UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
September 30, 2011
For the Quarterly Period Ended September 30, 2011
Commission File Number: 001-32739
HealthSpring, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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20-1821898
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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9009 Carothers Parkway
Suite 501
Franklin, Tennessee
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37067
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(Address of Principal Executive Offices)
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(Zip Code)
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(615) 291-7000
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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x
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Accelerated filer
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¨
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Non-accelerated filer
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¨
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Smaller reporting company
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¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
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Outstanding at October 27, 2011
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Common Stock, Par Value $0.01 Per Share
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67,912,161 Shares
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TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Item 1. Financial Statements.
HEALTHSPRING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
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September 30,
2011
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December 31,
2010
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Assets
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Current assets:
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Cash and cash equivalents
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$
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1,055,299
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$
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191,459
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Accounts receivable, net
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205,355
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168,893
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Funds due for the benefit of members
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83,429
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Deferred income taxes
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20,264
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15,459
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Prepaid expenses and other assets
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16,235
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17,481
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Total current assets
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1,297,153
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476,721
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Investment securities available for sale
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569,736
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551,207
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Property and equipment, net
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69,659
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60,017
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Goodwill
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835,237
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839,001
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Intangible assets, net
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335,980
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365,884
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Restricted investments
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28,886
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29,136
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Risk corridor receivable from CMS
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9,805
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Other assets
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20,663
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26,637
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Total assets
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$
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3,167,119
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$
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2,348,603
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Liabilities and Stockholders Equity
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Current liabilities:
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Medical claims liability
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$
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425,486
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$
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350,217
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Accounts payable, accrued expenses and other
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61,478
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101,915
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Deferred revenue
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445,222
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Book overdraft
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19,629
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Risk corridor payable to CMS
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6,967
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7,780
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Funds held for the benefit of members
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95,538
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Current portion of long-term debt
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37,350
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61,226
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Total current liabilities
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1,072,041
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540,767
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Deferred income taxes
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105,607
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104,301
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Long-term debt, less current portion
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298,099
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565,649
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Other long-term liabilities
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9,543
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5,755
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Total liabilities
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1,485,290
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1,216,472
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Stockholders equity:
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Common stock, $.01 par value, 180,000,000 shares authorized, 72,004,007 issued and 67,908,535 outstanding at September 30,
2011, and 61,905,457 issued and 57,850,709 outstanding at December 31, 2010
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720
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619
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Additional paid-in capital
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907,453
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569,024
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Retained earnings
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830,121
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622,988
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Accumulated other comprehensive income, net
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6,926
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1,495
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Treasury stock, at cost, 4,095,472 shares at September 30, 2011, and 4,054,748 shares at December 31,
2010
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(63,391
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)
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(61,995
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)
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Total stockholders equity
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1,681,829
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1,132,131
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Total liabilities and stockholders equity
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$
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3,167,119
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$
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2,348,603
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See accompanying notes to condensed consolidated financial statements.
1
HEALTHSPRING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
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Three Months
Ended
September 30,
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Nine Months
Ended
September 30,
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2011
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2010
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2011
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2010
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Revenue:
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Premium revenue
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$
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1,315,577
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$
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712,658
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$
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4,064,446
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$
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2,218,378
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Management and other fees
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12,281
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10,413
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39,946
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31,191
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Investment income
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3,442
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2,151
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10,148
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4,574
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Total revenue
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1,331,300
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725,222
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4,114,540
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2,254,143
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Operating expenses:
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Medical expense
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1,049,869
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561,823
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3,327,244
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1,779,275
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Selling, general and administrative
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133,557
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67,664
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390,507
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210,410
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Depreciation and amortization
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15,251
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7,513
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45,867
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22,810
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Interest expense
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5,735
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3,150
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21,989
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15,375
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Total operating expenses
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1,204,412
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640,150
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3,785,607
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2,027,870
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Income before income taxes
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126,888
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85,072
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328,933
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226,273
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Income tax expense
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(47,897
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)
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(31,292
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)
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(121,800
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)
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(82,917
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)
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Net income
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$
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78,991
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$
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53,780
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$
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207,133
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$
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143,356
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Net income per common share:
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Basic
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$
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1.18
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$
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0.95
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$
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3.24
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$
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2.52
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Diluted
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$
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1.16
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$
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0.95
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$
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3.18
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$
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2.51
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Weighted average common shares outstanding:
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Basic
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67,089,603
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56,482,679
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63,993,661
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56,872,071
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Diluted
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68,186,547
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56,577,063
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65,170,667
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57,058,075
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See accompanying notes to condensed consolidated financial statements.
2
HEALTHSPRING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Nine Months
Ended
September 30,
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2011
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|
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2010
|
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Cash flows from operating activities:
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Net income
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$
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207,133
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$
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143,356
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
|
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45,867
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22,810
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Share-based compensation
|
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7,001
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6,659
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Amortization of deferred financing cost
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6,037
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1,407
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Amortization on bond investments
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7,084
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2,187
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Loss on disposal of property and equipment
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999
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Equity in earnings of unconsolidated affiliate
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(310
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)
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(277
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)
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Deferred tax benefit
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(7,342
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)
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(9,883
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)
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Write-off of deferred financing fees
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5,079
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Increase (decrease) in cash due to:
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Accounts receivable
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(35,741
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)
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18,962
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Prepaid expenses and other assets
|
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1,275
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(12,266
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)
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Medical claims liability
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75,269
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(18,845
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)
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Accounts payable, accrued expenses, and other current liabilities
|
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(37,157
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)
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1,357
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Risk corridor payable to/receivable from CMS
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(10,619
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)
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(6,263
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)
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Deferred revenue
|
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|
445,222
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Other
|
|
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3,788
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|
|
1,485
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Net cash provided by operating activities
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708,506
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|
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155,768
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Cash flows from investing activities:
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Additional consideration paid on acquisition
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(610
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)
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Purchases of property and equipment
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|
(27,489
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)
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(9,120
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)
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Purchases of investment securities
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(127,973
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)
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(341,081
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)
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Maturities of investment securities
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61,976
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56,591
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Sales of investment securities
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49,047
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|
55,898
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Purchases of restricted investments
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(20,594
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)
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(43,182
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)
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Maturities of restricted investments
|
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|
20,790
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|
|
|
37,973
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Other
|
|
|
261
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|
262
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|
|
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|
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Net cash used in investing activities
|
|
|
(43,982
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)
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|
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(243,269
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)
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Cash flows from financing activities:
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Funds received for the benefit of the members
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1,729,261
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|
633,577
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Funds withdrawn for the benefit of members
|
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|
(1,550,294
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)
|
|
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(655,895
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)
|
Proceeds from the issuance of common stock, net
|
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|
301,464
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|
|
|
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Proceeds received on issuance of debt
|
|
|
|
|
|
|
200,000
|
|
Payments on long-term debt
|
|
|
(291,426
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)
|
|
|
(270,722
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)
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Excess tax benefit from stock options exercised
|
|
|
6,660
|
|
|
|
127
|
|
Proceeds from stock options exercised
|
|
|
23,321
|
|
|
|
867
|
|
Change in book overdraft
|
|
|
(19,629
|
)
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
(14,304
|
)
|
Payment of debt issue costs
|
|
|
(41
|
)
|
|
|
(7,334
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
199,316
|
|
|
|
(113,684
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
863,840
|
|
|
|
(201,185
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
191,459
|
|
|
|
439,423
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
1,055,299
|
|
|
$
|
238,238
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
4,263
|
|
|
$
|
7,609
|
|
Cash paid for taxes
|
|
$
|
59,465
|
|
|
$
|
88,893
|
|
See accompanying notes to condensed consolidated financial statements.
3
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Organization and Basis of Presentation
HealthSpring, Inc., a Delaware corporation (the Company), was organized in October 2004 and began
operations in March 2005. The Company is a managed care organization whose primary focus is on Medicare, the federal government sponsored health insurance program primarily for persons aged 65 and older, qualifying disabled persons, and persons
suffering from end-stage renal disease. Through its health maintenance organization (HMO) and regulated insurance subsidiaries, the Company operates Medicare Advantage health plans in the states of Alabama, Delaware, Florida, Georgia,
Illinois, Maryland, Mississippi, New Jersey, Pennsylvania, Tennessee, Texas, and the District of Columbia and also offers both national and regional stand-alone Medicare Part D prescription drug plans (PDPs) to persons in 30 of the 34
geographic regions delineated by the Centers for Medicare and Medicaid Services (CMS).
The accompanying condensed
consolidated financial statements are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto of HealthSpring, Inc. as of and for the year ended December 31, 2010, included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the Securities and Exchange Commission (the SEC) on February 25, 2011, as amended by Amendment No. 1 on Form 10-K/A that was filed with the SEC
on September 22, 2011 (collectively, the 2010 Form 10-K).
The accompanying unaudited condensed consolidated
financial statements reflect the Companys financial position as of September 30, 2011 and the Companys results of operations for the three and nine months ended September 30, 2011 and 2010, and cash flows for the nine months
ended September 30, 2011 and 2010.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended
(the Exchange Act). Accordingly, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations
applicable to interim financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normally recurring accruals) necessary to present fairly the
Companys financial position at September 30, 2011, its results of operations for the three and nine months ended September 30, 2011 and 2010, and its cash flows for the nine months ended September 30, 2011 and 2010.
The results of operations for the 2011 interim periods are not necessarily indicative of the operating results that may be expected for
the full year ending December 31, 2011.
The preparation of the condensed consolidated financial statements requires
management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the period. The most significant item subject to estimates and assumptions is the actuarial calculation for obligations related to medical claims. Other significant items subject to estimates and
assumptions include the Companys estimated risk adjustment payments receivable from CMS, the valuation of goodwill and intangible assets, the useful life of definite-lived intangible assets, the valuation of debt securities carried at fair
value, and certain amounts recorded related to the Companys Part D operations, including risk corridor adjustments and pharmaceutical manufacturer rebates. Actual results could differ significantly from those estimates and assumptions.
