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News Releases

News Release

Health Net Reports Second Quarter 2009 Adjusted1 Net Income of $50.8 Million, or $0.49 Per Diluted Share
Click here for the transcript of the conference call in PDF format.
The Company Recorded $7.9 Million in Retroactive Northeast Regulatory Fees, Assessments and Taxes in the Second Quarter

LOS ANGELES--(BUSINESS WIRE)--Aug. 4, 2009-- Health Net, Inc. (NYSE:HNT) today announced second quarter 2009 GAAP net income of $40.1 million, or $0.38 per diluted share, compared with $76.7 million, or $0.71 per share, for the second quarter of 2008.

The second quarter 2009 GAAP results include the effect of a $17.6 million pretax charge. The charge consists of $19.6 million comprised primarily of severance and other expenses related to the company’s previously announced operations strategy, reduced by a $2.1 million benefit from a litigation reserve true-up.

Excluding the after-tax impact of the charge, net income in the second quarter of 2009 was $50.8 million, or $0.49 per diluted share, which was in line with the company’s expectations. Net income in the second quarter of 2008 was $80.0 million, or $0.74 per diluted share, excluding the impact of a $13.0 million pretax charge related to the company’s operations strategy.

The company’s second quarter results also include the impact of approximately $7.9 million in retroactive regulatory fees, assessments and premium taxes relating to its Northeast health plans.

“Our second quarter results show continued progress consistent with the strategy we laid out at our investor day last November. We are particularly pleased with the performance of our Western health plans,” said Jay Gellert, president and chief executive officer of Health Net, Inc.

On July 20, 2009, Health Net announced that it had entered into a definitive agreement with UnitedHealthcare for the sale of Health Net’s Northeast health plan subsidiaries and membership renewal rights.

Membership

Total health plan enrollment as of June 30, 2009 was approximately 3.6 million members, a decrease of 158,000 members, or 4.2 percent, compared with June 30, 2008. Sequentially, total health plan enrollment increased by 42,000 members, or 1.2 percent, from March 31, 2009.

Total commercial risk enrollment decreased by 180,000 members, or 8.4 percent, to approximately 2.0 million members as of June 30, 2009 compared with June 30, 2008. Sequentially, commercial risk enrollment decreased by 5,000 members, or 0.3 percent, since March 31, 2009.

“We are encouraged that, due to new sales, the commercial membership attrition rate is slowing. However, a weak labor market continues to have an impact on membership,” said Jim Woys, Health Net’s chief operating officer.

“Our Western region health plans produced commercial new sales of 42,000 members in the second quarter, with 15,000 of these new members in California’s more affordable products, including Salud con Health Net, Elect Open Access and narrow network products,” Woys added. “Many customers are choosing these more affordable alternatives, especially given the current economic environment. The diversity and flexibility of our products are meeting these needs.”

Enrollment in the company’s Medicare Advantage plans decreased by 1,000 members, or 0.4 percent, to 284,000 members at the end of the second quarter of 2009 compared with the end of the second quarter of 2008. Sequentially, Medicare Advantage membership increased by 2,000 members, or nearly 1.0 percent, from March 31, 2009.

Membership in the company’s Medicare PDP plans was 458,000 at the end of the second quarter of 2009, a decrease of 68,000 members, or 12.9 percent, compared with the end of the second quarter of 2008. Sequentially, PDP membership increased by 9,000 members, or 2.0 percent, from March 31, 2009.

Medicaid enrollment at June 30, 2009 was 878,000 members, an increase of 97,000 members, or 12.4 percent, from June 30, 2008. Sequentially, Medicaid membership increased by 36,000 members, or 4.3 percent, from March 31, 2009. Both the quarter-over-quarter and sequential increases in Medicaid enrollment were the result of the economic downturn that causes the Medicaid-eligible population to increase.

Revenues, Health Care Costs and G&A Expenses

Health Net’s total revenues increased 4.5 percent in the second quarter of 2009 to $4.0 billion from $3.8 billion in the second quarter of 2008. Health plan services premium revenues increased approximately 1.2 percent to approximately $3.2 billion in the second quarter of 2009 compared with $3.1 billion in the second quarter of 2008.

The company’s Government contracts revenues increased 19.7 percent in the second quarter of 2009 to $832.1 million from $694.9 million in the second quarter of 2008. The increase was the result of Option Period 6 pricing for the company’s TRICARE contract. Additionally, Health Net’s Military & Family Life Consultant program continued to grow. This program with the Department of Defense is administered by Health Net’s behavioral health subsidiary, Managed Health Network, Inc. (MHN).

