EX-99.1 2 g10183exv99w1.htm EX-99.1 PRESS RELEASE EX-99.1
 

EXHIBIT 99.1
(LOGO)
     
Company Contact:
  Lankford Wade
 
  Vice President
 
  HealthSpring, Inc.
 
  (615) 236-6200
HealthSpring, Inc. Reports 2007 Third Quarter Results
 
Increases 2007 Earnings Guidance
FRANKLIN, Tenn. (October 30, 2007) — HealthSpring, Inc. (NYSE:HS) today announced its results for the third quarter and nine months ended September 30, 2007. Highlights for the 2007 third quarter included:
•   Medicare Advantage members of 126,616 at September 30, 2007; up 13.6% over the 2006 third quarter end. PDP membership of 128,127 at September 30, 2007; up 45.2% over the 2006 third quarter end.
•   Medicare premium revenue of $342.2 million; up 13.2% over the 2006 third quarter.
•   Net income of $22.4 million, or $0.39 per diluted share, compared with $31.1 million, or $0.54 per diluted share, in the 2006 third quarter. Retroactive risk payments from CMS received in the 2006 third quarter resulted in a favorable after-tax impact on net income of approximately $6.7 million, or $0.12 per diluted share.
Commenting on 2007 third quarter results, Herb Fritch, Chairman, President, and Chief Executive Officer, said, “We are pleased with our third quarter results. Despite the challenges we experienced during the first five months of 2007, it appears that our medical costs are now more in line with our historical experience. In addition, despite increases in competition and reductions in premiums, profitability in our Part D line of business continues to be better than originally expected. We were also pleased that we were able to finance and complete the acquisition of Leon Medical Centers Health Plans on October 1. We look forward to an exciting open enrollment period for 2008 in Florida and in our other markets.”
Third Quarter Results
                         
    Three Months Ended        
    September 30,     Percent  
($ in thousands)   2007     2006     Change  
Medicare premium revenue
   $ 342,173     $ 302,261       13.2 %
Total revenue
     366,342       343,861       6.5  
Medicare medical expense
     279,923       228,829       22.3  
Total medical expense
     288,261       256,439       12.4  
SG&A
     40,161       37,839       6.1  
EBITDA (1)
     38,078       49,676       (23.3 )
Net income
     22,365       31,053       (28.0 )
Net income per common share — diluted
     0.39       0.54       (27.8 )
 
