Sierra Health Services Inc. (NYSE:SIE) 2nd Quarter Highlights --
Year-to-Date Commercial Membership Up 4.5% -- Year-to-Date Medicare
Advantage Membership Up 3.4% -- Medical Premium Revenues Up 25%
From Q2 2005 -- Pre-Tax Income from Core Managed Care Operations Up
Over 26% From Q2 2005 -- Year-to-Date Earnings Per Share Up 12%
Sierra Health Services Inc. (NYSE:SIE) reported today that net
income for the quarter ended June 30, 2006 was $33.5 million or
$0.54 per diluted share, compared to $33.8 million or $0.51 per
diluted share for the same period in 2005, an earnings per share
increase of 6%. Included in the second quarter of 2005 was $12.0
million in operating income from the company's expired military
health services operations segment. Pre-tax income from the
company's core managed care and corporate operations segment was
$51.5 million, compared to $40.7 million for the second quarter of
2005, an increase of over 26%. Total revenues for the quarter were
$424.4 million, compared to $348.0 million for the same period in
2005, an increase of 22%. Medical premium revenues were $400.7
million, compared to $320.4 million for the same period in 2005, an
increase of 25%. In the second quarter, Sierra's medical care ratio
was 77.8%, a 180 basis point increase from the 76.0% reported in
the same period in 2005 and a 90 basis point sequential decrease
from the 78.7% reported in the first quarter of 2006. The
year-over-year increase in the medical care ratio is primarily due
to the impact of medical expenses related to the Medicare Part D
Prescription Drug Program (PDP). In the second quarter, this
program had a medical care ratio of 83.9%, down significantly from
the 97.5% reported in the first quarter of 2006. Exclusive of the
PDP, the company's medical care ratio was 76.9%, a 90 basis point
increase from the 76.0% reported in the same period in 2005. The
company believes that reflecting the medical care ratio excluding
the effects of the PDP provides a more comparable measure of this
ratio to its historical results. Sierra's medical claims payable
balance decreased to $148.0 million at June 30, 2006, compared to
$162.3 million at March 31, 2006. Days in claims payable, which is
the medical claims payable balance divided by the average medical
expenses per day for the period, were 42 days for the second
quarter of 2006, compared to 44 days for the same period in 2005
and 43 days sequentially. The decrease in days in claims payable is
due to the shorter payment cycle associated with the pharmacy
claims related to the PDP. As a percentage of premium revenue,
general and administrative expenses for the second quarter of 2006
improved 60 basis points to 12.6% from 13.2% for the same period in
2005. Cash flow from operations for the six months ended June 30,
2006, was $140.1 million, which includes seven months of payments
from the Centers for Medicare and Medicaid Services (CMS). Adjusted
for the timing of payments from CMS, cash flow from operations for
the six-month period was $59.5 million. Cash flow from operations
was $10.5 million for the quarter, compared to $16.0 million for
the same period in 2005. The decrease in cash from operations for
the second quarter was primarily due to the timing of payments for
the Medicare PDP and the impact of the change in cash flow
presentation of the tax benefit for stock based compensation.
During the quarter, Sierra purchased 923,000 shares of its common
stock in the open market for $36.6 million, at an average price of
$39.72. Since January 2006, the company has repurchased 3.1 million
shares for $127.8 million, at an average price of $40.91. The
current available and authorized balance for future share
repurchases is $64.4 million. In the second quarter of 2006, the
company's core commercial HMO membership grew by 1.8%, or 4,800
lives. For the first six months of the year, commercial membership
grew by 4.5%, or 11,400 lives. In the quarter, Medicare Advantage
membership, which includes both HMO and PPO membership, grew by
1.6%, or 900 lives. For the first six months of the year, Medicare
Advantage membership grew by 3.4%, or 1,900 lives. Sierra's
Medicare PDP membership was 180,300 at June 30, 2006. Of this
amount, approximately 90% were auto-enrolled as dual eligible
members. Medicaid membership increased 3.1% or 1,700 lives in the
second quarter. "As we move through 2006, we remain confident that
we will meet our initial projections for enrollment growth and
earnings," said Anthony M. Marlon, M.D., chairman, president and
chief executive officer of Sierra. "The continued growth dynamics
of the commercial market in Nevada, combined with our recent
re-selection as one of the state's Medicaid managed care plans,
bode well for another successful year." Sierra had previously
announced that it expected to earn between $2.05 and $2.15 per
fully diluted share for the year 2006. The company now expects to
earn between $2.10 and $2.18 per fully diluted share for 2006.
Sierra will host a conference call with investors, analysts and the
general public on Wednesday, July 26 at noon (Eastern time).