The health plan services medical care ratio (MCR) was 86.2 percent in the second quarter of 2009 and 85.3 percent in the second quarter of 2008. On an adjusted1 basis, the health plan services MCR in the second quarter of 2009 was 86.3 percent compared with 85.3 percent in the second quarter of 2008.

The commercial MCR was 86.1 percent in the second quarter of 2009 and 84.2 percent in the second quarter of 2008. Excluding the $2.1 million litigation reserve true-up benefit in the second quarter of 2009, the commercial MCR would have been 10 basis points higher than the reported commercial MCR, or 86.2 percent.

Commercial premium yields per member per month (PMPM) increased by 8.0 percent in the second quarter of 2009 compared with the second quarter of 2008.

Total commercial health care costs PMPM increased 10.5 percent in the second quarter of 2009 compared with the second quarter of 2008. Excluding the litigation reserve true-up benefit, total commercial health care costs PMPM would have been 10 basis points higher in the second quarter of 2009, or 10.6 percent.

“Our second quarter 2008 commercial health care costs were restated higher in the second half of last year, and the 2009 second quarter was impacted by H1N1 flu,” Woys said. “Taking this into account, we remain on track to produce a positive commercial premium yield and health care cost spread of approximately 50 basis points for the full year of 2009. We continue to maintain pricing discipline, and our underlying commercial health care cost trends are consistent with expectations,” said Woys.

Health Net’s Medicare plans continued to perform well in the second quarter of 2009. The Medicare Advantage MCR improved by 450 basis points in the second quarter of 2009 compared with the second quarter of 2008.

“We made many adjustments to our benefit packages and premiums in both Medicare Advantage and Part D for 2009, and we are pleased that these changes are producing the desired results,” added Woys. “Our Medicare Advantage plans continue to be popular in our core, network-model markets.”

The Government contracts cost ratio was 95.1 percent in the second quarter of 2009 compared with 94.7 percent in the second quarter of 2008 and 95.5 percent in the first quarter of 2009. The sequential improvement in the second quarter of 2009 was a result of Option Period 6 pricing on the TRICARE contract and additional volume on the Military & Family Life Consultant contract.

“The Government contracts ratio in the second quarter of 2009 was in line with our expectations,” said Woys. “We continue to expect that the Government contracts ratio will be in the 95.0 to 95.5 percent range in 2009.”

On a GAAP basis, general and administrative (G&A) expense was $332.2 million in the second quarter of 2009 compared with $297.5 million in the second quarter of 2008. On an adjusted basis1, G&A expense was $312.5 million in the second quarter of 2009 compared with $284.4 million in the second quarter of 2008.

On an adjusted1 basis, Health Net’s G&A expense ratio in the second quarter of 2009 increased 80 basis points compared with the second quarter of 2008. “Excluding the impact of the regulatory fees, assessments and premium taxes related to the Northeast business, G&A in the second quarter was consistent with our plans. We continue to expect a G&A expense ratio of 9.6 percent to 9.8 percent in 2009,” said Woys.

Health Net’s selling expenses of $81.4 million in the second quarter of 2009 decreased by $6.9 million compared with the second quarter of 2008, primarily a result of a decrease in commercial membership during the quarter.

Balance Sheet

Cash and investments as of June 30, 2009 were $2.1 billion compared with $2.3 billion as of June 30, 2008, and $2.1 billion as of March 31, 2009.

Reserves for claims and other settlements as of June 30, 2009 were $1.2 billion compared with $1.4 billion as of June 30, 2008.

Days claims payable (DCP), including provider and other claims settlements and charges, capitation payments and Medicare Part D expenses, for the second quarter of 2009 decreased by 4.7 days to 43.1 days compared with 47.8 days in the second quarter of 2008, and decreased sequentially by 1.0 day compared with the first quarter of 2009.

On an adjusted2 basis, DCP in the second quarter of 2009 decreased by 1.8 days to 54.2 days compared with the second quarter of 2008, and decreased by 0.9 days sequentially.

“The small sequential decrease in DCP is the result of an $85.2 million reduction in claims payable during the second quarter of 2009,” said Joseph Capezza, Health Net’s chief financial officer. “In the context of the Northeast transaction, we reduced claims inventory in the Northeast by 32 percent. We believe that this was a prudent step as we prepare for the transition of the Northeast business to UnitedHealthcare.”

The company’s debt-to-total capital ratio was 25.2 percent as of June 30, 2009 compared with 27.8 percent as of June 30, 2008 and 26.3 percent as of March 31, 2009.

