SIE Sierra Health Svcs

Sierra Health Services Inc. (NYSE:SIE) reported today that net income for the quarter ended Sept. 30, 2005, was $28.4 million or $0.87 per diluted share. This compares to net income for the quarter ended Sept. 30, 2004, of $30.7 million or $0.90 per diluted share. Operating income from the company's core managed care and corporate operations segment was $44.3 million for the quarter compared to $38.3 million for the same period in 2004, an increase of 16%. Operating income from the company's military health services operations segment was $163,000 for the quarter, compared to operating income of $10.4 million for the same period in 2004, when the segment was substantially operational. During the third quarter of 2005 and as previously reported in Form 8-K filings with the Securities and Exchange Commission, holders of $29.0 million of the company's convertible debentures opted to convert their holdings to approximately 1.6 million shares of Sierra common stock. These transactions resulted in a write-off of deferred debenture-related costs and incurred prepaid interest of approximately $1.2 million, or $0.02 per diluted share. During the quarter, Sierra also incurred expenses related to the launch of the Medicare Prescription Drug Plan (PDP) of approximately $1.3 million or $0.03 per diluted share. Sierra now expects to earn $3.55 per diluted share in 2005. In 2006, the company expects to earn between $3.80 and $4.00 per diluted share, inclusive of projected income from the PDP and compensation costs under Statement of Financial Accounting Standards 123R "Share-Based Payment," which becomes effective for the company on Jan. 1, 2006. Revenues for the quarter were $347.4 million, compared to $393.3 million for the same period in 2004. This decrease was due exclusively to the termination of the health care services of Sierra's military operations. Medical premium revenues for the quarter were $327.1 million, compared to $288.5 million for the same period in 2004, an increase of 13.4%. Revenues from professional fees and investment and other revenues, which includes income from the services provided to the company's sold workers' compensation operations, were $20.3 million for the quarter, compared to $18.8 million for the same period in 2004. In the third quarter, Sierra's medical care ratio increased 140 basis points to 76.8% from 75.4% for the third quarter of 2004. Sierra's medical claims payable balance increased to $127.0 million from $121.5 million at June 30, 2005. Days in claims payable, which is the medical claims payable balance divided by the average medical expenses per day for the period, were 45 days at Sept. 30, 2005, compared to 47 days for the same period in 2004 and 44 days sequentially. In the third quarter, as a percentage of medical premium revenue, general and administrative expenses were 13.3%, a 220 basis point improvement from 15.5% for the same period in 2004. Operating cash flow from continuing operations was $111.4 million for the quarter, compared to $16.2 million for the same period in 2004. The higher cash flow from operations for the quarter is primarily due to payments from the Centers for Medicare and Medicaid Services (CMS). During the quarter ended Sept. 30, 2005, the company received four monthly payments from CMS compared to three monthly payments from CMS in 2004. The company also received additional unearned revenue from CMS during the current quarter. Sierra's total external debt from continuing operations was $62.4 million, compared to $125.6 million at Sept. 30, 2004, and $81.5 million at June 30, 2005, and includes $52.0 million for the senior convertible debentures issued in March 2003 and $10.0 million drawn on the revolving credit facility. During the second and third quarters of 2005, holders of the debentures have converted $63.0 million of the debentures into shares of Sierra Common Stock. Sierra's debt to capital ratio is now just under 20%. During the quarter, the company purchased 1.4 million shares of its common stock for $93.6 million. Since the January 2003 inception of the board-authorized share repurchase program and through Sept. 30, 2005, the company has repurchased 10.9 million shares of its common stock for $377.7 million. In the third quarter of 2005, sequential membership in the company's HMO commercial market grew by 2.4% or nearly 5,900 lives. For the nine months ended Sept. 30, 2005, HMO commercial membership grew by 11.0% or nearly 25,000 lives. Sequentially, Medicare membership grew by 1% or 500 lives. For the nine months ended Sept. 30, 2005, Medicare membership grew by 3.6% or 1,900 lives. Approximately 97% of the company's Medicare members are enrolled in the Social HMO program, which provides higher federal reimbursement. In 