(1)   See “Supplemental Information” below and the accompanying reconciliation of non-GAAP measures to GAAP measures.
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HS Reports Third Quarter Results
Page 2
October 30, 2007
Operating Highlights
Revenue
•   Medicare Advantage premiums were $315.2 million for the 2007 third quarter, reflecting an increase of 17.9% over the 2006 third quarter as adjusted for the 2006 retroactive risk payments (see “Supplemental Information” Note 1 herein). As reported, Medicare Advantage premiums increased 12.7% over the 2006 third quarter.
•   PDP premium revenue was $26.9 million for the 2007 third quarter, an increase of 19.6% compared with the 2006 third quarter. The revenue increase is primarily attributable to the 45.2% increase in membership, which was partially offset by a decline in per member per month, or PMPM, premiums.
•   Commercial premiums were $10.9 million for the 2007 third quarter. Commercial membership was 12,453 at September 30, 2007, compared with 36,011 at September 30, 2006.
Medical Expense
•   Total Medicare medical loss ratio (MLR) was 81.8% for the 2007 third quarter, compared with 75.7% for the prior year’s third quarter.
•   Medicare Advantage MLR (excluding PDP) for the three months ended September 30, 2007, was 81.9% compared with 79.6% for the 2006 third quarter on an as-adjusted basis (see “Supplemental Information” Note 1 herein). As reported, Medicare Advantage MLR was 81.9% for the 2007 third quarter compared with 76.9% for the comparable prior-year period.
•   On a year-to-date basis, the MLR for PDP was 88.8% for 2007 compared with 81.9% in the 2006 period. The deterioration in PDP MLR was primarily the result of lower PDP PMPM revenue in the current year.
•   In October 2007, the Company received notification from CMS that the Company’s obligation to CMS to settle certain Part D payments (funds held for the benefit of members and risk corridor adjustments) for the 2006 plan year amounted to $103.7 million. Adjusting the Company’s prior estimate of amounts due CMS for the 2006 plan year to amounts set forth in the final settlement notification from CMS resulted in a negative impact of $3.5 million to operations for the three months ended September 30, 2007, which increased Medicare Advantage MLR (excluding PDP) by 60 basis points, PDP MLR by 440 basis points, and total Medicare MLR by 100 basis points for the three months ended September 30, 2007.
Selling General & Administrative (SG&A)
•   SG&A expense represented 11.0% of total revenue in both the 2007 third quarter and the 2006 third quarter.
•   In the third quarter of 2007, SG&A expense increased by $2.3 million, or 6.1%, over the 2006 third quarter, primarily as a result of increases in personnel and stock compensation.
Balance Sheet Highlights
•   At September 30, 2007, the Company’s cash and cash equivalents were $409.8 million, $90.1 million of which was held at unregulated subsidiaries. Approximately $56.0 million of cash at unregulated subsidiaries, together with the $12.0 million of funds held in escrow, were spent in the 2007 fourth quarter for the acquisition of Leon Medical Centers Health Plans and for transaction-related expenses (see below). Approximately $137.5 million of the cash balance at September 30, 2007, relates to amounts held by the Company for the benefit of its Part D members and $43.9 million relates to payables to CMS under the risk corridor provisions of Part D.
•   As noted above, in October 2007, the Company received notification from CMS of the 2006 final Part D settlement of $103.7 million. The Company anticipates such amount will settle against premium payments in the fourth quarter of 2007.
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HS Reports Third Quarter Results
Page 3
October 30, 2007
•   For the third quarter of 2007, net cash provided by operating activities, after adjusting for the early receipt of the $114.5 million July CMS payment in June, was $40.8 million, or 1.8 times net income, compared with $53.5 million for the third quarter of 2006, or 1.7 times net income, after adjusting for the early receipt of the $94.6 million July CMS payment in June 2006.
•   Days in claims payable totaled 38 at the end of the 2007 third quarter compared with 40 at the end of the second quarter 2007.
Acquisition of Leon Medical Centers Health Plans
As previously announced, on October 1, 2007, the Company completed its acquisition of Leon Medical Centers Health Plans, Inc. (“LMC Health Plans”), a Miami, Florida-based Medicare Advantage HMO with approximately 26,000 members. The Company acquired LMC Health Plans for $355 million in cash at closing and additional consideration of 2.67 million shares of HealthSpring’s common stock to be released from escrow upon satisfaction of certain conditions.
The $355 million cash purchase price was financed, in part, with the proceeds of a new $300 million senior secured term loan facility. The term loan facility has a term of five years and bears interest at a spread over a base rate or LIBOR (initially 250 basis points for LIBOR advances), depending on the Company’s leverage ratio. The Company also has entered into a $100 million senior secured revolving credit facility, which is currently undrawn.
As part of the transaction, the Company entered into an exclusive long-term provider contract with Leon Medical Centers, Inc., an operator of five Medicare-only medical clinics located throughout Miami-Dade County. The provider contract includes a risk-sharing arrangement whereby both the Company and LMC will share equally in the surplus or deficit of the health plan relative to targeted medical loss ratios, which is initially set at 80.0%.
Updated 2007 Guidance
The updated 2007 guidance provided below includes the estimated results from the operations of LMC Health Plans from October 1, 2007, the date of acquisition.
•   EPS: The Company estimates that earnings per share for 2007, on a fully diluted basis, will be in the range of $1.40 to $1.45, on weighted average shares outstanding of approximately 57.4 million. The estimated range of earnings per share includes the $0.05 net loss per share that resulted from the Company’s recording a charge to earnings of $4.5 million during the 2007 second quarter for the impairment of intangible assets.
