HealthSpring, Inc. Reports 2009 Third Quarter Results
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Increases 2009 Earnings Per Share Guidance to $2.30 to $2.40
NASHVILLE, Tenn.--(BUSINESS WIRE)-- HealthSpring, Inc. (NYSE: HS) today announced its results for the third quarter and nine months ended September 30, 2009. Highlights for the 2009 third quarter include:
-- Net income of $42.3 million, or $0.77 per diluted share, compared with
$29.4 million, or $0.53 per diluted share, in the 2008 third quarter;
-- Premium revenue of $649.8 million, up 26.0% over the 2008 third quarter;
and
-- Medicare Advantage membership of 186,635 at quarter-end, up 19.4% over
the 2008 third quarter-end, and up 15.1% compared with 2008 year-end;
stand-alone PDP membership of 303,975, up 11.6% over the 2008 third
quarter-end.
Commenting on 2009 third quarter results, Herb Fritch, Chairman and Chief Executive Officer, said, "We are pleased with our strong performance in the third quarter of 2009. Performance in the quarter was driven by improvement in inpatient admissions in most of our markets that more than offset any higher trends we continue to experience in outpatient and professional costs. Our Florida and Part-D operations also continue to outperform our expectations for the year. These positive trends have caused us to increase our earnings per share guidance for 2009. We believe that our intense focus on physician engagement and the value proposition we offer to Medicare beneficiaries have led to the current year's strong performance and position us well for a strong 2010 open enrollment season."
Third Quarter Results
($ in thousands, except per share amounts)
Three Months Ended
September 30, Percent
2009 2008 Change
Premium revenue $ 649,795 $ 515,892 26.0 %
Total revenue 659,780 527,899 25.0
Medical expense 519,478 411,703 26.2
Net income 42,314 29,360 44.1
Net income per common share - diluted (1) 0.77 0.53 45.3
(1) Weighted average shares outstanding used in the calculation of net income per common share - diluted, were 54,700,390 and 55,811,236, respectively, for the three months ended September 30, 2009 and 2008.
Operating Highlights
Revenue
-- Medicare Advantage premiums (including the prescription drug component
of HealthSpring's Medicare Advantage plans, or "MA-PD") were $580.0
million for the 2009 third quarter, reflecting an increase of 27.3% over
the 2008 third quarter. The premium revenue increase is attributable to
a 19.4% increase in membership and a 6.7% increase in premiums per
member per month, or "PMPM." Additionally, the 2009 third quarter
included $6.4 million of premium revenue for changes in estimates for
current-year retroactive risk settlements related to the first half of
2009. This change in estimate had a favorable impact on net income of
$3.5 million, or $0.06 per diluted share, in the current quarter. By
comparison, the change in estimate for the 2008 third quarter was
insignificant.
-- Medicare Advantage PMPM premiums were $1,043.09 in the 2009 third
quarter, compared with $977.38 in the 2008 third quarter. The PMPM
premium increase in the 2009 third quarter resulted from rate increases
in CMS-calculated base rates as well as rate increases related to risk
scores.
-- Stand-alone PDP premium revenue was $69.0 million for the 2009 third
quarter, an increase of 16.8% compared with the 2008 third quarter. The
higher revenue resulted from an 11.6% increase in membership and a 4.7%
increase in PDP premiums PMPM in the current quarter.
-- Investment income decreased from the 2008 third quarter by $2.9 million,
or 76.9%, to $0.9 million for the 2009 third quarter, primarily as a
result of a lower average yield on invested and cash balances.
Medical Expense
-- Medicare Advantage medical loss ratio, or "MLR," was 79.7% for the 2009
third quarter, compared with 79.2% for the prior year's third quarter.
The impact from risk-adjustment payments relating to prior periods of
2009 was favorable by 0.7% on the 2009 third quarter. Higher outpatient
expenses and increases in physician expenses in the Alabama, Tennessee,
and Texas health plans resulted in an increase in the current period
MLR, compared with the 2008 third quarter. Increasing pharmacy trends
for the drug benefit component of the Company's MA-PD plans during the
current period also contributed to the increase in the MLR. These
increases were partially offset by improvements in inpatient admissions
across all markets and continued strong performance in the Florida plan.
