PHS Pacificare Hlth Sys

* Q3 EPS was $1.21 per diluted share, up 29% from prior year * Net income totaled $118 million, up 34% from Q3 2004 * Commercial MLR improved by 220 basis points year-over-year * Total senior membership up 7% from prior year CYPRESS, Calif., Oct. 27 /PRNewswire-FirstCall/ -- PacifiCare Health Systems, Inc. (NYSE:PHS), today announced that reported net income for the third quarter ended September 30, 2005 was $118 million, or $1.21 per diluted share. This compares with reported net income of $88 million, or $0.94 per diluted share, for the third quarter of 2004. Results in the quarter were favorably impacted by $17 million after taxes, or $0.17 per diluted share, in federal income tax settlements and legal matters either settled or reserved. Offsetting this, the company incurred costs totaling $9 million pre-tax, or $0.06 per diluted share, in one-time items related to the proposed merger with UnitedHealth Group, as well as $13 million pre-tax, or $0.08 per diluted share, associated with Medicare Part D readiness. "We experienced solid year-over-year growth with our third quarter earnings, which were ahead of consensus expectations and our guidance after excluding the one-time items, and Part D readiness costs," said Chairman and Chief Executive Officer Howard Phanstiel. "This year-over-year earnings growth was driven by higher senior and commercial membership, and a 220 basis point decrease in the commercial medical loss ratio." Revenue and Membership Third quarter 2005 total operating revenue of $3.8 billion was 21% higher than the same quarter a year ago. Total commercial revenue rose 22%, driven by an 8.6% rise in premiums per member per month (PMPM) and 14% growth in fully insured and ASO membership, including the acquisitions of American Medical Security Group (AMS) and the group health business of Pacific Life Insurance Company. Senior revenue grew 19% over the third quarter of last year, primarily as the result of a premium increase of 11.9% PMPM and a 7% rise in membership. Specialty and Other revenue grew 34% over the third quarter last year, primarily as the result of membership growth and increases in retail service contract and mail order fulfillment revenues at PacifiCare's pharmacy benefit management company. Additionally, membership increased year-over-year at PacifiCare's behavioral health and dental and vision businesses by 27% and 43%, respectively. Health Care Costs The private sector commercial medical loss ratio (MLR) in the third quarter improved 220 basis points from the prior year, to 81.3%. This improvement was driven primarily by business mix changes resulting from the AMS and Pacific Life transactions. The MLR for same store membership was flat year-over-year as a result of the company's strategy of increasing premiums at levels equivalent to health care cost trends. The government sector senior MLR improved by 20 basis points year-over- year, to 84.7%, and by 280 basis points sequentially primarily as a result of the receipt of higher than expected risk-adjustment payments related to its Medicare Advantage business. The consolidated MLR of 82.9% was 120 basis points lower than the third quarter of the prior year. Selling, General & Administrative Expenses The SG&A expense ratio of 14.2% in the third quarter of 2005 was 120 basis points higher than the third quarter of 2004 and 80 basis points higher sequentially. The year-over-year increase was primarily a result of changes in business mix related to the acquired AMS and Pacific Life business, as well as costs incurred in connection with the company's preparations to administer the new Medicare Part D benefit, and expenses related to the proposed merger with UnitedHealth Group. The sequential increase is primarily attributable to increased spending related to Part D readiness, the proposed merger, staffing growth at the PBM, a full quarter's impact of the Pacific Life acquisition, and incentive compensation accruals reflective of improved operating results. Other