•   Membership: The Company estimates that its Medicare Advantage membership will be in the range of 153,000 to 154,000 (including approximately 26,000 from LMC Health Plans) at the end of 2007. Additionally, the Company estimates that PDP membership will be approximately 135,000 at the end of 2007.
•   Revenue: The Company estimates that 2007 total revenue will be approximately $1.55 billion, with approximately 97% of total revenue for the year attributable to the Medicare business.
•   MLRs: The Company now estimates Medicare Advantage full-year MLRs will range between 80.0% and 81.0% for 2007. The Company maintains its estimate that PDP MLRs will range between 83.0% and 86.0% for the year.
Conference Call
A live audio webcast of the conference call regarding third quarter results will begin at 10:00 a.m. ET on Wednesday, October 31, 2007. The public may access the conference call through HealthSpring’s website, www.healthspring.com, under the Investor Relations tab. The conference call can also be accessed by dialing (913) 981-5547, confirmation number 7704216. An online replay will be available approximately two hours following the conclusion of the live broadcast and will continue for 30 days.
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HS Reports Third Quarter Results
Page 4
October 30, 2007
About HealthSpring, Inc.
HealthSpring is one of the largest managed care organizations in the United States whose primary focus is the Medicare Advantage market. The Company owns and operates Medicare Advantage plans and a stand-alone Medicare prescription drug plan in Alabama, Florida, Illinois, Mississippi, Tennessee, and Texas, and, effective January 1, 2007, began offering Medicare Part D prescription drug plans on a nationwide basis to persons in all 50 states who are eligible for Medicare. The Company also uses its infrastructure and provider networks in Tennessee and Alabama to offer commercial health plans to employer groups.
Cautionary Statement Regarding Forward Looking Statements
Statements contained in this release that are not historical fact are forward-looking statements, which the Company intends to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend on or refer to future events or conditions, or that include words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions are forward-looking statements. Such statements include statements regarding explanations for medical cost trends, estimated CMS liabilities and risk corridor adjustments and the settlement thereof, Medicare-commercial premium revenue mix, estimates of retroactive risk rate adjustments, and earnings, membership, and MLR guidance. The Company cautions that forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause its actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.
The following factors, among others, could cause actual results to differ materially from those in the forward-looking statements: changes in membership enrollment and dis-enrollment patterns; changes in utilization; changes in medical and prescription drug cost trends; the Company’s ability to accurately estimate and calculate Part D risk corridor adjustments; the Company’s ability to accurately estimate CMS retroactive risk adjustments to Medicare rates; increasing competition and potential confusion in the marketplace regarding other MA, MA-PD, PDP, and PFFS plan offerings; the Company’s ability to accurately estimate incurred but not reported medical claims; challenges to integrating LMC Health Plans and the Company’s lack of experience in South Florida; negotiation of acceptable contracts with physicians, hospitals, and other providers; contractual disputes with providers; increases in costs or liabilities associated with litigation; legislative and regulatory actions or changes, including changes in Medicare funding; the reconciliation of Part D claims files errors; costs associated with information and data systems conversions and compliance with regulatory mandates; management changes; and changes in tax estimates, assets, or liabilities and valuation allowances related thereto. The foregoing list of factors is not intended to be exhaustive. Additional information concerning these and other important risks and uncertainties can be found under the headings “Special Note Regarding Forward-Looking Statements” and “Item 1A. - Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, and in the Company’s Quarterly Reports on Form 10-Q. Any projections or other forward-looking information in this release are based on limited information currently available to HealthSpring, which is subject to change. Although any such projections and forward-looking information and the factors influencing them will likely change, HealthSpring will not necessarily update the information except as required by law, as HealthSpring will only provide guidance at certain points during the year. Such information speaks only as of the date of this release.
Supplemental Information
1. Non-GAAP Measures
 The Company believes that the non-GAAP measures used in this release, when presented in conjunction with comparable GAAP measures, are useful to both management and investors in analyzing financial and business trends regarding the Company’s ongoing business and operating performance. These non-GAAP measures should be considered in addition to, but not as a substitute for, items prepared in accordance with GAAP.
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HS Reports Third Quarter Results
Page 5
October 30, 2007
(A) The Company uses EBITDA, or earnings before interest, taxes, depreciation and amortization, and impairment of intangible assets, to assess business performance among its health plans and related management companies.
The following table provides a reconciliation of EBITDA as used in this release to net income calculated in accordance with GAAP:
                 
