Health Net Inc.
) third-quarter 2012 operating income, which includes combined
net earnings from Western Region and Government Contracts
segments, came in at 38 cents per share, declining substantially
from the year-ago level of 84 cents per share. Operating income,
however, modestly exceeded the Zacks Consensus Estimate of 36
cents per share.
Income from continuing operations, including adjustment to
loss on sale of Northeast subsidiaries of $0.32 million in the
third quarter of 2011, amounted to $20.48 million or 25 cents per
share, compared with $57.81 million or 65 cents in the year-ago
Including a $4.7 million pre-tax loss from discontinued
operations and services as well as pre-tax expenses amounting to
$7.2 million, pertaining to Health Net's general and
administrative cost reduction efforts, the company reported net
income of $18.0 million or 22 cents per share in the third
quarter of 2012, reducing considerably from $61.8 million or 70
cents per share in the year-ago quarter.
The disappointing performance in the reported quarter was
primarily due to weak operating performance of the Government
Contracts segment along with higher health plan services
The company's total revenue improved 3.3% year over year to
$2.78 billion in the quarter. This came marginally below the
Zacks Consensus Estimate of $2.81 billion.
Total expenses increased 5.8% year over year to $2.75 billion
from $2.60 billion.
The segment posted revenues of $2.6 billion in the quarter, up 4%
year over year. Net investment income for the segment increased
to $16.4 million from $15.2 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 declined 1% year over year to
2.6 million members as of September 30, 2012. Total commercial
enrollment declined 9.5% to 1.3 million members, while enrollment
in the company's California health plans inched down 1.5% year
over year. However, enrollment climbed 13.8% to 0.23 million in
Medicare Advantage plans. Medicaid enrollment also increased 8.2%
to 1.1 million in the reported quarter.
Medical care ratio (MCR) for Health Net's health plan services
in the segment increased to 88.5% during the reported quarter
from 86.4% in the year-ago quarter, while Commercial MCR
deteriorated to 86.7% from 84.8% in the prior quarter. Medicare
Advantage MCR inched down to 90.1% from 90.7% in the year-ago
Revenues from the segment declined to $169.8 million from $175.8
million in the third quarter of 2011, while expenses climbed to
$148.7 million from $127.7 million.
As of September 30, 2012, Health Net had cash and investments
of approximately $2.0 billion, at par with September 30, 2011.
However, the company's debt-to-total capital ratio decreased to
24.4% from 27.4% as of September 30,
Health Net's cash outflow stood at $124.8 million in the
reported quarter compared with an inflow of $520.7 million in the
Total assets of the company were $3.81 billion as of September
30, 2012, declining from $3.87 billion a year ago. Stockholders'
equity increased to $1.55 billion from $1.44 billion as of
September 30, 2011.
Share Repurchase Update
During the reported quarter, Health Net repurchased 1.5
million shares at an average price of $23.79. The company had
$350 million remaining under its current share repurchase
authorization as of September 30, 2012.
Outlook for 2012
Health Net affirmed its earnings per share (EPS) guidance for
2012 in the band of $1.45 to $1.55. The EPS guidance for the
combined Western Region and Government Contracts segments lies
between $1.00 and $1.10.
Enrollment in the commercial business is expected to decline
by 9%−10%, while enrollment in Medicare Advantage and Medicaid
are expected to increase by 11%−13% and 7%−8%, respectively. The
company expects the total Western Region enrollment to decline in
the range of 1%−2%
Consolidated revenue is expected to be around $11.0−$11.5
billion, while tax rate for Health Net is expected to be 30%−31%.
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%.
Operating cash flow guidance for 2012 was affirmed at $10
million. Outstanding share count is expected to be around 83−84
million at the end of 2012.
Health Net's peer,
) will report its third-quarter financial results before the
opening bell on November 7, 2012.
We retain our long-term Neutral recommendation on Health Net.
The quantitative Zacks #3 Rank (short-term Hold) for the company
indicates no clear directional pressure on the stock over the
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