Financial Data Medical claims and benefits payable (MCBP) totaled approximately $1.3 billion at September 30, 2005, which was an increase of approximately $58 million from the prior quarter. Days claims payable for the third quarter compared to the prior quarter increased slightly to 39.5 days from 38.8 days. After excluding the non-risk, capitated portion of the company's business, as well as other non-claim related liabilities, days claims payable decreased by three tenths of one day from 66.7 to 66.4 days. Cash flow from operations in the third quarter of 2005 was $928.7 million. This includes the positive effect of certain large items in the quarter, including the early receipt in September of approximately $500 million from the Centers for Medicare and Medicaid Services (CMS) representing PacifiCare's October payment. Additionally, accounts receivable decreased due to the collection of receivables from CMS. Conference Call, Webcast and Website Information PacifiCare will host a conference call and webcast on Thursday, October 27, 2005 at 8:30 AM Pacific time, 11:30 AM Eastern, to discuss this release in further detail. Interested parties can access the live conference by dialing (877) 601-3546, password "PacifiCare". A replay of the call will be available through November 18, 2005 at (800) 234-2685. Additionally, a live webcast of the call will be available at http://www.pacificare.com/. Click on Investor Relations, and then Conference Calls to access the link. In accordance with Regulation G, a reconciliation of GAAP results to any non-GAAP measurements referred to in this release and during the conference call will be posted with the earnings press release on our website. Risk Factors Regarding Forward-Looking Statements The statements in this news release that are not historical facts are forward-looking statements within the meaning of the Federal securities laws, and may involve a number of risks and uncertainties. Such forward-looking statements include, but are not limited, to the company's expectations regarding financial results, including earnings, for the full-year 2005. Important factors that could cause results to differ materially from those expected by management include, but are not limited to, failure to implement programs to achieve expected membership, revenue or earnings targets as a result of adjustments to premiums or benefits; the inability to execute strategies related to cost controls, including medical management programs; actual medical claims differing from current estimates; the inability to maintain required capital levels at the company's regulated subsidiaries; the inability to maintain profitability and growth levels at the company's specialty businesses; provider contractual or financial problems or bankruptcy; unexpected increases in competition; new regulations or laws relating to capitation; Medicare reimbursements, benefit mandates, service, utilization management, provider contracts and similar matters; and the inability to comply with existing bank covenants. Additional information on factors, risks, and uncertainties that could potentially affect our financial results may be found in documents filed with the Securities and Exchange Commission. PacifiCare Health Systems is one of the nation's largest consumer health organizations with approximately 3.3 million health plan members and approximately 12 million specialty plan members nationwide. PacifiCare offers individuals, employers and Medicare beneficiaries a variety of consumer-driven health care and life insurance products. Specialty plan operations include behavioral health, dental and vision, and complete pharmacy benefit management through its wholly owned subsidiary, Prescription Solutions. More information on PacifiCare Health Systems is available at http://www.pacificare.com/. PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except per-share amounts) 2005 2004 2005 2004 Revenue: Commercial $1,731,062 $1,419,140 $4,976,111 $4,219,045 Senior 1,763,833 