Coventry Health Care Reports Second Quarter Earnings

Published on Friday, 30 July 2010 06:49 Written by TradersHuddle Staff

BETHESDA, Md.-( Business Wire )-

Coventry Health Care, Inc. (NYSE:CVH) today reported consolidated operating results for the quarter ended June 30, 2010. Operating revenues totaled $2.9 billion for the quarter with net earnings of $1.0 million, or $0.01 earnings per diluted share (EPS). These results include a favorable impact from the Medicare Advantage Private Fee-for-Service (MA-PFFS) product of $0.18 EPS and an unfavorable impact related to the previously announced provider class action litigation in Louisiana of $1.18 EPS. Excluding the impact of MA-PFFS results⁽¹⁾ and the provider class action charge⁽²⁾, earnings for the quarter were $149.2 million, or $1.01 EPS. Additionally, the Company has increased guidance for full year 2010 as detailed on page 3.

“The outstanding second quarter fundamentals that Coventry reported today are a result of the sharper focus and execution that have returned to the organization with all seven of our core businesses performing at or above expectations,” said Allen F. Wise, chairman and chief executive officer of Coventry. “Our diversified portfolio of risk and fee-based businesses combined with a relentless emphasis on driving a low cost structure throughout the organization positions us well for continued success in the long term.”

Consolidated Highlights

• Commercial risk membership of 1,522,000, an organic increase of 21,000 members sequentially
• Sequential membership growth in Medicare Advantage Coordinated Care Plans (MA-CCP), Medicare Part D, and Medicaid
• Announced an agreement to acquire Mercy Health Plans, a diversified health plan with approximately 180,000 members throughout Missouri and northwest Arkansas
• GAAP cash flows from operations were $120.9 million
• Approximately $670 million of deployable free cash at the parent at quarter-end

(1)		The Company did not renew the MA-PFFS product line effective January 1, 2010 and is in the process of paying claims liabilities related to prior dates of service. The Company believes that disclosing adjusted earnings figures which exclude the 2010 impact of the MA-PFFS results provides a more meaningful measure of its operating results for comparison to future periods and previously announced guidance.
(2)		On July 2, 2010, the Company announced that it will incur a non-recurring pre-tax charge to earnings in the second quarter of 2010 in the amount of $278 million, or $1.18 per share related to such litigation. The Company believes that disclosing adjusted earnings figures which exclude the impact of this litigation provides a more meaningful measure of its operating results for comparison to future periods and previously announced guidance.

Selected Second Quarter 2010 Highlights

• Health Plan Commercial Group Risk. Reported commercial group risk premium yields rose to $313.92 per member per month (PMPM) in the quarter, an increase of 4.7% from the prior year quarter. Reported commercial group risk premium yields rose to $313.00 PMPM year-to-date, an increase of 5.0% from the prior year-to-date. The health plan commercial group risk MLR was 78.3% in the quarter, a decrease of 340 basis points from the prior year quarter.
• Medicare Advantage. As of June 30, 2010, MA-CCP membership was 192,000, an increase of 10,000 members from the prior year quarter. The MA-CCP MLR was 81.2% in the quarter. During the second quarter, the MA-PFFS product line contributed $0.18 EPS largely due to favorable medical cost experience during the claims run-out process. When combined with the $0.17 EPS contribution reported in the first quarter, the total year-to-date contribution from the MA-PFFS product line was $0.35 EPS. As previously announced, the Company did not renew this product line effective January 1, 2010.
• Medicare Part D. As of June 30, 2010, Medicare Part D membership was 1,631,000, an increase of 76,000 members from the prior year quarter. The Medicare Part D MLR was 90.7% in the quarter, an increase of 80 basis points from the prior year quarter. The Medicare Part D MLR was 93.1% year-to-date, a decrease of 330 basis points from the prior year-to-date.
• Medicaid. As of June 30, 2010, Medicaid membership was 413,000, an increase of 28,000 members from the prior year quarter. Coventry commenced operations in Pennsylvania during the second quarter which contributed 5,000 new members. The Medicaid MLR was 84.2% in the quarter, a decrease of 600 basis points from the prior year quarter.

