SIE Sierra Health Svcs

Sierra Health Services, Inc. (NYSE:SIE) 3rd Quarter Highlights Year-to-Date Total Commercial Membership Up 8.2% Year-to-Date Total Medicare Advantage Membership Up 4.3% Pre-Tax Income Up 26% from Q3 2005 Total Revenues Up 24% from Q3 2005 Year-to-Date Earnings Per Share Up 17% Sierra Health Services, Inc. (NYSE:SIE) reported today that net income for the quarter ended September 30, 2006 was $34.9 million or $0.56 per diluted share, compared to $28.4 million or $0.43 per diluted share for the same period in 2005, an earnings per share increase of 30%. Sierra expects to earn between $2.16 and $2.18 per diluted share for the year 2006. In 2007, the Company expects to earn between $2.28 and $2.35 per diluted share, an increase of 5-8%. Total revenues for the quarter were $430.0 million, compared to $347.4 million for the same period in 2005, an increase of 24%. Medical premium revenues for the quarter were $405.6 million, compared to $327.1 million for the same period in 2005, an increase of 24%. Revenues from professional fees for the quarter were $13.3 million, compared to $11.1 million for the same period in 2005, an increase of 19%. Revenues from investment income for the quarter were $11.1 million, compared to $9.2 million for the same period in 2005, an increase of 20%. In the third quarter, Sierra�s medical care ratio was 77.3%, a 50 basis point increase from 76.8% for the third quarter of 2005 and a 50 basis point sequential decrease from 77.8% for the second quarter of 2006. The year-over-year increase in the medical care ratio is primarily due to the impact of prescription drug costs and other medical expenses. In the third quarter, the PDP had a medical care ratio of 77.0%, down significantly from 83.9% reported in the second quarter of 2006 and 97.5% reported in the first quarter of 2006. This improvement is primarily due to a larger portion of members reaching the coverage gap during the third quarter. Sierra�s medical claims payable balance increased to $157.3 million at September 30, 2006, from $148.0 million at June 30, 2006. The increase in the medical claims payable balance is primarily due to the timing of claims payments, the overall increase in medical expenses as a result of higher membership and reserves related to provider settlements. 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 for the third quarter of 2006, compared to the same number of days for the third quarter of 2005 and 42 days sequentially. In 2006, days in claims payable has been diluted by the shorter payment cycle for pharmacy claims related to the PDP. As a percentage of premium revenue, general and administrative expenses for the third quarter of 2006 improved 70 basis points to 12.6% from 13.3% reported in the third quarter of 2005. Cash flow from operations for the nine months ended September 30, 2006 was $93.9 million, compared to $152.9 million for the first nine months of 2005. This decrease was primarily due to negative cash flow related to the PDP and the overpayment received from the Centers for Medicare and Medicaid Services (CMS) in 2005, which is recorded on the Company�s balance sheet as unearned premiums. Cash flow from the PDP was negative $39.1 million for the first nine months of 2006. Cash flow from operations was a negative $46.2 million for the third quarter of 2006, compared to a positive $111.4 million for the same period in 2005. The decrease in operating cash flow for the quarter was primarily due to the timing of payments from CMS and negative cash flow from the PDP. Sierra received two months of payments from CMS during the third quarter of 2006 compared to four months of payments received in the third quarter of 2005. Cash flow from the PDP was negative $47.3 million for the quarter. Sierra did not purchase any shares of its common stock in the open market in the third quarter of 2006 as, due to blackout periods, the Company was excluded from buying in the market during much of the quarter. During 2006, the Company has repurchased 3.1 million shares for $127.8 million, at an average price of $40.91. On October 19, the Board of Directors authorized an additional $75.0 million for share repurchases. The current available and authorized balance for future share repurchases is $139.4 million. In the third quarter of 2006, the Company�s commercial HMO membership grew by 3.0% or 8,000 lives. For the first nine months of the year, total commercial