Sierra Health Services, Inc. (NYSE:SIE) reported today that net
income for the quarter ended June 30, 2007 was $39.4 million or
$0.67 per diluted share, compared to $33.5 million or $0.54 per
diluted share for the same period in 2006, an earnings per share
increase of 24%. The earnings for the quarter included the benefit
of positive prior period reserve development, a positive
retroactive rate adjustment on the Company�s Medicare Advantage
product offering and higher than projected earnings from its
Medicare Prescription Drug (PDP) basic product. The combination of
these three items represents approximately $15.4 million in pre-tax
earnings. These positive items were partially offset by a $6.5
million pre-tax adjustment to the premium deficiency reserve
established in the first quarter on the Company�s enhanced benefits
PDP product. Revenues for the quarter were $482.0 million, a 14%
increase over the $424.4 million for the same period in 2006.
Medical premium revenues were $457.2 million, an increase of 14%
over the $400.7 million for the same period in 2006. Medical
premium revenues for the current quarter include $41.5 million for
Sierra�s basic PDP product, compared to $49.7 million in 2006.
Premium revenues for the quarter also include $31.0 million for the
Company�s enhanced PDP product, which was not offered in 2006.
Revenues from professional fees for the quarter were $14.4 million,
compared to $12.9 million for the same period in 2006, an increase
of 12%. Investment and other revenues for the quarter were $10.4
million, a decrease of 4% from the $10.9 million for the same
period in 2006. Excluding the impact of both PDP products, Sierra�s
medical care ratio for the quarter was 75.5%, a decrease of 220
basis points sequentially and 140 basis points from the second
quarter of 2006. Sierra�s consolidated medical care ratio was
76.8%, compared to 77.8% for the same period in 2006 and 90.2%
sequentially. The positive prior period reserve development and
Medicare Advantage retroactive rate adjustment, totaling
approximately $10.4 million, significantly impacted this ratio in
the quarter. In the first quarter of 2007, the consolidated medical
care ratio included the impact of the premium deficiency reserve
for the enhanced PDP product, as well as the effect of seasonality
in the expenses related to both the enhanced and basic PDP
products. Sierra�s medical claims payable balance was $191.8
million at June 30, 2007, compared to $219.2 million at March 31,
2007. The decrease from March 31, 2007 is primarily related to
balances associated with the PDP along with positive prior period
reserve development. Days in claims payable, which is the medical
claims payable balance divided by the average medical expenses per
day for the period, were 48 days for the second quarter of 2007,
compared to 42 days for the second quarter of 2006 and 45 days
sequentially. Excluding both PDP products, days in claims payable
were 49 days for the second quarter of 2007, compared to 45 days
for the same period in 2006 and 50 days sequentially. For the
quarter, general and administrative expenses, as a percentage of
premium revenue, increased 40 basis points to 13.0% from 12.6% for
the same period in 2006. The general and administrative expenses
for the quarter include $6.5 million recorded as an additional
premium deficiency reserve on the enhanced PDP product. General and
administrative expenses also include $2.3 million in merger related
expenses. Cash flow from operations for the six months ended June
30, 2007 was $109.5 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 $11.8 million. Cash flow
from operations was $24.3 million for the quarter, compared to
$10.5 million for the same period in 2006. The increase in cash
flow from operations for the second quarter was primarily due to an
increase in cash flows from our PDP products during the quarter
compared to the same period in 2006. No share repurchases were made
during the quarter. The Company has halted its share repurchase
program pending the merger with UnitedHealth Group. In the second
quarter of 2007, Sierra�s core combined commercial membership grew
by 2% or 4,800 lives. For the first six months of the year, the
Company grew 1,600 combined HMO and PPO commercial lives, despite
the loss of 11,000 lives in January 2007, as previously reported.
For the quarter, combined Medicare Advantage membership was flat.
