R
|
Quarterly
Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of
1934
|
¨
|
Transition
Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of
1934
|
|
|
|
Nevada
|
|
88-0200415
|
(State
or Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
2724
North Tenaya Way, Las Vegas, NV
|
|
89128
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
Large
accelerated filer R
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Part
I.
Financial Information
|
Page
No.
|
|||
Item
1. Financial
Statements (Unaudited):
|
||||
1
|
||||
2
|
||||
3
|
||||
4
|
||||
5-16
|
||||
17-30
|
||||
31
|
||||
Item
4. Controls and Procedures
|
31
|
|||
|
||||
Part
II. Other Information
|
||||
Item
1. Legal Proceedings
|
32-33
|
|||
Item
1A. Risk Factors
|
33-34
|
|||
34-35
|
||||
Item
3. Defaults upon Senior Securities
|
35
|
|||
35
|
||||
Item
5. Other Information
|
35
|
|||
Item
6. Exhibits
|
35
|
|||
36
|
June
30, 2007
|
December
31, 2006
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ |
143,478
|
$ |
58,918
|
||||
Investments
|
288,398
|
323,846
|
||||||
Accounts
receivable (less allowance for doubtful accounts: 2007 - $9,184;
2006 -
$5,518)
|
31,510
|
21,308
|
||||||
Current
portion of deferred tax asset
|
45,968
|
29,861
|
||||||
Prepaid
expenses and other current assets
|
101,291
|
110,020
|
||||||
Total
current assets
|
610,645
|
543,953
|
||||||
Property
and equipment, net
|
64,947
|
71,893
|
||||||
Restricted
cash and investments
|
17,403
|
19,428
|
||||||
Goodwill
|
14,782
|
14,782
|
||||||
Deferred
tax asset (less current portion)
|
26,590
|
18,656
|
||||||
Note
receivable (less valuation allowance: 2007 and 2006 -
$15,000)
|
47,000
|
47,000
|
||||||
Other
assets
|
92,258
|
93,700
|
||||||
Total
assets
|
873,625
|
809,412
|
||||||
Liabilities
and stockholders' equity
|
||||||||
Current
liabilities:
|
||||||||
Accrued
and other current liabilities
|
78,450
|
99,314
|
||||||
Trade
accounts payable
|
1,670
|
1,552
|
||||||
Accrued
payroll and taxes
|
28,580
|
25,925
|
||||||
Medical
claims payable
|
191,788
|
222,895
|
||||||
Premium
deficiency reserve
|
39,294
|
1,076
|
||||||
Unearned
premium revenue
|
121,934
|
52,075
|
||||||
Current
portion of long-term debt
|
3,558
|
116
|
||||||
Total
current liabilities
|
465,274
|
402,953
|
||||||
Long-term
debt (less current portion)
|
55,505
|
118,734
|
||||||
Other
liabilities
|
91,703
|
71,007
|
||||||
Total
liabilities
|
612,482
|
592,694
|
||||||
Commitments
and contingencies
|
||||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, $.01 par value, 1,000 shares authorized; none issued or
outstanding
|
¾
|
¾
|
||||||
Common
stock, $.005 par value, 120,000 shares authorized; 2007 –
73,513;
|
|
|
||||||
2006 – 70,835 shares issued; 2007 – 56,008; 2006 – 53,824 shares outstanding | 368 | 354 | ||||||
Treasury
stock
at cost: 2007 – 17,425; 2006 – 17,011 common stock shares
|
(615,755 | ) | (600,539 | ) | ||||
Additional
paid-in capital
|
466,771
|
436,643
|
||||||
Accumulated
other comprehensive loss
|
(9,530 | ) | (8,635 | ) | ||||
Retained
earnings
|
419,289
|
388,895
|
||||||
Total
stockholders' equity
|
261,143
|
216,718
|
||||||
Total
liabilities and stockholders' equity
|
$ |
873,625
|
$ |
809,412
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
Operating
revenues:
|
||||||||||||||||
Medical
premiums
|
$ |
457,246
|
$ |
400,664
|
$ |
925,320
|
$ |
815,108
|
||||||||
Professional
fees
|
14,394
|
12,882
|
29,036
|
25,797
|
||||||||||||
Investment
and other revenues
|
10,407
|
10,892
|
22,328
|
21,781
|
||||||||||||
Total
|
482,047
|
424,438
