Health Net Inc.
) second-quarter 2012 operating income, which includes combined net
earnings from Western Region and Government Contracts segments,
came in at $15.9 million or 19 cents per share, declining
substantially from the year-ago level of $71.0 million or 77 cents
per share. Operating income was also lower than the Zacks Consensus
Estimate of 66 cents per share.
Including a $119.4 million gain from sale of discontinued
operations - Medicare PDP business sold to
CVS Caremark Corporation
), a $6.5 million loss from divested operations as well as services
and expenses amounting to $10.8 million, pertaining to Health Net's
general and administrative cost reduction efforts, the company
reported net income of $124.6 million or $1.48 per share in the
second quarter of 2012, improving considerably from $58.3 million
or 63 cents per share in the year-ago quarter.
The disappointing performance in the reported quarter was
primarily due to higher-than-expected commercial and Medicaid
The company's total revenue improved 7.1% year-over-year to
$2.84 billion in the quarter. This came marginally above the Zacks
Consensus Estimate of $2.80 billion.
Total expenses increased 10% year over year to $2.83 billion
from $2.57 billion.
The segment posted revenues of $2.7 billion in the quarter, up 8%
year over year. Net investment income for the segment decreased to
$24.7 million from $25.1 million in the year-ago quarter, while
health plan services expenses increased 14.3% year over year to
$2.4 billion from $2.1 billion.
Total enrollment in the segment stayed almost flat year over
year at 2.6 million members as of June 30, 2012. Total commercial
enrollment declined 7.4% to 1.3 million members, while enrollment
in the company's California health plan was relatively flat on a
year-over-year basis. Enrollment in the tailored network products
recorded a year-over-year increase of 6.5%. However, it surged
11.2% in Medicare Advantage plans.
Medical care ratio (MCR) for Health Net's health plan services
in the segment increased to 90.1% during the reported quarter from
86.9% in the year-ago quarter, while Commercial MCR deteriorated to
88.7% from 85.7% in the prior quarter.
Medicare Advantage MCR increased to 92.0% from 90.9% in the
year-ago quarter. Meanwhile, Medicaid MCR was 91.3%, compared with
85.2% in the prior-year quarter.
Revenues from the segment increased to $176.2 million from $171.0
million in the second quarter of 2011, while expenses also climbed
to $152.7 million from $130.8 million.
As of June 30, 2012, Health Net had cash and investments of
approximately $2.1 billion, up from $1.7 billion as of June 30,
2011. However, the company's debt-to-total capital ratio decreased
to 24.1% from 28.2% as of June 30,
Health Net's cash provided from operations stood at $119.8
million in the reported quarter compared with an outflow of $100.2
million in the year-ago quarter.
Total assets of the company were $4.03 billion as of June 30,
2012, increasing from $3.74 billion a year ago. Stockholders'
equity also increased to $1.54 billion from $1.49 billion as of
June 30, 2011.
Share Repurchase Update
Health Net repurchased 1.8 million shares at an average price of
$24.77 from April 1, 2012 to August 1, 2012. The company had $355.4
million remaining under its current share repurchase authorization
as of August 1, 2012.
Outlook for 2012
Health Net revised its guidance for fiscal 2012. Earnings per
share (EPS) is expected to be in the band of $1.45 to $1.55
compared with the earlier guidance of $2.85 to $3.00. The combined
Western Region and Government Contracts segments' guidance lies
between $1.00-1.10, down from $2.35-2.50. The guidance includes the
impact of the high commercial and Medicaid costs as well as
incremental general and administrative costs of $20-25 million
incurred for the implementation of dual-eligible demonstration
pilots in California.
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% to 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 is expected to be about $10 million in
Health Net's peer,
) reported second-quarter 2012 adjusted income of $2.04 per share,
lagging the Zacks Consensus Estimate by a penny, but surpassing the
year-ago earnings of $1.83 per share.
We retain our long-term 'Neutral' recommendation on Health Net.
The quantitative Zacks #4 Rank (short-term 'Sell' rating) for the
company indicates a slight downward pressure on the stock over the
CVS CAREMARK CP (CVS): Free Stock Analysis
HEALTH NET INC (HNT): Free Stock Analysis
WELLPOINT INC (WLP): Free Stock Analysis Report
To read this article on Zacks.com click here.