Coventry Health Care Reports Second Quarter Earnings and Increases Full Year 2009 Guidance

Tuesday, July 28, 2009 6:46 AM

GAAP Earnings of $0.12 per Diluted Share; Adjusted Earnings of $0.50 per Diluted Share

Coventry Health Care, Inc. (NYSE:CVH) today reported consolidated operating results for the quarter ended June 30, 2009. Operating revenues totaled $3.5 billion for the quarter with GAAP net earnings of $18.4 million, or $0.12 per diluted share. Excluding the impact of the First Health Services Corporation (FHSC) goodwill impairment, which resulted in a net $55.4 million, or $0.38 per diluted share, non-cash charge in the second quarter, adjusted net earnings were $73.8 million, or $0.50 per diluted share⁽¹⁾.

Excluding the impact of the anticipated FHSC divestiture and related current quarter goodwill impairment, the Company is increasing its full year 2009 adjusted earnings per diluted share (EPS) guidance to a range of $1.85 to $1.95, an increase of $0.10 from the midpoint of the prior EPS range of $1.70 to $1.90. GAAP EPS for the full year is now expected to be in a range of $1.25 to $1.40 as, consistent with the FHSC divestiture announcement on June 5, 2009, the Company expects to record a largely non-cash full year charge of $0.55 to $0.60 per diluted share as a result of the transaction.

“I am pleased with the financial and operational progress made by the Company during the past six months,” said Allen F. Wise, chairman and chief executive officer of Coventry. “Coventry remains focused on continually improving our seven core businesses while we work to deliver on our 2009 commitments. While there is always more hard work to be done, we are making progress as evidenced by today’s increase to full year EPS guidance.”

Second Quarter Consolidated Highlights

Revenues increased 18.8% from the prior year quarter
Continued growth in all Medicare products
- Medicare Coordinated Care Product (CCP) membership growth of 39% from the prior year quarter
Continued growth in Individual risk membership
Announced the divestiture of a non-core business, First Health Services Corporation, for $110.0 million in cash
Excellent liquidity position
- Approximately $550 million of deployable free cash at the parent at quarter-end
- Debt reduction of $95.7 million during the quarter
Strong investment portfolio
- Portfolio in a net unrealized gain position at quarter-end
GAAP cash flows from operations were $120.3 million, or 163% of adjusted net income

1) The Company believes that adjusting earnings to remove the unfavorable impact of the non-recurring FHSC divestiture-related impairment charge provides a more meaningful measure of its on-going operating results. See page two for further details.

Selected Second Quarter Highlights

Health Plan Commercial Group Premium Yield & Medical Loss Ratio (MLR). Reported commercial premium yields rose to $299.79 PMPM (per member per month) in the quarter, an increase of 5.1% from the prior year quarter. The health plan commercial group risk MLR was 81.7% in the quarter, down 100 basis points from the prior year quarter.
Medicare Advantage Membership & MLR. As of June 30, 2009, Medicare Advantage membership was 511,000, an increase of 131,000 members year-to-date. Medicare Advantage CCP membership was 182,000, an increase of 6,000 members from the prior quarter and 45,000 members year-to-date. The Medicare Advantage MLR was 90.4% in the quarter, down 10 basis points from the prior quarter.
Medicare Part D Membership & MLR. As of June 30, 2009, Medicare Part D membership was 1,555,000, an increase of 54,000 members from the prior quarter and 624,000 members year-to-date. The Medicare Part D MLR was 89.9% in the quarter and 96.4% year-to-date, up 30 basis points from the prior year-to-date.
Medicaid Membership. As of June 30, 2009, Medicaid membership was 385,000, an increase of 10,000 members from the prior quarter.
First Health Services Corporation Divestiture. During the second quarter of 2009, the Company recorded a non-cash net charge of $55.4 million, or $0.38 per diluted share. This charge included a gross write down of $72.4 million of goodwill related to the divestiture of FHSC, net of a $17.0 million reduction to the Company’s income tax provision in accordance with intra-period tax allocation requirements. Assuming successful completion of the transaction, during the third quarter the Company is projecting an additional charge of approximately $0.17 to $0.22 per diluted share. The total expected charge on the FHSC divestiture of $0.55 to $0.60 per diluted share is consistent with the estimate previously provided when the transaction was announced on June 5, 2009. Furthermore, subsequent to closing of the transaction, the Company expects that the FHSC divestiture proceeds will be used for a combination of debt reduction and share repurchase resulting in a neutral impact to adjusted 2009 earnings per diluted share of $1.85 to $1.95.