Cash Flow

Operating cash flow was negative $54.2 million in the second quarter of 2009. This result was driven by an $85.2 million sequential reduction in claims payables due to inventory reductions, certain legal settlements and the payment of provider shared-risk settlements. In addition, the company paid $30 million, primarily related to previously recorded charges for severance and other items during the quarter.

“We anticipate receiving approximately $250 million in Part D and Medicare risk adjuster payments in the second half of 2009. We received $100 million of that in July 2009,” said Capezza. “Therefore, we continue to believe that operating cash flow for the full year of 2009 will be approximately $325 million to $350 million.”

2009 Guidance

Including the impact of $60 million to $70 million in expected operations strategy-related pretax charges in 2009, Health Net continues to expect 2009 full-year GAAP earnings per diluted share of $1.85 to $2.05 based on expected diluted weighted average shares of 104 to 105 million shares. Excluding these charges, the company continues to expect full-year 2009 earnings per diluted share of $2.25 to $2.35.

“Due to retroactive regulatory fees, assessments and premium taxes in the Northeast that were not included in our original plan, we are reducing the upper end of our GAAP and non-GAAP guidance by $0.05 per diluted share,” said Capezza.

The company is currently evaluating the impact of the potential sale of the Northeast business on its 2009 financial results, including potential impairment of goodwill and other intangibles, tax benefits, severance costs, other transaction-related costs and operating costs that will be incurred during the transition period following the close of the transaction.

The table on the following page updates previously issued full-year 2009 guidance.

Metric

       

2009 Guidance

Year-end Membership         Commercial Risk: –3% to –5%
Medicaid: +6% to +8% (previously +4% to +5%)
Medicare Advantage: –1% to –2%
          PDP: –15% to –20%

Consolidated Revenues

       

$15.5 billion to $16.0 billion

Commercial Yields

       

~ 7.5% – 8.0% (previously ~8.0 – 8.5%)

Commercial

Health Care Cost Trends

       

~ 7.0% – 7.5% (previously ~7.5 – 8.0%)

Selling Cost Ratio ~ 2.9%
Government Contracts Ratio ~ 95.0% to 95.5%
G&A Expense Ratio((a))         ~ 9.6% to 9.8%

Tax Rate(a)

       

38.5% to 38.7%

Weighted-average Fully
Diluted Shares Outstanding         104 million to 105 million
GAAP EPS((b)) $1.85 to $2.05 (previously $1.85 to $2.10)
Non-GAAP EPS((a))         $2.25 to $2.35 (previously $2.25 to $2.40)

(a) Excludes the impact of expected operations strategy-related charges of $60 million to $70 million in 2009.

(b) The company is currently evaluating the impact of the potential sale of the Northeast business on its 2009 financial results, including potential impairment of goodwill and other intangibles, tax benefits, severance costs, other transaction-related costs and operating costs that will be incurred during the transition period following the close of the transaction.

Conference Call

As previously announced, Health Net will discuss the company’s second quarter 2009 results during a conference call on Tuesday, August 4, 2009, beginning at approximately 11:00 a.m. Eastern time. The conference call should be accessed at least 15 minutes prior to its start with the following numbers:

          866.393.1637 (Domestic)           800.642.1687 (Replay – Domestic)
706.643.5711 (International) 706.645.9291 (Replay – International)

An access code is required for both the live conference call and the replay. The access code is 17080650. A replay of the conference call will be available through 12.00 a.m. Eastern time on August 9, 2009. A live webcast and replay of the conference call also will be available at www.healthnet.com under “Investor Relations.” The conference call webcast is open to all interested parties. Anyone listening to the company’s conference call will be presumed to have read Health Net’s Annual Report on Form 10-K for the year ended December 31, 2008, Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, and other reports filed by the company from time to time with the Securities and Exchange Commission.

About Health Net

Health Net, Inc. is among the nation’s largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company’s health plans and government contracts subsidiaries provide health benefits to approximately 6.7 million individuals across the country through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs programs. Health Net’s behavioral health subsidiary, MHN, provides mental health benefits to approximately 6.6 million individuals in all 50 states. The company’s subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.

For more information on Health Net, Inc., please visit the company’s Web site at www.healthnet.com.