|
976,684
|
862,686
|
||||||||||||
Operating
expenses:
|
||||||||||||||||
Medical
expenses
|
362,211
|
321,545
|
797,522
|
658,064
|
||||||||||||
General
and administrative expenses
|
59,528
|
50,422
|
118,720
|
101,761
|
||||||||||||
Total
|
421,739
|
371,967
|
916,242
|
759,825
|
||||||||||||
Operating
income
|
60,308
|
52,471
|
60,442
|
102,861
|
||||||||||||
Interest
expense
|
(1,037 | ) | (1,002 | ) | (2,992 | ) | (1,778 | ) | ||||||||
Other
income (expense), net
|
844
|
9
|
1,494
|
(24 | ) | |||||||||||
Income
before income taxes
|
60,115
|
51,478
|
58,944
|
101,059
|
||||||||||||
Provision
for income taxes
|
(20,755 | ) | (17,944 | ) | (20,823 | ) | (34,854 | ) | ||||||||
Net
income
|
$ |
39,360
|
$ |
33,534
|
$ |
38,121
|
$ |
66,205
|
||||||||
Net
income per common share
|
$ |
0.70
|
$ |
0.60
|
$ |
0.68
|
$ |
1.16
|
||||||||
Net
income per common share assuming dilution
|
$ |
0.67
|
$ |
0.54
|
$ |
0.65
|
$ |
1.05
|
Common
Stock
|
In
Treasury
|
Additional
Paid-in
|
Accumulated
Other
Comprehensive
|
Retained
|
Total
Stock-
holders'
|
|||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Loss
|
Earnings
|
Equity
|
|||||||||
Balance,
January 1, 2006
|
69,136
|
$
|
346
|
11,006
|
$
|
(377,190)
|
$
|
400,287
|
$
|
(1,750)
|
$
|
262,559
|
$
|
284,252
|
||
Common
stock issued in connection with stock plans
|
557
|
3
|
(461)
|
15,589
|
6,697
|
¾
|
(11,570)
|
10,719
|
||||||||
Share-based
compensation expense
|
¾
|
¾
|
¾
|
15
|
3,024
|
¾
|
3
|
3,042
|
||||||||
Common
stock issued in connection with conversion of debentures
|
54
|
¾
|
¾
|
¾
|
500
|
¾
|
¾
|
500
|
||||||||
Excess
tax benefits from share-based payment arrangements
|
¾
|
¾
|
¾
|
¾
|
10,260
|
¾
|
¾
|
10,260
|
||||||||
Repurchase
of common stock shares
|
¾
|
¾
|
3,136
|
(127,780)
|
¾
|
¾
|
¾
|
(127,780)
|
||||||||
Comprehensive
income:
|
||||||||||||||||
Net
income
|
¾
|
¾
|
¾
|
¾
|
¾
|
¾
|
66,205
|
66,205
|
||||||||
Other
comprehensive income:
|
||||||||||||||||
Net
unrealized holding loss on
available-for-sale
investments ($3,269 pretax)
|
¾
|
¾
|
¾
|
¾
|
¾
|
(2,125)
|
¾
|
(2,125)
|
||||||||
Total
comprehensive income
|
¾
|
¾
|
¾
|
¾
|
¾
|
(2,125)
|
66,205
|
64,080
|
||||||||
Balance,
June 30, 2006
|
69,747
|
$
|
349
|
13,681
|
$
|
(489,366)
|
$
|
420,768
|
$
|
(3,875)
|
$
|
317,197
|
$
|
245,073
|
||
Balance,
January 1, 2007
|
70,835
|
$
|
354
|
17,011
|
$
|
(600,539)
|
$
|
436,643
|
$
|
(8,635)
|
$
|
388,895
|
$
|
216,718
|
||
Common
stock activity in connection with stock plans
|
135
|
1
|
(171)
|
4,665
|
1,056
|
¾
|
(3,658)
|
2,064
|
||||||||
Share-based
compensation expense
|
¾
|
¾
|
¾
|
1,200
|
1,596
|
¾
|
198
|
2,994
|
||||||||
Common
stock issued in connection with conversion of debentures
|
2,543
|
13
|
¾
|
¾
|
23,243
|
¾
|
¾
|
23,256
|
||||||||
Excess
tax benefits from share-based payment arrangements
|
¾
|
¾
|
¾
|
¾
|
4,233
|
¾
|
¾
|
4,233
|
||||||||
Repurchase
of common stock shares
|
¾
|
¾
|
585
|
(21,081)
|
¾
|
¾
|
¾
|
(21,081)
|
||||||||
Cumulative
effect from adoption of
FIN
48
|
¾
|
¾
|
¾
|
¾
|
¾
|
¾
|
(4,267)
|
(4,267)
|
||||||||
Comprehensive
income:
|
||||||||||||||||
Net
income
|
¾
|
¾
|
¾
|
¾
|
¾
|
¾
|
38,121
|
38,121
|
||||||||
Other
comprehensive income:
|
||||||||||||||||
Net
unrealized holding loss on available-for-sale investments
($2,088 pretax)
|
¾
|
¾
|
¾
|
¾
|
¾
|
(1,357)
|
¾
|
(1,357)
|
||||||||
Unfunded
portion of defined benefit pension plan ($711 pretax)
|
¾
|
¾
|
¾
|
¾
|
¾
|
462
|
¾
|
462
|
||||||||
Total
comprehensive income
|
¾
|
¾
|
¾
|
¾
|
¾
|
(895)
|
38,121
|
37,226
|
||||||||
Balance,