2010 Full Year Guidance

• Risk revenue of $10.10 billion to $10.33 billion
• Management services revenue of $1.15 billion to $1.17 billion
• Consolidated revenue of $11.25 billion to $11.50 billion
• Consolidated MLR of 81.3% to 81.9%
• Cost of sales expense of $245.0 million to $250.0 million
• Selling, general, and administrative expense (SG&A) of $1.92 billion to $1.96 billion
• Charge for provider class action of $278.0 million
• Depreciation and amortization expense of $137.0 million to $145.0 million
• Other income of $72.0 million to $78.0 million
• Interest expense of $80.0 million to $86.0 million
• Tax rate of 37.0% to 38.0%
• Diluted share count of 146.5 million to 148.0 million
• EPS of $1.72 to $1.87

GUIDANCE PROGRESSION TABLE
		Guidance Provided as of:
		April 30, 2010		July 2, 2010		July 30, 2010
GAAP EPS range		$2.35 - $2.50		$1.57 - $1.72		$1.72 - $1.87
Remove unfavorable impact of litigation charge(2)		-		$1.18		$1.18
Adjusted EPS range excluding litigation charge		$2.35 - $2.50		$2.75 - $2.90		$2.90 - $3.05
Remove favorable impact of MA-PFFS(1)		($0.17)		($0.28)		($0.35)
Adjusted core EPS range		$2.18 - $2.33		$2.47 - $2.62		$2.55 - $2.70

Mr. Allen F. Wise, chairman and chief executive officer of Coventry, will host a conference call at 8:30 a.m. ET on Friday, July 30, 2010. To listen to the call, dial toll-free at (888) 587-0615 or, for international callers, (719) 325-2432. Callers will be asked to identify themselves and their affiliations. The conference call will also be webcast from Coventry’s Investor Relations site at www.coventryhealthcare.com. Coventry asks participants on both the call and webcast to review and be familiar with its filings with the Securities and Exchange Commission. A replay of the call will be available for one week at (888) 203-1112 or, for international callers, (719) 457-0820. The access code is 8644262.

This press release contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are defined as statements that are not historical facts and include those statements relating to future events or future financial performance. Actual performance may be significantly impacted by certain risks and uncertainties including those described in Coventry’s Annual Report on Form 10-K for the year ended December 31, 2009 and Coventry’s Form 10-Q for the quarter ended March 31, 2010. Coventry undertakes no obligation to update or revise any forward-looking statements.

Coventry Health Care (www.coventryhealthcare.com) is a diversified national managed healthcare company based in Bethesda, Maryland, operating health plans, insurance companies, network rental and workers’ compensation services companies. Coventry provides a full range of risk and fee-based managed care products and services to a broad cross section of individuals, employer and government-funded groups, government agencies, and other insurance carriers and administrators.

COVENTRY HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
		Quarters Ended								Six Months Ended
		June 30,								June 30,
			2010				2009				2010				2009
Operating revenues:		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Managed care premiums		$	2,570,508			$	3,201,919			$	5,141,083			$	6,442,731
Management services			297,633				296,455				586,036				588,538
Total operating revenues			2,868,141				3,498,374				5,727,119				7,031,269
Operating expenses:
Medical costs			2,032,556				2,766,974				4,146,898				5,599,971
Cost of sales			64,116				58,020				123,262				115,896
Selling, general, administrative			454,254				535,949				949,159				1,079,969
Charge for provider class action			278,000				-				278,000				-
Depreciation and amortization			33,985				34,972				69,504				69,649
Total operating expenses			2,862,911				3,395,915				5,566,823				6,865,485
Operating earnings			5,230				102,459				160,296				165,784
Operating earnings percentage of total revenues			0.2	%			2.9	%			2.8	%			2.4	%
Interest expense			20,195				21,775				40,325				43,906
Other income, net			18,207				31,895				38,494				51,762
Earnings before income taxes			3,242				112,579				158,465				173,640
Provision for income taxes			2,221				44,871				60,119				67,825
Income from continuing operations			1,021				67,708				98,346				105,815
Discontinued operations:
Loss from discontinued operations			-				(65,507	)			-				(55,900	)
Income tax benefit			-				16,224				-				12,677
Loss from discontinued operations			-				(49,283	)			-				(43,223	)
Net earnings		$	1,021			$	18,425			$	98,346			$	62,592
Net earnings per share:
Basic earnings per share from continuing operations		$	0.01			$	0.46			$	0.67			$	0.72
Basic loss per share from discontinued operations			-				(0.33	)			-				(0.29	)
Total basic earnings per share		$	0.01			$	0.13			$	0.67			$	0.43
Diluted earnings per share from continuing operations		$	0.01			$	0.46			$	0.67			$	0.72
Diluted loss per share from discontinued operations			-				(0.34	)			-				(0.30	)
Total diluted earnings per share		$	0.01			$	0.12			$	0.67			$	0.42
Weighted average shares outstanding, basic			145,943				146,955				145,863				146,901
Weighted average shares outstanding, diluted			147,300				147,616				147,291				147,460