Cautionary Statements

All statements in this press release, other than statements of historical information provided herein, may be deemed to be forward-looking statements and as such are subject to a number of risks and uncertainties. These statements are based on management’s analysis, judgment, belief and expectation only as of the date hereof, and are subject to uncertainty and changes in circumstances. Without limiting the foregoing, statements including the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate,” “intend” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to, among other things, any failure to close the pending sale of our Northeast business; costs, fees and expenses related to the pending sale and proposed post-closing administrative services; potential termination of our TRICARE North operations; rising health care costs; a continued decline in the economy; negative prior period claims reserve developments; investment portfolio impairment charges; volatility in the financial markets; trends in medical care ratios; unexpected utilization patterns or unexpectedly severe or widespread illnesses; membership declines; rate cuts affecting our Medicare or Medicaid businesses; litigation costs; regulatory issues; operational issues; health care reform and general business and market conditions. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the “Risk Factors” section included within the company's most recent Annual Report on Form 10-K, subsequent quarterly reports on Form 10-Q, and the risks discussed in the company’s other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to publicly revise any of its forward-looking statements to reflect events or circumstances that arise after the date of this release.

Footnotes

1Detailed explanations of the non-GAAP financial measures referred to in this release and reconciliations to the comparable GAAP measures are included in the attached financial tables.

2See footnote (a) in the Notes to Consolidated Financial Statements in the financial schedules attached to this release for a reconciliation of this information to the comparable GAAP financial measure.

Health Net, Inc.
Enrollment Data - By State
(In thousands)
            Change from
March 31, 2009   June 30, 2008
June 30, Mar 31, June 30, Increase/   % Increase/   %
2009 2009 2008 (Decrease) Change (Decrease) Change
California
Large Group 908 920 971 (12 ) (1.3 )% (63 ) (6.5 )%
Small Group and Individual 380 393 453 (13 ) (3.3 )% (73 ) (16.1 )%
Commercial Risk 1,288 1,313 1,424 (25 ) (1.9 )% (136 ) (9.6 )%
ASO 3 2 5 1   50.0 % (2 ) (40.0 )%
Total Commercial 1,291 1,315 1,429 (24 ) (1.8 )% (138 ) (9.7 )%
Medicare Advantage 134 132 126 2 1.5 % 8 6.3 %
Medi-Cal 827 793 737 34   4.3 % 90   12.2 %
Total California 2,252 2,240 2,292 12   0.5 % (40 ) (1.7 )%
 
Connecticut
Large Group 92 94 124 (2 ) (2.1 )% (32 ) (25.8 )%
Small Group and Individual 23 24 25 (1 ) (4.2 )% (2 ) (8.0 )%
Commercial Risk 115 118 149 (3 ) (2.5 )% (34 ) (22.8 )%
ASO 26 26 25 0   0.0 % 1   4.0 %
Total Commercial 141 144 174 (3 ) (2.1 )% (33 ) (19.0 )%
Medicare Advantage 52 52 57 0 0.0 % (5 ) (8.8 )%
Medicaid 0 0 0 0   0.0 % 0   0.0 %
Total Connecticut 193 196 231 (3 ) (1.5 )% (38 ) (16.5 )%
 
New York
Large Group 97 98 104 (1 ) (1.0 )% (7 ) (6.7 )%
Small Group and Individual 145 115 109 30   26.1 % 36   33.0 %
Commercial Risk 242 213 213 29 13.6 % 29 13.6 %
ASO 7 7 11 0   0.0 % (4 ) (36.4 )%
Total Commercial 249 220 224 29 13.2 % 25 11.2 %
Medicare Advantage 2 3 6 (1 ) (33.3 )% (4 ) (66.7 )%
Total New York 251 223 230 28   12.6 % 21   9.1 %
 
New Jersey
Large Group 19 19 22 0 0.0 % (3 ) (13.6 )%
Small Group and Individual 61 56 56 5   8.9 % 5   8.9 %
Commercial Risk 80 75 78 5 6.7 % 2 2.6 %
ASO 2 3 3 (1 ) (33.3 )% (1 ) (33.3 )%
Total Commercial 82 78 81 4 5.1 % 1 1.2 %
Medicaid 51 49 44 2   4.1 % 7   15.9 %
Total New Jersey 133 127 125 6   4.7 % 8   6.4 %
 
Arizona
Large Group 64 69 84 (5 ) (7.2 )% (20 ) (23.8 )%
Small Group and Individual 39 43 54 (4 ) (9.3 )% (15 ) (27.8 )%
Commercial Risk 103 112 138 (9 ) (8.0 )% (35 ) (25.4 )%
Medicare Advantage 65 65 64 0   0.0 % 1   1.6 %
Total Arizona 168 177 202 (9 ) (5.1 )% (34 ) (16.8 )%
 