June 30, 2007
|
73,513
|
$
|
368
|
17,425
|
$
|
(615,755)
|
$
|
466,771
|
$
|
(9,530)
|
$
|
419,289
|
$
|
261,143
|
Six
Months Ended June 30,
|
||||||||
2007
|
2006
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ |
38,121
|
$ |
66,205
|
||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Depreciation
|
7,976
|
8,239
|
||||||
Share-based
compensation expense
|
2,994
|
3,042
|
||||||
Excess
tax benefits from share-based payment arrangements
|
(4,233 | ) | (10,260 | ) | ||||
Provision
for doubtful accounts
|
3,424
|
1,202
|
||||||
Other
adjustments
|
(1,082 | ) |
149
|
|||||
Change
in operating assets and liabilities:
|
||||||||
Deferred
tax asset
|
(23,299 | ) | (3,217 | ) | ||||
Other
current assets
|
1,838
|
(34,485 | ) | |||||
Other
assets
|
(2,271 | ) | (3,500 | ) | ||||
Accrued
payroll and taxes
|
2,655
|
5,093
|
||||||
Medical
claims payable
|
(31,107 | ) |
12,097
|
|||||
Other
current liabilities
|
(10,464 | ) |
30,515
|
|||||
Unearned
premium revenue
|
69,859
|
65,090
|
||||||
Premium
deficiency reserve
|
38,217
|
¾
|
||||||
Other
liabilities
|
16,888
|
(73 | ) | |||||
Net
cash provided by operating activities
|
109,516
|
140,097
|
||||||
Cash
flows from investing activities:
|
||||||||
Capital
expenditures, net of dispositions
|
(120 | ) | (8,179 | ) | ||||
Purchase
of investments, net of proceeds
|
27,789
|
(36,268 | ) | |||||
Net
cash provided by (used for) investing activities
|
27,669
|
(44,447 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Payments
on debt and capital leases
|
(40,078 | ) | (53 | ) | ||||
Proceeds
from other long-term debt
|
¾
|
20,000
|
||||||
Purchase
of treasury stock
|
(21,081 | ) | (127,780 | ) | ||||
Excess
tax benefits from share-based payment arrangements
|
4,233
|
10,260
|
||||||
Proceeds
from exercise of stock in connection with stock plans
|
4,301
|
10,719
|
||||||
Net
cash used for financing activities
|
(52,625 | ) | (86,854 | ) | ||||
Net
increase in cash and cash equivalents
|
84,560
|
8,796
|
||||||
Cash
and cash equivalents at beginning of period
|
58,918
|
88,059
|
||||||
Cash
and cash equivalents at end of period
|
$ |
143,478
|
$ |
96,855
|
||||
Supplemental
condensed consolidated statement of cash flows
information:
|
||||||||
Cash
paid during the period for interest
|
$ |
2,966
|
$ |
1,339
|
||||
Net
cash paid during the period for income taxes
|
45,015
|
21,248
|
||||||
Non-cash
investing and financing activities:
|
||||||||
Senior
convertible debentures converted into Sierra common stock
|
23,256
|
500
|
||||||
Asset
received in consideration for payment of a loan
|
6,815
|
¾
|
||||||
Additions
to capital leases
|
171
|
¾
|
||||||
Cashless
exercise of restricted stock units
|
2,237
|
¾
|
||||||
Investments
purchased but not settled
|
8,285
|
2,531
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Medical
expenses
|
$ |
387
|
$ |
234
|
$ |
577
|
$ |
421
|
||||||||
General
and administrative
expenses
|
863
|
1,148
|
2,417
|
2,621
|
||||||||||||
Share-based
compensation expense before income taxes
|
1,250
|
1,382
|
2,994
|
3,042
|
||||||||||||
Income
tax benefit
|
(438 | ) | (484 | ) | (1,048 | ) | (1,065 | ) | ||||||||
Net
share-based compensation expense
|
$ |
812
|
898
|
$ |
1,946
|
$ |
1,977
|
Weighted
|
||||||||||||||||
Number
|
Weighted
|
Average
|
Aggregate
|
|||||||||||||
Of
|
Average
|
Contractual
Life
|
Intrinsic
|
|||||||||||||
Shares
|
Exercise
Price
|
Remaining
|
Value
|
|||||||||||||
(In
thousands)
|
(per
share)
|
(In
years)
|
(In
thousands)
|
|||||||||||||
Outstanding,
January 1, 2007
|
1,775
|
$ |
12.94
|