2005, this program is subject to a 30% risk modifier, which increases to a 50% risk modifier in 2006. The Social HMO program is set to expire at the end of 2007 at which time the company will transition to a full Medicare Advantage payment methodology, beginning in 2008. In the third quarter, Medicaid membership grew 2.5% or 1,300 lives. For the nine months ended Sept. 30, 2005, Medicaid membership grew 5.5% or 2,800 lives. "Our performance to date clearly indicates that 2005 will be another successful year for Sierra," said Anthony M. Marlon, M.D., chairman and chief executive officer. "The growth in our core commercial market has already surpassed our most optimistic projections for the year while our medical care ratio continues to remain among the best in the industry." In late September, Sierra announced that its wholly owned subsidiaries, Sierra Health and Life Insurance Co. Inc. (SHL) and Health Plan of Nevada (HPN), had been selected by CMS to participate for 2006 in the stand-alone PDP, Medicare Advantage HMO, and local and regional PPO programs. SHL will offer a stand-alone PDP in 10 western states, including Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and Washington. SHL has also been selected as a PDP sponsor in the same states for dual-eligible Medicare and Medicaid beneficiaries who will be auto enrolled into the program. SHL will also offer a regional PPO throughout Nevada and a local PPO in Nevada as well as three counties in Arizona and seven counties in Utah. HPN will continue to offer its Medicare Advantage HMO in several counties in Nevada. Based on its selection as an auto enroll provider in 10 states, Sierra currently projects it will receive more than 130,000 dually eligible members through auto assignment and approximately 200,000 total PDP members in 2006. Sierra Health Services Inc., based in Las Vegas, is a diversified health care services company that operates health maintenance organizations, indemnity insurers, preferred provider organizations and multispecialty medical groups. Sierra's subsidiaries serve more than 600,000 people through health benefit plans for employers, government programs and individuals. For more information, visit the company's Web site at www.sierrahealth.com. Statements in this news release that are not historical facts are forward looking and based on management's projections, assumptions and estimates; actual results may vary materially. Forward-looking statements are subject to certain risks and uncertainties, which include but are not limited to: 1) potential adverse changes in government regulations, contracts and programs, including Medicare, Medicaid and legislative proposals to eliminate or reduce ERISA pre-emption of state laws that would increase potential managed care litigation exposure; 2) competitive forces that may affect pricing, enrollment, renewals and benefit levels; 3) unpredictable medical costs, malpractice exposure, reinsurance costs and inflation; 4) impact of economic conditions; 5) changes in health care reserves; and 6) the amount of actual proceeds to be realized from the note receivable related to the sale of the workers' compensation insurance operation. Further factors concerning financial risks and results may be found in documents filed with the Securities and Exchange Commission and which are incorporated herein by reference. Consequently, all of the forward-looking statements made in this press release are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by Sierra will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, Sierra or its business or operations. Sierra assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise. -0- *T SIERRA HEALTH SERVICES INC. AND SUBSIDIAIRES Earnings Report (In thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended Sept. 30, Sept. 30, ------------------ -------------------- 2005 2004 2005 2004 -------- -------- ---------- --------- Medical premiums $327,084 $288,485 $958,834 $834,584 Military contract revenues 11 85,983 16,322 354,312 Professional fees 11,133 8,705 31,102 26,268 Investment and other revenues 9,215 10,117 25,071 27,641 --------- --------- ---------- --------- Total Revenues 347,443 393,290 1,031,329 1,242,805 --------- --------- ---------- --------- Medical expenses 259,591 224,132 755,779 650,435 Medical Care Ratio 76.8% 75.4% 76.3% 75.6% (Medical expenses/premiums and professional fees) Military contract expenses (108) 75,830 2,265 313,047 General and administrative expenses 43,451 44,593 127,082 126,914 --------- --------- ---------- --------- Operating Income From Continuing Operations 44,509 48,735 146,203 152,409 Interest expense (1,991) (1,221) (7,971) (3,561) Other income (expense), net 427 (49) 828 41 --------- --------- ---------- --------- Income From