The accompanying unaudited condensed consolidated financial statements also include the accounts of variable interest
entities (VIEs) of which the Company is the primary beneficiary. As of November 30, 2010, in connection with the acquisition of Bravo Health, Inc. (Bravo Health), the Company holds interest in certain physician practices
that are considered VIEs because the physician practices may not have sufficient capital to finance their activities separate from the revenue received from the Company. The Company is deemed to be the primary
4
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
beneficiary and, under the VIE accounting rules, is deemed to control the physician entities, the financial condition and results of which have been consolidated in the Companys
financial statements. Revenues and net income (loss) from VIEs were $4.4 million and $252,000, respectively, for the three months ended September 30, 2011 and $12.9 million and $(110,000), respectively, for the nine months ended
September 30, 2011. Total assets of VIEs were $4.1 million as of September 30, 2011. The Company had no VIEs requiring consolidation prior to November 30, 2010.
The Companys regulated insurance subsidiaries are restricted from making distributions without appropriate regulatory notifications and approvals or to the extent such distributions would cause
non-compliance with statutory capital requirements. At September 30, 2011, $1.4 billion of the Companys $1.7 billion of cash, cash equivalents, investment securities, and restricted investments were held by the Companys regulated
insurance subsidiaries and subject to these restrictions.
(2) Recently Adopted Accounting Pronouncements
On September 15, 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) No. 2011-08, Intangibles Goodwill and Other (Topic 350) Testing Goodwill for Impairment. The FASBs objective is to simplify goodwill impairment testing by permitting assessment of qualitative factors to
determine whether events and circumstances lead to the conclusion that it is necessary to perform the two-step goodwill impairment test currently required under Topic 350 Intangibles Goodwill and Other. Currently, Topic 350 requires entities
to test goodwill on an annual basis by comparing the fair value of a reporting unit to its carrying value including goodwill (Step one). The second part of the test must be performed to measure the amount of impairment. Under the amendment, entities
are not required to calculate the fair value of a reporting unit unless they conclude that it is more likely than not that the units carrying value is greater than its fair value based on an assessment of events and circumstances. The
more likely than not threshold is when there is a likelihood of more than 50% that a reporting units carrying value is greater than its fair value. ASU No. 2011-08 is effective for fiscal years beginning after
December 15, 2011. Early adoption of this ASU is permitted for interim or annual reports that have not been issued. In September 2011, the Company adopted this ASU for its 2011 annual goodwill test. The Companys annual goodwill testing
date is October 1, 2011.
Effective January 1, 2010, the Company adopted the FASB updated guidance related to fair
value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition,
effective January 1, 2011, the Company adopted FASBs updated guidance requiring a reporting entity to disclose separately Level 3 information about purchases, sales, issuances, and settlements in the reconciliation for fair value
measurements using significant unobservable inputs. The updated guidance also requires an entity to should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The guidance was effective for interim or annual financial reporting periods beginning after December 15,
2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements, which were effective for fiscal years beginning after December 15, 2010 and for interim periods
within those fiscal years. The adoption of the updated guidance for fair value measurements did not have an impact on the Companys consolidated results of operations or financial condition.
In December 2010, FASB provided additional guidance on disclosure of supplementary pro forma information for business combinations. The
guidance provided by FASB resolves uncertainty related to pro forma disclosures by indicating that revenue and earnings of the combined entity should be presented as though the business combination that occurred during the current year had occurred
as of the beginning of the comparable prior annual reporting period only. These rules are effective on or after the beginning of the first annual reporting period beginning on or after December 15, 2010; with early adoption permitted. As these
rules pertain to disclosure items only, the adoption of such rules will not have an impact on the Companys consolidated results of operations or financial condition.
5
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(3) Acquisition of Bravo Health, Inc.
Purchase Price Allocation
On November 30, 2010, the Company acquired all the of the outstanding stock of Bravo Health, Inc., an operator of Medicare Advantage coordinated care plans in Pennsylvania, the Mid-Atlantic region,
and Texas, and a Medicare Part D stand-alone prescription drug plan in 43 states and the District of Columbia. The Company acquired Bravo Health for approximately $545.0 million in cash, subject to a post-closing adjustment. The estimated fair value
of the contingent consideration resulting from such post-closing adjustment at December 31, 2010 was $10.0 million. During the three months ended June 30, 2011, the adjustment was determined to be $7.0 million and the Company recorded income of $3.0
million relating to finalizing the estimate. Such amount is included in management and other fee revenue on the Companys condensed consolidated statements of income for the nine months ended September 30, 2011.
The Companys acquisition of Bravo Health was funded by borrowings of approximately $480.0 million under a new credit facility and
the use of cash on hand. The Companys new credit facility is described in Note 14 Debt. The results of operations for Bravo Health are included in the Companys consolidated financial statements beginning
December 1, 2010.
The total preliminary purchase price and the fair value of contingent consideration were allocated to
the net tangible and intangible assets based upon their fair values as of November 30, 2010. The excess of the preliminary purchase price over the net tangible and intangible assets was recorded as goodwill. As a result of the finalization of
certain tax returns, the Company completed the final purchase accounting for this transaction during the third quarter of 2011, which resulted in reducing the goodwill recorded on the transaction by $3.8 million and making related adjustments to tax
and other liability accounts. The total goodwill recorded on the transaction after this adjustment was $210.7 million.
Unaudited Pro Forma
Information
The following summary of unaudited pro forma financial information presents revenue, net income, and per share
data of the Company as if the acquisition of Bravo Health had occurred at the beginning of the periods presented:
|
|
|
|
|
|
|
|
|
(dollars in thousands, except per share data)
|
|
Three Months ended
September 30, 2010
|
|
|
Nine Months ended
September 30, 2010
|
|
Revenue
|
|
$
|
1,122,305
|
|
|
$
|
3,485,578
|
|
Net income available to common stockholders
|
|
|
59,318
|
|
|
|
154,387
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.05
|
|
|
$
|
2.71
|
|
Diluted
|
|
$
|
1.05
|
|
|
$
|
2.71
|
|
The unaudited pro forma information includes the results of operations for Bravo Health for the period
prior to the acquisition, with adjustments to give effect to pro forma events that are directly attributable to the acquisition and have a continuing impact, but excludes the impact of pro forma events that are directly attributable to the
acquisition and are one-time occurrences. The pro forma information includes adjustments for interest expense on long-term debt and reduced investment income related to the cash used to fund the acquisition, additional depreciation and amortization
associated with the purchase, and the related income tax effects. The unaudited pro forma information does not give effect to the potential impact of current financial conditions, regulatory matters, or any anticipated synergies, operating
efficiencies, or cost savings that may be associated with the acquisition. The unaudited pro forma financial information is presented for informational purposes only and may not be indicative of the results of operations had Bravo Health been owned
by the Company for the period presented, nor is it necessarily indicative of future results.
6
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) Accounts Receivable
Accounts receivable at September 30, 2011 and December 31, 2010 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
Medicare premium receivables
|
|
$
|
55,645
|
|
|
$
|
59,030
|
|
Rebates
|
|
|
133,531
|
|
|
|
90,148
|
|
Due from providers
|
|
|
19,252
|
|
|
|
19,126
|
|
Other
|
|
|
10,380
|
|
|
|
5,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218,808
|
|
|
|
173,410
|
|
Allowance for doubtful accounts
|
|
|
(13,453
|
)
|
|
|
(4,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
205,355
|
|
|
$
|
168,893
|
|
|
|
|
|
|
|
|
|
|
Medicare premium receivables at September 30, 2011 and December 31, 2010 include $48.1 million
and $52.2 million, respectively, of receivables from CMS related to the accrual of retroactive risk adjustment payments. Accounts receivable relating to unpaid health plan enrollee premiums are recorded during the period the Company is obligated to
provide services to enrollees and do not bear interest. The Company does not have any off-balance sheet credit exposure related to its health plan enrollees.
Rebates for drug costs represent estimated rebates owed to the Company from prescription drug companies. The Company has entered into contracts with certain pharmaceutical manufacturers that provide for
rebates to the Company based on the utilization of specific prescription drugs by the Companys members. Due from providers primarily includes management fees receivable as well as amounts owed to the Company for the refund of certain medical
expenses paid by the Company under risk sharing agreements.
(5) Investment Securities
Investment securities, which consist primarily of debt securities, have been categorized as available for sale. The
Company holds no held to maturity or trading securities. Investment securities are classified as non-current assets based on the Companys intention to reinvest such assets upon sale or maturity and to not use such assets in current operations.
Available for sale securities are recorded at fair value. Unrealized gains and losses (net of applicable deferred taxes) on
available for sale securities are included as a component of stockholders equity and comprehensive income until realized from a sale or other than temporary impairment. Realized gains and losses from the sale of securities are determined on a
specific identification basis. Purchases and sales of investments are recorded on their trade dates. Dividend and interest income are recognized when earned.
7
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Available for sale securities at September 30, 2011 and December 31, 2010 were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Estimated
Fair
Value
|
|
Government obligations
|
|
$
|
33,177
|
|
|
|
658
|
|
|
|
(1
|
)
|
|
|
33,834
|
|
Agency obligations
|
|
|
17,383
|
|
|
|
201
|
|
|
|
|
|
|
|
17,584
|
|
Corporate debt securities
|
|
|
201,921
|
|
|
|
3,622
|
|
|
|
(851
|
)
|
|
|
204,692
|
|
Mortgage-backed securities (Residential)
|
|
|
170,490
|
|
|
|
3,859
|
|
|
|
(409
|
)
|
|
|
173,940
|
|
Mortgage-backed securities (Commercial)
|
|
|
1,355
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
1,343
|
|
Other structured securities
|
|
|
17,053
|
|
|
|
598
|
|
|
|
(3
|
)
|
|
|
17,648
|
|
Municipal bonds
|
|
|
117,485
|
|
|
|
3,261
|
|
|
|
(51
|
)
|
|
|
120,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
558,864
|
|
|
|
12,199
|
|
|
|
(1,327
|
)
|
|
|
569,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Estimated
Fair
Value
|
|
Government obligations
|
|
$
|
28,228
|
|
|
|
123
|
|
|
|
(53
|
)
|
|
|
28,298
|
|
Agency obligations
|
|
|
33,712
|
|
|
|
77
|
|
|
|
(251
|
)
|
|
|
33,538
|
|
Corporate debt securities
|
|
|
196,109
|
|
|
|
1,726
|
|
|
|
(741
|
)
|
|
|
197,094
|
|
Mortgage-backed securities (Residential)
|
|
|
154,612
|
|
|
|
1,243
|
|
|
|
(653
|
)
|
|
|
155,202
|
|
Mortgage-backed securities (Commercial)
|
|
|
6,374
|
|
|
|
76
|
|
|
|
(150
|
)
|
|
|
6,300
|
|
Other structured securities
|
|
|
14,138
|
|
|
|
228
|
|
|
|
(38
|
)
|
|
|
14,328
|
|
Municipal bonds
|
|
|
115,758
|
|
|
|
1,158
|
|
|
|
(469
|
)
|
|
|
116,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
548,931
|
|
|
|
4,631
|
|
|
|
(2,355
|
)
|
|
|
551,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains or losses related to investment securities for the three and nine months ended
September 30, 2011 and 2010 were immaterial.