Oregon
Large Group 86 89 103 (3 ) (3.4 )% (17 ) (16.5 )%
Small Group and Individual 47 46 36 1   2.2 % 11   30.6 %
Commercial Risk 133 135 139 (2 ) (1.5 )% (6 ) (4.3 )%
Medicare Advantage 24 23 22 1   4.3 % 2   9.1 %
Total Oregon 157 158 161 (1 ) (0.6 )% (4 ) (2.5 )%
 
Other States
Medicare Advantage 7 7 10 0   0.0 % (3 ) (30.0 )%
 
Medicare PDP (stand-alone) 458 449 526 9   2.0 % (68 ) (12.9 )%
 
                                 
Total Health Plan Enrollment
Large Group 1,266 1,289 1,408 (23 ) (1.8 )% (142 ) (10.1 )%
Small Group and Individual 695 677 733 18   2.7 % (38 ) (5.2 )%
Commercial Risk 1,961 1,966 2,141 (5 ) (0.3 )% (180 ) (8.4 )%
ASO 38 38 44 0   0.0 % (6 ) (13.6 )%
Total Commercial 1,999 2,004 2,185 (5 ) (0.2 )% (186 ) (8.5 )%
Medicare Advantage 284 282 285 2 0.7 % (1 ) (0.4 )%
Medicare PDP (stand-alone) 458 449 526 9 2.0 % (68 ) (12.9 )%
Medi-Cal/Medicaid 878 842 781 36   4.3 % 97   12.4 %
    Total Health Plans   3,619   3,577   3,777   42     1.2 %   (158 )   (4.2 )%
 
 
TRICARE - North Contract Eligibles   3,040   3,004   2,951   36     1.2 %   89     3.0 %
 
Health Net, Inc.
Enrollment Data - Line of Business
(In thousands)
          Change from
March 31, 2009   June 30, 2008
June 30, Mar 31, June 30, Increase/   % Increase/   %
2009 2009 2008 (Decrease) Change (Decrease) Change
 
Large Group
California 908 920 971 (12 ) (1.3 )% (63 ) (6.5 )%
Connecticut 92 94 124 (2 ) (2.1 )% (32 ) (25.8 )%
New York 97 98 104 (1 ) (1.0 )% (7 ) (6.7 )%
New Jersey 19 19 22 0 0.0 % (3 ) (13.6 )%
Arizona 64 69 84 (5 ) (7.2 )% (20 ) (23.8 )%
Oregon 86 89 103 (3 ) (3.4 )% (17 ) (16.5 )%
1,266 1,289 1,408 (23 ) (1.8 )% (142 ) (10.1 )%
 
Small Group and Individual
California 380 393 453 (13 ) (3.3 )% (73 ) (16.1 )%
Connecticut 23 24 25 (1 ) (4.2 )% (2 ) (8.0 )%
New York 145 115 109 30 26.1 % 36 33.0 %
New Jersey 61 56 56 5 8.9 % 5 8.9 %
Arizona 39 43 54 (4 ) (9.3 )% (15 ) (27.8 )%
Oregon 47 46 36 1   2.2 % 11   30.6 %
695 677 733 18   2.7 % (38 ) (5.2 )%
 
Commercial Risk
California 1,288 1,313 1,424 (25 ) (1.9 )% (136 ) (9.6 )%
Connecticut 115 118 149 (3 ) (2.5 )% (34 ) (22.8 )%
New York 242 213 213 29 13.6 % 29 13.6 %
New Jersey 80 75 78 5 6.7 % 2 2.6 %
Arizona 103 112 138 (9 ) (8.0 )% (35 ) (25.4 )%
Oregon 133 135 139 (2 ) (1.5 )% (6 ) (4.3 )%
1,961 1,966 2,141 (5 ) (0.3 )% (180 ) (8.4 )%
 
ASO
California 3 2 5 1 50.0 % (2 ) (40.0 )%
Connecticut 26 26 25 0 0.0 % 1 4.0 %
New York 7 7 11 0 0.0 % (4 ) (36.4 )%
New Jersey 2 3 3 (1 ) (33.3 )% (1 ) (33.3 )%
38 38 44 0 0.0 % (6 ) (13.6 )%
 