COVENTRY HEALTH CARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
			June 30,			March 31,			December 31,
			2010			2010			2009
			(unaudited)			(unaudited)
Assets:
Current assets:
Cash and cash equivalents		$	1,495,414		$	1,370,243		$	1,418,554
Short-term investments			16,011			6,000			442,106
Accounts receivable, net			271,108			264,334			258,993
Other receivables, net			499,457			502,535			496,059
Other current assets			338,131			232,732			234,446
Total current assets			2,620,121			2,375,844			2,850,158
Long-term investments			2,285,411			2,297,901			1,994,987
Property and equipment, net			258,503			266,027			271,931
Goodwill			2,546,351			2,551,884			2,529,284
Other intangible assets, net			448,948			464,906			471,693
Other long-term assets			32,454			33,526			48,479
Total assets		$	8,191,788		$	7,990,088		$	8,166,532
Liabilities and Stockholders’ Equity:
Current liabilities:
Medical liabilities		$	1,353,268		$	1,417,027		$	1,605,407
Accounts payable and accrued liabilities			855,927			606,479			682,171
Deferred revenue			111,737			126,781			110,855
Total current liabilities			2,320,932			2,150,287			2,398,433
Long-term debt			1,599,211			1,599,119			1,599,027
Other long-term liabilities			428,155			421,571			456,518
Total liabilities			4,348,298			4,170,977			4,453,978
Stockholders’ equity			3,843,490			3,819,111			3,712,554
Total liabilities and stockholders’ equity		$	8,191,788		$	7,990,088		$	8,166,532

COVENTRY HEALTH CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)
			Quarter Ended			Year Ended
			June 30, 2010			June 30, 2010
Cash flows from operating activities:
Net earnings		$	1,021		$	98,346
Adjustments to earnings:
Depreciation and amortization			33,985			69,504
Amortization of stock compensation			10,742			21,258
Charge for provider class action			278,000			278,000
Changes in assets and liabilities:
Accounts receivable, net			(6,514)			(2,915)
Medical liabilities			(60,183)			(291,330)
Accounts payable and other accrued liabilities			(135,194)			(240,155)
Deferred revenue			(15,044)			(2,743)
Other operating activities			14,083			4,007
Net cash flows from operating activities			120,896			(66,028)
Cash flows from investing activities:
Capital expenditures, net			(10,439)			(22,920)
Proceeds from investments, net of purchases			16,066			234,215
Payments for acquisitions, net of cash acquired			-			(66,894)
Net cash flows from investing activities			5,627			144,401
Cash flows from financing activities:
Proceeds from issuance of stock			747			1,128
Payments for repurchase of stock			(2,349)			(3,628)
Excess tax benefit from stock compensation			250			987
Net cash flows from financing activities			(1,352)			(1,513)
Net change in cash and cash equivalents for current period			125,171			76,860
Cash and cash equivalents at beginning of period			1,370,243			1,418,554
Cash and cash equivalents at end of period		$	1,495,414		$	1,495,414
Cash and Investments:
Cash and cash equivalents		$	1,495,414		$	1,495,414
Short-term investments			16,011			16,011
Long-term investments			2,285,411			2,285,411
Total cash and investments		$	3,796,836		$	3,796,836

