WellCare Reports Third Quarter 2012 Results

WellCare Reports Third Quarter 2012 Results

TAMPA, Fla.--(BUSINESS WIRE)-- WellCare Health Plans, Inc. (NYS: WCG) today reported results for the third quarter and nine months ended September 30, 2012. As determined under generally accepted accounting principles ("GAAP"), net income for the third quarter of 2012 was $38.3 million, or $0.87 per diluted share, compared with $88.3 million, or $2.03 per diluted share, for the third quarter of 2011. Adjusted net income for the third quarter of 2012 was $46.2 million, or $1.05 per diluted share, compared with $93.2 million, or $2.15 per diluted share, for the third quarter of 2011.

WellCare's third quarter 2012 results were below the Company's expectation, principally as a result of an isolated matter in the Georgia Medicaid program, as well as lower-than-targeted performance of the Kentucky Medicaid program. In the Georgia program, premium revenue was reduced by $18 million in the third quarter of 2012 related to an unanticipated partial disallowance by the Centers for Medicare & Medicaid Services of a 2011 settlement. The settlement resolved issues with certain premium payments that covered the period from the inception of the program through the settlement and resulted from a comprehensive review and negotiation involving the three health plans that operate in the program. The Company is in discussions with the state regarding a resolution to this matter.


In addition, WellCare's Kentucky Medicaid program operating results for the third quarter 2012 were below the Company's target, due in part to unfavorable development of medical benefits payable related primarily to fourth quarter of 2011 and first quarter of 2012. Please refer to the schedule on page 12 of this news release that reconciles the Kentucky program medical benefits ratio ("MBR") as determined in accordance with GAAP to an MBR recast to reflect the development of medical benefits payable in the period in which the services were provided. During the past few months, the Company has continued to make progress toward its long-term goals for the Kentucky program and anticipates further gains in performance in the coming months. The improvement is expected to result from the combined effect of medical expense management initiatives and a 3% increase in premium rates that was effective October 1.

As a result of these two issues, WellCare has decreased its guidance for 2012 full year adjusted net income per diluted share to between $4.90 and $5.05.

"Aside from our Georgia Medicaid and Kentucky Medicaid issues, our third quarter results were consistent with our expectations," said Alec Cunningham, WellCare's chief executive officer. "As we plan for 2013, we will continue to execute on our health care quality, access, and service initiatives. In addition, we have capitalized on several significant and promising growth opportunities during the past few months, and we see a number of similar opportunities available to us over the coming year."

Highlights of Recent Accomplishments

  • WellCare has entered into an agreement to acquire Easy Choice Health Plan, which as of October 2012 served an estimated 36,000 Medicare Advantage plan members in Los Angeles, Orange, Riverside, and San Bernardino Counties in Southern California.

  • The Company recently entered into an agreement to acquire UnitedHealthcare's Medicaid business in South Carolina, which as of October 2012 served approximately 65,000 members in the South Carolina Healthy Connections Choices program.

  • WellCare was selected by the Kentucky Cabinet for Health and Human Services to serve the Medicaid program in the Commonwealth's Region 3, including Louisville and 15 surrounding counties, beginning January 1, 2013.

  • In Florida, WellCare was approved by the Department of Elder Affairs to expand its Long-Term Care Community Diversion Pilot Project service area by 17 counties, to a total of 19 counties. In the Florida Medicaid program, WellCare recently expanded its service area by four counties to a total of 42 out of Florida's 67 counties, the largest service area of the state's Medicaid plans. In addition, on October 1, 2012, WellCare launched its expanded service area for the Florida Healthy Kids program, increasing counties served from 18 to 65.

  • Medicare Advantage segment membership of 167,000 as of September 30, 2012, was the highest coordinated care plan membership in WellCare's history.

  • WellCare's Prescription Drug Plan ("PDP") segment continued to perform better than anticipated, resulting in a 40% increase in PDP gross margin year-over-year. In conjunction with the Medicare Annual Election Period, the Company launched a new enhanced PDP that offers members a relatively low monthly premium, no deductible, no co-payment on preferred generic drugs, and generic drug coverage in the coverage gap.