Maturities of investments at September 30, 2011 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Estimated
Fair
Value
|
|
Due within one year
|
|
$
|
25,658
|
|
|
|
25,663
|
|
Due after one year through five years
|
|
|
301,017
|
|
|
|
306,675
|
|
Due after five years through ten years
|
|
|
41,785
|
|
|
|
42,944
|
|
Due after ten years
|
|
|
1,507
|
|
|
|
1,523
|
|
Mortgage and asset-backed securities
|
|
|
188,897
|
|
|
|
192,931
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
558,864
|
|
|
|
569,736
|
|
|
|
|
|
|
|
|
|
|
8
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Gross unrealized losses on investment securities and the fair value of the related
securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2011, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
12 Months
|
|
|
More Than
12 Months
|
|
|
Total
|
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
Government obligations
|
|
$
|
(1
|
)
|
|
|
2,211
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
2,211
|
|
Corporate debt securities
|
|
|
(851
|
)
|
|
|
45,234
|
|
|
|
|
|
|
|
|
|
|
|
(851
|
)
|
|
|
45,234
|
|
Mortgage-backed securities (Residential)
|
|
|
(409
|
)
|
|
|
32,722
|
|
|
|
|
|
|
|
|
|
|
|
(409
|
)
|
|
|
32,722
|
|
Mortgage-backed securities (Commercial)
|
|
|
(12
|
)
|
|
|
1,186
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
1,186
|
|
Other structured securities
|
|
|
(3
|
)
|
|
|
3,233
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
3,233
|
|
Municipal bonds
|
|
|
(49
|
)
|
|
|
10,828
|
|
|
|
(2
|
)
|
|
|
870
|
|
|
|
(51
|
)
|
|
|
11,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,325
|
)
|
|
|
95,414
|
|
|
|
(2
|
)
|
|
|
870
|
|
|
|
(1,327
|
)
|
|
|
96,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized losses on investment securities and the fair value of the related securities, aggregated
by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2010, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than
12 Months
|
|
|
More Than
12 Months
|
|
|
Total
|
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
Government obligations
|
|
$
|
(53
|
)
|
|
|
12,924
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
12,924
|
|
Agency obligations
|
|
|
(251
|
)
|
|
|
25,930
|
|
|
|
|
|
|
|
|
|
|
|
(251
|
)
|
|
|
25,930
|
|
Corporate debt securities
|
|
|
(741
|
)
|
|
|
91,908
|
|
|
|
|
|
|
|
|
|
|
|
(741
|
)
|
|
|
91,908
|
|
Mortgage-backed securities (Residential)
|
|
|
(653
|
)
|
|
|
78,537
|
|
|
|
|
|
|
|
|
|
|
|
(653
|
)
|
|
|
78,537
|
|
Mortgage-backed securities (Commercial)
|
|
|
(150
|
)
|
|
|
5,840
|
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
5,840
|
|
Other structured securities
|
|
|
(38
|
)
|
|
|
1,922
|
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
|
1,922
|
|
Municipal bonds
|
|
|
(469
|
)
|
|
|
40,746
|
|
|
|
|
|
|
|
|
|
|
|
(469
|
)
|
|
|
40,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,355
|
)
|
|
|
257,807
|
|
|
|
|
|
|
|
|
|
|
|
(2,355
|
)
|
|
|
257,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company reviews fixed maturities and equity securities with a decline in fair value from cost for
impairment based on criteria that include duration and severity of decline; financial viability and outlook of the issuer; and changes in the regulatory, economic, and market environment of the issuers industry or geographic region.
All issuers of securities the Company owned in an unrealized loss as of September 30, 2011 remain current on all
contractual payments. The unrealized losses on investments were caused by an increase in investment yields as a result of a widening of credit spreads. The contractual terms of these investments do not permit the issuer to settle the securities at a
price less than the amortized cost of the investment. The Company determined that it did not intend to sell these investments and that it was not more-likely-than-not to be required to sell these investments prior to their recovery, thus these
investments are not considered other-than-temporarily impaired.
9
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6) Fair Value Measurements
The Companys 2011 third quarter condensed consolidated balance sheet includes the following financial
instruments: cash and cash equivalents; accounts receivable; investment securities; restricted investments; accounts payable; medical claims liabilities; funds due (held) from CMS for the benefit of members; and long-term debt. The carrying amounts
of accounts receivable, funds due (held) from CMS for the benefit of members, accounts payable, and medical claims liabilities approximate their fair value because of the relatively short period of time between the origination of these instruments
and their expected realization. The fair value of the Companys long-term debt (including the current portion) was $312.3 million at September 30, 2011 and consisted solely of non-tradable bank debt. The Company obtains the fair value of
its debt from a third party that uses market observations to determine fair value.
Cash and cash equivalents consist of such
items as certificates of deposit, money market funds, and certain U.S. Government securities with an original maturity of three months or less. The original cost of these assets approximates fair value due to their short-term maturity. In February
2010, the Company terminated its interest rate swap agreements in connection with the termination of the related credit agreement. See Note 9 Derivatives and Note 14 Debt. The fair values of investment
securities is determined by quoted market prices or pricing models developed using market data provided by a third party vendor.
The following are the levels of the hierarchy and a brief description of the type of valuation information (inputs) that qualifies a financial asset for each level:
|
|
|
Level Input
|
|
Input Definition
|
Level I
|
|
Inputs are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date.
|
|
|
Level II
|
|
Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement
date.
|
|
|
Level III
|
|
Unobservable inputs that reflect managements best estimate of what market participants would use in pricing the asset or liability at the measurement date.
|
When quoted prices in active markets for identical debt securities are available, the Company uses these
quoted market prices to determine the fair value of debt securities and classifies these assets as Level I. In other cases where a quoted market price for identical debt securities in an active market is either not available or not observable, the
Company obtains the fair value from a third party vendor that bases the fair value on quoted market prices of identical or similar securities or uses pricing models, such as matrix pricing, to determine fair value. These debt securities would then
be classified as Level II. In the event quoted market prices were not available, the Company would determine fair value using broker quotes or an internal analysis of each investments financial statements and cash flow projections. In these
instances, financial assets would be classified based upon the lowest level of input that is significant to the valuation. Thus, financial assets might be classified in Level III even though there could be some significant inputs that may be readily
available.
10
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
There were no transfers to or from Levels I and II during the nine months ended
September 30, 2011. The following tables summarize fair value measurements by level at September 30, 2011 and December 31, 2010 for assets and liabilities measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,055,299
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,055,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government obligations
|
|
$
|
28,634
|
|
|
$
|
5,200
|
|
|
$
|
|
|
|
$
|
33,834
|
|
Agency obligations
|
|
|
|
|
|
|
17,584
|
|
|
|
|
|
|
|
17,584
|
|
Corporate debt securities
|
|
|
|
|
|
|
204,692
|
|
|
|
|
|
|
|
204,692
|
|
Mortgage-backed securities (Residential)
|
|
|
|
|
|
|
173,940
|
|
|
|
|
|
|
|
173,940
|
|
Mortgage-backed securities (Commercial)
|
|
|
|
|
|
|
1,343
|
|
|
|
|
|
|
|
1,343
|
|
Other structured securities
|
|
|
|
|
|
|
17,648
|
|
|
|
|
|
|
|
17,648
|
|
Municipal securities
|
|
|
|
|
|
|
120,695
|
|
|
|
|
|
|
|
120,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,634
|
|
|
$
|
541,102
|
|
|
$
|
|
|
|
$
|
569,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
191,459
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
191,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government obligations
|
|
$
|
21,943
|
|
|
$
|
6,355
|
|
|
$
|
|
|
|
$
|
28,298
|
|
Agency obligations
|
|
|
|
|
|
|
33,538
|
|
|
|
|
|
|
|
33,538
|
|
Corporate debt securities
|
|
|
|
|
|
|
197,094
|
|
|
|
|
|
|
|
197,094
|
|
Mortgage-backed securities (Residential)
|
|
|
|
|
|
|
155,202
|
|
|
|
|
|
|
|
155,202
|
|
Mortgage-backed securities (Commercial)
|
|
|
|
|
|
|
6,300
|
|
|
|
|
|
|
|
6,300
|
|
Collateralized mortgage obligations
|
|
|
|
|
|
|
2,252
|
|
|
|
|
|
|
|
2,252
|
|
Other structured securities
|
|
|
|
|
|
|
12,076
|
|
|
|
|
|
|
|
12,076
|
|
Municipal securities
|
|
|
|
|
|
|
116,447
|
|
|
|
|
|
|
|
116,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,943
|
|
|
$
|
529,264
|
|
|
$
|
|
|
|
$
|
551,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7) Medical Liabilities
The Companys medical liabilities at September 30, 2011 and December 31, 2010 consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
Fee-for-service medical liabilities
|
|
$
|
299,376
|
|
|
$
|
258,832
|
|
Pharmacy liabilities
|
|
|
75,967
|
|
|
|
45,785
|
|
Provider incentives and other medical payments
|
|
|
36,035
|
|
|
|
38,065
|
|
Other medical liabilities
|
|
|
14,108
|
|
|
|
7,535
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
425,486
|
|
|
$
|
350,217
|
|
|
|
|
|
|
|
|
|
|
11
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(8) Medicare Part D
Total Part D related net assets (excluding medical claims payable) of $75.6 million at December 31, 2010 all
relate to the 2010 CMS plan year. The Companys Part D related assets and liabilities (excluding medical claims payable) at September 30, 2011 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related to the
2010 plan year
|
|
|
Related to the
2011 plan year
|
|
|
Total
|
|
Current assets (liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds due for the benefit of members
|
|
$
|
97,676
|
|
|
$
|
(193,214
|
)
|
|
$
|
(95,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk corridor payable to CMS
|
|
$
|
(6,967
|
)
|
|
$
|
|
|
|
$
|
(6,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk corridor receivable from CMS
|
|
$
|
|
|
|
$
|
9,805
|
|
|
$
|
9,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances associated with Part D related assets and liabilities are expected to be settled in the second
half of the year following the year to which they relate. Current year Part D amounts are routinely updated in subsequent periods as a result of retroactivity.