|||||||||||||
Granted
|
¾
|
¾
|
||||||||||||||
Exercised
|
(288 | ) |
9.72
|
|||||||||||||
Canceled
|
(17 | ) |
15.42
|
|||||||||||||
Outstanding,
June 30, 2007
|
1,470
|
$ |
13.54
|
5.09
|
$ |
41,214
|
||||||||||
Exercisable
at June 30, 2007
|
882
|
$ |
10.45
|
4.94
|
$ |
27,464
|
Number
|
Weighted-Average
|
|||||||
Of
|
Grant
Date
|
|||||||
Shares
|
Fair
Value
|
|||||||
(In
thousands)
|
(per
share)
|
|||||||
Nonvested
shares, January 1, 2007 (1)
|
803
|
$ |
7.34
|
|||||
Granted
|
¾
|
¾
|
||||||
Vested
|
(358 | ) |
6.04
|
|||||
Canceled
|
(11 | ) |
6.72
|
|||||
Nonvested
shares, June 30, 2007 (1)
|
434
|
$ |
8.43
|
|
(1)
|
Excludes
164,000 and 154,000 shares at January 1, 2007 and June 30, 2007,
respectively, which vested in 2005, but are not exercisable until
2008.
|
Number
|
Aggregate
|
||||
Of
|
Intrinsic
|
||||
Shares
|
Value
|
||||
(In
thousands)
|
|||||
Outstanding,
January 1, 2007(1)(2)
|
104
|
||||
Granted
|
10
|
||||
Vested
|
(23 | ) | |||
Canceled
|
(1 | ) | |||
Outstanding,
June 30, 2007(1)(3)
|
90
|
$3,743
|
(1)
|
The
Units have no exercise price.
|
(2)
|
Does
not include 540,000 Units that have vested but have not
settled. These Units are included in outstanding
shares.
|
(3)
|
Does
not include 296,000 Units that have vested but have not settled.
These
Units are included in outstanding
shares.
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Components
of net periodic benefit cost:
|
||||||||||||||||
Service
cost
|
$ |
139
|
$ |
126
|
$ |
278
|
$ |
252
|
||||||||
Interest
cost
|
426
|
399
|
852
|
798
|
||||||||||||
Amortization
of prior service credits
|
302
|
303
|
605
|
606
|
||||||||||||
Recognized
actuarial loss
|
53
|
32
|
105
|
64
|
||||||||||||
Net
periodic benefit cost
|
$ |
920
|
$ |
860
|
$ |
1,840
|
$ |
1,720
|
Three
Months Ended June 30,
|
Six Months
Ended June 30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
(In
thousands, except per share data)
|
||||||||||||||||
Basic
income per share:
|
||||||||||||||||
Net
income
|
$ |
39,360
|
$ |
33,534
|
$ |
38,121
|
$ |
66,205
|
||||||||
Weighted
average common shares outstanding
|
56,009
|
56,074
|
55,713
|
56,896
|
||||||||||||
Net
income per common share
|
$ |
0.70
|
$ |
0.60
|
$ |
0.68
|
$ |
1.16
|
||||||||
Diluted
income per share:
|
||||||||||||||||
Net
income
|
$ |
39,360
|
$ |
33,534
|
$ |
38,121
|
$ |
66,205
|
||||||||
Interest
expense on Sierra debentures, net of tax
|
73
|
188
|
168
|
377
|
||||||||||||
Income
for purposes of computing diluted net income per share
|
$ |
39,433
|
$ |
33,722
|
$ |
38,289
|
$ |
66,582
|
||||||||
Weighted
average common shares outstanding
|
56,009
|
56,074
|
55,713
|
56,896
|
||||||||||||
Dilutive
options and restricted shares outstanding
|
714
|
892
|
725
|
990
|
||||||||||||
Dilutive
impact of conversion of Sierra debentures
|
2,214
|
5,631
|
2,516
|
5,639
|
||||||||||||
Weighted
average common shares outstanding assuming dilution
|
58,937
|
62,597
|
58,954
|
63,525
|
||||||||||||
Net
income per common share assuming dilution
|
$ |
0.67
|
$ |
0.54
|
$ |
0.65
|
$ |
1.05
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||
2007
|
2006
|
2007
|
2006
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Net
income
|
$ |
39,360
|
$ |
33,534
|
$ |
38,121
|
$ |
66,205
|
||||||||
Change
in net unrealized holding loss on available-for-sale
investments
|
(1,203 | ) | (1,077 | ) | (1,357 | ) | (2,125 | ) | ||||||||
Unfunded
portion of defined benefit pension plan
|
232
|
¾
|
462
|
¾
|
||||||||||||
Comprehensive
income
|
$ |
38,389
|
$ |
32,457
|
$ |
37,226
|
$ |
64,080
|
11.