Total Commercial
California 1,291 1,315 1,429 (24 ) (1.8 )% (138 ) (9.7 )%
Connecticut 141 144 174 (3 ) (2.1 )% (33 ) (19.0 )%
New York 249 220 224 29 13.2 % 25 11.2 %
New Jersey 82 78 81 4 5.1 % 1 1.2 %
Arizona 103 112 138 (9 ) (8.0 )% (35 ) (25.4 )%
Oregon 133 135 139 (2 ) (1.5 )% (6 ) (4.3 )%
1,999 2,004 2,185 (5 ) (0.2 )% (186 ) (8.5 )%
 
Medicare Advantage
California 134 132 126 2 1.5 % 8 6.3 %
Connecticut 52 52 57 0 0.0 % (5 ) (8.8 )%
New York 2 3 6 (1 ) (33.3 )% (4 ) (66.7 )%
Arizona 65 65 64 0 0.0 % 1 1.6 %
Oregon 24 23 22 1 4.3 % 2 9.1 %
Other States 7 7 10 0   0.0 % (3 ) (30.0 )%
284 282 285 2 0.7 % (1 ) (0.4 )%
 
Medi-Cal/Medicaid
California 827 793 737 34 4.3 % 90 12.2 %
Connecticut 0 0 0 0 0.0 % 0 0.0 %
New Jersey 51 49 44 2   4.1 % 7   15.9 %
878 842 781 36 4.3 % 97 12.4 %
 
Medicare PDP (stand-alone) 458 449 526 9   2.0 % (68 ) (12.9 )%
 
                                 
Total Health Plan Enrollment
Large Group 1,266 1,289 1,408 (23 ) (1.8 )% (142 ) (10.1 )%
Small Group and Individual 695 677 733 18   2.7 % (38 ) (5.2 )%
Commercial Risk 1,961 1,966 2,141 (5 ) (0.3 )% (180 ) (8.4 )%
ASO 38 38 44 0   0.0 % (6 ) (13.6 )%
Total Commercial 1,999 2,004 2,185 (5 ) (0.2 )% (186 ) (8.5 )%
Medicare Advantage 284 282 285 2 0.7 % (1 ) (0.4 )%
Medicare PDP (stand-alone) 458 449 526 9 2.0 % (68 ) (12.9 )%
Medi-Cal/Medicaid 878 842 781 36   4.3 % 97   12.4 %
    Total Health Plans   3,619   3,577   3,777   42     1.2 %   (158 )   (4.2 )%
 
 
TRICARE - North Contract Eligibles   3,040   3,004   2,951   36     1.2 %   89     3.0 %
 
Health Net, Inc.
Consolidated Statements of Operations
(Amounts in thousands, except per share, PMPM and ratio data)
           
 
Quarter Ended Quarter Ended Quarter Ended
June 30, March 31, June 30,
REVENUES: 2008 2009 2009
Health plan services premiums $ 3,114,168 $ 3,139,251 3,152,783
Government contracts 694,885 759,339 832,088
Net investment income 20,931 24,321 20,432
Administrative services fees and other income   11,516     9,892     8,387  
  3,841,500     3,932,803     4,013,690  
 
EXPENSES:
Health plan services 2,655,066 2,721,779 2,718,039
Government contracts 658,255 725,002 791,044
General and administrative 297,475 354,910 332,188
Selling 88,243 81,410 81,359
Depreciation and amortization 13,073 16,040 15,708
Interest   11,316     9,567     11,518  
3,723,428 3,908,708 3,949,856
Income from operations before income taxes 118,072 24,095 63,834
Income tax provision   41,394     2,060     23,694  
Net income $ 76,678   $ 22,035   $ 40,140  
 
Basic earnings per share $ 0.71 $ 0.21 $ 0.39
Diluted earnings per share $ 0.71 $ 0.21 $ 0.38
 
Weighted average shares outstanding:
Basic 107,308 103,766 103,854
Diluted 108,338 104,265 104,323
 
Pretax margin 3.1 % 0.6 % 1.6 %
Health plan services MCR 85.3 % 86.7 % 86.2 %
Government contracts cost ratio 94.7 % 95.5 % 95.1 %
G&A expense ratio 9.5 % 11.3 % 10.5 %
Selling costs ratio 2.8 % 2.6 % 2.6 %
Days claims payable (a) 47.8 44.1 43.1
Days claims payable - adjusted (a) 56.0 55.1 54.2
Effective tax rate 35.1 % 8.5 % 37.1 %
Health plan services premiums PMPM $ 278.25 $ 295.91 $ 295.11
Health plan services costs PMPM $ 237.23 $ 256.56 $ 254.41
 
Health Net, Inc.
Reconciliation of Non-GAAP Financial Measures
Operating Results Excluding Charges
(Amounts in thousands, except per share, PMPM and ratio data)
 

Note: This table presents the company's consolidated operations for the periods presented below and the charges recorded in the consolidated statement of operations. Management believes that the presentation of certain financial information in the attached press release (such as Net investment income, Health plan services expense, General and administrative expense, Income before income taxes, Income tax provision, Net income, Basic and diluted earnings per share, Pretax margin, MCR, G&A expense ratio, and effective tax rate), excluding the charges that were recorded, all of which are non-GAAP financial information, are important to investors as they exclude special items that are not indicative of our core operating results. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP.