(9) Derivatives
In October 2008, the Company entered into two interest rate swap agreements in a total notional amount of $100.0
million, relating to the floating interest rate component of the term loan agreement under its 2007 credit agreement. In February 2010, the Company terminated its interest rate swap agreements in connection with the termination of the 2007 credit
agreement. See Note 14 Debt. The interest rate swap agreements were classified as cash flow hedges.
All
derivatives were recognized on the balance sheet at their fair value. To the extent that the cash flow hedges were effective, changes in their fair value were recorded in other comprehensive income until earnings were affected by the variability of
cash flows of the hedged transaction (e.g. until periodic settlements of a variable asset or liability were recorded in earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivatives
differ from changes in the fair value of the hedged instrument) was recorded in current-period earnings. As a result of terminating the interest rate swap agreements, the Company settled the swap obligations with the counterparties for approximately
$2.0 million and reclassified such amount from other comprehensive income to interest expense during the first quarter of 2010.
The Company had no derivative financial instruments outstanding at September 30, 2011 or December 31, 2010.
A summary of the effect of cash flow hedges on the Companys financial statements for the periods presented is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion
|
|
|
Ineffective Portion
|
|
Type of Cash Flow Hedge
|
|
Pretax Hedge
Gain (Loss)
Recognized
in
Other
Comprehensive
Income
|
|
|
Income Statement
Location of
Gain
(Loss) Reclassified
from Accumulated
Other
Comprehensive
Income
|
|
Hedge
Gain
(Loss)
Reclassified
from
Accumulated
Other
Comprehensive
Income
|
|
|
|
|
|
|
Income
Statement
Location of
Gain (Loss)
Recognized
|
|
Hedge Gain
(Loss)
Recognized
|
|
For the three months ended September 30, 2011:
Interest rate swaps
|
|
$
|
|
|
|
Interest Expense
|
|
$
|
|
|
|
None
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2010:
Interest rate swaps
|
|
$
|
|
|
|
Interest Expense
|
|
$
|
|
|
|
None
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2011:
Interest rate swaps
|
|
$
|
|
|
|
Interest Expense
|
|
$
|
|
|
|
None
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2010:
Interest rate swaps
|
|
$
|
38
|
|
|
Interest Expense
|
|
$
|
(1,253
|
)
|
|
None
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(10) Goodwill and Intangible Assets
Changes to goodwill during the nine months ended September 30, 2011 are as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
839,001
|
|
Acquisition of Bravo Health
(1)
|
|
|
(3,764
|
)
|
|
|
|
|
|
Balance at September 30, 2011
|
|
$
|
835,237
|
|
|
|
|
|
|
(1)
|
The Company finalized certain tax matters in connection with the filing of tax returns and completed the final purchase accounting for this transaction
during the third quarter of 2011 which resulted in a decrease to goodwill of approximately $3.8 million.
|
A
breakdown of the identifiable intangible assets and their assigned value and accumulated amortization at September 30, 2011 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Trade names (indefinite-lived)
|
|
$
|
39,497
|
|
|
$
|
|
|
|
$
|
39,497
|
|
Trade names (definite-lived)
|
|
|
3,800
|
|
|
|
316
|
|
|
|
3,484
|
|
Non-compete agreements
|
|
|
800
|
|
|
|
800
|
|
|
|
|
|
Provider networks
|
|
|
149,378
|
|
|
|
40,304
|
|
|
|
109,074
|
|
Medicare member networks
|
|
|
243,320
|
|
|
|
62,136
|
|
|
|
181,184
|
|
Licenses
|
|
|
2,000
|
|
|
|
166
|
|
|
|
1,834
|
|
Management contract right
|
|
|
1,555
|
|
|
|
648
|
|
|
|
907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
440,350
|
|
|
$
|
104,370
|
|
|
$
|
335,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense on identifiable intangible assets for the three months ended September 30, 2011
and 2010 was approximately $10.0 million and $4.5 million, respectively. Amortization expense on identifiable intangible assets for the nine months ended September 30, 2011 and 2010 was approximately $29.9 million and $13.4 million,
respectively.
(11) Stockholders Equity
March 2011 Equity Offering
On March 29, 2011, the Company completed an underwritten public offering of 8,625,000 shares of its common stock. The shares were resold by the underwriters at a price of $35.95 per share. The net
proceeds to the Company from the offering, after offering expenses and underwriting discounts, were $301.5 million. The Company used $263.4 million of the net proceeds for the repayment of indebtedness. See Note 14 Debt.
Stock Repurchase Program
In May 2010, the Companys Board of Directors authorized a stock repurchase program to buy back up to $100.0 million of the Companys common stock. The program expired on June 30, 2011.
During the six months ended June 30, 2011, the Company did not repurchase any shares pursuant to the repurchase program. As of June 30, 2011, the Company had repurchased 837,634 shares of its common stock under the program in open market
transactions for approximately $14.3 million, or at an average cost of $17.10 per share.
13
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(12) Share-Based Compensation
PerformanceBased Equity Awards
Prior to 2011, vesting restrictions with respect to equity awards to the Companys executive officers were based on time and continued service, not performance measures. Beginning with annual equity
awards made to certain executive officers in 2011, at least 50% of such awards (in terms of number of shares) made pursuant to the Companys Amended and Restated 2006 Equity Incentive Plan (the 2006 Plan) were in the form of
performance-based equity awards that are earned or paid out based on the achievement of performance targets, rather than purely time-based vesting.
Pricing of performance-based awards and the term of such awards are similar to the Companys other equity awards; however, vesting of the performance grants over a four-year period is contingent upon
the achievement of performance targets. Performance targets are set at the date of grant with threshold and maximum levels. A diluted earnings per share target cumulated over a two-year period was used for performance-based awards granted in 2011.
The number of awards that ultimately vests, if any, is dependent on the cumulative earnings per share actually attained. The fair values of the performance awards are estimated on the date of the grant using the Black-Scholes method option-pricing
model and related valuation assumptions for stock awards. The amount of compensation expense for performance-based stock awards will be recognized by the Company based on the probable achievement of the established performance targets, which are
assessed each quarter. Based on such assessment, as of September 30, 2011 no compensation expense had been recorded for performance-based awards.
Stock Options
During the nine months ended September 30, 2011, the
Company granted options to purchase 166,558 shares of common stock pursuant to the 2006 Plan, 72,697 of which were in the form of performance-based option awards. Options to purchase 11,505 shares of common stock either were forfeited or expired
during the nine months ended September 30, 2011. Options to purchase approximately 1.2 million shares of common stock were exercised during the nine months ended September 30, 2011. Options to purchase approximately 2.5 million
shares of common stock were unexercised and outstanding at September 30, 2011. Options, including performance-based options, vest and become exercisable generally over a four-year period and expire 10 years from their grant dates.
Restricted Stock
During
the nine months ended September 30, 2011, the Company granted 268,558 shares of restricted stock to employees pursuant to the 2006 Plan, 30,142 of which shares were in the form of performance-based restricted stock awards, the vesting
provisions for which are discussed above. The restrictions on restricted stock awards, including performance-based awards, generally lapse over a four-year period. Additionally, 21,437 shares were purchased by certain executives pursuant to the
Management Stock Purchase Plan (the MSPP). The restrictions on shares purchased under the MSPP generally lapse on the second anniversary of the grant date. Unvested restricted stock at September 30, 2011 totaled 800,205 shares.
During the nine months ended September 30, 2011, the Company awarded 20,716 shares of restricted stock to certain of its
directors pursuant to the 2006 Plan, all of which were outstanding at September 30, 2011. The restrictions relating to the 2011 annual restricted stock awards to non-employee directors generally lapse one year from the grant date. In the event
a director resigns or is removed prior to the lapsing of the restriction, or if the director fails to attend 75% of the board and applicable committee meetings during the one-year period, the award agreements provide that such shares will be
forfeited unless resignation or failure to attend is caused by death or disability.
14
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(13) Net Income Per Common Share
The following table presents the calculation of the Companys net income per common share basic and diluted
(in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
78,991
|
|
|
$
|
53,780
|
|
|
$
|
207,133
|
|
|
$
|
143,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
67,089,603
|
|
|
|
56,482,679
|
|
|
|
63,993,661
|
|
|
|
56,872,071
|
|
Dilutive effect of stock options
|
|
|
812,410
|
|
|
|
|
|
|
|
887,053
|
|
|
|
58,676
|
|
Dilutive effect of unvested restricted shares
|
|
|
284,534
|
|
|
|
94,384
|
|
|
|
289,953
|
|
|
|
127,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
68,186,547
|
|
|
|
56,577,063
|
|
|
|
65,170,667
|
|
|
|
57,058,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
|
$
|
0.95
|
|
|
$
|
3.24
|
|
|
$
|
2.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.16
|
|
|
$
|
0.95
|
|
|
$
|
3.18
|
|
|
$
|
2.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share (EPS) reflects the potential dilution that could occur from
outstanding equity plan awards, including unexercised stock options and unvested restricted shares. The dilutive effect is computed using the treasury stock method, which assumes all share-based awards are exercised and the hypothetical proceeds
from exercise are used by the Company to purchase common stock at the average market price during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are
included in the denominator of the diluted EPS calculation. Restricted stock awards and options to purchase common stock with respect to 2.2 million shares and 4.8 million shares were antidilutive and therefore excluded from the
computation of diluted earnings per share for the three months ended September 30, 2011 and 2010, respectively. Restricted stock awards and options to purchase common stock with respect to 2.1 million shares and 4.7 million shares
were antidilutive and therefore excluded from the computation of diluted earnings per share for the nine months September 30, 2011 and 2010, respectively.