2009 Full Year Guidance

Excluding the impact of the pending First Health Services Corporation divestiture:

Risk revenue of $12.45 billion to $12.70 billion
Management services revenue of $1.31 billion to $1.34 billion
Consolidated revenue of $13.76 billion to $14.04 billion
Consolidated MLR of 85.4% to 85.9%
Cost of sales expense of $225.0 million to $235.0 million
Selling, general, and administrative expense (SG&A) of $2.275 billion to $2.325 billion
Depreciation and amortization expense of $148.0 million to $154.0 million
Other income of $85.0 million to $91.0 million
Interest expense of $85.0 million to $90.0 million
Tax rate of 37.0% to 37.5%
Diluted share count of 147.0 million to 149.0 million
Excluding the FHSC divestiture impact, EPS on a diluted basis of $1.85 to $1.95

Impact of the pending FHSC divestiture (assumes transaction completion in third quarter):

One-time FHSC divestiture-related charge of approximately $0.55 to $0.60 per diluted share
- $0.38 per diluted share charge incurred in the second quarter
- $0.17 to $0.22 per diluted share charge expected to be incurred in the third quarter
Resulting GAAP full year EPS on a diluted basis of $1.25 to $1.40

Mr. Allen F. Wise, chairman and chief executive officer of Coventry, will host a conference call at 8:00 a.m. ET on Tuesday, July 28, 2009. To listen to the call, dial toll-free at (877) 795-3649 or, for international callers, (719) 325-4756. Callers will be asked to identify themselves and their affiliations. The conference call will also be webcast from Coventry’s Investor Relations site at www.coventryhealthcare.com. Coventry asks participants on both the call and webcast to review and be familiar with its filings with the Securities and Exchange Commission. A replay of the call will be available for one week at (888) 203-1112 or, for international callers, (719) 457-0820. The access code is 1238364.

This press release contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are defined as statements that are not historical facts and include those statements relating to future events or future financial performance. Actual performance may be significantly impacted by certain risks and uncertainties including those described in Coventry’s Annual Report on Form 10-K for the year ended December 31, 2008 and Coventry’s Form 10-Q for the quarter ended March 31, 2009. Coventry undertakes no obligation to update or revise any forward-looking statements.

Coventry Health Care (www.coventryhealthcare.com) is a diversified national managed healthcare company based in Bethesda, Maryland, operating health plans, insurance companies, network rental and workers’ compensation services companies. Coventry provides a full range of risk and fee-based managed care products and services to a broad cross section of individuals, employer and government-funded groups, government agencies, and other insurance carriers and administrators.


COVENTRY HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(unaudited)

	Quarters Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008

Operating revenues:
Managed care premiums	$	3,201,919		$	2,643,744		$	6,442,731		$	5,264,356
Management services		335,031			334,160			667,808			654,157
Total operating revenues		3,536,950			2,977,904			7,110,539			5,918,513

Operating expenses:
Medical costs		2,766,974			2,268,819			5,599,971			4,430,545
Cost of sales		58,020			47,406			115,896			84,749
Selling, general, administrative		566,694			496,756			1,140,843			1,005,185
Depreciation and amortization		35,935			38,603			71,588			77,391
Impairment of FHSC goodwill⁽²⁾		72,373			-			72,373			-
Total operating expenses		3,499,996			2,851,584			7,000,671			5,597,870

Operating earnings		36,954			126,320			109,868			320,643
Operating earnings percentage of total revenues		1.0	%		4.2	%		1.5	%		5.4	%

Interest expense		21,775			23,282			43,906			48,023
Other income, net		31,893			31,077			51,778			62,344

Earnings before income taxes		47,072			134,115			117,740			334,964

Provision for income taxes⁽³⁾		28,647			50,964			55,148			126,784
Net earnings	$	18,425		$	83,151		$	62,592		$	208,180


Net earnings per share, basic	$	0.13		$	0.55		$	0.43		$	1.38
Net earnings per share, diluted	$	0.12		$	0.55		$	0.42		$	1.36

Weighted average shares outstanding, basic		146,955			149,988			146,901			151,077
Weighted average shares outstanding, diluted		147,616			151,680			147,460			152,959

2)		Goodwill impairment charge related to the pending divestiture of FHSC
3)		Includes a $17.0 million reduction to the provision for income taxes related to the pending divestiture of FHSC


COVENTRY HEALTH CARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)

	June 30,		March 31,		December 31,
	2009		2009		2008
	(unaudited)		(unaudited)
Assets:

