PacifiCare Health Systems Announces 2nd Quarter 2005 Results

CYPRESS, Calif., July 28 /PRNewswire-FirstCall/ -- PacifiCare Health Systems, Inc. , today announced that reported net income for the second quarter ended June 30, 2005 was $92.6 million, or $0.96 per diluted share. This compares with reported net income of $76 million, or $0.80 per diluted share, for the second quarter of 2004.

"We are very pleased with the year-over-year increase in our earnings, which were ahead of consensus expectations even after including approximately $7.6 million, or 5 cents per share, in costs related to our Medicare Part D readiness and $4 million, or 3 cents per share, in out-of-pocket costs related to our previously announced agreement to merge with UnitedHealth Group," said Chairman and Chief Executive Officer Howard Phanstiel. "This earnings improvement was driven by higher senior membership, higher commercial membership and a 310 basis point decrease in the commercial medical loss ratio."

Revenue and Membership

Second quarter 2005 total operating revenue of $3.6 billion was 18% higher than the same quarter a year ago. Total commercial revenue rose 19%, driven by a 6% rise in premiums per member per month (PMPM) and 15% growth in fully insured and ASO membership, including the acquisitions of American Medical Security Group (AMS) and the group health business of Pacific Life Insurance Company. Senior revenue grew 14% over the second quarter of last year, primarily as the result of a premium increase of 7% PMPM and a 6% rise in membership.

Specialty and Other revenue grew 35% over the second quarter last year, primarily as the result of a 24% rise in retail service contract and mail order fulfillment revenues at PacifiCare's pharmacy benefit management company and membership growth at both the behavioral health and dental and vision subsidiaries.

Health Care Costs

The private sector commercial medical loss ratio (MLR) in the second quarter improved 310 basis points from the prior year, to 81.2%. This improvement was driven primarily by business mix changes resulting from the AMS and Pacific Life transactions, but also included an 80 basis point reduction in the MLR related to same-store membership.

The government sector senior MLR was up 110 basis points year-over-year, to 87.5%, primarily as the result of benefit increases intended to grow Medicare Advantage membership. However, the second quarter MLR was at the low end of the company's previously issued 2005 full-year guidance of 87.5% to 88.5%.

The consolidated MLR of 84.1% was 100 basis points lower than the second quarter of the prior year.

Selling, General & Administrative Expenses

The SG&A expense ratio of 13.4% in the second quarter of 2005 was 110 basis points higher than the second quarter of 2004 and 20 basis points higher sequentially. The year-over-year increase was primarily a result of changes in business mix related to the acquired AMS and Pacific Life business, as well as $4 million in costs incurred in connection with the pending merger with UnitedHealth Group and the company's preparations to administer the new Medicare Part D benefit. The sequential increase is primarily attributable to the costs related to the pending merger with UnitedHealth Group, increased Medicare Part D readiness costs and the impact of a higher SG&A ratio associated with the acquired Pacific Life membership.

Other Financial Data

Medical claims and benefits payable (MCBP) totaled approximately $1.25 billion at June 30, 2005, which was an increase of approximately $48 million from the prior quarter. The IBNR component of MCBP increased by approximately $29 million sequentially.

Days claims payable for the second quarter compared to the prior quarter increased slightly to 38.8 days from 38.2 days. However, after excluding the non-risk, capitated portion of the company's business, as well as other non-claim related liabilities, days claims payable decreased from 68.3 to 66.7 days.

Cash flow from operations in the second quarter of 2005 was $14 million. This includes the effect of certain large items in the quarter, including tax payments totaling more than $115 million. Additionally, accounts receivable increased due to the timing of premiums received in connection with the coinsurance arrangement related to the Pacific Life acquisition, and an increasing receivable balance from the Centers for Medicare and Medicaid Services for accrued revenue that is expected to be received in September.

Conference Call, Webcast and Website Information

PacifiCare will host a conference call and webcast on Thursday, July 28, 2005 at 8:00 AM Pacific time, 11:00 AM Eastern, to discuss this release in further detail. Interested parties can access the live conference by dialing (877) 601-3546, password "PacifiCare". A replay of the call will be available through August 19, 2005 at (866) 454-9173, and for international callers at (203) 369-1257. Additionally, a live webcast of the call will be available at http://www.pacificare.com/. Click on Investor Relations, and then Conference Calls to access the link. In accordance with Regulation G, a reconciliation of GAAP results to any non-GAAP measurements referred to in this release and during the conference call will be posted with the earnings press release on our website.