1,480,778 5,021,313 4,332,078 Specialty and other 242,668 181,199 694,816 501,891 Net investment income 32,879 24,509 95,281 64,183 Total operating revenue 3,770,442 3,105,626 10,787,521 9,117,197 Expenses: Health care services and other: Commercial 1,415,012 1,192,632 4,071,329 3,559,411 Senior 1,493,221 1,257,631 4,333,357 3,730,703 Specialty and other 139,735 101,678 409,488 276,170 Total health care services and other 3,047,968 2,551,941 8,814,174 7,566,284 Selling, general and administrative expenses 528,951 401,050 1,453,811 1,142,525 Operating income 193,523 152,635 519,536 408,388 Interest expense, net (19,611) (10,182) (55,117) (31,852) Income before income taxes 173,912 142,453 464,419 376,536 Provision for income taxes 55,802 54,285 168,026 145,343 Net income $118,110 $88,168 $296,393 $231,193 Weighted average common shares outstanding used to calculate basic earnings per share 86,808 83,691 86,373 84,296 Basic earnings per share $ 1.36 $ 1.05 $ 3.43 $ 2.74 Weighted average common shares and equivalents outstanding used to calculate diluted earnings per share 97,896 94,492 97,405 95,416 Diluted earnings per share $ 1.21 $ 0.94 $ 3.06 $ 2.44 OPERATING STATISTICS Medical loss ratio: Consolidated 82.9% 84.1% 83.7% 84.7% Private - Commercial 81.3% 83.5% 81.4% 83.8% Private - Senior 74.1% 69.5% 75.4% 72.4% Private - Consolidated 81.2% 83.2% 81.4% 83.6% Government - Senior 84.7% 84.9% 86.3% 85.9% Selling, general and administrative expenses as a percentage of operating revenue (excluding net investment income) 14.2% 13.0% 13.6% 12.6% Operating income as a percentage of operating revenue 5.1% 4.9% 4.8% 4.5% Effective tax rate 32.1% 38.1% 36.2% 38.6% PACIFICARE HEALTH SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Nine Months (Unaudited) Ended Ended September 30, September 30, (In thousands) 2005 2004 2005 2004 Operating activities: Net income $118,110 $88,168 $296,393 $231,193 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 15,961 12,686 46,567 37,407 Stock-based compensation expense 7,740 7,445 23,719 27,822 Tax benefit realized for stock option exercises 1,848 2,618 23,339 15,982 Amortization of intangible assets 5,461 4,946 16,318 14,839 Deferred income taxes 30,723 (1,122) 4,951 32,899 Amortization of capitalized loan fees 1,037 1,077 3,113 3,232 Amortization of notes receivable from sale of fixed assets - (1,421) (2,626) (4,172) Provision for (recovery of) doubtful accounts (1,518) 1,601 (2,582) 425 Amortization of discount on 10 3/4% senior notes 529 71 977 213 Loss on disposal of property, plant and equipment 668 2,325 767 2,749 Amortization of deferred gain (175) - (175) - Changes in assets and liabilities, net of effects of acquisitions: Receivables, net 78,240 9,645 (6,102) (41,555) Prepaid expenses and other assets (2,442) 11,930 4,591 1,087 Medical claims and benefits payable 57,801 (14,100) 100,903 39,100 Accounts payable and accrued liabilities: Accrued taxes 19,124 7,075 1,049 (971) Other changes in accounts payable and accrued liabilities 81,613 49,677 43,430 27,909 Unearned premium revenue 513,964 4,084 516,357 (394,223) Net cash flows provided by (used in) operating activities 928,684 186,705 1,070,989 (6,064) Investing activities: Purchase of marketable securities, net (128,311) (131,561) (276,133) (242,546) Purchase of property, plant and equipment (36,879) (17,815) (68,850) (45,087) Acquisitions, net of cash acquired (4,218) - (58,964) - Sale (purchase) of marketable securities - restricted, net (1,480) 2,632 (43,385) 29,495 Proceeds from the sale of property, plant and equipment 6 - 2,458 - Net cash flows used in investing activities (170,882) (146,744) (444,874) (258,138) Financing activities: Proceeds from issuance of common stock 9,130 12,130 28,507 43,206 Principal payments on long-term debt (8,638) (417) (26,077) (1,365) Purchase and retirement of common stock (1,141) (62,409) (14,986) (102,951) Adjustment to fair value of 10 3/4% senior notes - - (7,487) - Payments on software financing agreements (179) (1,462) (2,907) (5,515) Net