For the first six months of the year, Medicare Advantage HMO
membership decreased by 100 lives, which was offset by growth in
PPO membership of 500 lives and Private Fee-for-Service membership
of 900 lives. �While a number of uncommon items are impacting our
earnings, Sierra�s core operations continue to perform well,� said
Anthony M. Marlon, M.D. �Revenue growth is within our targets and,
despite the loss of three accounts at the beginning of the year,
commercial HMO membership is solid. Additionally, the Company
continues to work through the state and federal regulatory
processes required to close our proposed merger with UnitedHealth
Group. I believe we are on track for an expected close in the
fourth quarter of this year.� Sierra had previously announced it
had expected to earn between $1.76 and $1.86 per share for the year
2007. The Company now expects to earn between $1.80 and $1.86 per
share for the year 2007. This revised guidance continues to include
the recorded losses on the Company�s enhanced PDP product offering
along with costs associated with its pending merger with
UnitedHealth Group. Sierra will host a conference call with
investors, analysts and the general public on Tuesday, July 31,
2007 at noon (Eastern Time). Interested parties can access the call
by dialing 888-988-9162 (using the passcode: EARNINGS). Listeners
may also access the conference call free over the Internet by
visiting the investors 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 860,000 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; 6) the effects of the
termination of the HCA contract; 7) the amount of actual proceeds
to be realized from the note receivable related to the sale of the
workers� compensation insurance operation; and 8) receipt of
certain regulatory approvals and the satisfaction or waiver of
other conditions pertaining to the proposed merger with
UnitedHealth Group. 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
June 30, Six Months Ended June 30, � 2007 � � 2006 � � 2007 � �
2006 � � Medical premiums $ 457,246 $ 400,664 $ 925,320 $ 815,108
Professional fees 14,394 12,882 29,036 25,797 Investment and other
revenues � 10,407 � � 10,892 � � 22,328 � � 21,781 � � Total
revenues � 482,047 � � 424,438 � � 976,684 � � 862,686 � � Medical
expenses 362,211 321,545 797,522 658,064 Medical care ratio 76.8 %
77.8 % 83.6 % 78.3 % (Medical expenses/premiums and professional
fees) � General and administrative expenses � 59,528 � � 50,422 � �
118,720 � � 101,761 � � Operating income 60,308 52,471 60,442
102,861 � Interest expense (1,037 ) (1,002 ) (2,992 ) (1,778 )
Other income (expense), net � 844 � � 9 � � 1,494 � � (24 ) �
Income before income taxes 60,115 51,478 58,944 101,059 � Provision
for income taxes � (20,755 ) � (17,944 ) � (20,823 ) � (34,854 ) �
Net income $ 39,360 � $ 33,534 � $ 38,121 � $ 66,205 � � � Net
income per common share $ 0.70 $ 0.60 $ 0.68 $ 1.16 � Net income
per common share assuming dilution $ 0.67 $ 0.54 $ 0.65 $ 1.05 �
Weighted average common shares outstanding 56,009 56,074 55,713
56,896 Weighted average common shares outstanding assuming dilution
58,937 62,597 58,954 63,525 PERIOD END MEMBERSHIP � Number Of
Members At June 30, 2007 2006 HMO: Commercial 278,200 265,600
Medicare 56,500 56,900 Medicaid 58,200 56,700 Commercial PPO and
HSA 36,100 29,800 Medicare PPO and PFFS 3,300 1,300 Medicare Part
D-Basic 155,300 180,300 Medicare Part D-Enhanced 44,300 - Medicare
supplement 12,700 14,000 Administrative services 221,200 219,700
Total membership 865,800 824,300 SIERRA HEALTH SERVICES, INC. AND
SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands)
(Unaudited) � June 30, December 31, 2007 2006 ASSETS Current
assets: Cash and cash equivalents $ 143,478 $ 58,918 Investments
288,398 323,846 Accounts receivable 31,510 21,308 Current portion
of deferred tax asset 45,968 29,861 Prepaid expenses and other
current assets � 101,291 � � 110,020 � Total current assets 610,645
543,953 � Property and equipment, net 64,947 71,893 Restricted cash
and investments 17,403 19,428 Goodwill 14,782 14,782 Deferred tax
asset (less current portion) 26,590 18,656 Note receivable 47,000
47,000 Other assets � 92,258 � � 93,700 � Total assets $ 873,625 �
$ 809,412 � � LIABILITIES AND STOCKHOLDERS' EQUITY Current
liabilities: Accrued and other current liabilities $ 78,450 $
99,314 Trade accounts payable 1,670 1,552 Accrued payroll and taxes
28,580 25,925 Medical claims payable 191,788 222,895 Premium
deficiency reserve 39,294 1,076 Unearned premium revenue 121,934
52,075 Current portion of long-term debt � 3,558 � � 116 � Total
current liabilities 465,274 402,953 � Long-term debt (less current
portion) 55,505 118,734 Other liabilities � 91,703 � � 71,007 �
Total liabilities � 612,482 � � 592,694 � � Commitments and
contingencies � Stockholders' equity: Common stock 368 354 Treasury
stock (615,755 ) (600,539 ) Additional paid-in capital 466,771