Interested parties can access the call by dialing 888-988-9162
(using the passcode: EARNINGS). Listeners may also access the call
free over the Internet by visiting the investors page of Sierra's
Web site at www.sierrahealth.com. Sierra Health Services Inc.,
based in Las Vegas, is a diversified healthcare services company
that operates health maintenance organizations, indemnity insurers,
preferred provider organizations, prescription drug plans and
multispecialty medical groups. Sierra's subsidiaries serve more
than 800,000 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 the Medicare
Advantage program, the Medicare Prescription Drug Plan and any
potential reconciliation issues, Medicaid and legislative proposals
to eliminate or reduce ERISA pre-emption of state laws that would
increase potential managed care litigation exposure; 2) a
competitor's successful bid protest of the recently awarded
Medicaid contract with the state of Nevada; 3) competitive forces
that may affect pricing, enrollment, renewals and benefit levels;
4) unpredictable medical costs, malpractice exposure, reinsurance
costs and inflation; 5) impact of economic conditions; 6) changes
in healthcare reserves; and 7) 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 SUBSIDIARIES Earnings Report (In thousands,
except per share data) (Unaudited) Three Months Ended Six Months
Ended June 30, June 30, ------------------- -------------------
2006 2005 2006 2005 --------- -------- --------- --------- Medical
premiums $400,664 $320,395 $ 815,108 $ 631,750 Military contract
revenues -- 9,952 -- 16,311 Professional fees 12,882 10,116 25,797
19,969 Investment and other revenues 10,892 7,564 21,781 15,856
--------- --------- --------- --------- Total revenues 424,438
348,027 862,686 683,886 --------- --------- --------- ---------
Medical expenses 321,545 251,233 658,064 496,188 Medical care ratio
77.8% 76.0% 78.3% 76.1% (Medical expenses/premiums and professional
fees) Military contract expenses -- (1,734) 138 2,373 General and
administrative expenses 50,422 42,158 101,623 83,631 ---------
--------- --------- --------- Operating income 52,471 56,370
102,861 101,694 Interest expense (1,002) (4,349) (1,778) (5,980)
Other income (expense), net 9 302 (24) 401 --------- ---------
--------- --------- Income before income taxes 51,478 52,323
101,059 96,115 Provision for income taxes (17,944) (18,487)
(34,854) (32,874) --------- --------- --------- --------- Net
income $ 33,534 $ 33,836 $ 66,205 $ 63,241 ========= =========
========= ========= Net income per common share $ 0.60 $ 0.62 $
1.16 $ 1.18 Net income per common share assuming dilution $ 0.54 $
0.51 $ 1.05 $ 0.94 Weighted average common shares outstanding
56,074 54,398 56,896 53,824 Weighted average common shares
outstanding assuming dilution 62,597 67,782 63,525 68,016 PERIOD
END MEMBERSHIP Number of Members at June 30, -------------------
2006 2005 --------- --------- HMO: Commercial 265,600 245,100
Medicare 56,900 54,700 Medicaid 56,700 52,000 PPO: Commercial
29,800 27,400 Medicare 1,300 -- Medicare Part D 180,300 -- Medicare
supplement 14,000 16,100 Administrative services 219,700 190,400
--------- --------- Total membership 824,300 585,700 =========
========= SIERRA HEALTH SERVICES INC. AND SUBSIDIARIES Condensed
Consolidated Balance Sheets (In thousands) (Unaudited) June 30,
Dec. 31, 2006 2005 --------- --------- ASSETS Current assets: Cash
and cash equivalents $ 96,855 $ 88,059 Investments 284,945 281,250
Accounts receivable 13,940 14,501 Current portion of deferred tax
asset 27,576 23,949 Prepaid expenses and other current assets
64,481 30,596 --------- --------- Total current assets 487,797
438,355 Property and equipment, net 71,149 71,357 Restricted cash
and investments 18,080 18,252 Goodwill 14,782 14,782 Deferred tax
asset (less current portion) 13,978 13,266 Note receivable 47,000
47,000 Other assets 101,319 65,834 --------- --------- Total assets
$ 754,105 $ 668,846 ========= ========= LIABILITIES AND
STOCKHOLDERS' EQUITY Current liabilities: Accrued and other current
liabilities $ 81,496 $ 58,238 Trade accounts payable 1,873 2,347
Accrued payroll and taxes 26,562 21,469 Medical claims payable
147,964 135,867 Unearned premium revenue 114,157 49,067 Current
portion of long-term debt 110 106 --------- --------- Total current
liabilities 372,162 267,094 Long-term debt (less current portion)
71,750 52,307 Other liabilities 65,120 65,193 --------- ---------
Total liabilities 509,032 384,594 --------- --------- Commitments
and contingencies Stockholders' equity: Common stock 349 346
Treasury stock (489,366) (377,190) Additional paid-in capital
420,768 400,287 Accumulated other comprehensive loss (3,875)
(1,750) Retained earnings 317,197 262,559 --------- --------- Total
stockholders' equity 245,073 284,252 --------- --------- Total
liabilities and stockholders' equity $ 754,105 $ 668,846 =========
========= SIERRA HEALTH SERVICES INC. AND SUBSIDIARIES Condensed
Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Six Months Ended June 30, ------------------- 2006 2005 ---------
--------- Cash flows from operating activities: Net income $ 66,205
$ 63,241 Adjustments to reconcile net income to net cash provided