|
Income
Taxes
|
12.
|
Recently
Issued Accounting
Standards
|
13.
|
Segment
Reporting
|
14.
|
Commitments
and Contingencies
|
Three
Months Ended
June
30,
|
Percent
Of Revenue
Three
Months Ended
June
30,
|
Increase
(Decrease)
|
||||||||||||||||||||||
2007
|
2006
|
2007
|
2006
|
2007
vs. 2006
|
||||||||||||||||||||
(In
thousands, except percentages, per share and
membership)
|
||||||||||||||||||||||||
Operating
revenues:
|
||||||||||||||||||||||||
Medical
premiums
|
$ |
457,246
|
$ |
400,664
|
94.9 | % | 94.4 | % | $ |
56,582
|
14.1 | % | ||||||||||||
Professional
fees
|
14,394
|
12,882
|
3.0
|
3.0
|
1,512
|
11.7
|
||||||||||||||||||
Investment
and other revenues
|
10,407
|
10,892
|
2.1
|
2.6
|
(485 | ) | (4.5 | ) | ||||||||||||||||
Total
|
482,047
|
424,438
|
100.0
|
100.0
|
57,609
|
13.6
|
||||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||
Medical
expenses
|
362,211
|
321,545
|
75.1
|
75.7
|
40,666
|
12.7
|
||||||||||||||||||
Medical
care ratio
|
76.8 | % | 77.8 | % | (1.0 | ) | ||||||||||||||||||
General
and administrative expenses
|
59,528
|
50,422
|
12.4
|
11.9
|
9,106
|
18.1
|
||||||||||||||||||
Total
|
421,739
|
371,967
|
87.5
|
87.6
|
49,772
|
13.4
|
||||||||||||||||||
Operating
income
|
60,308
|
52,471
|
12.5
|
12.4
|
7,837
|
14.9
|
||||||||||||||||||
Interest
expense
|
(1,037 | ) | (1,002 | ) | (0.2 | ) | (0.3 | ) | (35 | ) |
3.5
|
|||||||||||||
Other
income (expense), net
|
844
|
9
|
0.2
|
835
|
9277.8
|
|||||||||||||||||||
Income
before income taxes
|
60,115
|
51,478
|
12.5
|
12.1
|
8,637
|
16.8
|
||||||||||||||||||
Provision
for income taxes
|
(20,755 | ) | (17,944 | ) | (4.3 | ) | (4.2 | ) | (2,811 | ) |
15.7
|
|||||||||||||
Tax
rate
|
34.5 | % | 34.9 | % | (0.4 | ) | ||||||||||||||||||
Net
income
|
$ |
39,360
|
$ |
33,534
|
8.2 | % | 7.9 | % | $ |
5,826
|
17.4 | % | ||||||||||||
Net
income per common share assuming dilution
|
$ |
0.67
|
$ |
0.54
|
$ |
0.13
|
24.1 | % | ||||||||||||||||
Membership
|
||||||||||||||||||||||||
HMO:
|
||||||||||||||||||||||||
Commercial
|
278,200
|
265,600
|
12,600
|
4.7 | % | |||||||||||||||||||
Medicare
|
56,500
|
56,900
|
(400 | ) | (0.7 | ) | ||||||||||||||||||
Medicaid
|
58,200
|
56,700
|
1,500
|
2.6
|
||||||||||||||||||||
Subtotal
HMO
|
392,900
|
379,200
|
13,700
|
3.6
|
||||||||||||||||||||
Commercial
PPO and HSA
|
36,100
|
29,800
|
6,300
|
21.1
|
||||||||||||||||||||
Medicare
PPO and PFFS
|
3,300
|
1,300
|
2,000
|
153.8
|
||||||||||||||||||||
Medicare
Part D-Basic
|
155,300
|
180,300
|
(25,000 | ) | (13.9 | ) | ||||||||||||||||||
Medicare
Part D-Enhanced
|
44,300
|
¾
|
44,300
|
¾
|
||||||||||||||||||||
Medicare
supplement
|
12,700
|
14,000
|
(1,300 | ) | (9.3 | ) | ||||||||||||||||||
Administrative
services
|
221,200
|
219,700
|
1,500
|
0.7
|
||||||||||||||||||||
Total
membership
|
865,800
|
824,300
|
41,500