                     
 
Quarter Ended June 30, 2008 Quarter Ended March 31, 2009 Quarter Ended June 30, 2009
Excluding Excluding Excluding
Impact of Impact of Impact of Impact of Impact of Impact of
As Reported Charge1 Charge As Reported Charge2 Charge As Reported Charge3 Charge
REVENUES:
Health plan services premiums $ 3,114,168 $ 3,114,168 $ 3,139,251 $ 3,139,251 $ 3,152,783 $ 3,152,783
Government contracts 694,885 694,885 759,339 759,339 832,088 832,088
Net investment income 20,931 20,931 24,321 24,321 20,432 20,432
Administrative services fees and other income   11,516       11,516     9,892       9,892     8,387       8,387  
  3,841,500     -     3,841,500     3,932,803     -     3,932,803     4,013,690     -     4,013,690  
 
EXPENSES:
Health plan services 2,655,066 2,655,066 2,721,779 $ (2,178 ) 2,723,957 2,718,039 (2,056 ) 2,720,095
Government contracts 658,255 658,255 725,002 725,002 791,044 791,044
General and administrative 297,475 13,037 284,438 354,910 $ 46,934 307,976 332,188 19,646 312,542
Selling 88,243 88,243 81,410 81,410 81,359 81,359
Depreciation and amortization 13,073 13,073 16,040 16,040 15,708 15,708
Interest   11,316       11,316     9,567       9,567     11,518       11,518  
3,723,428 13,037 3,710,391 3,908,708 44,756 3,863,952 3,949,856 17,590 3,932,266
Income (loss) from operations before income taxes 118,072 (13,037 ) 131,109 24,095 (44,756 ) 68,851 63,834 (17,590 ) 81,424
Income tax provision (benefit)   41,394     (9,739 )   51,133     2,060     (24,516 )   26,576     23,694     (6,977 )   30,671  
Net income (loss) $ 76,678   $ (3,298 ) $ 79,976   $ 22,035   $ (20,240 ) $ 42,275   $ 40,140   $ (10,613 ) $ 50,753  
 
Basic earnings (loss) per share $ 0.71 $ 0.75 $ 0.21 $ (0.20 ) $ 0.41 $ 0.39 $ (0.10 ) $ 0.49
Diluted earnings (loss) per share $ 0.71 $ (0.03 ) $ 0.74 $ 0.21 $ (0.20 ) $ 0.41 $ 0.38 $ (0.11 ) $ 0.49
 
Weighted average shares outstanding:
Basic 107,308 107,308 103,766 103,766 103,854 103,854
Diluted 108,338 108,338 104,265 104,265 104,323 104,323
 
Pretax margin 3.1 % -0.3 % 3.4 % 0.6 % -1.2 % 1.8 % 1.6 % -0.4 % 2.0 %
Health plan services MCR 85.3 % 0.0 % 85.3 % 86.7 % -0.1 % 86.8 % 86.2 % -0.1 % 86.3 %
Government contracts cost ratio 94.7 % - 94.7 % 95.5 % - 95.5 % 95.1 % - 95.1 %
G&A expense ratio 9.5 % 0.4 % 9.1 % 11.3 % 1.5 % 9.8 % 10.5 % 0.6 % 9.9 %
Selling costs ratio 2.8 % - 2.8 % 2.6 % - 2.6 % 2.6 % - 2.6 %
Effective tax rate 35.1 % -3.9 % 39.0 % 8.5 % -30.1 % 38.6 % 37.1 % -0.6 % 37.7 %
 
                                       
 

1 Includes a $0.7 million pretax benefit for a litigation reserve true-up and a $13.7 million pretax charge primarily for severance and other expenses related to the company's operations strategy and included in G&A.

 

2 Includes a $2.2 million pretax benefit for a litigation reserve true-up included in health plan services expenses and a $46.9 million pretax charge primarily for severance and other expenses related to the company's operations strategy and included in G&A.