Risk Factors Regarding Forward-Looking Statements

The statements in this news release that are not historical facts are forward-looking statements within the meaning of the Federal securities laws, and may involve a number of risks and uncertainties. Such forward-looking statements include, but are not limited, to the company's expectations regarding financial results, including earnings, for the full-year 2005. Important factors that could cause results to differ materially from those expected by management include, but are not limited to, failure to implement programs to achieve expected membership, revenue or earnings targets as a result of premium or benefit adjustments; the inability to execute cost control strategies, including medical management programs; actual medical claims differing from current estimates; inability to maintain required capital levels at the company's regulated subsidiaries; inability to maintain profitability and growth at the company's specialty businesses; provider contractual or financial problems or bankruptcy; unexpected increases in competition; new regulations or laws relating to capitation; Medicare reimbursements, benefit mandates, service, utilization management, provider contracts and similar matters; and the inability to comply with existing bank covenants. Additional information on factors, risks, and uncertainties that could potentially affect our financial results may be found in documents filed with the Securities and Exchange Commission.

PacifiCare Health Systems is one of the nation's largest consumer health organizations with approximately 3.3 million health plan members and approximately 11.3 million specialty plan members nationwide. PacifiCare offers individuals, employers and Medicare beneficiaries a variety of consumer-driven health care and life insurance products. Specialty plan operations include behavioral health, dental and vision, and complete pharmacy benefit management through its wholly owned subsidiary, Prescription Solutions. More information on PacifiCare Health Systems is available at http://www.pacificare.com/.

PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, (In thousands, except per-share amounts) 2005 2004 2005 2004 Revenue: Commercial $1,678,717 $1,413,587 $3,245,049 $2,799,905 Senior 1,637,775 1,441,187 3,257,480 2,851,300 Specialty and other 230,454 170,845 452,148 320,692 Net investment income 34,510 21,829 62,402 39,674 Total operating revenue 3,581,456 3,047,448 7,017,079 6,011,571 Expenses: Health care services and other: Commercial 1,367,917 1,198,216 2,656,317 2,366,779 Senior 1,431,195 1,248,111 2,840,136 2,473,072 Specialty and other 137,421 93,420 269,753 174,492 Total health care services and other 2,936,533 2,539,747 5,766,206 5,014,343 Selling, general and administrative expenses 475,729 372,423 924,860 741,475 Operating income 169,194 135,278 326,013 255,753 Interest expense, net (18,729) (10,853) (35,506) (21,670) Income before income taxes 150,465 124,425 290,507 234,083 Provision for income taxes 57,888 48,401 112,224 91,058 Net income $92,577 $76,024 $178,283 $143,025 Weighted average common shares outstanding used to calculate basic earnings per share 86,413 84,933 86,152 84,602 Basic earnings per share $1.07 $0.90 $2.07 $1.69 Weighted average common shares and equivalents outstanding used to calculate diluted earnings per share 97,253 96,132 97,130 95,849 Diluted earnings per share $0.96 $0.80 $1.85 $1.51 OPERATING STATISTICS Medical loss ratio: Consolidated 84.1% 85.1% 84.2% 85.1% Private - Commercial 81.2% 84.3% 81.5% 83.9% Private - Senior 69.5% 64.9% 76.1% 73.8% Private - Consolidated 81.0% 83.9% 81.4% 83.8% Government - Senior 87.5% 86.4% 87.2% 86.5% Government - Consolidated 87.5% 86.4% 87.2% 86.5% Selling, general and administrative expenses as a percentage of operating revenue (excluding net investment income) 13.4% 12.3% 13.3% 12.4% Operating income as a percentage of operating revenue 4.7% 4.4% 4.6% 4.3% Effective tax rate 38.5% 38.9% 38.6% 38.9% PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended Six Months Ended June 30, June 30, (In thousands) 2005 2004 2005 2004 Operating activities: Net income $92,577 $76,024 $178,283 $143,025 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 15,473 12,705 30,606 24,721 Deferred income taxes (36,838) 31,806 (25,772) 34,021 Tax benefit realized for stock option exercises 9,218 3,553 21,491 13,364 Stock-based compensation expense 8,915 10,925 15,979 20,377 Amortization of intangible assets 5,276 4,947 10,857 9,893 Amortization of notes receivable from sale of fixed assets (1,330) (1,391) (2,626) (2,751) Amortization of capitalized loan fees 1,042 1,078 2,076 2,155 Provision for (recovery on) doubtful accounts 229 44 (1,064) (1,176) Amortization of discount on 10 3/4% senior notes 377 71 448 142 Loss (gain) on disposal of property, plant and equipment and other (210) 219 99 424 Changes in assets and liabilities, net of effects of acquisitions: Receivables, net (70,370) (3,827) (84,342) (51,200) Prepaid expenses and other assets 11,249 1,772 7,033 (10,843) Medical claims and benefits payable 33,202 (23,800) 43,102 53,200 Accounts payable and accrued liabilities: Accrued taxes (35,913) (40,286) (18,075) (8,046) Other changes in accounts payable and accrued liabilities (15,597) (32,053) (38,183) (21,768) Unearned premium revenue (3,179) (16,525) 2,393 (398,307) Net cash flows provided by (used in) operating activities 14,121 25,262 142,305 (192,769) Investing activities: Purchase of marketable securities, net (48,139) (52,296) (147,822) (110,985) Acquisitions, net of cash acquired (47,389) -- (54,746) -- Sale (purchase) of marketable securities - restricted (41,373) (2,327) (41,905) 26,863 Purchase of property, plant and equipment (16,968) (13,031) (31,971) (27,272) Proceeds from the sale of property, plant and equipment 2,452 -- 2,452 -- Net cash flows used in investing activities (151,417) (67,654) (273,992) (111,394) Financing activities: Proceeds from issuance of common stock 8,685 9,830 19,377 31,076 Principal payments on long-term debt (8,726) (457) (17,439) (948) Purchase and retirement of common stock (1,174) (38,030) (13,845) (40,542) Adjustment to fair value of 10 3/4% senior notes (7,487) -- (7,487) -- Payments on software financing agreements (1,372) (1,448) (2,728) (4,053) Net cash flows used in financing activities (10,074) (30,105) (22,122) (14,467) Net decrease in cash and equivalents (147,370) (72,497) (153,809) (318,630) Beginning cash and equivalents 817,665 952,289 824,104 1,198,422 Ending cash and equivalents $670,295 $879,792 $670,295 $879,792 PACIFICARE HEALTH SYSTEMS, INC. BALANCE SHEET DATA (Unaudited) June 30, December 31, June 30, (in thousands) 2005 2004 2004 Assets: Cash, equivalents and marketable securities $2,744,372 $2,760,869 $2,316,405 Receivables, net 405,394 317,362 313,770 Property, plant and equipment, net 230,198 226,594 151,534 Goodwill and intangible assets, net 1,565,299 1,505,799 1,194,319 Other assets 482,731 416,293 395,003 Total assets $5,427,994 $5,226,917 $4,371,031 Liabilities and stockholders' equity: Total medical claims and benefits payable $1,250,700 $1,192,400 $1,080,700 Current portion of long-term debt 35,146 37,534 6,142 Long-term debt 1,026,702 1,051,520 609,195 Other liabilities 709,544 757,025 673,823 Total stockholders' equity 2,405,902 2,188,438 2,001,171 Total liabilities and stockholders' equity $5,427,994 $5,226,917 $4,371,031 MEMBERSHIP DATA June 30, December 31, June 30, 2005 2004 2004 Total Membership: Commercial: HMO 1,758,200 1,927,900 1,963,000 PPO and indemnity 746,200 582,500 279,500 Employer self-funded 106,300 82,600 27,500 2,610,700 2,593,000 2,270,000 Senior: Medicare Advantage 721,700 704,700 689,600 Medicare Supplement 40,000 36,200 32,800 CMS Disease Management 4,200 2,500 -- 765,900 743,400 722,400 Total membership 3,376,600 3,336,400 2,992,400 Specialty Membership: Pharmacy benefit management (A) 5,502,900 5,588,700 5,545,100 Behavioral health (B) 4,626,200 3,813,600 3,752,600 Dental and vision (B) 1,183,300 1,040,500 809,000 (A) Pharmacy benefit management membership includes PacifiCare members that are in our Commercial, Medicare Advantage, Medicare Supplement or CMS Disease Management plans, excluding members covered under other PBM contracts. All of these members either have a prescription drug benefit or are able to purchase their prescriptions utilizing our retail network contracts or our mail service. (B) Behavioral health, dental and vision membership includes PacifiCare members in our Commercial, Medicare Advantage or Medicare Supplement plans that are also enrolled in our behavioral health, dental and/or vision plans. PacifiCare Health Systems, Inc. Guidance Metrics (Unaudited) Commercial Membership Growth* 1.5%-2.5% Medicare Advantage Ending Members* 745,000 Revenue Increase 17.5%-18.5% MLRs Consolidated 84%-85% Private - Commercial 81%-82% Private - Senior 73%-74% Government - Senior 87.5%-88.5% Gross Margins Commercial 18%-19% Senior 11.5%-12.5% Specialty and Other* 39%-40% EBITDA $750 - $775 million Cash Flow from Operations (CFFO) $500 - $525 million Free Cash Flow $320 - $335 million SG&A Ratio* 13%-13.5% Depreciation/Amortization $89 million Capital Expenditures $130 - $135 million Net Income $365 - $380 million Average Outstanding Shares 98.8 million EPS, Full Year $3.70 - $3.85 EPS, 3rd Quarter*, ** $1.01 - $1.06 Tax Rate 38.8% * Indicates change or addition since last issuance on April 28, 2005. ** Excludes anticipated Part D stand-alone administrative expenses.