(14) Debt
Long-term debt at September 30, 2011 and December 31, 2010 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
Credit agreement
|
|
$
|
335,449
|
|
|
$
|
626,875
|
|
Less: current portion of long-term debt
|
|
|
(37,350
|
)
|
|
|
(61,226
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt less current portion
|
|
$
|
298,099
|
|
|
$
|
565,649
|
|
|
|
|
|
|
|
|
|
|
February 2010 Credit Facility
On February 11, 2010, the Company entered into a $350.0 million credit agreement (the Prior Credit Agreement), which, subject to the terms and conditions set forth therein, provided for a
five-year, $175.0 million term loan credit facility and a four-year, $175.0 million revolving credit facility (the Prior Credit Facilities). Proceeds from the Prior Credit Facilities, together with cash on hand, were used to fund the
repayment of $237.0 million in term loans outstanding under the Companys 2007 credit agreement and transaction expenses related thereto.
15
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Borrowings under the Prior Credit Agreement accrued interest on the basis of either a
base rate or a LIBOR rate plus, in each case, an applicable margin depending on the Companys debt-to-EBITDA leverage ratio. The Company also paid a commitment fee of 0.375% on the actual daily unused portions of the Prior Credit Facilities.
In connection with entering into the Prior Credit Agreement, the Company wrote-off unamortized deferred financing costs of
approximately $5.1 million incurred in connection with the 2007 credit agreement. The Company also terminated its interest rate swap agreements, which resulted in a payment of approximately $2.0 million to the swap counterparties. Such amounts are
classified as interest expense and are reflected in the financial results of the Company for the quarter ended March 31, 2010.
Bravo
Health Acquisition Indebtedness
In connection with the acquisition of Bravo Health, the Company and its existing lenders
and certain additional lenders amended and restated the Prior Credit Agreement in the form of the Amended and Restated Credit Agreement (Restated Credit Agreement) on November 30, 2010 to provide for, among other things, the
acquisition financing. As amended, the Restated Credit Agreement provides for the following:
|
|
|
$355.0 million in term loan A indebtedness maturing in February 2015 comprised of:
|
|
|
|
$175.0 million of term loan A indebtedness as Existing Term Loan A ($166.3 million of which was outstanding prior to the
acquisition); and
|
|
|
|
$180.0 million of new term loan A indebtedness as New Term Loan A (funded at the closing of the acquisition);
|
|
|
|
$175.0 million revolving credit facility maturing in February 2014 (the Revolving Credit Facility, $100.0 million of which was drawn
at the closing); and
|
|
|
|
$200.0 million of new term loan B indebtedness maturing in November 2016 (New Term Loan B which was funded at the closing).
|
The Revolving Credit Facility, Existing Term Loan A, New Term Loan A, and New Term Loan B are sometimes referred to herein
as the Credit Facilities.
Borrowings under the Restated Credit Agreement accrue interest on the basis of either a
base rate or LIBOR plus, in each case, an applicable margin depending on the Companys total debt to adjusted EBITDA leverage ratio (450 basis points for LIBOR borrowings under New Term Loan B and 325 basis points for LIBOR borrowings under the
other Credit Facilities at September 30, 2011). With respect to New Term Loan B indebtedness, the Restated Credit Agreement includes a minimum LIBOR of 1.5%. The Company also is required to pay a commitment fee of 0.375% per annum on the
daily unused portions of the Revolving Credit Facility. The effective interest rate on borrowings under the Credit Facilities was 4.5% as of September 30, 2011. The Revolving Credit Facility matures, the commitments thereunder terminate, and
all amounts then outstanding thereunder are payable on February 11, 2014. The $175.0 million Revolving Credit Facility, which is available for working capital and general corporate purposes including capital expenditures and permitted
acquisitions, was undrawn as of September 30, 2011.
Under the Restated Credit Agreement, Existing Term Loan A and New
Term Loan A are payable in quarterly principal installments. Prior to June 30, 2013, each quarterly principal installment payable in respect of each of Existing Term Loan A and New Term Loan A will be in an amount equal to 2.5% of the aggregate
initial principal amount of Existing Term Loan A or New Term Loan A, as the case may be, and for principal installments payable on June 30, 2013 and thereafter, that percentage increases to 3.75%. The entire outstanding principal balance of
each of Existing Term Loan A and New Term Loan A is due and payable at maturity on February 11, 2015.
16
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Under the Restated Credit Agreement, New Term Loan B is payable in quarterly principal
installments, each in an amount equal to 0.25% of the aggregate initial principal amount (as adjusted for certain prepayments) of New Term Loan B. The entire outstanding principal balance of New Term Loan B is due and payable at maturity on
November 30, 2016.
The net proceeds from certain asset sales, casualty and condemnation events, and certain incurrences
of indebtedness (subject, in the cases of asset sales and casualty and condemnation events, to certain reinvestment rights), a portion of the net proceeds from equity issuances and, under certain circumstances, the Companys excess cash flow,
are required to be used to make prepayments in respect of loans outstanding under the Credit Facilities. The Company used $263.4 million of the net proceeds from the underwritten public offering of its common stock for the repayment of indebtedness
in March 2011.
In connection with entering into the Prior Credit Agreement, the Company incurred financing costs of
approximately $7.3 million, which were capitalized in February 2010. In connection with entering into the Restated Credit Agreement, the Company incurred financing costs of approximately $19.5 million, which were capitalized in November 2010. These
capitalized cost amounts have been accounted for as deferred financing fees and are being amortized over the term of the Restated Credit Agreement using the interest method. During the three months ended March 31, 2011, the Company recorded
$1.1 million of related amortization expense which amortization was accelerated as a result of the $263.4 million repayment of debt discussed above. Such amortization expense is classified as interest expense in the financial results of the Company
for the nine months ended September 30, 2011. The unamortized balance of such deferred financing costs at September 30, 2011 totaled $18.8 million and is included in other assets on the accompanying consolidated balance sheet.
(15) Comprehensive Income
The following table presents details supporting the determination of comprehensive income for the three and nine months
ended September 30, 2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
Net income
|
|
$
|
78,991
|
|
|
$
|
53,780
|
|
|
$
|
207,133
|
|
|
$
|
143,356
|
|
Net unrealized gain on available for sale investment securities, net of tax
|
|
|
1,563
|
|
|
|
2,144
|
|
|
|
5,431
|
|
|
|
4,136
|
|
Net gain on interest rate swaps, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Reclass of accumulated other comprehensive income on interest rate swap termination
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of tax
|
|
$
|
80,554
|
|
|
$
|
55,924
|
|
|
$
|
212,564
|
|
|
$
|
148,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Accumulated other comprehensive income balances related to interest rate swap derivatives that were reclassified to interest expense and recognized in the three months
ended March 31, 2010. See Note 9, Derivatives.
|
(16) Segment Information
The Company reports its business in four segments: Medicare Advantage, stand-alone PDP, other, and Corporate. Medicare
Advantage (MA-PD) consists of Medicare-eligible beneficiaries receiving healthcare benefits, including prescription drugs, through a coordinated care plan qualifying under Part C and Part D of the Medicare Program. Stand-alone PDP
(PDP) consists of Medicare-eligible beneficiaries receiving prescription drug benefits on a stand-alone basis in accordance with Medicare Part D. The Companys other segment is insignificant and includes the
Companys Medicaid and commercial insurance lines of business. The Company commenced its
17
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Medicaid operations in 2011 while its commercial insurance operations have been insignificant since 2008. The Corporate segment consists of corporate expenses not allocated to the other
reportable segments. These segment groupings are also consistent with information used by the Companys chief executive officer in making operating decisions.
The accounting policies of each segment are the same and are described in Note 1 to the 2010 Form 10-K. The results of each segment are measured and evaluated by earnings before interest expense,
depreciation and amortization expense, and income taxes (EBITDA). The Company does not allocate certain corporate overhead amounts (classified as selling, general and administrative expenses, or SG&A) or interest expense
to the segments. The Company evaluates interest expense, income taxes, and asset and liability details on a consolidated basis as these items are managed in a corporate shared service environment and are not the responsibility of segment operating
management.
Revenue includes premium revenue, management and other fee income, and investment income.
Asset and equity details by reportable segment have not been disclosed, as the Company does not internally report such information.
Financial data by reportable segment for the three and nine months ended September 30 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MA-PD
|
|
|
PDP
|
|
|
Other
|
|
|
Corporate
|
|
|
Total
|
|
Three months ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,126,924
|
|
|
$
|
201,716
|
|
|
$
|
2,647
|
|
|
$
|
13
|
|
|
$
|
1,331,300
|
|
EBITDA
|
|
|
138,214
|
|
|
|
24,950
|
|
|
|
(3,788
|
)
|
|
|
(11,502
|
)
|
|
|
147,874
|
|
Depreciation and amortization expense
|
|
|
11,926
|
|
|
|
661
|
|
|
|
|
|
|
|
2,664
|
|
|
|
15,251
|
|
|
|
|
|
|
|
Three months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
631,452
|
|
|
$
|
93,452
|
|
|
$
|
306
|
|
|
$
|
12
|
|
|
$
|
725,222
|
|
EBITDA
|
|
|
91,656
|
|
|
|
11,938
|
|
|
|
(63
|
)
|
|
|
(7,796
|
)
|
|
|
95,735
|
|
Depreciation and amortization expense
|
|
|
6,166
|
|
|
|
14
|
|
|
|
|
|
|
|
1,333
|
|
|
|
7,513
|
|
|
|
|
|
|
|
Nine months ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,380,102
|
|
|
$
|
730,175
|
|
|
$
|
4,221
|
|
|
$
|
42
|
|
|
$
|
4,114,540
|
|
EBITDA
|
|
|
419,377
|
|
|
|
17,937
|
|
|
|
(8,778
|
)
|
|
|
(31,747
|
)
|
|
|
396,789
|
|
Depreciation and amortization expense
|
|
|
37,447
|
|
|
|
2,014
|
|
|
|
|
|
|
|
6,406
|
|
|
|
45,867
|
|
|
|
|
|
|
|
Nine months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,914,754
|
|
|
$
|
338,323
|
|
|
$
|
1,028
|
|
|
$
|
38
|
|
|
$
|
2,254,143
|
|
EBITDA
|
|
|
273,487
|
|
|
|
11,337
|
|
|
|
(72
|
)
|
|
|
(20,294
|
)
|
|
|
264,458
|
|
Depreciation and amortization expense
|
|
|
18,596
|
|
|
|
45
|
|
|
|
|
|
|
|
4,169
|
|
|
|
22,810
|
|
The Company uses segment EBITDA as an analytical indicator for purposes of assessing segment performance,
as is common in the healthcare industry. Segment EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles and segment EBITDA, as presented, may not be comparable to other companies.
