52,787) (24,438) (22,697)
Reserves for claims
and other
settlements (89,415) 37,154 42,962 (26,416) (52,591)
Accounts payable
and other
liabilities 106,722 (117,256) (42,085) (15,900) 44,267
-------------------------------------------------
Net cash provided by
(used in) operating
activities 79,648 179,986 (154,575) 12,514 84,552
-------------------------------------------------
CASH FLOWS FROM
INVESTING
ACTIVITIES:
Sales of investments 127,622 32,243 125,015 65,320 79,438
Maturities of
investments 143,532 121,944 112,345 84,102 30,632
Purchases of
investments (306,732) (259,912) (186,289) (284,446) (22,774)
Purchases of
property and
equipment (13,891) (12,435) (5,853) (10,045) (9,178)
Cash received (paid)
from the sale of
businesses - 90,316 11,026 - (400)
Sales and purchases
of restricted
investments and
other 4,650 (4,685) (49,279) (84,552) 39,307
-------------------------------------------------
Net cash (used in)
provided by
investing
activities (44,819) (32,529) 6,965 (229,621) 117,025
-------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from
exercise of stock
options and
employee stock
purchases 7,414 12,798 4,785 3,040 6,053
Repurchases of
common stock (103,146) (26,761) (33,264) (3,150) (52,292)
Repayment of debt
and other
noncurrent
liabilities (16) - - - -
-------------------------------------------------
Net cash used in
financing
activities (95,748) (13,963) (28,479) (110) (46,239)
-------------------------------------------------
Net (decrease)
increase in cash
and cash
equivalents (60,919) 133,494 (176,089) (217,217) 155,338
Cash and cash
equivalents,
beginning of period 788,296 727,377 860,871 684,782 467,565
-------------------------------------------------
Cash and cash
equivalents, end of
period $727,377 $860,871 $684,782 $467,565 $622,903
=================================================
Health Net, Inc.
Notes to Condensed Consolidated Statements of Operations
Notes:
(a) Loss on settlement from disposition of discontinued operations of
$89.1 million, net of tax of $47.9 million, related to the
settlement of a lawsuit arising from our 1998 sale of certain of
our workers' compensation subsidiaries.
(b) Pretax impairment charges for buildings held for sale of $2.6
million and our investment in CSMS IPA connectivity services of
$13.8 million.
(c) Pretax $18.9 million gain on the sales of our Employers Services,
Dental and Vision subsidiaries.
(d) Pretax $1.9 million gain on the sales of our Subacute
subsidiaries.
(e) Pretax severance and related benefit costs of $22.6 million
(comprised of $17.4 million in Q2, $5.2 million in Q3) related to
our workforce reduction announced in May 2004.
(f) Pretax $0.4 million additional loss on the sale of our Florida
health plan resulting from the stock purchase and reinsurance
settlement agreements dated September 30, 2004.
HEALTH NET, INC.
Medical Covered Lives at September 30, 2004
(in Thousands)
------------------ ------------------ ------------------
Commercial - Commercial - Commercial Risk
Large Group(a) Small Group & Subtotal
Individual
--------------------------------------------------------
09/04 06/04 09/03 09/04 06/04 09/03 09/04 06/04 09/03
------------------ ------------------ ------------------
Arizona 74 71 68 55 54 50 129 125 118
California 1,130 1,170 1,150 489 515 518 1,619 1,685 1,668
Connecticut 194 200 213 43 44 47 238 244 260
New Jersey 109 122 144 123 135 150 232 257 294
New York 153 156 158 110 112 115 262 268 273
Oregon 100 95 87 33 33 22 133 128 109
Pennsylvania - - 17 - - - - - 17
------------------ ------------------ ------------------
Total 1,760 1,815 1,837 853 893 902 2,613 2,707 2,740
================== ================== ==================
Year over
Year (4)% (5)% (5)%
Sequential (3)% (4)% (3)%
------------------ ------------------ ------------------
------------------ ------------------
ASO Commercial
Subtotal
------------------ ------------------
09/04 06/04 09/03 09/04 06/04 09/03
------------------ ------------------
Arizona - - - 129 125 118
California 3 3 2 1,622 1,688 1,670
Connecticut 51 51 58 289 296 318
New Jersey 18 18 19 250 274 313
New York 7 6 10 269 274 283
Oregon 1 - - 134 128 109
Pennsylvania - - - - - 17
------------------ ------------------
Total 80 79 88 2,693 2,786 2,828
================== ==================
Year over Year (9)% (5)%
Sequential 2% (3)%
------------------ ------------------
------------------ ------------------ ------------------
Medicare Risk Medicaid Health Plan Total
------------------ ------------------ ------------------
09/04 06/04 09/03 09/04 06/04 09/03 09/04 06/04 09/03
------------------ ------------------ ------------------
Arizona 36 36 37 - - - 164 161 155
California 97 97 101 695 662 709 2,414 2,447 2,480
Connecticut 27 27 28 95 96 99 411 419 445
New Jersey - - - 43 44 47 293 318 360
New York 6 5 6 - - - 275 280 288
Oregon 6 5 0 - - - 140 133 109
Pennsylvania - - - - - - - - 17
------------------ ------------------ ------------------
Total 171 170 171 833 803 856 3,696 3,758 3,855
================== ================== ==================
Year over
Year (0)% (3)% (4)%
Sequential 1% 4% (2)%
------------------ ------------------ ------------------
-----------------------
09/04 06/04 09/03
-----------------------
TRICARE
Previous TRICARE Contracts(b) 642 1,477 1,484
North Contract(c) 2,929 - -
-----------------------
Total TRICARE 3,571 1,477 1,484
(a) Commercial Large Group includes Medicare Supplement
(b) Includes only CHAMPUS eligible for which we have health care risk
(c) Includes CHAMPUS eligible for which we have health care risk, and
those for which we provide Administrative Services Only (ASO),
primarily active duty
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