membership, HMO and PPO combined, grew by 8.2% or 23,200 lives. In the quarter, total Medicare Advantage membership grew by 0.9% or 500 lives. For the first nine months of the year, total Medicare Advantage membership grew by 4.3% or 2,400 lives. Sierra�s stand-alone Medicare PDP membership was 183,300, an increase of 1.7% or 3,000 lives, compared to 180,300 reported at June 30, 2006. For the first nine months of the year, Medicaid membership increased 3.4% or 1,900 lives. �As the population of Las Vegas continues to rise our Company has maintained its strong commercial growth track,� said Anthony M. Marlon, M.D., chairman and chief executive officer of Sierra. �The third quarter was no exception, as more local employers recognized the value of our products and services and the cost savings we contribute to their bottom line. I believe 2006 will end as a another good year for our shareholders.� Marlon also offered comments regarding the Company�s provider contract with three Las Vegas hospitals owned by HCA, Inc. (HCA). �While I had earlier expressed optimism that a new contract could be negotiated between Sierra and HCA, it is becoming clear that these facilities will likely not be part of our contracted hospital provider network in 2007. I believe the remaining hospital capacity in Las Vegas is more than adequate to accommodate the needs of our members who require hospital-based care.� In other news, the Company announced that Erin E. MacDonald has retired from the Board of Directors, effective immediately. She will remain with Sierra as a special assistant to the CEO through May of 2007. MacDonald is retiring at this time due to health reasons. �For thirty years, Erin has been a vital contributor to the success of this Company,� said Marlon. �From her earliest position as a registered nurse with Southwest Medical Associates, through her rise to president and chief operating officer, to her tenure on our Board, she has remained a loyal and committed member of the Sierra team. We wish her good health in her retirement and applaud her for all she has done.� Sierra will host a conference call with investors, analysts and the general public on Wednesday, October 25 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 over the internet by visiting the investor page of Sierra�s website 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 multi-specialty medical groups. Sierra�s subsidiaries serve over 800,000 people through health benefit plans for employers, government programs and individuals. For more information, visit the Company�s website 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) competitive forces that may affect pricing, enrollment, renewals and benefit levels; 3) unpredictable medical costs, malpractice exposure, reinsurance costs, changes in provider contracts and inflation; 4) impact of economic conditions; 5) changes in healthcare 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. SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES Earnings Report (In thousands, except per share data) (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2006� 2005� 2006� 2005� Medical premiums $ 405,618� $ 327,084� $ 1,220,726� $ 958,834� Military contract revenues --� 11� --� 16,322� Professional fees 13,300� 11,133� 39,097� 31,102� Investment and other revenues 11,079� 9,215� 32,860� 25,071� Total revenues 429,997� 347,443� 1,292,683� 1,031,329� � Medical expenses 323,694� 259,591� 981,758� 755,779� Medical care ratio 77.3% 76.8% 77.9% 76.3% (Medical expenses/premiums and professional fees) � Military contract expenses --� (108) 138� 2,265� General and administrative expenses 51,291� 43,451� 152,914� 127,082� � Operating income 55,012� 44,509� 157,873� 146,203� Interest expense (1,015) (1,991) (2,793) (7,971) Other income (expense), net 14� 427� (10) 828� � Income before income taxes 54,011� 42,945� 155,070� 139,060� Provision for income taxes (19,082) (14,503) (53,936) (47,377) Net income $ 34,929� $ 28,442� $ 101,134� $ 91,683� � Net income per common share $ 0.62� $ 0.50� $ 1.78� $ 1.67� � Net income per common share assuming dilution $ 0.56� $ 0.43� $ 1.61� $ 1.38� � Weighted average common shares outstanding 56,332� 56,770� 56,706� 54,818� Weighted average common shares outstanding assuming dilution 62,656� 66,244� 63,247� 67,392� PERIOD END MEMBERSHIP Number Of Members At September 30, HMO: 2006� 2005� � Commercial 273,600� 251,000� Medicare 57,000� 55,200� Medicaid 