On a year-to-date basis, the MA MLR was 81.1%, compared with 79.2% for
the prior year's first nine months, as adjusted in both periods to
exclude favorable final CMS settlement adjustments associated with prior
years.
-- PDP MLR was 81.5% for the 2009 third quarter, compared with 85.1% in the
2008 third quarter. On a year-to-date basis, the PDP MLR was 90.2%,
compared with 93.3% for the prior year's first nine months. The
improvement in the PDP MLR was primarily attributable to higher PMPM
premium revenue. Higher utilization of generic prescription drugs in the
2009 period also contributed to the improvement in the year-to-date PDP
MLR.
Selling, General & Administrative (SG&A) Expense
-- SG&A expense as a percentage of total revenue in the 2009 third quarter
decreased 110 basis points to 10.0%, compared with 11.1% in the 2008
third quarter. The improvement in SG&A as a percentage of revenue
resulted primarily from improvements in the Company's operating model
and revenue increases. The $7.2 million increase in the 2009 third
quarter compared with the 2008 third quarter was primarily the result of
additional personnel costs associated with membership increases. On a
year-to-date basis, SG&A expense as a percentage of total revenue in
2009 was 10.1% compared with 10.8% for the prior year's first nine
months.
Interest Expense
-- Interest expense in the 2009 third quarter decreased $0.8 million
compared with the 2008 third quarter as a result of lower effective
interest rates and lower average principal balances.
-- The Company's weighted average effective interest rate (exclusive of the
amortization of deferred financing costs) for the three months ended
September 30, 2009 was 4.7% compared with 5.3% for the three months
ended September 30, 2008.
Income Tax Expense
-- The effective income tax rate was adjusted in the 2009 third quarter to
34.9% for the nine months ended September 30, 2009. This lower tax rate
resulted primarily from a favorable tax impact related to business
combination accounting for the Florida health plan acquisition. This and
other minor adjustments contributed $0.04 to diluted earnings per share
for the 2009 third quarter. The Company currently expects the effective
income tax rate for the full year will approximate 35.2%, which includes
the items reported in the third quarter.
Balance Sheet Highlights
-- At September 30, 2009, the Company's cash and cash equivalents were
$389.8 million, $75.3 million of which was held at unregulated
subsidiaries, compared with cash and cash equivalents of $282.2 million
at December 31, 2008, $31.4 million of which was held at unregulated
subsidiaries.
-- Total debt outstanding was $244.2 million at September 30, 2009,
compared with $268.0 million at December 31, 2008, and $275.3 million at
September 30, 2008. There were no borrowings outstanding under the
Company's $100 million revolving credit facility at September 30, 2009
or 2008.
-- For the first nine months of 2009, net cash generated in operating
activities was $115.5 million compared with $152.6 million generated in
the same period of 2008. Operating cash flows on a year-to-date basis
for 2009 included the receipt of approximately $31.8 million of
prior-year CMS risk premium settlements compared with the settlement of
$57.9 million received in the first nine months of 2008.
-- Days in claims payable totaled 35 at the end of the 2009 third quarter,
compared with 36 at the end of the 2009 second quarter.
Outlook
-- EPS: The Company is increasing its expectations for diluted earnings per
share for 2009 to be in the range of $2.30 to $2.40, on weighted average
shares outstanding of approximately 55.4 million.
-- Membership: The Company increases its estimate for Medicare Advantage
membership from 186,000-188,000 to a range of 188,000-189,000 at the end
of 2009. The Company also refines its estimate for PDP membership from
310,000-320,000 to a range of 311,000-313,000 at the end of 2009.
-- Revenue: The Company now estimates that 2009 total revenue will be
approximately $2.65 billion.