18
HEALTHSPRING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A reconciliation of reportable segment EBITDA to net income included in the consolidated
statements of income for the three and nine months ended September 30 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
EBITDA
|
|
$
|
147,874
|
|
|
$
|
95,735
|
|
|
$
|
396,789
|
|
|
$
|
264,458
|
|
Income tax expense
|
|
|
(47,897
|
)
|
|
|
(31,292
|
)
|
|
|
(121,800
|
)
|
|
|
(82,917
|
)
|
Interest expense
|
|
|
(5,735
|
)
|
|
|
(3,150
|
)
|
|
|
(21,989
|
)
|
|
|
(15,375
|
)
|
Depreciation and amortization
|
|
|
(15,251
|
)
|
|
|
(7,513
|
)
|
|
|
(45,867
|
)
|
|
|
(22,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
78,991
|
|
|
$
|
53,780
|
|
|
$
|
207,133
|
|
|
$
|
143,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17) Subsequent Events
Proposed Merger
On October 24, 2011, the Company announced the execution of an Agreement and Plan of Merger (the Merger Agreement) by and among the Company, Cigna Corporation (Cigna) and
Cigna Magnolia Corp. (Merger Sub), an indirect wholly-owned subsidiary of Cigna, pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will be merged with and into the Company, with the Company
surviving the merger as an indirect wholly-owned subsidiary of Cigna (the Proposed Merger). If the Proposed Merger is completed, the Companys stockholders (other than holders of restricted shares of Company common stock and persons
who properly demand statutory appraisal of their shares) will be entitled to receive $55.00 per share in cash (without interest) for each share of the Company common stock that they hold. Under the Merger Agreement, each option to purchase shares of
Company common stock will be converted into an option to purchase shares of Cigna common stock, and each outstanding award of restricted shares of Company common stock will be converted into an award of restricted shares of Cigna common stock.
The consummation of the Proposed Merger is subject to customary closing conditions, including, among others, the adoption of
the Merger Agreement by the Companys stockholders, the absence of certain legal impediments to the consummation of the Proposed Merger, the receipt of specified governmental consents and approvals, the early termination or expiration of the
waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, and, subject to materiality exceptions, the accuracy of representations and warranties made by the Company and Cigna, respectively, and compliance by the Company and Cigna
with their respective obligations under the Merger Agreement. The consummation of the Proposed Merger is not subject to any financing condition. The Proposed Merger is expected to close in the first half of 2012.
Stockholder Litigation
Certain purported class action lawsuits related to the Proposed Merger have been filed against the Company, its Chairman and Chief
Executive Officer, each of its directors, and Cigna. The complaints are substantially similar and allege, among other things, (i) breach of fiduciary duty, (ii) that the Proposed Merger is the product of a flawed process, and
(iii) that the consideration to be paid to the Companys stockholders in the Proposed Merger is unfair and inadequate. The complaints further allege that Cigna aided and abetted the actions of the Companys officers and directors in
breaching their fiduciary duties to the Companys stockholders. Among other relief, the complaints seek an injunction preventing completion of the Proposed Merger. The Company believes that these lawsuits are without merit and plans to defend
them vigorously.
19
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
|
On October 24, 2011, the Company announced the execution of an Agreement and Plan of Merger (the Merger Agreement) by and
among the Company, Cigna Corporation (Cigna) and Cigna Magnolia Corp. (Merger Sub), an indirect wholly-owned subsidiary of Cigna, pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will
be merged with and into the Company, with the Company surviving the merger as an indirect wholly-owned subsidiary of Cigna (the Proposed Merger).
You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report and our audited consolidated
financial statements and the notes thereto for the year ended December 31, 2010, appearing in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (SEC) on February 25, 2011, as amended by
Amendment No. 1 on Form 10-K/A that was filed with the SEC on September 22, 2011 (collectively, the 2010 Form 10-K). Statements contained in this Quarterly Report on Form 10-Q that are not historical fact are forward-looking
statements that 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.
The Company cautions that the forward-looking statements involve significant known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those
expressed in or implied by the forward-looking statements, and undue reliance should not be placed on such statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among
other things, the following risks and uncertainties: the failure to receive, on a timely basis or otherwise, the required approvals by the Companys stockholders and government or regulatory agencies for the Proposed Merger with Cigna; the risk
that a condition to closing of the Proposed Merger may not be satisfied; the Companys and Cignas ability to consummate the Proposed Merger, including the financing thereof; the failure to obtain the necessary debt financing arrangements
set forth in the commitment letter received in connection with the Proposed Merger; the possibility that costs related to the Proposed Merger will be greater than expected; operating costs and business disruption, including difficulties in
maintaining relationships, may be greater than expected; the ability of the Company to retain key personnel and maintain relationships with providers or other business partners; the impact of legislative, regulatory and competitive changes and other
risk factors relating to the industry in which the Company and Cigna operate, as detailed from time to time in each of the Companys and Cignas reports filed with the SEC. There can be no assurance that the Proposed Merger will in fact be
consummated.
In evaluating any forward-looking statement, you should specifically consider the information set forth under
the captions Special Note Regarding Forward-Looking Statements and Item 1A. Risk Factors in the 2010 Form 10-K and the information set forth under Cautionary Statement Regarding Forward-Looking Statements in our
earnings and other press releases, as well as other cautionary statements contained elsewhere in this report, including the matters discussed in Part II, Item 1A. Risk Factors below and Critical Accounting Policies and
Estimates. We undertake no obligation beyond that required by law to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. You should read this report and
the documents that we reference in this report and have filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect.
Overview
General
HealthSpring, Inc. (the Company or HealthSpring) is one of the countrys largest
operators of coordinated care plans whose primary focus is Medicare, the federal government-sponsored health insurance program primarily for persons aged 65 and older, qualifying disabled persons, and persons suffering from end-stage renal disease.
On November 30, 2010, HealthSpring acquired Bravo Health, Inc. (Bravo Health), an operator of Medicare Advantage coordinated care plans in Pennsylvania, the Mid-Atlantic region, and Texas, and a Medicare Part D stand-alone
prescription drug plan in 43 states and the District of Columbia. We currently operate Medicare
20
Advantage plans in Alabama, Delaware, Florida, Georgia, Illinois, Maryland, Mississippi, New Jersey, Pennsylvania, Tennessee, Texas, and the District of Columbia. We also offer national and
regional stand-alone Medicare Part D prescription drug plans. The Company also provides management services to physician practices.
We sometimes refer to our Medicare Advantage plans, including plans providing prescription drug benefits, or MA-PD, collectively as Medicare Advantage plans and our stand-alone
prescription drug plans as our PDPs. For purposes of additional analysis, the Company provides membership and certain financial information, including premium revenue and medical expense, for our Medicare Advantage (including MA-PD)
plans and PDPs.
We report our business in four segments: Medicare Advantage; PDP; other; and Corporate. The following
discussion of our results of operations includes a discussion of revenue and certain expenses by reportable segment. See Segment Information below for additional information related thereto.
Proposed Merger
If the
Proposed Merger is completed, the Companys stockholders (other than holders of restricted shares of Company common stock and persons who properly demand statutory appraisal of their shares) will be entitled to receive $55.00 per share in cash
(without interest) for each share of the Company common stock that they hold. Under the Merger Agreement, each option to purchase shares of Company common stock will be converted into an option to purchase shares of Cigna common stock, and each
outstanding award of restricted shares of Company common stock will be converted into an award of restricted shares of Cigna common stock.
The consummation of the Proposed Merger is subject to customary closing conditions, including, among others, the adoption of the Merger Agreement by the Companys stockholders, the absence of certain
legal impediments to the consummation of the Proposed Merger, the receipt of specified governmental consents and approvals, the early termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, and,
subject to materiality exceptions, the accuracy of representations and warranties made by the Company and Cigna, respectively, and compliance by the Company and Cigna with their respective obligations under the Merger Agreement. The consummation of
the Proposed Merger is not subject to any financing condition. The Proposed Merger is expected to close in the first half of 2012.
Stockholder Litigation
The Company is presently aware of four purported class action lawsuits related to the Proposed Merger that have been filed against the
Company, its Chairman and Chief Executive Officer, each of its directors, and Cigna. Two of the lawsuits were filed in the Chancery Court for Williamson County, Tennessee (where the Company is headquartered) and two were filed in the Delaware Court
of Chancery (where the Company is incorporated). The complaints are substantially similar and allege, among other things, (i) breach of fiduciary duty, (ii) that the Proposed Merger is the product of a flawed process, and (iii) that
the consideration to be paid to the Companys stockholders in the Proposed Merger is unfair and inadequate. The complaints further allege that Cigna aided and abetted the actions of the Companys officers and directors in breaching their
fiduciary duties to the Companys stockholders. Among other relief, the complaints seek an injunction preventing completion of the Proposed Merger. The Company believes that these lawsuits are without merit and plans to defend them vigorously.
Additional lawsuits arising out of or relating to the Proposed Merger may be filed in the future. If additional similar lawsuits are filed or the pleadings referenced above are amended, the Company does not intend to announce the filing of any
similar suits or amendments unless they contain allegations that are substantially distinct from those made in the pending actions.
Recently Issued Accounting Pronouncements
On September 15, 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles Goodwill and Other (Topic
350) Testing Goodwill for Impairment. The FASBs objective is to simplify goodwill impairment testing by permitting assessment of qualitative factors to determine whether events and circumstances lead to the conclusion that it is necessary to
perform the two-step goodwill impairment test currently required under Topic 350 Intangibles Goodwill and Other. Currently, Topic
21
350 requires entities to test goodwill on an annual basis by comparing the fair value of a reporting unit to its carrying value including goodwill (Step one). The second part of the test must be
performed to measure the amount of impairment. Under the amendment, entities are not required to calculate the fair value of a reporting unit unless they conclude that it is more likely than not that the units carrying value is greater than
its fair value based on an assessment of events and circumstances. The more likely than not threshold is when there is a likelihood of more than 50% that a reporting units carrying value is greater than its fair value. ASU
No. 2011- 08 is effective for fiscal years beginning after December 15, 2011. Early adoption of this ASU is permitted for interim or annual reports that have not been issued. In September 2011, the Company adopted this ASU for its 2011
annual goodwill test. The Companys annual goodwill testing date is October 1, 2011.