57,000� 53,300� PPO: Commercial 31,300� 27,000� Medicare 1,700� --� Medicare Part D 183,300� --� Medicare supplement 13,700� 15,900� Administrative services 221,100� 202,000� Total membership 838,700� 604,400� SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands) (Unaudited) September 30, 2006 December 31, 2005 ASSETS Current assets: Cash and cash equivalents $ 77,925� $ 88,059� Investments 243,332� 281,250� Accounts receivable 26,445� 14,501� Current portion of deferred tax asset 26,092� 23,949� Prepaid expenses and other current assets 81,688� 30,596� Total current assets 455,482� 438,355� � Property and equipment, net 72,001� 71,357� Restricted cash and investments 19,311� 18,252� Goodwill 14,782� 14,782� Deferred tax asset (less current portion) 14,354� 13,266� Note receivable 47,000� 47,000� Other assets 95,187� 65,834� Total assets $ 718,117� $ 668,846� � LIABILITIES AND STOCKHOLDERS� EQUITY Current liabilities: Accrued and other current liabilities $ 73,078� $ 58,238� Trade accounts payable 2,165� 2,347� Accrued payroll and taxes 28,216� 21,469� Medical claims payable 157,263� 135,867� Unearned premium revenue 52,566� 49,067� Current portion of long-term debt 104� 106� Total current liabilities 313,392� 267,094� � Long-term debt (less current portion) 43,729� 52,307� Other liabilities 64,057� 65,193� Total liabilities 421,178� 384,594� � Commitments and contingencies � Stockholders� equity: Common stock 354� 346� Treasury stock (485,852) (377,190) Additional paid-in capital 434,543� 400,287� Accumulated other comprehensive loss (2,235) (1,750) Retained earnings 350,129� 262,559� Total stockholders� equity 296,939� 284,252� Total liabilities and stockholders� equity $ 718,117� $ 668,846� SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Nine Months Ended September 30, 2006� 2005� Cash flows from operating activities: Net income $ 101,134� $ 91,683� Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 12,327� 11,167� Excess tax benefits from share-based payment arrangements (11,445) --� Other adjustments 7,819� 6,918� Other current assets (64,748) 2,521� Medical claims payable 21,396� 7,695� Other current liabilities 20,868� (19,928) Unearned premium revenue 3,499� 40,511� Changes in other assets and liabilities 3,053� 12,378� Net cash provided by operating activities 93,903� 152,945� � Cash flows from investing activities: Capital expenditures, net of dispositions (13,183) (8,566) Purchase of investments, net of proceeds 11,500� (138,572) Net cash used for investing activities (1,683) (147,138) � Cash flows from financing activities: Payments on debt and capital leases, net of proceeds (82) (84) Purchase of treasury stock (127,780) (144,421) Excess tax benefits from share-based payment arrangements 11,445� --� Exercise of stock in connection with stock plans 14,063� 19,596� Net cash used for financing activities (102,354) (124,909) � Net decrease in cash and cash equivalents (10,134) (119,102) Cash and cash equivalents at beginning of period 88,059� 207,619� Cash and cash equivalents at end of period $ 77,925� $ 88,517� Reconciliation of Non-GAAP Financial Measures Medical Care Ratio The Company is presenting its 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: Three Months Ended September 30, 2006 Non-GAAP Items GAAP Other Medical PDP Reporting Medical premiums $ 362,312� $ 43,306� $ 405,618� Professional fees 13,300� --� 13,300� Total medical premiums and professional fees 375,612� 43,306� 418,918� � Medical expenses 290,329� 33,365� 323,694� Medical care ratio (medical expenses/premiums and professional fees) 77.3� % 77.0� % 77.3� % Nine Months Ended September 30, 2006 Non-GAAP Items GAAP Other Medical PDP Reporting Medical premiums $ 1,065,746� $ 154,980� $ 1,220,726� Professional fees 39,097� --� 39,097� Total medical premiums and professional fees 1,104,843� 154,980� 1,259,823� � Medical expenses 846,260� 135,498� 981,758� Medical care ratio (medical expenses/premiums and professional fees) 76.6� % 87.4� % 77.9� % Sierra Health Services, Inc. (NYSE:SIE) 3rd Quarter Highlights -- Year-to-Date Total Commercial Membership Up 8.2% -- Year-to-Date Total Medicare Advantage Membership Up 4.3% -- Pre-Tax Income Up 26% from Q3 2005 -- Total Revenues Up 24% from Q3 2005 -- Year-to-Date Earnings Per Share Up 17% Sierra Health Services, Inc. (NYSE:SIE) reported today that net income for the quarter ended September 30, 2006 was $34.9 million or $0.56 per diluted