|
5.0 | % | |||||||||||||||||||
Member
months
|
||||||||||||||||||||||||
Commercial
|
936,100
|
878,200
|
57,900
|
6.6 | % | |||||||||||||||||||
Medicare
HMO
|
169,700
|
169,800
|
(100 | ) | (0.1 | ) | ||||||||||||||||||
Medicaid
|
175,300
|
169,000
|
6,300
|
3.7
|
Six
Months Ended
June
30,
|
Percent
Of Revenue
Six
Months Ended
June
30,
|
Increase
(Decrease)
|
||||||||||||||||||||||
2007
|
2006
|
2007
|
2006
|
2007
vs. 2006
|
||||||||||||||||||||
(In
thousands, except percentages, per share and
membership)
|
||||||||||||||||||||||||
Operating
revenues:
|
||||||||||||||||||||||||
Medical
premiums
|
$ |
925,320
|
$ |
815,108
|
94.7 | % | 94.5 | % | $ |
110,212
|
13.5 | % | ||||||||||||
Professional
fees
|
29,036
|
25,797
|
3.0
|
3.0
|
3,239
|
12.6
|
||||||||||||||||||
Investment
and other revenues
|
22,328
|
21,781
|
2.3
|
2.5
|
547
|
2.5
|
||||||||||||||||||
Total
|
976,684
|
862,686
|
100.0
|
100.0
|
113,998
|
13.2
|
||||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||
Medical
expenses
|
797,522
|
658,064
|
81.7
|
76.3
|
139,458
|
21.2
|
||||||||||||||||||
Medical
care ratio
|
83.6 | % | 78.3 | % |
5.3
|
|||||||||||||||||||
General
and administrative expenses
|
118,720
|
101,761
|
12.1
|
11.8
|
16,959
|
16.7
|
||||||||||||||||||
Total
|
916,242
|
759,825
|
93.8
|
88.1
|
156,417
|
20.6
|
||||||||||||||||||
Operating
income
|
60,442
|
102,861
|
6.2
|
11.9
|
(42,419 | ) | (41.2 | ) | ||||||||||||||||
Interest
expense
|
(2,992 | ) | (1,778 | ) | (0.3 | ) | (0.2 | ) | (1,214 | ) |
68.3
|
|||||||||||||
Other
income (expense), net
|
1,494
|
(24 | ) |
0.1
|
¾
|
1,518
|
(6,325.0 | ) | ||||||||||||||||
Income
before income taxes
|
58,944
|
101,059
|
6.0
|
11.7
|
(42,115 | ) | (41.7 | ) | ||||||||||||||||
Provision
for income taxes
|
(20,823 | ) | (34,854 | ) | (2.1 | ) | (4.0 | ) |
14,031
|
(40.3 | ) | |||||||||||||
Tax
rate
|
35.3 | % | 34.5 | % |
0.8
|
|||||||||||||||||||
Net
income
|
$ |
38,121
|
$ |
66,205
|
3.9 | % | 7.7 | % | $ | (28,084 | ) | (42.4 | )% | |||||||||||
Net
income per common share assuming dilution
|
$ |
0.65
|
$ |
1.05
|
$ | (0.40 | ) | (38.1 | )% | |||||||||||||||
Member
months
|
||||||||||||||||||||||||
Commercial |
1,858,700
|
1,740,400
|
118,300
|
6.8 | % | |||||||||||||||||||
Medicare HMO | 340,200 | 338,700 | 1,500 | 0.4 | ||||||||||||||||||||
Medicaid | 355,500 | 336,000 | 19,500 | 5.8 |
·
|
Total
operating revenues increased by 13.2%. This improvement was
primarily driven by a 13.5% increase in medical premiums due to a
41.3%
increase in premiums for our stand alone Medicare Part D prescription
drug
(PDP) programs, an increase in our commercial membership and premium
rate
increases. Also contributing to the improvement in operating
revenues was a 12.6% increase in professional fees due to an increase
in
visits to our clinical
subsidiaries.