Current assets:
Cash and cash equivalents	$	1,712,152	$	1,585,092	$	1,123,114
Short-term investments		112,677		216,642		338,129
Accounts receivable, net		280,292		283,686		293,636
Other receivables, net		607,359		533,434		524,803
Other current assets		186,651		156,225		130,808
Total current assets		2,899,131		2,775,079		2,410,490

Long-term investments		1,762,120		1,763,627		1,709,878
Property and equipment, net		292,690		301,457		308,016
Goodwill		2,622,479		2,694,861		2,695,025
Other intangible assets, net		513,209		529,689		546,168
Other long-term assets		34,430		37,365		57,821
Total assets	$	8,124,059	$	8,102,078	$	7,727,398



Liabilities and Stockholders’ Equity:

Current liabilities:
Medical liabilities	$	1,752,969	$	1,688,522	$	1,446,391
Accounts payable and accrued liabilities		499,602		517,961		474,561
Deferred revenue		122,294		121,971		104,823
Total current liabilities		2,374,865		2,328,454		2,025,775

Long-term debt		1,806,842		1,902,569		1,902,472
Other long-term liabilities		416,286		370,816		368,482
Total liabilities		4,597,993		4,601,839		4,296,729

Stockholders’ equity		3,526,066		3,500,239		3,430,669

Total liabilities and stockholders’ equity	$	8,124,059	$	8,102,078	$	7,727,398


COVENTRY HEALTH CARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)

	Quarter Ended			Six Months Ended
	June 30, 2009			June 30, 2009

Cash flows from operating activities:
Net earnings	$	18,425		$	62,592
Adjustments to earnings:
Depreciation and amortization		35,935			71,588
Amortization of stock compensation		10,295			23,779
Loss on FHSC goodwill impairment		72,373			72,373
Gain on repurchase of debt		(8,330	)		(8,330	)
Changes in assets and liabilities:
Accounts receivable, net		3,394			13,344
Medical liabilities		64,447			306,578
Accounts payable and other accrued liabilities		(22,771	)		17,623
Deferred revenue		323			17,471
Other operating activities		(53,742	)		(98,440	)
Net cash flows from operating activities		120,349			478,578

Cash flows from investing activities:
Capital expenditures, net		(10,624	)		(23,173	)
Proceeds from investments, net of purchases		109,198			215,678
Proceeds from settlement of acquisitions		366			10,085
Net cash flows from investing activities		98,940			202,590

Cash flows from financing activities:
Proceeds from issuance of stock		362			479
Payments for repurchase of stock		(1,643	)		(1,728	)
Payments for retirement of debt		(87,020	)		(87,020	)
Tax provision for stock compensation		(3,928	)		(3,861	)
Net cash flows from financing activities		(92,229	)		(92,130	)

Net change in cash and cash equivalents for current period		127,060			589,038
Cash and cash equivalents at beginning of period		1,585,092			1,123,114
Cash and cash equivalents at end of period	$	1,712,152		$	1,712,152



Cash and Investments:
Cash and cash equivalents	$	1,712,152		$	1,712,152
Short-term investments		112,677			112,677
Long-term investments		1,762,120			1,762,120
Total cash and investments	$	3,586,949		$	3,586,949


COVENTRY HEALTH CARE, INC.
SELECTED OPERATING STATISTICS
(Unaudited)

	Q2 2009			Q1 2009			Total 2008			Q4 2008			Q3 2008			Q2 2008			Q1 2008			Total 2007
Membership by Product (000s)
Health Plan Commercial Risk		1,477			1,501						1,575			1,587			1,584			1,580			1,644
Health Plan Commercial ASO		697			702						714			720			765			761			750
Medicare Advantage CCP		182			176						137			134			131			127			117
Medicaid Risk		385			375						371			386			493			488			480
Health Plan Total		2,741			2,754						2,797			2,827			2,973			2,956			2,991

Medicare Advantage PFFS		329			318						243			243			241			192			166
Other National Risk		15			21						24			27			29			29			29
Other National ASO		571			575						633			641			645			646			783
Total Medical Membership		3,656			3,668						3,697			3,738			3,888			3,823			3,969

Medicare Part D		1,555			1,501						931			910			874			853			704

Total Membership		5,211			5,169						4,628			4,648			4,762			4,676			4,673

Revenues by Product Type (000s)
Commercial Risk	$	1,310,645		$	1,327,221		$	5,421,984		$	1,364,232		$	1,362,956		$	1,353,101		$	1,341,695		$	4,889,768
Commercial Management Services		83,675			83,810			352,369			97,108			86,672			82,446			86,143			410,071
Medicare Advantage		1,224,011			1,161,590			3,177,244			847,231			825,504			795,495			709,014			2,170,844
Medicaid Risk		263,039			260,838			1,087,189			259,926			260,060			285,024			282,179			928,259
Total Health Plan and Medical Services Businesses		2,881,370			2,833,459			10,038,786			2,568,497			2,535,192			2,516,066			2,419,031			8,398,942