-- MLRs: The Company is modifying its estimate for Medicare Advantage
(including MA-PD) full-year MLR to be approximately 81.0% for 2009. The
Company maintains its estimate for stand-alone PDP MLR to be in the
range of 84.0% to 86.0% for the year.
-- SG&A: The Company continues to estimate that selling, general and
administrative expense will be approximately 10.5% of total revenue for
2009.
Conference Call
A live audio webcast of the conference call regarding third quarter results will begin at 10:00 a.m. ET on Thursday, October 29, 2009. The public may access the conference call through HealthSpring's website, www.healthspring.com, under the Investor Relations tab. The conference call can also be accessed by dialing (913) 312-0643, confirmation number 6838864. An online replay will be available approximately two hours following the conclusion of the live broadcast and will continue for 30 days.
About HealthSpring
HealthSpring is based in Nashville, Tenn., and is one of the country's largest coordinated care plans whose primary focus is the Medicare Advantage market. HealthSpring currently owns and operates Medicare Advantage plans in Alabama, Florida, Illinois, Mississippi, Tennessee, and Texas and also offers a national stand-alone Medicare prescription drug plan. For more information, visit www.healthspring.com.
Cautionary Statement Regarding Forward Looking Statements
Statements contained in this release that are not historical fact are forward-looking statements, which the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would," and similar expressions are forward-looking statements. Such statements include statements regarding 2010 open enrollment and 2009 guidance, including effective tax rates. The Company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause its actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Any projections or other forward-looking information in this release or made orally and related thereto are based on management's beliefs and assumptions and on information available to HealthSpring at the time the statements were or are made, which is subject to change. Although any such projections and forward-looking information and the factors influencing them will likely change, HealthSpring will not necessarily update the information except as required by law, as HealthSpring will only provide guidance at certain points during the year. Information contained herein speaks only as of the date of this release.
The following factors, among others, could cause actual results to differ materially from those in the forward-looking statements: changes in membership enrollment and dis-enrollment patterns; legislative and regulatory actions or changes, including changes in Medicare funding and premium rates; changes in our members' utilization of medical services; changes in medical and prescription drug cost trends; the Company's ability to accurately estimate CMS retroactive risk adjustments to Medicare premiums; competition; the Company's ability to accurately estimate incurred but not reported medical claims; negotiation of acceptable contracts with physicians, hospitals, and other providers; contractual disputes with providers; increases in costs or liabilities associated with litigation; costs associated with compliance with regulatory mandates and with responding to regulatory audits; management changes; substantial changes in interest rates over a prolonged period; and changes in tax estimates, assets, or liabilities and valuation allowances related thereto. The foregoing list of factors is not intended to be exhaustive. Additional information concerning these and other important risks and uncertainties can be found under the headings "Special Note Regarding Forward-Looking Statements" and "Item 1A. - Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, and in other public filings by the Company.