COVENTRY HEALTH CARE, INC.
SELECTED OPERATING STATISTICS
(Unaudited)
		Q2 2010			Q1 2010			Total 2009			Q4 2009			Q3 2009			Q2 2009			Q1 2009			Total 2008
Membership by Product (000s)
Health Plan Commercial Risk			1,522			1,501						1,418			1,431			1,477			1,501			1,575
Health Plan Commercial ASO			657			663						685			689			697			702			714
Medicare Advantage CCP			192			190						186			185			182			176			137
Medicaid Risk			413			406						402			391			385			375			371
Health Plan Total			2,784			2,760						2,691			2,696			2,741			2,754			2,797
Medicare Advantage PFFS			-			-						329			336			329			318			243
Other National Risk			-			-						2			5			15			21			24
Other National ASO			466			482						564			567			571			575			633
Total Medical Membership			3,250			3,242						3,586			3,604			3,656			3,668			3,697
Medicare Part D			1,631			1,600						1,683			1,636			1,555			1,501			931
Total Membership			4,881			4,842						5,269			5,240			5,211			5,169			4,628
Revenues by Product Type (000s)
Commercial Risk		$	1,367,457		$	1,317,221		$	5,174,772		$	1,257,335		$	1,279,571		$	1,310,645		$	1,327,221		$	5,421,984
Commercial Management Services			82,395			82,957			346,042			96,896			81,661			83,675			83,810			352,369
Medicare Advantage			505,084			507,592			4,901,918			1,247,725			1,268,592			1,224,011			1,161,590			3,177,244
Medicaid Risk			268,460			265,771			1,066,231			261,208			281,146			263,039			260,838			1,087,189
Total Health Plan and Medical Services Businesses			2,223,396			2,173,541			11,488,963			2,863,164			2,910,970			2,881,370			2,833,459			10,038,786
Medicare Part D			423,664			473,809			1,545,858			347,991			316,654			397,090			484,123			847,702
Other Premiums			25,201			25,105			94,562			23,291			23,568			23,746			23,957			64,783
Other Management Services			217,706			207,904			850,184			212,054			211,769			215,468			210,893			826,321
Total Specialized Managed Care Businesses			666,571			706,818			2,490,604			583,336			551,991			636,304			718,973			1,738,806
Total Premiums			2,589,866			2,589,498			12,783,341			3,137,550			3,169,531			3,218,531			3,257,729			10,598,902
Total Management Services			300,101			290,861			1,196,226			308,950			293,430			299,143			294,703			1,178,690
Other/Eliminations			(21,826)			(21,381)			(76,041)			(18,353)			(18,851)			(19,300)			(19,537)			(43,365)
Total Revenue		$	2,868,141		$	2,858,978		$	13,903,526		$	3,428,147		$	3,444,110		$	3,498,374		$	3,532,895		$	11,734,227
Consolidated Coventry
Operating Income % of Revenues			0.2%			5.4%			3.6%			5.4%			4.4%			2.9%			1.8%			5.0%
SGA % of Revenues			15.8%			17.3%			15.5%			15.9%			15.3%			15.3%			15.4%			16.5%
Total Medical Liabilities (000s)(3)		$	1,026,355		$	979,173					$	900,402		$	939,678		$	904,711		$	898,224		$	846,004
Days in Claims Payable (DCP) (3)			55.47			54.14						49.45			50.39			48.35			48.54			47.57
Total Debt (millions)		$	1,599.2		$	1,599.1					$	1,599.0		$	1,708.9		$	1,806.8		$	1,902.6		$	1,902.5
Total Capital (millions)		$	5,442.7		$	5,418.2					$	5,311.6		$	5,311.6		$	5,332.9		$	5,402.8		$	5,333.1
Debt to Capital			29.4%			29.5%						30.1%			32.2%			33.9%			35.2%			35.7%

(3)		“Total Medical Liabilities” and “Days in Claims Payable” are calculated consistent with prior disclosures to exclude MA-PFFS for all periods presented due to the Company’s non-renewal of this product line effective January 1, 2010. These statistics also exclude the effect of the Preferred Health Systems (“PHS”) acquisition for the first quarter of 2010 but include the effect of the PHS acquisition for the second quarter of 2010 due to the timing of closing (February 1, 2010).

COVENTRY HEALTH CARE, INC.
SELECTED REVENUE AND MEDICAL COST STATISTICS
(Unaudited)
		Q2 2010			Q1 2010			Total 2009			Q4 2009			Q3 2009			Q2 2009			Q1 2009			Total 2008
Revenue PMPM
Health Plan Commercial Group Risk		$	313.92		$	312.05		$	301.63		$	306.75		$	304.13		$	299.79		$	296.36		$	286.30
Medicare Advantage(4), (5)		$	867.43		$	885.26		$	855.16		$	849.62		$	853.90		$	857.05		$	860.46		$	862.60
Medicare Part D(6)		$	90.49		$	88.05		$	84.40		$	83.42		$	84.63		$	85.27		$	84.35		$	88.34
Medicaid		$	217.77		$	218.76		$	229.94		$	218.62		$	239.22		$	230.27		$	231.93		$	208.50
MLR%
Consolidated Total			79.1%			82.3%			85.4%			83.2%			84.4%			86.4%			87.4%			84.0%
Health Plan Commercial Group Risk			78.3%			80.2%			81.9%			82.9%			82.1%			81.7%			80.9%			81.7%
Medicare Advantage(5)			81.2%			85.7%			89.9%			89.4%			89.4%			90.4%			90.5%			89.0%
Medicare Part D			90.7%			95.3%			85.7%			64.4%			79.4%			89.9%			101.8%			84.1%
Medicaid			84.2%			84.0%			87.6%			85.8%			86.1%			90.2%			88.3%			85.3%

(4)		Revenue PMPM excludes the impact of revenue ceded to external parties.
(5)		Beginning with Q1 2010, Medicare Advantage revenue and medical cost statistics represent the MA-CCP business only as the Company did not renew the MA-PFFS product line effective January 1, 2010.
(6)		Revenue PMPM excludes the impact of CMS risk-share premium adjustments and revenue ceded to external parties.

Coventry Health Care, Inc.John StelbenInterim Chief Financial Officer301-581-5729orDrew AsherSVP, Corporate Finance301-581-5717