On June 16, 2011, the
FASB issued ASU No. 2011-05,
Presentation of Comprehensive Income
, which amends Topic 200,
Comprehensive Income
, to facilitate the convergence of US GAAP with International Financial Reporting Standards (IFRS).
ASU No. 2011-05 amendments (1) eliminate the option to present components of other comprehensive income (OCI) in the statement of changes in shareholders equity, and (2) permit presentation of total
comprehensive income and components of net income in a single statement of comprehensive income, or in two separate, consecutive statements. The amendments do not change current treatment of items in OCI, transfer of items from OCI, or reporting
items in OCI net of the related tax impact. ASU No. 2011-05 is effective for fiscal years and interim periods beginning after December 15, 2011. Early adoption is permitted since compliance with the amendments is already permitted. The
adoption of this update is not expected to have a material impact on the companys financial statements.
On
May 12, 2011, the FASB and the International Accounting Standards Board (IASB) issued guidance on fair value measurement and disclosure requirements outlined in IFRS 13,
Fair Value Measurement,
and ASU
No. 2011-04,
Fair Value Measurement (Topic 820)Amendments to Achieve Common
Fair
Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.
The amendments do not require additional fair
value measurements; they explain how to measure fair value, revise wording to ensure that fair value has the same meaning in U.S. GAAP and IFRS, and harmonize disclosure requirements. In addition, ASU No. 2011-04 expands disclosure
requirements in FASB ASC Topic 820, particularly for Level 3 inputs. ASU No. 2011-04 supersedes most of the guidance in FASB ASC Topic 820. The amendments in ASU No. 2011-04 must be applied prospectively. For public entities, the
amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The adoption of this update is not expected to have a material impact on the companys
financial statements.
In September 2010, the Emerging Issues Task Force issued EITF Issue 09-G, Accounting for
Costs Associated with Acquiring or Renewing Insurance Contracts (EITF Issue 09-G), which modifies the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal insurance contracts.
The Task Force reached a final consensus that requires costs to be incremental or directly related to the successful acquisition of new or renewal contracts to be capitalized as a deferred acquisition cost. EITF Issue 09-G is effective for the
Company beginning with its interim period ended March 31, 2012 with either prospective or retrospective application permitted. Early adoption is permitted. We are currently evaluating the impact that EITF Issue 09-G will have on our
consolidated financial statements.
Results of Operations
The consolidated results of operations include the accounts of HealthSpring and its subsidiaries. The following table sets forth the consolidated statements of income data expressed in dollars (in
thousands) and as a percentage of total revenue for each period indicated:
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium revenue
|
|
$
|
1,315,577
|
|
|
|
98.8
|
%
|
|
$
|
712,658
|
|
|
|
98.3
|
%
|
Management and other fees
|
|
|
12,281
|
|
|
|
0.9
|
|
|
|
10,413
|
|
|
|
1.4
|
|
Investment income
|
|
|
3,442
|
|
|
|
0.3
|
|
|
|
2,151
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,331,300
|
|
|
|
100.0
|
%
|
|
|
725,222
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical expense
|
|
|
1,049,869
|
|
|
|
78.9
|
|
|
|
561,823
|
|
|
|
77.5
|
|
Selling, general and administrative
|
|
|
133,557
|
|
|
|
10.0
|
|
|
|
67,664
|
|
|
|
9.3
|
|
Depreciation and amortization
|
|
|
15,251
|
|
|
|
1.1
|
|
|
|
7,513
|
|
|
|
1.0
|
|
Interest expense
|
|
|
5,735
|
|
|
|
0.5
|
|
|
|
3,150
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,204,412
|
|
|
|
90.5
|
|
|
|
640,150
|
|
|
|
88.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
126,888
|
|
|
|
9.5
|
|
|
|
85,072
|
|
|
|
11.7
|
|
Income tax expense
|
|
|
(47,897
|
)
|
|
|
(3.6
|
)
|
|
|
(31,292
|
)
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
78,991
|
|
|
|
5.9
|
%
|
|
$
|
53,780
|
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium revenue
|
|
$
|
4,064,446
|
|
|
|
98.8
|
%
|
|
$
|
2,218,378
|
|
|
|
98.4
|
%
|
Management and other fees
|
|
|
39,946
|
|
|
|
1.0
|
|
|
|
31,191
|
|
|
|
1.4
|
|
Investment income
|
|
|
10,148
|
|
|
|
0.2
|
|
|
|
4,574
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
4,114,540
|
|
|
|
100.0
|
%
|
|
|
2,254,143
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical expense
|
|
|
3,327,244
|
|
|
|
80.9
|
|
|
|
1,779,275
|
|
|
|
78.9
|
|
Selling, general and administrative
|
|
|
390,507
|
|
|
|
9.5
|
|
|
|
210,410
|
|
|
|
9.3
|
|
Depreciation and amortization
|
|
|
45,867
|
|
|
|
1.1
|
|
|
|
22,810
|
|
|
|
1.0
|
|
Interest expense
|
|
|
21,989
|
|
|
|
0.5
|
|
|
|
15,375
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,785,607
|
|
|
|
92.0
|
|
|
|
2,027,870
|
|
|
|
90.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
328,933
|
|
|
|
8.0
|
|
|
|
226,273
|
|
|
|
10.0
|
|
Income tax expense
|
|
|
(121,800
|
)
|
|
|
(3.0
|
)
|
|
|
(82,917
|
)
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
207,133
|
|
|
|
5.0
|
%
|
|
$
|
143,356
|
|
|
|
6.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership
Our primary source of revenue is monthly premium payments we receive based on membership enrolled in one of our Medicare health plans. The following table summarizes our membership as of the dates
specified:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
|
September 30,
2010
|
|
Medicare Advantage Membership
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama
|
|
|
32,984
|
|
|
|
30,148
|
|
|
|
30,397
|
|
Florida
|
|
|
38,774
|
|
|
|
37,022
|
|
|
|
36,472
|
|
Pennsylvania
|
|
|
70,667
|
|
|
|
63,044
|
|
|
|
N/A
|
|
Tennessee
|
|
|
71,813
|
|
|
|
65,533
|
|
|
|
65,334
|
|
Texas
|
|
|
83,493
|
|
|
|
71,105
|
|
|
|
48,025
|
|
Other
|
|
|
44,395
|
|
|
|
37,752
|
|
|
|
17,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
342,126
|
|
|
|
304,604
|
|
|
|
198,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare PDP Membership
|
|
|
844,458
|
|
|
|
724,394
|
|
|
|
409,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Medicare Advantage.
Our Medicare Advantage membership increased by 72.7% to
342,126 members at September 30, 2011 as compared to 198,055 members at September 30, 2010. Our Medicare Advantage net membership gain of 144,071 members since September 30, 2010 reflects the inclusion of Bravo Health members, focused
sales and marketing efforts during the enrollment period, and better retention rates resulting from, we believe, the relative attractiveness of our various plans benefits.
PDP.
PDP membership increased by 106.3% to 844,458 members at September 30, 2011 as compared to 409,239 at
September 30, 2010, primarily as a result of the inclusion of Bravo Healths PDP and the auto-assignment of new members at the beginning of the year. We do not actively market our PDPs and have relied on CMS auto-assignments of
dual-eligible beneficiaries for membership. We continue to receive assignments or otherwise enroll dual-eligible beneficiaries in our PDPs during lock-in and expect incremental growth for the balance of the year.
According to CMS, our 2012 bids were below the relevant benchmarks and we expect to retain existing membership and be qualified for
auto-assignment of new members in 11 of the 34 CMS PDP geographic regions delineated by CMS for 2012. In addition, under CMSs de minimis rules, we expect to retain existing membership in 15 of the regions (although we will not be eligible to
receive auto-assignments of new members in these regions in 2012). Based upon recent data released by CMS, the Company estimates it will have approximately 645,000-655,000 members in these 26 regions as of January 1, 2012. Of the 2011
membership that the Company does not expect to retain in 2012, approximately 170,000 members are in CMSs PDP region that includes California.
Medicaid.
On May 1, 2011, the Company began serving STAR+PLUS members under the Texas Medicaid STAR+PLUS program which provides health care coverage to seniors and other persons with
disabilities in the six-county service area in and around Fort Worth, Texas. We had 2,255 Medicaid STAR+PLUS members at September 30, 2011.
In September 2011, the Texas Health and Human Services Commission announced that our health plan was one of three plans selected under the STAR+PLUS program to provide health care coverage in the
ten-county service area in and around McAllen, Texas. The anticipated start date for serving Medicaid members in this new service area is March 1, 2012.
Comparison of the Three-Month Period Ended September 30, 2011 to the Three-Month Period Ended September 30, 2010
Revenue
Total revenue was $1.3 billion in the three-month period
ended September 30, 2011 as compared with $725.2 million for the same period in 2010, representing an increase of $606.1 million, or 83.6%. The components of revenue were as follows:
Premium Revenue:
Total premium revenue for the three months ended September 30, 2011 was $1.3 billion as compared with
$712.7 million in the same period in 2010, representing an increase of $602.9 million, or 84.6%. The components of premium revenue and the primary reasons for changes were as follows:
Medicare Advantage:
Medicare Advantage (including MA-PD) premiums were $1.1 billion for the three months ended
September 30, 2011 as compared to $618.9 million in the third quarter of 2010, representing an increase of $492.3 million, or 79.6%. The increase in Medicare Advantage premiums in 2011 was primarily attributable to the inclusion of Bravo Health
membership for the 2011 third quarter and to a 9.0% increase in membership in the HealthSpring health plans compared to the 2010 third quarter. Premiums per member per month (PMPM) for the 2011 third quarter averaged $1,089, which
reflects an increase of 4.5% as compared to the 2010 third quarter. The increase in PMPM premiums in the current quarter was primarily the result of including PMPM premiums in the Bravo Health Pennsylvania and Mid-Atlantic markets and increased risk
adjustment payments.