share, compared to $28.4 million or $0.43 per diluted share for the same period in 2005, an earnings per share increase of 30%. Sierra expects to earn between $2.16 and $2.18 per diluted share for the year 2006. In 2007, the Company expects to earn between $2.28 and $2.35 per diluted share, an increase of 5-8%. Total revenues for the quarter were $430.0 million, compared to $347.4 million for the same period in 2005, an increase of 24%. Medical premium revenues for the quarter were $405.6 million, compared to $327.1 million for the same period in 2005, an increase of 24%. Revenues from professional fees for the quarter were $13.3 million, compared to $11.1 million for the same period in 2005, an increase of 19%. Revenues from investment income for the quarter were $11.1 million, compared to $9.2 million for the same period in 2005, an increase of 20%. In the third quarter, Sierra's medical care ratio was 77.3%, a 50 basis point increase from 76.8% for the third quarter of 2005 and a 50 basis point sequential decrease from 77.8% for the second quarter of 2006. The year-over-year increase in the medical care ratio is primarily due to the impact of prescription drug costs and other medical expenses. In the third quarter, the PDP had a medical care ratio of 77.0%, down significantly from 83.9% reported in the second quarter of 2006 and 97.5% reported in the first quarter of 2006. This improvement is primarily due to a larger portion of members reaching the coverage gap during the third quarter. Sierra's medical claims payable balance increased to $157.3 million at September 30, 2006, from $148.0 million at June 30, 2006. The increase in the medical claims payable balance is primarily due to the timing of claims payments, the overall increase in medical expenses as a result of higher membership and reserves related to provider settlements. 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 for the third quarter of 2006, compared to the same number of days for the third quarter of 2005 and 42 days sequentially. In 2006, days in claims payable has been diluted by the shorter payment cycle for pharmacy claims related to the PDP. As a percentage of premium revenue, general and administrative expenses for the third quarter of 2006 improved 70 basis points to 12.6% from 13.3% reported in the third quarter of 2005. Cash flow from operations for the nine months ended September 30, 2006 was $93.9 million, compared to $152.9 million for the first nine months of 2005. This decrease was primarily due to negative cash flow related to the PDP and the overpayment received from the Centers for Medicare and Medicaid Services (CMS) in 2005, which is recorded on the Company's balance sheet as unearned premiums. Cash flow from the PDP was negative $39.1 million for the first nine months of 2006. Cash flow from operations was a negative $46.2 million for the third quarter of 2006, compared to a positive $111.4 million for the same period in 2005. The decrease in operating cash flow for the quarter was primarily due to the timing of payments from CMS and negative cash flow from the PDP. Sierra received two months of payments from CMS during the third quarter of 2006 compared to four months of payments received in the third quarter of 2005. Cash flow from the PDP was negative $47.3 million for the quarter. Sierra did not purchase any shares of its common stock in the open market in the third quarter of 2006 as, due to blackout periods, the Company was excluded from buying in the market during much of the quarter. During 2006, the Company has repurchased 3.1 million shares for $127.8 million, at an average price of $40.91. On October 19, the Board of Directors authorized an additional $75.0 million for share repurchases. The current available and authorized balance for future share repurchases is $139.4 million. In the third quarter of 2006, the Company's commercial HMO membership grew by 3.0% or 8,000 lives. For the first nine months of the year, total commercial membership, HMO and PPO combined, grew by 8.2% or 23,200 lives. In the quarter, total Medicare Advantage membership grew by 0.9% or 500 lives. For the first nine months of the year, total Medicare Advantage membership grew by 4.3% or 2,400 lives. Sierra's stand-alone Medicare PDP membership was 183,300, an increase of 1.7% or 3,000 lives, compared to 180,300 reported at June 30, 2006. For the first nine months of the year, Medicaid membership increased 3.4% or 