|
·
|
HMO
membership increased 3.6% as a result of new accounts and in-case
growth
on commercial membership and growth in Medicaid
membership. This increase is net of the 11,000 commercial
member terminations effective January 1, 2007, from three large employer
groups that had been anticipated.
|
·
|
Medical
expenses, as a percentage of medical premiums and professional fees,
or
medical care ratio, increased to 83.6% in 2007 from 78.3% in
2006. The increase in our medical care ratio is primarily
related to the estimated full year 2007 pre-tax loss of $55.3 million
related to our new enhanced PDP product that was recorded during
the
period, which significantly increased medical expenses. See
Medical Expenses below for more
details.
|
·
|
General and administrative (G&A) expenses as a percentage of medical premiums increased to 12.8% in 2007 from 12.5% in 2006. G&A expenses increased 16.7% primarily due to costs associated with our pending merger with UnitedHealth Group, increases in premium taxes and brokers' fees, and an $8.8 million premium deficiency reserve recorded in G&A related to our new enhanced PDP product. This increase was entirely related to higher bad debt expense for the members’ portion of premiums. |
·
|
We
had operating income of $60.4 million in 2007 compared to $102.9
million
in 2006. This decrease is related to the $55.3 million
operating loss recorded during 2007 related to our new enhanced PDP
product. See Medical Expenses below for more details. This
decrease was partially offset by an increase in operating income
primarily
driven by medical premium revenue growth from new members and premium
rate
increases.
|
·
|
Cash
flows from operating activities decreased to $109.5 million from
$140.1
million during 2006. This decrease is mostly due to the timing
of tax payments and a $14.9 million decrease in operating cash flows
from
our PDP plans during 2007 compared to 2006, which was primarily related
to
the timing of PDP activity during the
year.
|
Six
Months Ended June 31,
|
||||||||
2007
|
2006
|
|||||||
(In
thousands)
|
||||||||
Sources
of cash:
|
||||||||
Cash
provided by operating activities
|
$ |
109,516
|
$ |
140,097
|
||||
Purchase
of investments, net of proceeds
|
27,789
|
¾
|
||||||
Exercise
of stock in connection with stock plans
|
4,301
|
10,719
|
||||||
Proceeds
from other long-term debt
|
¾
|
20,000
|
||||||
Other
|
4,233
|
10,260
|
||||||
Total
cash sources
|
145,839
|
181,076
|
||||||
Uses
of cash:
|
||||||||
Purchase
of investments, net of proceeds
|
¾
|
(36,268 | ) | |||||
Purchase
of treasury stock
|
(21,081 | ) | (127,780 | ) | ||||
Payment
on debt and capital leases
|
(40,078 | ) | (53 | ) | ||||
Other
|
(120 | ) | (8,179 | ) | ||||
Total
cash uses
|
(61,279 | ) | (172,280 | ) | ||||
Net
increase in cash
|
$ |
84,560
|
$ |
8,796
|
A.M.
Best Company, Inc. (1)
|
Fitch
Ratings (2)
|
||||||||||
Rating
|
Ranking
|
Rating
|
Ranking
|
||||||||
Financial
strength rating:
|
|||||||||||
HMO
and health and life insurance subsidiaries
|
B++
Good
|
5th
of 16
|
A-
Strong
|
7th
of 23
|
|||||||
Issuer
credit ratings:
|
|||||||||||
HMO
and health and life insurance subsidiaries
|
bbb+
Adequate
|
8th
of 22
|
n/a
|
n/a
|
|||||||
Parent
company
|
bb+
Speculative
|
11th
of 22
|
BBB
Good
|
9th
of 23
|
|||||||
Senior
convertible debentures
|
bb+
Speculative
|
11th
of 22
|
BBB-
Investment Grade
|
10th
of 23
|
Standard
& Poor's Corp. (3)
|
||
Rating
|
Ranking
|
|
Counterparty
credit rating
|
BB+
Speculative
|
11th
of 22
|
Senior
convertible debentures
|
BB+
Speculative
|
11th
of 22
|
•
|
|
current
and prospective employees may experience uncertainty about their
future
roles with the combined company, which might adversely affect our
ability
to retain key managers and other
employees;
|
•
|
|
the
merger agreement with UnitedHealth Group imposes certain restrictions
on
the operations of our business until completion of the merger;
and
|
•
|
|
current
or prospective customers may experience uncertainty about the consequences
of the merger to them resulting in possible loss of their
business.