Medicare Part D		397,090			484,123			847,702			191,899			170,483			201,911			283,409			700,761
Other Premiums		23,746			23,957			64,783			22,916			18,937			15,193			7,737			-
Other Management Services		254,044			251,587			1,005,740			253,512			263,363			253,522			235,343			785,431
Total Specialized Managed Care Businesses		674,880			759,667			1,918,225			468,327			452,783			470,626			526,489			1,486,192

Total Premiums		3,218,531			3,257,729			10,598,902			2,686,204			2,637,940			2,650,724			2,624,034			8,689,632
Total Management Services		337,719			335,397			1,358,109			350,620			350,035			335,968			321,486			1,195,502
Other/Eliminations		(19,300	)		(19,537	)		(43,365	)		(16,976	)		(12,690	)		(8,788	)		(4,912	)		(5,603	)
Total Revenue	$	3,536,950		$	3,573,589		$	11,913,646		$	3,019,848		$	2,975,285		$	2,977,904		$	2,940,608		$	9,879,531

Consolidated Coventry

Operating Income % of Revenues		1.0	%		2.0	%		5.2	%		4.3	%		5.6	%		4.2	%		6.6	%		9.4	%

SGA % of Revenues		16.0	%		16.1	%		17.5	%		18.5	%		17.3	%		16.7	%		17.3	%		18.1	%

Total Medical Liabilities (000s)	$	1,413,243		$	1,416,735					$	1,243,620		$	1,209,560		$	1,126,396		$	1,027,194		$	996,859
Days in Claims Payable (DCP)		54.07			55.11						54.75			54.94			49.69			50.71			50.82

Total Debt (millions)	$	1,806.8		$	1,902.6					$	1,902.5		$	1,472.3		$	1,472.3		$	1,662.1		$	1,662.0
Total Capital (millions)	$	5,332.9		$	5,402.8					$	5,333.1		$	4,779.3		$	4,789.0		$	4,949.5		$	4,963.5
Debt to Capital		33.9	%		35.2	%					35.7	%		30.8	%		30.7	%		33.6	%		33.5	%


COVENTRY HEALTH CARE, INC.
SELECTED REVENUE AND MEDICAL COST STATISTICS
(Unaudited)

	Q2 2009			Q1 2009			Total 2008			Q4 2008			Q3 2008			Q2 2008			Q1 2008			Total 2007
Revenue PMPM
Health Plan Commercial Group Risk	$	299.79		$	296.36		$	286.30		$	289.71		$	286.73		$	285.32		$	283.50		$	273.76
Medicare Advantage⁽⁴⁾	$	857.05		$	860.46		$	862.60		$	862.79		$	856.90		$	879.79		$	849.60		$	837.69
Medicare Part D⁽⁵⁾	$	85.27		$	84.35		$	88.34		$	89.16		$	85.64		$	89.92		$	88.64		$	99.57
Medicaid Risk	$	230.27		$	231.93		$	208.50		$	228.33		$	226.08		$	193.59		$	194.16		$	183.77


MLR %
Consolidated Total		86.4	%		87.4	%		84.0	%		83.8	%		83.8	%		85.8	%		82.5	%		79.6	%

Health Plan Commercial Group Risk		81.7	%		80.9	%		81.7	%		83.2	%		82.3	%		82.7	%		78.8	%		78.3	%
Medicare Advantage		90.4	%		90.5	%		89.0	%		90.9	%		88.4	%		93.2	%		82.8	%		80.5	%
Medicare Part D		89.9	%		101.8	%		84.1	%		58.8	%		78.5	%		86.0	%		103.2	%		78.1	%
Medicaid Risk		90.2	%		88.3	%		85.3	%		85.9	%		84.2	%		86.4	%		84.4	%		87.3	%

Explanatory Notes

4)		Revenue PMPM excludes the impact of revenue ceded to external parties.

5)		Revenue PMPM excludes the impact of CMS risk-share premium adjustments and revenue ceded to external parties.

Coventry Health Care, Inc.
Shawn M. Guertin,
Chief Financial Officer
301-581-5701
or
Drew Asher
SVP, Corporate Finance
301-581-5717

(Source: Business Wire )

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