1,900 lives. "As the population of Las Vegas continues to rise our Company has maintained its strong commercial growth track," said Anthony M. Marlon, M.D., chairman and chief executive officer of Sierra. "The third quarter was no exception, as more local employers recognized the value of our products and services and the cost savings we contribute to their bottom line. I believe 2006 will end as a another good year for our shareholders." Marlon also offered comments regarding the Company's provider contract with three Las Vegas hospitals owned by HCA, Inc. (HCA). "While I had earlier expressed optimism that a new contract could be negotiated between Sierra and HCA, it is becoming clear that these facilities will likely not be part of our contracted hospital provider network in 2007. I believe the remaining hospital capacity in Las Vegas is more than adequate to accommodate the needs of our members who require hospital-based care." In other news, the Company announced that Erin E. MacDonald has retired from the Board of Directors, effective immediately. She will remain with Sierra as a special assistant to the CEO through May of 2007. MacDonald is retiring at this time due to health reasons. "For thirty years, Erin has been a vital contributor to the success of this Company," said Marlon. "From her earliest position as a registered nurse with Southwest Medical Associates, through her rise to president and chief operating officer, to her tenure on our Board, she has remained a loyal and committed member of the Sierra team. We wish her good health in her retirement and applaud her for all she has done." Sierra will host a conference call with investors, analysts and the general public on Wednesday, October 25 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 over the internet by visiting the investor page of Sierra's website 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 multi-specialty medical groups. Sierra's subsidiaries serve over 800,000 people through health benefit plans for employers, government programs and individuals. For more information, visit the Company's website 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) competitive forces that may affect pricing, enrollment, renewals and benefit levels; 3) unpredictable medical costs, malpractice exposure, reinsurance costs, changes in provider contracts and inflation; 4) impact of economic conditions; 5) changes in healthcare 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 SUBSIDIARIES Earnings Report (In thousands, except per share data) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------ --------------------- 2006 2005 2006 2005 --------- -------- ---------- ---------- Medical premiums $ 405,618 $327,084 $1,220,726 $ 958,834 Military contract revenues -- 11 -- 16,322 Professional fees 13,300 11,133 39,097 31,102 Investment and other revenues 11,079 9,215 32,860 25,071 --------- -------- ---------- ---------- Total revenues 429,997 347,443 1,292,683 1,031,329 --------- -------- ---------- ---------- Medical expenses 323,694 259,591 981,758 755,779 Medical care ratio 77.3% 76.8% 77.9% 76.3% (Medical expenses/premiums and professional fees) Military contract expenses -- (108) 138 2,265 General and administrative expenses 51,291 43,451 152,914 127,082 --------- -------- ---------- ---------- Operating income 55,012 44,509 157,873 146,203 Interest expense (1,015) (1,991) (2,793) (7,971) Other income (expense), net 14 427 (10) 828 --------- -------- ---------- ---------- Income before income taxes 54,011 42,945 155,070 139,060 Provision for income taxes (19,082) (14,503) (53,936) (47,377) --------- -------- ---------- ---------- Net income $ 34,929 $ 28,442 $ 101,134 $ 91,683 ========= ======== ========== ========== Net income per common share $ 0.62 $ 0.50 $ 1.78 $ 1.67 Net income per common share assuming dilution $ 0.56 $ 0.43 $ 1.61 $ 1.38 Weighted average common shares outstanding 56,332 56,770 56,706 54,818 Weighted average common shares outstanding assuming dilution 62,656 66,244 63,247 67,392 *T -0- *T PERIOD END MEMBERSHIP Number Of Members At September 30, --------------------- 2006 2005 ---------- ---------- HMO: Commercial 273,600 251,000 Medicare 57,000 55,200 Medicaid 57,000 53,300 PPO: Commercial 31,300 27,000 Medicare 1,700 -- Medicare Part D 183,300 -- Medicare supplement 13,700 15,900 Administrative services 221,100 202,000 ---------- ---------- Total membership 838,700 604,400 ========== ========== *T -0- *T SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands) (Unaudited) September 30, December 31, 2006 2005 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 77,925 $ 88,059 Investments 243,332 281,250 Accounts receivable 26,445 14,501 Current portion of deferred tax asset 26,092 23,949 Prepaid expenses and other current assets 81,688 30,596 ------------- ------------ Total current assets 455,482 438,355 Property and equipment, net 72,001 71,357 Restricted cash and investments 19,311 18,252 Goodwill 14,782 14,782 Deferred tax asset (less current portion) 14,354 13,266 Note receivable 47,000 47,000 Other assets 95,187 65,834 ------------- ------------ Total assets $ 718,117 $ 668,846 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accrued and other current liabilities $ 73,078 $ 58,238 Trade accounts payable 2,165 2,347 Accrued payroll and taxes 28,216 21,469 Medical claims payable 157,263 135,867 Unearned premium revenue 52,566 49,067 Current portion of long-term debt 104 106 ------------- ------------ Total current liabilities 313,392 267,094 Long-term debt (less current portion) 43,729 52,307 Other liabilities 64,057 65,193 ------------- ------------ Total liabilities 421,178 384,594 ------------- ------------ Commitments and contingencies Stockholders' equity: Common stock 354 346 Treasury stock (485,852) (377,190) Additional paid-in capital 434,543 400,287 Accumulated other comprehensive loss (2,235) (1,750) Retained earnings 350,129 262,559 ------------- ------------ Total stockholders' equity 296,939 284,252 ------------- ------------ Total liabilities and stockholders' equity $ 718,117 $ 668,846 ============= ============ *T -0- *T SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Nine Months Ended September 30, --------------------- 2006 2005 ---------- ---------- Cash flows from operating activities: Net income $ 101,134 $ 91,683 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 12,327 11,167 Excess tax benefits from share-based payment arrangements (11,445) -- Other adjustments 7,819 6,918 Other current assets (64,748) 2,521 Medical claims payable 21,396 7,695 Other current liabilities 20,868 (19,928) Unearned premium revenue 3,499 40,511 Changes in other assets and liabilities 3,053 12,378 ---------- ---------- Net cash provided by operating activities 93,903 152,945 ---------- ---------- Cash flows from investing activities: Capital expenditures, net of dispositions (13,183) (8,566) Purchase of investments, net of proceeds 11,500 (138,572) ---------- ---------- Net cash used for investing activities (1,683) (147,138) ---------- ---------- Cash flows from financing activities: Payments on debt and capital leases, net of proceeds (82) (84) Purchase of treasury stock (127,780) (144,421) Excess tax benefits from share-based payment arrangements 11,445 -- Exercise of stock in connection with stock plans 14,063 19,596 ---------- ---------- Net cash used for financing activities (102,354) (124,909) ---------- ---------- Net decrease in cash and cash equivalents (10,134) (119,102) Cash and cash equivalents at beginning of period 88,059 207,619 ---------- ---------- Cash and cash equivalents at end of period $ 77,925 $ 88,517 ========== ========== *T -0- *T Reconciliation of Non-GAAP Financial Measures Medical Care Ratio *T The Company is presenting its 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 September 30, 2006 ---------------------------------------- Non-GAAP Items GAAP --------------------------- ------------ Other Medical PDP Reporting ---------------- ---------- ------------ Medical premiums $ 362,312 $ 43,306 $ 405,618 Professional fees 13,300 -- 13,300 --------------- ---------- ----------- Total medical premiums and professional fees 375,612 43,306 418,918 Medical expenses 290,329 33,365 323,694 Medical care ratio (medical expenses/premiums and professional fees) 77.3 % 77.0 % 77.3 % *T -0- *T Nine Months Ended September 30, 2006 ---------------------------------------- Non-GAAP Items GAAP --------------------------- ------------ Other Medical PDP Reporting ---------------- ---------- ------------ Medical premiums $ 1,065,746 $ 154,980 $ 1,220,726 Professional fees 39,097 -- 39,097 --------------- ---------- ----------- Total medical premiums and professional fees 1,104,843 154,980 1,259,823 Medical expenses 846,260 135,498 981,758 Medical care ratio (medical expenses/premiums and professional fees) 76.6 % 87.4 % 77.9 % *T