Supplemental Information
1. Membership
Sept. 30, June 30, Percent Dec. 31, Percent Sept. 30, Percent
2009 2009 Change 2008 Change 2008 Change
MA
Membership:
Alabama 31,007 30,101 3.0 29,022 6.8 28,651 8.2
Florida 31,513 30,892 2.0 27,568 14.3 27,204 15.8
Illinois 11,077 10,821 2.4 9,245 19.8 9,005 23.0
Mississippi 4,473 4,152 7.7 2,425 84.5 2,183 104.9
Tennessee 57,240 55,917 2.4 49,933 14.6 49,366 16.0
Texas 51,325 50,348 1.9 43,889 16.9 39,896 28.6
Total 186,635 182,231 2.4 162,082 15.1 156,305 19.4
PDP 303,975 294,753 3.1 282,429 7.6 272,469 11.6
Membership:
Commercial: 735 739 (0.5 ) 895 (17.9 ) 921 (20.2 )
2. Segment Information
Financial data by reportable segment for the three and nine months ended
September 30 is as follows (in thousands):
MA-PD PDP Commercial Corporate Total
Three months ended
September 30, 2009
Revenue $ 589,966 $ 69,044 $ 754 $ 16 $ 659,780
EBITDA 71,983 10,644 (269 ) (7,907 ) 74,451
Depreciation and
amortization 6,330 20 -- 1,432 7,782
expense
Three months ended
September 30, 2008
Revenue $ 466,916 $ 59,917 $ 960 $ 106 $ 527,899
EBITDA 57,477 6,429 670 (7,014 ) 57,562
Depreciation and
amortization 6,060 2 -- 985 7,047
expense
Nine months ended
September 30, 2009
Revenue $ 1,736,970 $ 249,158 $ 2,269 $ 42 $ 1,988,439
EBITDA 183,866 18,557 (277 ) (21,596 ) 180,550
Depreciation and
amortization 19,052 60 -- 3,836 22,948
expense
Nine months ended
September 30, 2008
Revenue $ 1,430,899 $ 211,923 $ 4,346 $ 313 $ 1,647,481
EBITDA 190,758 7,974 66 (20,871 ) 177,927
Depreciation and
amortization 18,261 5 -- 3,014 21,280
expense
As of January 1, 2009, the Company revised its methodology for allocating the selling, general, and administrative expenses within its prescription drug operations, which resulted in its allocating a greater share of such expenses to its MA-PD segment. As such, the MA-PD and PDP segment's EBITDA amounts for the 2008 period include reclassification adjustments between segments such that the periods presented are comparable.
A reconciliation of reportable segment EBITDA to net income included in the consolidated statements of income for the three and nine months ended September 30 is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
EBITDA $ 74,451 $ 57,562 $ 180,550 $ 177,927
Income tax expense (20,593 ) (16,635 ) (50,772 ) (51,494 )
Interest expense (3,762 ) (4,520 ) (12,014 ) (14,513 )
Depreciation and (7,782 ) (7,047 ) (22,948 ) (21,280 )
amortization
Net Income $ 42,314 $ 29,360 $ 94,816 $ 90,640
HealthSpring, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet Information
(in thousands)
(Unaudited)
September 30, December 31,
Assets 2009 2008
Current assets:
Cash and cash equivalents $ 389,766 $ 282,240
Accounts receivable, net 71,546 74,398
Investment securities available for sale 6,066 3,259
Investment securities held to maturity 16,040 24,750
Funds due for the benefit of members 4,085 40,212
Deferred income taxes 3,458 4,198
Prepaid expenses and other 8,794 6,560
Total current assets 499,755 435,617
Investment securities available for sale 18,480 30,463
Investment securities held to maturity 41,924 20,086
Property and equipment, net 29,177 26,842
Goodwill 589,760 590,016
Intangible assets, net 207,739 221,227
Restricted investments 16,260 11,648
Risk corridor receivable from CMS 8,967 -
Other 7,176 8,878
Total assets $ 1,419,238 $ 1,344,777
Liabilities and Stockholders' Equity
Current liabilities:
Medical claims liability $ 200,372 $ 190,144
Accounts payable, accrued expenses and other 28,305 35,050
Risk corridor payable to CMS 3,089 1,419
Current portion of long-term debt 35,729 32,277
Total current liabilities 267,495 258,890
Deferred income taxes 80,433 89,615
Long-term debt, less current portion 208,425 235,736
Other long-term liabilities 9,027 9,658
Total liabilities 565,380 593,899
Stockholders' equity:
Common stock 581 578