    Three Months Ended  
    September 30,  
(in thousands)   2007     2006  
Net income
   $ 22,365     $ 31,053  
Plus: income tax expense
     12,574       15,963  
Plus: interest expense
     123       119  
Plus: depreciation and amortization
     3,016       2,541  
 
            
EBITDA
   $ 38,078     $ 49,676  
 
            
(B) The table below includes pro-forma adjustments to include the Medicare premiums and expense (excluding PDP) related to the risk adjustment payment for the 2006 plan year, which was received and recognized in the third quarter of 2006, as if it had been recorded in the applicable period of 2006 in which it was earned. The 2006 third quarter payment, after adjusting medical expense to reflect payments to providers pursuant to risk-sharing arrangements, resulted in a favorable after-tax impact on net income in that quarter of approximately $6.7 million, or $0.12 per share.
                                 
    Three Months Ended              
    September 30,     $     %  
($ in millions)   2007     2006     Change     Change  
Premiums:
                                
Medicare Advantage Premiums — as reported
   $ 315.2     $ 279.7     $ 35.5       12.7 %
Pro-forma Adjustment for the CMS Risk Adjustment Payment
     —       (12.3 )     12.3       —  
 
                        
Medicare Advantage Premiums — as adjusted
   $ 315.2     $ 267.4     $ 47.8       17.9 %
 
                        
Medical Expense:
                                
Medical Expense — as reported
   $ 258.3     $ 215.1                  
Pro-forma Adjustment for the CMS Risk Adjustment Payment
     —       (2.2 )                
 
                            
Medical Expense — as adjusted
   $ 258.3     $ 212.9                  
 
                            
Medical Loss Ratios (MLRs):
                                
Medicare Advantage — as reported
     81.9 %     76.9 %                
Medicare Advantage — as adjusted
     81.9 %     79.6 %                
2. Membership
                                         
    Sept. 30,     Dec. 31,     Percent     Sept. 30,     Percent  
    2007     2006     Change     2006     Change  
Medicare Advantage Membership:
                                        
Tennessee
     50,228       46,261       8.6 %     45,763       9.8 %
Texas
     36,491       34,638       5.3       33,057       10.4  
Alabama
     30,642       27,307       12.2       26,084       17.5  
Illinois
     8,453       6,284       34.5       6,024       40.3  
Mississippi
     802       642       24.9       566       41.7  
 
                              
Total
     126,616       115,132       10.0 %     111,494       13.6 %
 
                              
PDP Membership:
     128,127       88,753       44.4 %     88,262       45.2 %
 
                              
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HS Reports Third Quarter Results
Page 6
October 30, 2007
HealthSpring, Inc. and Subsidiaries
Condensed Consolidated Balance Sheet Information
September 30, 2007 and December 31, 2006
(in thousands)
(Unaudited)
                 
    September 30,     December 31,  
    2007     2006  
Assets
                
Current Assets:
                
Cash and cash equivalents
   $ 409,828     $ 338,443  
Accounts receivable, net of allowance for doubtful accounts
     36,966       17,588  
Investment securities available for sale
     49,160       7,874  
Current portion of investment securities held to maturity
     17,701       10,566  
Deferred income tax asset
     2,974       3,644  
Prepaid expenses and other assets
     5,950       4,047  
 
            
Total current assets
     522,579       382,162  
Investment securities held to maturity, less current portion
     13,324       19,560  
Funds held in escrow for acquisition
     12,000       —  
Property and equipment, net
     17,127       8,831  
Goodwill
     341,804       341,619  
Intangible assets, net
     71,636       81,175  
Restricted assets
     8,062       7,195  
Other
     2,328       2,103  
 
            
Total assets
   $ 988,860     $ 842,645  
 
            
Liabilities and Stockholders’ Equity
                
Current Liabilities:
                
Medical claims liability
   $ 118,937     $ 122,778  
Accounts payable, accrued expenses and other
     17,461       25,984  
Deferred revenue
     351       64  
Funds held for the benefit of members
     137,464       62,125  
Risk corridor payable to CMS
     34,062       27,587  
 
            
Total current liabilities
     308,275       238,538  
Deferred tax liability
     25,917       28,444  
Risk corridor payable to CMS, less current portion
     9,877       —  
Other long-term liabilities
     2,177       381  
 
            
Total liabilities
     346,246       267,363  
 
            
Stockholders’ Equity:
                
Common stock
     576       575  
Additional paid in capital
     492,088       485,002  
Retained earnings
     150,015       89,758  
Treasury stock
     (65 )     (53 )
 
            
Total stockholders’ equity
     642,614       575,282  
 
            
Total liabilities and stockholders’ equity
   $ 988,860     $ 842,645  
 
            
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HS Reports Third Quarter Results
Page 7
October 30, 2007
HealthSpring, Inc. and Subsidiaries
Condensed Consolidated Statement of Income Information
(in thousands, except share data)
(Unaudited)
                                 
    Three-Month Period Ended     Nine-Month Period Ended  
    September 30,     September 30,  
    2007     2006     2007     2006  
Revenue:
                                
Premium:
                                
Medicare
   $ 342,173     $ 302,261     $ 1,033,481     $ 851,295  
Commercial
     10,876       30,037       36,225       94,123  
 
                        
Total premium revenue
     353,049       332,298       1,069,706       945,418  
Management and fee revenue
     6,528       8,249       18,613       19,995  
Investment income
     6,765       3,314       17,972       7,872  
 
                        
Total revenue
     366,342       343,861       1,106,291       973,285  
 
                        
Operating Expenses:
                                
Medical Expense:
                                
Medicare expense
     279,923       228,829       838,798       670,713  
Commercial expense
     8,338       27,610       28,934       83,955  
 
                        
Total medical expenses
     288,261       256,439       867,732       754,668  
Selling, general and administrative
     40,161       37,839       131,314       108,410  
Depreciation and amortization
     3,016       2,541       8,850       7,408  
Impairment of intangible assets
     —       —       4,537       —  
Interest expense
     123       119       357       8,576  
 