Company Operations

Adjusted net income per diluted share for the third quarter of 2012 decreased by $1.10 compared with 2011. The year-over-year decrease resulted mainly from increases in the Medicaid and Medicare Advantage segments' MBRs. These factors were partially offset by higher premium revenue in the Medicaid and Medicare Advantage segments and decreases in the Company's PDP segment MBR and adjusted administrative expense ratio.

Membership as of September 30, 2012, increased 6% to 2.6 million, compared with 2.4 million members as of September 30, 2011. Premium revenue for the third quarter of 2012 increased 18% year-over-year to $1.8 billion. Medical benefits expense for the third quarter of 2012 was $1.5 billion, an increase of 28% from the third quarter of 2011. The Company MBR was 86.3% in the third quarter of 2012, compared with 79.8% in the third quarter of 2011.

Selling, general, and administrative ("SG&A") expense as determined under GAAP was $177 million in the third quarter of 2012, compared with $161 million for the same period in 2011. Adjusted SG&A expense was $165 million in the third quarter of 2012, an increase of 8% from $153 million for the same period last year. The increase was driven primarily by the Kentucky Medicaid program launched in November 2011, as well as the Company's growth initiatives. The adjusted administrative expense ratio was 9.2% in the third quarter of 2012, compared with 10.0% for the same period in 2011.

Medicaid Segment Operations

Medicaid segment membership increased by 202,000, or 15%, year-over-year, to 1.5 million members as of September 30, 2012. The increase resulted mainly from the 2011 launch of the Kentucky Medicaid program. In addition, the Company experienced growth in Florida and several other states, offset in part by the end of the Company's participation in the Missouri program on June 30, 2012.

Premium revenue was $1.1 billion for the third quarter of 2012, an increase of 22% year-over-year, mainly due to the Kentucky program. Revenue and gross margin were reduced by the previously described reversal of premium in the Georgia Medicaid program.

The Medicaid segment MBR was 91.1% for the third quarter of 2012, an increase from 80.4% in the third quarter of 2011. The MBR increase results primarily from challenges associated with the performance of the Kentucky Medicaid program.

Medicare Advantage Segment Operations

Medicare Advantage segment membership increased by 37,000 year-over-year, or 28%, to 167,000 members, which is the highest coordinated care plan membership in WellCare's history. Premium revenue grew 25%. The Medicare Advantage segment MBR was 86.8% in the third quarter of 2012, an increase from 82.0% in the third quarter of 2011.

Prescription Drug Plan Segment Operations

PDP segment membership decreased 88,000 year-over-year, or 9%. Premium revenue decreased 6%. The PDP segment MBR was 64.7% in the third quarter of 2012, a decrease from 74.4% in the third quarter of 2011. The decrease resulted in part from the positioning of the Company's plans relative to member utilization and cost-sharing patterns and WellCare's focus on generic medications.

Cash Flow and Financial Condition

Net cash used in operating activities as determined under GAAP was $134 million for the nine months ended September 30, 2012, compared with net cash provided by operating activities of $319 million for the nine months ended September 30, 2011. As previously disclosed, WellCare has experienced temporary premium payment delays by the Georgia Medicaid program. Although Georgia repaid a portion of its balance due during the third quarter, the delayed remaining payments had an adverse effect on WellCare's operating cash flow for the nine months ended September 30, 2012. Modified for the timing of receipts from, and payments to, WellCare's government customers, net cash provided by operating activities was $20 million for the first nine months of 2012, compared with $177 million for the first nine months of 2011.

As of September 30, 2012, unregulated cash and investments were approximately $350 million, compared with $168 million as of June 30, 2012. The increase resulted primarily from a reduction in premiums receivable from the Georgia Medicaid program and dividends received from the Company's regulated entities, offset in part by capital contributions to certain regulated entities.

Days in claims payable were 40 days as of September 30, 2012, compared with 38 days as of June 30, 2012, and 57 days as of September 30, 2011.

Financial Outlook

WellCare is updating its financial outlook for the year ended December 31, 2012. The following elements of WellCare's financial outlook have changed:

  • Adjusted net income per diluted share is expected to be between approximately $4.90 and $5.05. The previous guidance was for adjusted net income per diluted share of between approximately $5.25 and $5.45. The reduction results principally from the isolated revenue matter associated with the Georgia Medicaid program and lower-than-targeted performance of the Kentucky Medicaid program.