Additional paid in capital 511,933 504,367
Retained earnings 389,986 295,170
Accumulated other comprehensive loss, net (1,288 ) (1,955 )
Treasury stock (47,354 ) (47,282 )
Total stockholders' equity 853,858 750,878
Total liabilities and stockholders' equity $ 1,419,238 $ 1,344,777
HealthSpring, Inc. and Subsidiaries
Condensed Consolidated Statement of Income Information
(in thousands, except share data)
(Unaudited)
Three Months Ended Nine Moths Ended
September 30, September 30,
2009 2008 2009 2008
Revenue:
Premium revenue $ 649,795 $ 515,892 $ 1,955,842 $ 1,611,450
Management and 9,108 8,207 29,065 24,056
other fees
Investment 877 3,800 3,532 11,975
income
Total revenue 659,780 527,899 1,988,439 1,647,481
Operating
expenses:
Medical expense 519,478 411,703 1,607,481 1,292,042
Selling, general
and 65,851 58,634 200,408 177,512
administrative
Depreciation and 7,782 7,047 22,948 21,280
amortization
Interest expense 3,762 4,520 12,014 14,513
Total operating 596,873 481,904 1,842,851 1,505,347
expenses
Income before 62,907 45,995 145,588 142,134
income taxes
Income taxes (20,593 ) (16,635 ) (50,772 ) (51,494 )
Net income $ 42,314 $ 29,360 $ 94,816 $ 90,640
Net Income per
common share:
Basic $ 0.78 $ 0.53 $ 1.74 $ 1.61
Diluted $ 0.77 $ 0.53 $ 1.73 $ 1.61
Weighted average
common shares
outstanding:
Basic 54,518,162 55,693,943 54,502,081 56,137,029
Diluted 54,700,390 55,811,236 54,653,367 56,243,533
HealthSpring, Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flow Information
(in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Cash flows from
operating activities:
Net income $ 42,314 $ 29,360 $ 94,816 $ 90,640
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and 7,782 7,047 22,948 21,280
amortization
Amortization of deferred 582 599 1,785 1,840
financing cost
Equity in earnings of (178 ) (156 ) (281 ) (357 )
unconsolidated affiliate
Stock-based compensation 2,355 2,235 7,513 6,722
Deferred tax (benefit) (2,209 ) 4,148 (8,794 ) 680
expense
Increase (decrease) in
cash due to:
Accounts receivable 78,605 126,810 3,446 3,997
Prepaid expenses and 503 (803 ) (2,231 ) (1,284 )
other current assets
Medical claims liability (21,087 ) (11,934 ) 10,228 29,570
Accounts payable,
accrued expenses and 2,480 (6,841 ) (6,766 ) 9,029
other current
liabilities
Risk corridor payable 13,304 9,136 (7,298 ) (8,794 )
to/ receivable from CMS
Other (560 ) 221 94 (772 )
Net cash provided by 123,891 159,822 115,460 152,551
operating activities
Cash flows from
investing activities:
Purchases of property (6,018 ) (4,548 ) (11,519 ) (8,386 )
and equipment
Purchases of investment (11,079 ) (9,423 ) (39,766 ) (41,181 )
securities
Maturities of investment 12,933 11,181 36,107 51,296
securities
Deposit made for - (7,200 ) - (7,200 )
acquisition
Additional consideration - - (910 ) -
paid on acquisition
Proceeds received on 297 - 297 -
disposition
Purchases of restricted (5,892 ) (1,900 ) (16,015 ) (6,410 )
investments
Maturities of restricted 5,011 1,906 11,403 5,857
investments
Distributions from 196 185 196 309
affiliates
Net cash (used in) (4,552 ) (9,799 ) (20,207 ) (5,715 )
investing activities
Cash flows from
financing activities:
Funds received for the 169,587 129,936 494,591 378,950
benefit of members
Funds withdrawn for the (186,989 ) (154,719 ) (458,465 ) (374,557 )
benefit of members
Payments on long-term (7,181 ) (3,623 ) (23,859 ) (20,994 )
debt
Proceeds from stock - 923 6 1,210
option exercises
Purchase of treasury - (3 ) - (28,347 )
stock
Net cash (used in)
provided by financing (24,583 ) (27,486 ) 12,273 (43,738 )
activities
Net increase in cash and 94,756 122,537 107,526 103,098
cash equivalents
Cash and cash
equivalents at beginning 295,010 304,651 282,240 324,090
of period
Cash and cash
equivalents at end of $ 389,766 $ 427,188 $ 389,766 $ 427,188
period
Source: HealthSpring, Inc.
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