                        
Total operating expenses
     331,561       296,938       1,012,790       879,062  
 
                        
Income before equity in earnings of unconsolidated affiliate, minority interest and income taxes
     34,781       46,923       93,501       94,223  
Equity in earnings of unconsolidated affiliate
     158       93       275       264  
 
                        
Income before minority interest and income taxes
     34,939       47,016       93,776       94,487  
Minority interest
     —       —       —       (303 )
 
                        
Income before income taxes
     34,939       47,016       93,776       94,184  
Income taxes
     (12,574 )     (15,963 )     (33,519 )     (33,449 )
 
                        
Net income
     22,365       31,053       60,257       60,735  
Preferred dividends
     —       —       —       (2,021 )
 
                        
Net income available to common stockholders and members
   $ 22,365     $ 31,053     $ 60,257     $ 58,714  
 
                        
Net Income per common share:
                                
Basic
   $ 0.39     $ 0.54     $ 1.05     $ 1.09  
 
                        
Diluted
   $ 0.39     $ 0.54     $ 1.05     $ 1.09  
 
                        
Weighted average common shares outstanding:
                                
Basic
     57,259,106       57,218,805       57,244,854       53,741,536  
 
                        
Diluted
     57,355,150       57,319,221       57,355,891       53,840,646  
 
                        
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HS Reports Third Quarter Results
Page 8
October 30, 2007
HealthSpring, Inc. and Subsidiaries
Condensed Consolidated Statement of Cash Flow Information
For the Three and Nine Months Ended September 30, 2007 and 2006
(in thousands)
(Unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2007     2006     2007     2006  
Cash flows from operating activities:
                                
Net income
   $ 22,365     $ 31,053     $ 60,257     $ 60,735  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                
Depreciation and amortization
     3,016       2,541       8,850       7,408  
Impairment of intangible assets
     —       —       4,537       —  
Amortization of deferred financing cost
     51       47       152       195  
Equity in earnings of unconsolidated affiliate
     (158 )     (93 )     (275 )     (264 )
Minority interest
     —       —       —       303  
Paid in kind (PIK) interest
     —       —       —       116  
Stock-based compensation
     1,984       1,608       6,082       3,772  
Deferred tax benefit
     387       5,779       (2,042 )     (717 )
Write off of deferred financing cost
     —       —       —       5,375  
Increase (decrease) in cash and cash equivalents due changes in:
                                
Accounts receivable
     11,627       5,256       (19,378 )     (22,216 )
Prepaid expenses and other current assets
     1,223       (31 )     (1,903 )     226  
Medical claims payable
     (10,533 )     3,548       (3,841 )     24,730  
Accounts payable, accrued expenses and other current liabilities
     1,063       (7,496 )     (8,523 )     2,638  
Risk corridor payable to CMS
     9,728       11,340       16,352       16,178  
Deferred revenue
     (114,536 )     (94,550 )     287       (33 )
Other long-term liabilities
     63       (14 )     1,796       (163 )
 
                        
Net cash provided by (used in) operating activities
     (73,720 )     (41,012 )     62,351       98,283  
 
                        
Cash flows from investing activities:
                                
Purchase of property and equipment
     (4,933 )     (1,926 )     (12,143 )     (3,559 )
Escrowed deposit for acquisition
     (12,000 )     —       (12,000 )     —  
Purchase of investment securities
     (40,941 )     (2,449 )     (66,354 )     (8,334 )
Maturity of investment securities
     3,050       5,028       24,169       12,279  
Purchase/maturities of restricted investments
     4       (495 )     (867 )     (1,558 )
Distributions from affiliates
     186       120       216       226  
 
                        
Net cash provided by (used in) investing activities
     (54,634 )     278       (66,979 )     (946 )
 
                        
Cash flows from financing activities:
                                
Funds received for the benefit of members
     (1,858 )     (12,266 )     75,340       60,615  
Payments on borrowings
     —       —       —       (188,642 )
Proceeds from issuance of common stock
     —       (138 )     1,002       188,611  
Purchase of treasury stock
     (2 )     (6 )     (12 )     (13 )
Deferred financing cost
     (317 )     —       (317 )     (932 )
 
                        
Net cash provided by (used in) financing activities
     (2,177 )     (12,410 )     76,013       59,639  
 
                        
Net increase (decrease) in cash and cash equivalents
     (130,531 )     (53,144 )     71,385       156,976  
Cash and cash equivalents at beginning of period
     540,359       320,205       338,443       110,085  
 
                        
Cash and cash equivalents at end of period
   $ 409,828     $ 267,061     $ 409,828     $ 267,061  
 
                        
-END-