 

3 Includes a $2.1 million pretax benefit for a litigation reserve true-up included in health plan services expenses and a $19.7 million pretax charge primarily for severance and other expenses related to the company's operations strategy and included in G&A.

 

Health Net, Inc.
Consolidated Balance Sheet
(Amounts in thousands, except ratio data)
     
June 30, March 31, June 30,
2008 2009 2009
ASSETS
Current Assets
  Cash and cash equivalents $ 760,648 $ 739,824 $ 565,856
Investments - available for sale 1,514,421 1,374,883 1,477,651
Premiums receivable, net 400,918 417,664 414,199
Amounts receivable under government contracts 262,877 265,028 279,290

Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract

280,801 290,835 334,104
Other receivables 92,310 198,688 181,563
Deferred taxes 107,478 104,154 77,600
Other assets   223,326     199,517     207,383  
Total current assets 3,642,779 3,590,593 3,537,646
Property and equipment, net 234,423 178,248 169,925
Goodwill, net 751,949 751,949 751,949
Other intangible assets, net 101,216 86,935 82,698
Deferred taxes 55,096 55,549 67,247
Investments - available for sale-noncurrent - - 60,047
Other noncurrent assets   135,896     141,344     133,501  
Total Assets $ 4,921,359   $ 4,804,618   $ 4,803,013  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Reserves for claims and other settlements $ 1,357,756 $ 1,328,709 $ 1,243,517
Health care and other costs payable under government contracts 78,341 71,486 76,709
IBNR health care costs payable under TRICARE North contract 280,801 290,835 334,104
Unearned premiums 190,204 209,019 184,881
Borrowings under amortizing financing facility 26,028 133,519 117,999
Accounts payable and other liabilities   327,782     317,862     352,890  
Total current liabilities 2,260,912 2,351,430 2,310,100
Senior notes payable 398,173 398,327 398,378
Borrowings under amortizing financing facility 117,984 - -
Borrowings under revolving credit facility 145,000 100,000 100,000
Other noncurrent liabilities   215,199     179,944     167,993  
Total Liabilities   3,137,268     3,029,701     2,976,471  
 
Stockholders' Equity
Common stock and additional paid-in capital 1,173,132 1,185,297 1,191,021
Treasury common stock, at cost (1,267,192 ) (1,368,825 ) (1,368,825 )
Retained earnings 1,890,095 1,966,135 2,006,275
Accumulated other comprehensive loss   (11,944 )   (7,690 )   (1,929 )
Total Stockholders' Equity   1,784,091     1,774,917     1,826,542  
Total Liabilities and Stockholders' Equity $ 4,921,359   $ 4,804,618   $ 4,803,013  
 
Debt-to-Total Capital Ratio 27.8 % 26.3 % 25.2 %
 
Health Net, Inc.
Consolidated Statements of Cash Flows
(Amounts in thousands)
     
 
Quarter Ended Quarter Ended Quarter Ended
June 30, March 31, June 30,
2008 2009 2009
 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 76,678 $ 22,035 $ 40,140

Adjustments to reconcile net income to net cash operating activities:

  Amortization and depreciation 13,073 16,040 15,708
Share-based compensation expense 7,888 5,838 5,987
Deferred income taxes 1,975 10,424 11,579
Excess tax benefits from share-based compensation (6 ) - -
Asset and investment impairment charges 841 11,893 491
Other changes 4,796 (2,719 ) 1,140
Changes in assets and liabilities:
Premiums receivable and unearned premiums (58,723 ) (81,664 ) (20,673 )
Other receivables, deferred taxes and other assets 35,652 44,979 29,290
Amounts receivable/payable under government contracts 8,196 (22,149 ) (9,039 )
Reserves for claims and other settlements (72,974 ) (9,440 ) (85,192 )
Accounts payable and other liabilities   (97,888 )   (1,062 )   (43,598 )
Net cash used in operating activities   (80,492 )   (5,825 )   (54,167 )
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments 209,569 331,926 307,407
Maturities of investments 89,812 55,038 51,010
Purchases of investments (296,988 ) (257,567 ) (455,652 )
Proceeds from sale of property and equipment - 3,835 -
Purchases of property and equipment (60,078 ) (4,782 ) (5,081 )
Net sales and purchases of restricted investments and other   1,959     504     (41 )
Net cash (used in) provided by investing activities   (55,726 )   128,954     (102,357 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases 842 -
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding Health Net, Inc.'s business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report or Form 10-K for the most recently ended fiscal year.