  • Premium revenue is expected to be between approximately $7.15 and 7.20 billion. Previous guidance was for premium revenue to be approximately $7.1 billion.

  • The adjusted administrative expense ratio is expected to be in the range of 8.8% to 8.9%. The prior guidance was for the adjusted administrative expense ratio to be in the range of 8.7% to 8.9%.

The following elements of WellCare's financial outlook are unchanged:

  • The 2012 Medicaid and Medicare Advantage segments' MBRs each are anticipated to increase relative to the respective 2011 segment MBRs.

All elements of the Company's outlook exclude the impact of Medicaid premium taxes.

Webcast

A discussion of WellCare's third quarter 2012 results will be webcast live on Wednesday, October 31, 2012, beginning at 8:30 a.m. Eastern Time. A replay will be available beginning approximately one hour following the conclusion of the live broadcast and will be available for 30 days. The webcast is available via the Company's web site at www.wellcare.com and at www.earnings.com.

About WellCare Health Plans, Inc.

WellCare Health Plans, Inc. provides managed care services targeted to government-sponsored health care programs, focusing on Medicaid and Medicare. Headquartered in Tampa, Fla., WellCare offers a variety of health plans for families, children, and the aged, blind, and disabled, as well as prescription drug plans. The Company served approximately 2.6 million members nationwide as of September 30, 2012. For more information about WellCare, please visit the Company's website at www.wellcare.com.

Basis of Presentation

Premium revenue as described in this news release excludes the impact of premium taxes. Both the Company and segment MBRs, as well as the Company's administrative expense ratio, are calculated as a percentage of premium revenue, excluding premium taxes. In addition to results determined under GAAP, net income and certain other operating results described in this news release are reported after adjustment for certain SG&A expenses related to previously disclosed government investigations and related litigation and resolution costs that management believes are not indicative of long-term business operations. Please refer to the schedule in this news release that provides supplemental information reconciling results determined under GAAP to adjusted results.

Cautionary Statement Regarding Forward-Looking Statements

This news release contains "forward-looking" statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," and similar expressions are forward-looking statements. For example, statements regarding the Company's financial outlook, further improvements in the Kentucky Medicaid program, and the timing of the closing of the acquisition of the Medicare Advantage plans in Mohave and Yavapai counties in Arizona and the acquisition of Easy Choice Health Plan, Inc. of California contain forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause WellCare's actual future results to differ materially from those projected or contemplated in the forward-looking statements. These risks and uncertainties include, but are not limited to, WellCare's progress on top priorities such as improving health care quality and access, ensuring a competitive cost position, and delivering prudent, profitable growth, WellCare's ability to effectively manage growth, WellCare's ability to address operational challenges relating to new business, WellCare's ability to effectively execute and integrate acquisitions, and WellCare's ability to estimate and manage medical benefits effectively.

Additional information concerning these and other important risks and uncertainties can be found under the captions "Forward-Looking Statements" and "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, and in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2012, and other subsequent filings by WellCare with the U.S. Securities and Exchange Commission, which contain discussions of WellCare's business and the various factors that may affect it. WellCare undertakes no duty to update these forward-looking statements to reflect any future events, developments, or otherwise.

WELLCARE HEALTH PLANS, INC.

SELECTED DATA FROM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; dollars in thousands except per share data)

For the Three Months
Ended September 30,

For the Nine Months Ended
September 30,

2012

2011

2012

2011

Revenues:

Premium

$

1,795,796

$

1,523,057

$

5,353,083

$

4,443,848

Medicaid premium taxes

20,581

18,869

61,048

55,838

Total premium

1,816,377

1,541,926

5,414,131

4,499,686

Investment and other income

2,018

2,433

6,772

7,050

Total revenues

1,818,395

1,544,359

5,420,903

4,506,736

Expenses:

Medical benefits

1,549,456

1,214,822

4,617,411

3,680,145

Selling, general and administrative

176,797

160,591

497,493

458,612

Medicaid premium taxes

20,581

18,869

61,048

55,838

Depreciation and amortization

8,193

6,453

22,704

19,824

Interest

1,016

3,648

3,163

3,823

Total expenses

1,756,043

1,404,383

5,201,819

4,218,242

Income before income taxes

62,352

139,976

219,084

288,494

Income tax expense

24,065

51,721

83,123

109,309

Net income

$

38,287

$

88,255

$

135,961

$

179,185

Net income per common share:

Basic

$

0.89

$

2.06

$

3.16

$

4.19

Diluted

$

0.87

$

2.03

$

3.11

$

4.14

Weighted average common shares outstanding:

Basic

43,149,455

42,887,381

43,070,113

42,757,476

Diluted

43,844,223

43,424,414

43,785,424

43,285,969

WELLCARE HEALTH PLANS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited; dollars in thousands except share data)

Sept. 30,
2012

Dec. 31,
2011

ASSETS

Current Assets:

Cash and cash equivalents

$

1,062,340

$

1,325,098

Investments

209,798

198,569

Premiums receivable, net

393,508

217,509

Pharmacy rebates receivable, net

121,979

109,933

Funds receivable for the benefit of members

219,967

162,745

Income taxes receivable

39,920

20,655

Prepaid expenses and other current assets, net

67,744

63,053

Deferred income tax asset

27,937

22,332

Total current assets

2,143,193

2,119,894

Property, equipment and capitalized software, net

123,875

98,238

Goodwill

111,131

111,131

Other intangible assets, net

8,506

9,896

Long-term investments

87,797

83,019

Restricted investments

66,805

60,663

Other assets

2,480

5,270

Total Assets

$

2,543,787

$

2,488,111

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Medical benefits payable

$

671,187

$

744,821

Unearned premiums

141

164

Accounts payable

8,802

3,294

Other accrued expenses and liabilities

197,036

215,817

Current portion of amount payable related to investigation resolution

37,016

49,557

Current portion of long-term debt

15,000

11,250

Other payables to government partners

118,409

98,237

Total current liabilities

1,047,591

1,123,140

Deferred income tax liability

22,573

1,026

Amount payable related to investigation resolution

67,642

101,705

Long-term debt

123,750

135,000

Other liabilities

8,931

10,394

Total liabilities

1,270,487

1,371,265

Commitments and contingencies

-

-

Stockholders' Equity:

Preferred stock, $0.01 par value (20,000,000 authorized, no shares issued or outstanding)

-

-

Common stock, $0.01 par value (100,000,000 authorized, 43,199,188 and 42,848,798 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively)

431

429

Paid-in capital

468,211

448,820

Retained earnings

805,319

669,358

Accumulated other comprehensive loss

(661

)

(1,761

)

Total stockholders' equity

1,273,300

1,116,846

Total Liabilities and Stockholders' Equity

$

2,543,787

$

2,488,111

WELLCARE HEALTH PLANS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; dollars in thousands)

Nine Months Ended
September 30,

2012

2011

Cash (used in) provided by operating activities:

Net income

$

135,961

$

179,185

Adjustments to reconcile net income to net cash (used in)

provided by operating activities:

Depreciation and amortization

22,704

19,824

Equity-based compensation expense

13,534

13,160

Incremental tax benefit from equity-based compensation

(3,666

)

(2,518

)

Deferred taxes, net

15,296

27,032

Provision for doubtful receivables

10,272

8,310

Changes in operating accounts:

Premiums receivable, net

(184,632

)

(104,340

)

Pharmacy rebates receivable, net

(12,046

)

(5,182

)

Prepaid expenses and other current assets, net

(6,162

)

(20,050

)

Medical benefits payable

(73,634

)

14,112

Unearned premiums

(23

)

208,374

Accounts payable and other accrued expenses

(11,895

)

(2,967

)

Other payables to government partners

20,172

30,067

Amount payable related to investigation resolution

(46,604

)

(80,749

)

Income taxes receivable/payable, net

(16,289

)

36,995

Other, net

2,618

(2,240

)

Net cash (used in) provided by operating activities

(134,394

)

319,013

Cash used in investing activities:

Purchases of investments

(357,214

)

(332,934

)

Proceeds from sale and maturities of investments

342,963

208,758

Purchases of restricted investments

(30,973

)

(26,118

)

Proceeds from maturities of restricted investments

24,821

68,712

Additions to property, equipment and capitalized software, net

(47,665

)

(30,773

)

Net cash used in investing activities