cash flows used in financing activities (828) (52,158) (22,950) (66,625) Net increase (decrease) in cash and equivalents 756,974 (12,197) 603,165 (330,827) Beginning cash and equivalents 670,295 879,792 824,104 1,198,422 Ending cash and equivalents $1,427,269 $867,595 $1,427,269 $867,595 PACIFICARE HEALTH SYSTEMS, INC. BALANCE SHEET DATA (Unaudited) September 30, December 31, September 30, (in thousands) 2005 2004 2004 Assets: Cash, equivalents and marketable securities $3,602,365 $2,760,869 $2,454,200 Receivables, net 328,672 317,362 303,945 Property, plant and equipment, net 250,404 226,594 152,920 Goodwill and intangible assets, net 1,560,303 1,505,799 1,189,373 Other assets 469,420 416,293 371,544 Total assets $6,211,164 $5,226,917 $4,471,982 Liabilities and stockholders' equity: Total medical claims and benefits payable $1,308,500 $1,192,400 $1,066,600 Current portion of long-term debt 35,157 37,534 6,059 Long-term debt 1,018,403 1,051,520 607,470 Other liabilities 1,324,177 757,025 731,299 Total stockholders' equity 2,524,927 2,188,438 2,060,554 Total liabilities and stockholder's equity $6,211,164 $5,226,917 $4,471,982 MEMBERSHIP DATA (Unaudited) September 30, December 31, September 30, 2005 2004 2004 Commercial: HMO 1,744,500 1,927,900 1,923,700 PPO and indemnity 749,000 582,500 304,800 Employer self-funded 104,000 82,600 40,700 2,597,500 2,593,000 2,269,200 Senior: Medicare Advantage 731,600 704,700 693,300 Medicare Supplement 42,000 36,200 34,300 CMS Disease Management 4,300 2,500 1,500 777,900 743,400 729,100 Total membership 3,375,400 3,336,400 2,998,300 Specialty Membership: Pharmacy benefit management (A) 5,917,800 5,588,700 5,526,300 Behavioral health (B) 4,770,100 3,813,600 3,762,300 Dental and vision (B) 1,171,600 1,040,500 821,100 (A) Pharmacy benefit management membership represents members that are in our Commercial, Medicare Advantage, Medicare Supplement or CMS Disease Management plans, excluding members covered under other PBM contracts. All of these members either have a prescription drug benefit or are able to purchase their prescriptions utilizing our retail network contracts or our mail service. Behavioral health, dental and vision membership includes PacifiCare (B) Behavioral health, dental and vision membership includes PacifiCare members in our Commercial, Medicare Advantage or Medicare Supplement plans that are also enrolled in our behavioral health, dental and/or vision plans. PacifiCare Health Systems, Inc. Guidance Metrics October 27, 2005 (Unaudited) GAAP Net Income (1) $352 - $357 million GAAP EPS - Full Year (1) $3.63 - $3.68 GAAP EPS - 4th Quarter (1) $0.57 - $0.62 Average Outstanding Shares (1) 97.7 million Run Rate Net Income (1)(2)(4) $375 - $380 million Run Rate EPS - Full Year (1)(2)(4) $3.86 - $3.91 Run Rate EPS - 4th Quarter (1)(2) $0.89 - $0.94 Revenue Increase (1) 17.5% MLRs Consolidated (1) 83.5%-84% Private - Commercial 81%-82% Private - Senior 73%-74% Government - Senior (1) 86.5%-87.5% Gross Margins Commercial 18%-19% Senior (1) 12.5%-13.5% Specialty and Other (1) 41%-42% EBITDA (1) $700 - $725 million Cash Flow from Operations (CFFO) (1) $600 - $650 million SG&A Ratio (2)(4) 13.5%-13.8% Depreciation/Amortization $89 million Capital Expenditures (1) $100 million Commercial Membership Growth (1)(3) Flat Medicare Advantage Ending Members 745,000 Tax Rate (1) 37.0% (1) Indicates change since last issuance on July 28, 2005. (2) Excludes anticipated Part D stand-alone administrative expenses for Q3 and Q4 2005. (3) Excludes Guam membership from both December 31, 2004 and December 31, 2005. (4) Excludes favorable impact of $0.17 related to federal income tax settlements and net legal matters either settled or reserved in Q3 2005. DATASOURCE: PacifiCare Health Systems, Inc. CONTACT: Tyler Mason, Media Relations, +1-714 226-3530, ; Dan Yarbrough, Investor Relations, +1-714-226-3540, , both of PacifiCare Health Systems, Inc. Web site: http://www.pacificare.com/

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