by operating activities: Depreciation 8,239 7,496 Excess tax
benefits from share-based payment arrangements (10,260) -- Other
adjustments 4,393 4,780 Other current assets (34,485) 7,558 Medical
claims payable 12,097 2,184 Other current liabilities 20,255
(18,441) Unearned premium revenue 65,090 (34,562) Changes in other
assets and liabilities 8,563 9,334 --------- --------- Net cash
provided by operating activities 140,097 41,590 --------- ---------
Cash flows from investing activities: Capital expenditures, net of
dispositions (8,179) (5,952) Purchase of investments, net of
proceeds (36,268) (83,232) --------- --------- Net cash used for
investing activities (44,447) (89,184) --------- --------- Cash
flows from financing activities: Payments on debt and capital
leases (53) (10,053) Proceeds from other long-term debt 20,000 --
Purchase of treasury stock (127,780) (50,864) Excess tax benefits
from share-based payment arrangements 10,260 -- Exercise of stock
in connection with stock plans 10,719 13,314 --------- ---------
Net cash used for financing activities (86,854) (47,603) ---------
--------- Net increase (decrease) in cash and cash equivalents
8,796 (95,197) Cash and cash equivalents at beginning of period
88,059 207,619 --------- --------- Cash and cash equivalents at end
of period $ 96,855 $112,422 ========= ========= *T Reconciliation
of Non-GAAP Financial Measures Operating Cash Flow In this press
release, the company presented operating cash flow, adjusted for
the timing of payments from the Centers for Medicare and Medicaid
Services (CMS). These are non-GAAP financial measures. The company
received seven months of payments from CMS in the first six months
of 2006 as the July CMS payments were received at the end of June.
The company received five months of payments from CMS in the first
six months of 2005 as the January CMS payments were received at the
end of December 2004. The company believes that reflecting six
months of CMS payments provides a more useful measure of cash
provided by operations during the six-month period. The following
is a reconciliation to the most directly comparable GAAP financial
measure: -0- *T Six Months Ended June 30, 2006 2005 ---------
--------- GAAP net cash provided by operating activities $ 140,097
$ 41,590 Add: January CMS payments received in December -- 40,845
Less: July CMS payments received in June (80,616) -- ---------
--------- Cash flow from operations adjusted for the timing of
payments from CMS $ 59,481 $ 82,435 ========= ========= *T Medical
Care Ratio In this press release, the company presented the medical
care ratio, excluding the effects of the Medicare Part D
prescription drug program (PDP). This is a non-GAAP financial
measure. The company believes that reflecting the ratio excluding
the effects of the PDP provides a more comparable measure of its
medical care ratio to its historical results. The following is a
reconciliation to the most directly comparable GAAP financial
measure: -0- *T Three Months Ended June 30, 2006
---------------------------------------- Non-GAAP Items GAAP
-------------------------- ------------- Other Medical PDP
Reporting ------------- ------------ ------------- Medical premiums
$ 351,013 $ 49,651 $ 400,664 Professional fees 12,882 -- 12,882
------------- ------------ ------------- Total medical premiums and
professional fees 363,895 49,651 413,546 Medical expenses 279,911
41,634 321,545 Medical care ratio (medical expenses/premiums and
professional fees) 76.9% 83.9% 77.8% Six Months Ended June 30, 2006
---------------------------------------- Non-GAAP Items GAAP
-------------------------- ------------- Other Medical PDP
Reporting ------------- ------------ ------------- Medical premiums
$ 703,434 $ 111,674 $ 815,108 Professional fees 25,797 -- 25,797
------------- ------------ ------------- Total medical premiums and
professional fees 729,231 111,674 840,905 Medical expenses 555,931
102,133 658,064 Medical care ratio (medical expenses/premiums and
professional fees) 76.2% 91.5% 78.3% *T Debt to Capitalization
Ratio The company disclosed its debt to capitalization ratio
excluding the effects of its 2 1/4% senior convertible debentures.
This is a non-GAAP financial measure. The company believes that
reflecting this ratio excluding the effects of the debentures,
which if redeemed by the debenture holders can be converted by the
company to equity, provides a more useful measure of its debt to
capitalization ratio. The following is a reconciliation to the most
directly comparable GAAP financial measure: -0- *T GAAP Non-GAAP
Items ------------ ------------------------- Reporting Debentures
Revised ------------ ------------ ------------ Total debt (less
senior convertible debentures) $ 20,360 $ -- $ 20,360 Senior
convertible debentures 51,500 (51,500) -- ------------ ------------
------------ Total debt 71,860 (51,500) 20,360 Stockholders' equity
245,073 51,500 296,573 ------------ ------------ ------------ Total
debt plus stockholders' equity $ 316,933 $ -- $ 316,933
============ ============ ============ Debt to capitalization ratio
(total debt/total debt and stockholders' equity) 22.7% 6.4% *T
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