Continuing Operations Before Income Taxes 42,945 47,465 139,060 148,889 Provision for income taxes (14,503) (16,738) (47,377) (53,430) --------- --------- ---------- --------- Income From Continuing Operations 28,442 30,727 91,683 95,459 Loss from discontinued operations - - - (682) --------- --------- ---------- --------- Net Income $28,442 $30,727 $91,683 $94,777 ========= ========= ========== ========= Earnings Per Common Share: -------------------------- Income from continuing operations $1.00 $1.16 $3.34 $3.57 Loss from discontinued operations - - - (0.03) --------- --------- ---------- --------- Net Income $1.00 $1.16 $3.34 $3.54 ========= ========= ========== ========= Earnings Per Common Share Assuming Dilution: ------------------------- Income from continuing operations $0.87 $0.90 $2.75 $2.76 Loss from discontinued operations - - - (0.02) --------- --------- ---------- --------- Net Income $0.87 $0.90 $2.75 $2.74 ========= ========= ========== ========= Weighted average common shares outstanding 28,385 26,498 27,409 26,767 Weighted average common shares outstanding assuming dilution 33,122 34,454 33,696 35,032 PERIOD END MEMBERSHIP At Sept. 30, --------------------- 2005 2004 ---------- -------- HMO Commercial 251,000 222,200 Medicare 55,200 53,000 Medicaid 53,300 49,100 Managed indemnity 27,000 25,600 Medicare supplement 15,900 16,600 Administrative services 202,000 186,600 ---------- -------- Total Members 604,400 553,100 ========== ======== SIERRA HEALTH SERVICES INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands) (Unaudited) Sept. 30, Dec. 31, 2005 2004 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents $88,517 $207,619 Investments 303,056 147,575 Accounts receivable 18,384 15,150 Military accounts receivable 665 25,452 Current portion of deferred tax asset 22,414 17,555 Prepaid expenses and other current assets 29,517 36,123 --------- --------- Total Current Assets 462,553 449,474 Property and equipment, net 68,439 71,152 Restricted cash and investments 17,248 21,853 Goodwill 14,782 14,782 Deferred tax asset (less current portion) 12,656 13,275 Note receivable 47,000 47,000 Other assets 68,307 72,244 --------- --------- Total Assets $690,985 $689,780 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accrued and other current liabilities $70,868 $76,256 Trade accounts payable 3,016 7,123 Accrued payroll and taxes 23,527 27,668 Medical claims payable 127,032 119,337 Unearned premium revenue 91,274 50,763 Military health care payable - 17,061 Current portion of long- term debt 104 100 --------- --------- Total Current Liabilities 315,821 298,308 Long-term debt (less current portion) 62,335 125,395 Other liabilities 59,995 64,380 --------- --------- Total Liabilities 438,151 488,083 --------- --------- Commitments and contingencies Stockholders' Equity: Common stock 200 178 Treasury stock (373,566) (237,876) Additional paid-in capital 389,974 286,571 Deferred compensation (1,739) (288) Accumulated other comprehensive loss (1,304) (245) Retained earnings 239,269 153,357 --------- --------- Total Stockholders' Equity 252,834 201,697 --------- --------- Total Liabilities And Stockholders' Equity $690,985 $689,780 ========= ========= SIERRA HEALTH SERVICES INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Nine Months Ended Sept. 30, --------------------------- 2005 2004 ---------- --------- Cash Flows From Operating Activities: Net Income $91,683 $94,777 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Loss from discontinued operations - 682 Depreciation 11,167 12,372 Other adjustments 6,918 5,549 Unearned premium revenue 40,511 (28,386) Changes in other assets and liabilities 2,666 10,011 ---------- ---------- Net Cash Provided By Operating Activities Of Continuing Operations 152,945 95,005 ---------- ---------- Cash Flows From Investing Activities: Capital expenditures, net of dispositions (8,566) (16,767) (Purchase of) proceeds from investments, net (138,572) 76,682 ---------- ---------- Net Cash (Used For) Provided By Investing Activities Of Continuing Operations (147,138) 59,915 ---------- ---------- Cash Flows From Financing Activities: Payments on debt and capital leases (10,075) (1,544) Proceeds from other long-term debt 10,000 10,000 Purchase of treasury stock (144,421) (112,277) Exercise of stock in connection with stock plans 19,587 22,686 ---------- ---------- Net Cash Used For Financing Activities Of Continuing Operations (124,909) (81,135) ---------- ---------- Net cash provided by discontinued operations - 3,720 ---------- ---------- Net (Decrease) Increase In Cash And Cash Equivalents (119,102) 77,505 Cash And Cash Equivalents At Beginning Of Period 207,619 118,520 ---------- ---------- Cash And Cash Equivalents At End Of Period $88,517 $196,025 ========== ========== *T