Health Net Inc.
) first-quarter 2012 operating income, which includes combined net
earnings from Western Region and Government Contracts segments,
came in at 10 cents per share, declining substantially from the
year-ago level of 77 cents per share Reported operating income was
also lower than the Zacks Consensus Estimate of 60 cents per
Including a $18.5 million loss from discontinued operations
(Medicare PDP business sold to
CVS Caremark Corporation
]), $23.1 million in expenses related to the Northeast operations
and the transition of its Medicare PDP business and $3.6 million in
expenses pertaining to general and administrative cost reduction
efforts, the company reported net loss of $26.6 million or 32 cents
per share in the first quarter of 2012, compared with a loss of
$108.2 million or $1.16 per share in the year-ago quarter.
The company reported a 15.8% year-over-year downside in total
revenue to $2.83 billion in the quarter. The decline was
attributable primarily to lower Government Contracts revenues.
Total revenue came in below the Zacks Consensus Estimate of $2.88
Total expenses decreased 17.4% year over year to $2.8 billion,
primarily due to decrease in Government contracts expenses.
The segment posted revenues of $2.6 billion in the quarter, up 4%
year over year. Net investment income for the segment decreased to
$1.5 million from $23.8 million in the year-ago quarter, while
health plan services expenses increased 9.5% year over year to
$2.3 billion from $2.1 billion.
Total enrollment in the segment crept up 1.2% from March 31,
2011 to 3.0 million members, while total commercial enrollment
declined 7.1% to 1.3 million members. Enrollment in the company's
California health plan was relatively flat on a year-over-year
basis. Although enrollment in the tailored network products
recorded a year-over-year increase of 8%, enrollment in Medicare
Prescription Drug Plan (PDP) and Medicare Advantage plans declined
5.7% and 8.1%, respectively.
Medical care ratio (MCR) for Health Net's health plan services
in the segment increased to 89.6% from 86.5% in the year-ago
quarter while Commercial MCR improved to 91.4% from 85.7% in the
Medicare Advantage MCR decreased to 87.9% from 89% in the
Revenues from the segment declined to $181.4 million from $875.1
million in the first quarter of 2011, mainly due to the new T-3
TRICARE North contract implemented on April 1, 2011. The company
believes that fiscal 2012 will be characterized by lower revenues,
coupled with reduced level of cost for the period of T-3
As of March 31, 2012, Health Net had cash and investments of
approximately $1.8 billion, flat year over year. In addition, the
company's debt-to-total capital ratio increased to 26.4% from 21.1%
as of March 31, 2011.
Health Net's cash provided from operations was $4.2 million in
the reported quarter compared with $1.9 billion used in a year-ago
Total assets of the company stood at $3.97 billion as of March
31, 2012, down from $4.03 billion a year ago. Stockholders' equity
also declined to $1.42 billion from $1.49 billion as of March 31,
Share Repurchase Update
Health Net did not repurchase any shares in the given quarter.
The company had $400 million remaining under its current share
repurchase authorization as of March 31, 2012.
Outlook for 2012
Health Net revised its guidance for full fiscal 2012. Earnings
per share is expected to be in the band of $2.85 to $3.00 and the
combined Western Region and Government Contracts segments' guidance
lies between $2.35-2.50. The guidance excludes the increasing
administrative costs incurred for the implementation of
dual-eligibles demonstration pilots.
Enrollment in the commercial business is expected to decline by
7−9%, while enrollment in Medicare Advantage and Medicaid are
expected to increase by 11−13% and 3−5%, respectively.
The company expects the total western region membership to
decline in the range of 1% to 2%.
Consolidated revenue is expected to be around $11.0−11.5
billion, while tax rate for Health Net is expected to be
The company also expects selling cost ratio to be in the range
of 2.3−2.4% and general and administrative expense ratio to be in
the range of 8.5−8.7%.
) a close competitor of Health Net, reported first quarter earnings
of $1.31 per share, substantially higher than the Zacks Consensus
Estimate of $1.16. Earnings also compared favorably with $1.22 per
share reported in the prior-year quarter.
The outperformance can be attributed to strong revenue growth at
UnitedHealthcare, higher revenues from the Optum businesses, and
strong enrollment growth, partially offset by higher operating
) another close competitor, reported its first quarter 2012
earnings of $1.34 cents per share that missed the Zacks Consensus
Estimate by 6 cents. Earnings declined 6.3% year over year. Despite
an increase in revenues, the growth did not trickle down to the
bottom-line results due to higher health care costs and operating
We retain our long term Neutral recommendation on Health Net.
The quantitative Zacks #3 Rank (short-term Hold rating) for the
company indicates no clear directional pressure on the stock over
the near term.
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