436,643 Accumulated other comprehensive loss (9,530 ) (8,635 )
Retained earnings � 419,289 � � 388,895 � Total stockholders'
equity � 261,143 � � 216,718 � Total liabilities and stockholders'
equity $ 873,625 � $ 809,412 � SIERRA HEALTH SERVICES, INC. AND
SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In
thousands) (Unaudited) � � Six Months Ended June 30, 2007 � � 2006
Cash flows from operating activities: Net income $ 38,121 $ 66,205
Adjustments to reconcile net income to net cash provided by
operating activities: Depreciation 7,976 8,239 Excess tax benefits
from share-based payment arrangements (4,233 ) (10,260 ) Other
adjustments 5,336 4,393 Other current assets 1,838 (34,485 )
Deferred tax assets (23,299 ) (3,217 ) Medical claims payable
(31,107 ) 12,097 Other current liabilities (7,809 ) 35,608 Unearned
premium revenue 69,859 65,090 Premium deficiency 38,217 - Changes
in other assets and liabilities � 14,617 � � (3,573 ) Net cash
provided by operating activities � 109,516 � � 140,097 � � Cash
flows from investing activities: Capital expenditures, net of
dispositions (120 ) (8,179 ) Purchase of investments, net of
proceeds � 27,789 � � (36,268 ) Net cash provided by (used for)
investing activities � 27,669 � � (44,447 ) � Cash flows from
financing activities: Payments on debt and capital leases (40,078 )
(53 ) Proceeds from other long-term debt - 20,000 Purchase of
treasury stock (21,081 ) (127,780 ) Excess tax benefits from
share-based payment arrangements 4,233 10,260 Exercise of stock in
connection with stock plans � 4,301 � � 10,719 � Net cash used for
financing activities � (52,625 ) � (86,854 ) � Net increase in cash
and cash equivalents 84,560 8,796 Cash and cash equivalents at
beginning of period � 58,918 � � 88,059 � Cash and cash equivalents
at end of period $ 143,478 � $ 96,855 � Reconciliation of Non-GAAP
Financial Measures � Medical Care Ratio � In this press release,
the Company presented 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 from period to period
and to its historical results.��The following is a reconciliation
to the most directly comparable GAAP financial measure: � Three
Months Ended June 30, 2007 Non-GAAP Items GAAP Other Medical PDP
Reporting (In thousands) � Medical premiums $ 384,789 $ 72,457 $
457,246 Professional fees � 14,394 � � - � � 14,394 � Total medical
premiums and professional fees 399,183 72,457 471,640 � Medical
expenses 301,363 60,848 362,211 Medical care ratio (medical
expenses/premiums and professional fees) 75.5 % 84.0 % 76.8 % � �
Three Months Ended June 30, 2006 Non-GAAP Items GAAP Other Medical
PDP Reporting (In thousands) � 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, 2007 Non-GAAP Items GAAP Other Medical
PDP Reporting (In thousands) � Medical premiums $ 767,539 $ 157,781
$ 925,320 Professional fees � 29,036 � � - � � 29,036 � Total
medical premiums and professional fees 796,575 157,781 954,356 �
Medical expenses 610,313 187,209 797,522 Medical care ratio
(medical expenses/premiums and professional fees) 76.6 % 118.7 %
83.6 % � � Six Months Ended June 30, 2006 Non-GAAP Items GAAP Other
Medical PDP Reporting (In thousands) � 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 % 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) for both
2007 and 2006.��These are non-GAAP financial measures.��The Company
received seven months of payments from CMS in the first six months
of 2007 and in the first six months of 2006.��The July CMS payments
were received at the end of June in both years.��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: � Six Months Ended June 30, 2007
2006 (In thousands) � GAAP net cash provided by operating
activities $ 109,516 $ 140,097 Less: July CMS payments received in
June � (97,712 ) � (80,616 ) Cash flow from operations adjusted for
the timing of payments from CMS $ 11,804 � $ 59,481 � Days in
Claims Payable � In this press release, the Company presented days
in claims payable, excluding the effects of the PDP.��This is a
non-GAAP financial measure.��The Company believes that reflecting
the days in claims payable excluding the effects of the PDP
provides a more comparable measure of its days in claims payable to
its historical results.��The following is a reconciliation to the
most directly comparable GAAP financial measure: � Three Months
Ended June 30, 2007 Non-GAAP Items GAAP Other Medical PDP Reporting
(In thousands) � Medical claims payable $ 163,470 $ 28,318 $
191,788 Medical expenses $ 301,363 $ 60,848 $ 362,211 Days in
quarter � 91 � 91 � 91 Medical expenses per day $ 3,312 $ 669 $
3,980 Days in claims payable � 49 � 42 � 48 � � � Three Months
Ended June 30, 2006 Non-GAAP Items GAAP Other Medical PDP Reporting
(In thousands) � Medical claims payable $ 139,564 $ 8,400 $ 147,964
Medical expenses $ 279,911 $ 41,634 $ 321,545 Days in quarter � 91
� 91 � 91 Medical expenses per day $ 3,076 $ 458 $ 3,533 Days in
claims payable � 45 � 18 � 42
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