|
|
(c)
|
Below,
is a summary of stock repurchases for the six months ended June
30,
2007. See Note 8, "Share Repurchases", of our Notes to
Condensed Consolidated Financial Statements for information regarding
our
stock repurchase plan.
|
Period
|
Total
Number
Of
Shares
Repurchased
(1)
|
Average
Price
Paid
Per
Share
|
Total
Number
Of
Shares Purchased
As
Part Of Publicly
Announced
Plan
Or
Program
|
Approximate
Dollar
Value
Of Shares
That
May Yet Be
Purchased
Under
The
Plan (2)
|
||||||||||||
(In
thousands, except per share data)
|
||||||||||||||||
Beginning
approximate dollar value of shares that may yet be
purchased
|
$ |
24,142
|
||||||||||||||
January
1, 2007 – January 31, 2007
|
500
|
$ |
35.80
|
500
|
56,251
|
|||||||||||
February
1, 2007 – February 28, 2007
|
85
|
37.45
|
85
|
53,070
|
||||||||||||
March
1, 2007 – March 31, 2007
|
¾
|
¾
|
¾
|
53,070
|
||||||||||||
April
1, 2007 – April 30, 2007
|
¾
|
¾
|
¾
|
53,070
|
||||||||||||
May
1, 2007 – May 31, 2007
|
¾
|
¾
|
¾
|
53,070
|
||||||||||||
June
1, 2007 – June 30, 2007
|
¾
|
¾
|
¾
|
53,070
|
|
(1)
|
Repurchases
were made pursuant to a 10b5-1
plan.
|
|
(2)
|
At
January 1, 2007, $24.1 million remained available for purchase
under
previously approved plans. On January 25, 2007, our Board of Directors
authorized an additional $50.0 million in share
repurchases. The repurchase program has no stated expiration
date; however we have halted our repurchase program pending the
UnitedHealth Group
merger.
|
|
(d)
|
Below,
is a summary of 2¼% senior convertible debenture conversions for the six
months ended June 30, 2007. See Note 6, "Long-Term Debt", of
our Notes to Condensed Consolidated Financial Statements for information
regarding our senior convertible
debentures.
|
Period
|
Total
Dollar Value Of Debentures Converted
|
Average
Price
Paid
Per
Debenture
|
Total
Dollar Value
Of
Debentures
Purchased
As
Part Of Publicly
Announced
Plan
Or
Program
|
Approximate
Dollar
Value
Of Debentures
That
May Yet Be
Purchased
Under
The
Plan
|
||||||||||||
January
1, 2007 – January 31, 2007
|
$ |
21,720,000
|
109.35
shares of common stock for each $1,000 principal amount of
debentures
|
none
|
none
|
|||||||||||
February
1, 2007 – February 28, 2007
|
¾
|
¾
|
¾
|
¾
|
||||||||||||
March
1, 2007 – March 31, 2007
|
1,536,000
|
109.35
shares of common stock for each $1,000 principal amount of
debentures
|
none
|
none
|
||||||||||||
April
1, 2007 – April 30, 2007
|
¾
|
¾
|
¾
|
¾
|
||||||||||||
May
1, 2007 – May 31, 2007
|
¾
|
¾
|
¾
|
¾
|
||||||||||||
June
1, 2007 – June 30, 2007
|
¾
|
¾
|
¾
|
¾
|
Broker
|
|||
For
|
Against
|
Abstain
|
Non-votes
|
40,959,541
|
113,920
|
22,022
|
0
|
(10.9)
|
||
(31.1)
|
||
(31.2)
|
||
(32.1)
|
||
(32.2)
|
|
SIERRA
HEALTH SERVICES, INC.
Registrant
By:
/s/ MARC R. BRIGGS
Marc
R. Briggs
Senior
Vice President of Finance,
Chief
Financial Officer and Treasurer
(Principal
Financial and Accounting Officer)
|