PDP:
PDP premiums (after risk corridor adjustments) were $201.7 million in the three months
ended September 30, 2011 compared to $93.4 million in the same period of 2010, an increase of $108.3 million,
24
or 115.9%. The increase in premiums for the 2011 third quarter was primarily the result of the inclusion of Bravo Health Part D membership and premium revenue for the 2011 third quarter. Our
average PMPM premiums (after risk corridor adjustments) were $80 in the 2011 third quarter, compared with $77 in the 2010 third quarter.
Medical Expense
Medicare Advantage.
Medicare Advantage (including MA-PD) medical expense for the three months ended September 30, 2011
increased $398.4 million, or 82.0%, to $884.5 million from $486.1 million for the comparable period of 2010, which was primarily attributable to membership increases in the 2011 period. For the three months ended September 30, 2011, the
Medicare Advantage MLR was 79.6% as compared to 78.5% for the same period of 2010. The increase in the 2011 third quarter MLR was primarily the result of the inclusion of Bravo Health, which has historically experienced higher MLRs than the
Companys other health plans, and as a result of increases in 2011 member benefits. The increase in MLR was partially offset by lower MLRs in certain of the Companys other health plans resulting primarily from favorable inpatient
utilization in the 2011 third quarter. Our Medicare Advantage medical expense calculated on a PMPM basis was $867 for the three months ended September 30, 2011, compared with $818 for the comparable 2010 quarter.
PDP.
PDP medical expense for the three months ended September 30, 2011 increased $85.3 million to $160.7 million,
compared to $75.4 million in the same period last year, which was primarily attributable to membership increases in the 2011 period as compared to the 2010 period. PDP MLR for the 2011 third quarter was 79.7%, compared to 80.7% in the 2010 third
quarter. The MLR improvement in the 2011 third quarter was primarily the result of PMPM premium increases and increased drug rebates in the current quarter.
Selling, General, and Administrative Expense
Selling, general, and
administrative, or SG&A, expense for the three months ended September 30, 2011 was $133.6 million as compared with $67.7 million for the same prior year period, an increase of $65.9 million, or 97.4%. The increase in the 2011
third quarter as compared to the prior year period was the result of the inclusion of Bravo Health for the 2011 third quarter and from increases in selling costs as a result of new membership and accelerated printing and advertising costs in the
2011 third quarter to accommodate the earlier selling season in 2011. In addition, the Company incurred incremental administrative costs in the 2011 third quarter related to its expansion into new Medicare Advantage markets for 2012. As a percentage
of revenue, SG&A expense increased approximately 70 basis points to 10.0% for the three months ended September 30, 2011 compared to the prior year period.
The Company now expects the majority of its sales and marketing expenses to be incurred in the first and fourth quarters of each year in connection with the annual Medicare enrollment cycle.
For the 2011 third quarter, the Company accrued approximately $1.3 million in legal and other expenses related to the Proposed Merger.
Depreciation and Amortization Expense
Depreciation and amortization expense in the 2011 third quarter increased $7.7 million to $15.3 million as compared to the 2010 third quarter, the majority of which increase relates to the amortization of
identifiable intangible assets acquired in the Bravo Health transaction.
Interest Expense
Interest expense was $5.7 million in the 2011 third quarter, compared with $3.1 million in the 2010 third quarter. Interest expense
increased $2.6 million in the 2011 third quarter, reflecting higher average debt amounts outstanding related to borrowings made to finance the Bravo Health acquisition.
25
The weighted average interest rate incurred on our borrowings during the three months ended
September 30, 2011 and 2010 was 6.4% and 7.2%, respectively (4.4% and 3.2%, respectively, exclusive of amortization of deferred financing costs and credit facility fees).
Income Tax Expense
For the three months ended September 30,
2011, income tax expense was $47.9 million, reflecting an effective tax rate of 37.7%, as compared to $31.3 million, reflecting an effective tax rate of 36.8%, for the same period of 2010. The higher effective rate is primarily attributable to
additional state income tax expense incurred in the 2011 third quarter as a result of the Bravo Health acquisition in November 2010.
Comparison of the Nine-Month Period Ended September 30, 2011 to the Nine-Month Period Ended September 30, 2010
Revenue
Total
revenue was $4.1 billion in the nine-month period ended September 30, 2011 as compared with $2.3 billion for the same period in 2010, representing an increase of $1.9 billion, or 82.5%. The components of revenue were as follows:
Premium Revenue:
Total premium revenue for the nine months ended September 30, 2011 was $4.1 billion as compared with
$2.2 billion in the same period in 2010, representing an increase of $1.9 billion, or 83.2%. The components of premium revenue and the primary reasons for changes were as follows:
Medicare Advantage:
Medicare Advantage (including MA-PD) premiums increased $1.5 billion, or 77.2%, to $3.3 billion for the
nine months ended September 30, 2011 as compared to the same period of 2010. The increase in Medicare Advantage premiums in 2011 was primarily attributable to increases in membership, including the additional Bravo Health membership. PMPM
premiums for the current nine month period averaged $1,104, which reflects an increase of 4.0% as compared to the 2010 period. The PMPM premium increase in the current period was primarily the result of including PMPM premiums in the Bravo Health
Pennsylvania and Mid-Atlantic markets and increased risk adjustment payments.
PDP:
PDP premiums (after risk
corridor adjustments) were $730.1 million in the nine months ended September 30, 2011 compared to $338.3 million in the same period of 2010, an increase of $391.8 million, or 115.8%. The increase in premiums for the current nine month period
was primarily the result of Bravo Health Part D membership and premiums for the 2011 period. Our average PMPM premiums (after risk corridor adjustments) were $97 in the current nine month period, as compared to $95 during the 2010 comparable period.
Medical Expense
Medicare Advantage.
Medicare Advantage (including MA-PD) medical expense for the nine months ended September 30, 2011 increased $1.2 billion, or 80.8%, to $2.7 billion from $1.5 billion
for the comparable period of 2010, which was primarily attributable to membership increases in the 2011 period as compared to the 2010 period. For the nine months ended September 30, 2011, the Medicare Advantage MLR was 79.8% versus 78.2% for
the same period of 2010. The increase in the MLR in the current period was primarily attributable to the inclusion of Bravo Health, which has historically experienced higher MLRs than the Companys other health plans, and as a result of
increases in 2011 member benefits. The increase in MLR was partially offset by lower MLRs in certain of the Companys other health plans resulting from favorable inpatient utilization in the 2011 period. Our Medicare Advantage medical expense
calculated on a PMPM basis was $881 for the nine months ended September 30, 2011, compared with $831 for the comparable 2010 period.
PDP.
PDP medical expense for the nine months ended September 30, 2011 increased $353.9 million to $662.1 million, compared to $308.2 million in the same period last year. PDP MLR for
the 2011 nine month period was 90.7%, compared to 91.1% in the same period in 2010. The decrease in PDP MLR for the current period was
26
primarily the result of the inclusion of $6.1 million of Bravo Health rebates relating to 2010, which were higher than previously estimated, which reduced medical expense in the period.
Selling, General, and Administrative Expense
SG&A expense for the nine months ended September 30, 2011 was $390.5 million as compared with $210.4 million for the same prior year period, an increase of $180.1 million, or 85.6%. The increase
in the 2011 period as compared to the prior year period was the result of the inclusion of Bravo Health and increased selling costs related to new membership in the 2011 period. As a percentage of revenue, SG&A expense as a percent of revenue
increased approximately 20 basis points for the nine months ended September 30, 2011 to 9.5% as compared to 9.3% for the prior year period.
For the nine months ended September 30, 2011, the Company accrued approximately $1.3 million in legal and other expenses related to the Proposed Merger.
Depreciation and Amortization Expense
Depreciation and amortization expense in the 2011 nine month period increased $23.1 million to $45.9 million as compared to the same period in 2010, the majority of which increase relates to the
amortization of identifiable intangible assets acquired in the Bravo Health transaction.
Interest Expense
Interest expense was $22.0 million in the 2011 nine month period, compared with $15.4 million in the 2010 same period. Interest expense in
the 2010 period included debt extinguishment costs of $7.1 million resulting from the Companys entering into a new credit facility in the 2010 first quarter. Additionally, interest expense for the 2011 period includes $1.1 million of amortized
deferred financing fees, the expensing of which was accelerated in the 2011 first quarter as a result of the early repayment of debt. Net of the 2010 extinguishment costs and the 2011 accelerated amortization expense amounts, interest expense
increased $12.6 million in the 2011 period, reflecting higher average debt amounts outstanding related to borrowings made to finance the Bravo Health acquisition.
The weighted average interest rate incurred on our borrowings during the nine month periods ended September 30, 2011 and 2010 were 6.6% and 5.9%, respectively (4.6% and 3.5%, respectively, exclusive
of amortization of deferred financing costs and credit facility fees).
Income Tax Expense
For the nine months ended September 30, 2011, income tax expense was $121.8 million, reflecting an effective tax rate of 37.0%,
versus $82.9 million, reflecting an effective tax rate of 36.6%, for the same period of 2010. The higher effective rate is primarily attributable to additional state income tax expense incurred in the 2011 period as a result of the Bravo
Health acquisition in November 2010.
Segment Information
We report our business in four segments: Medicare Advantage; stand-alone PDP; other; and Corporate. Medicare Advantage (MA-PD)
consists of Medicare-eligible beneficiaries receiving healthcare benefits, including prescription drugs, through a coordinated care plan qualifying under Part C and Part D of the Medicare Program. Stand-alone PDP consists of Medicare-eligible
beneficiaries receiving prescription drug benefits on a stand-alone basis in accordance with Medicare Part D. The Companys other segment is insignificant and includes the Companys Medicaid and commercial insurance lines of
business. The Company commenced its Medicaid operations in 2011 while its commercial insurance operations have been insignificant since 2008. The Corporate segment consists of corporate expenses not allocated to the other reportable segments. These
segment groupings are also consistent with information used by our chief executive officer in making operating decisions.
27
The results of each segment are measured and evaluated by earnings before interest expense,
depreciation and amortization expense, and income taxes (EBITDA). We do not allocate certain corporate overhead amounts (classified as SG&A expense) or interest expense to our segments. We evaluate interest expense, income taxes, and
asset and liability details on a consolidated basis as these items are managed in a corporate shared service environment and are not the responsibility of segment operating management.
Revenue includes premium revenue, management and other fee income, and investment income.
Asset and equity details by reportable segment have not been disclosed, as the Company does not internally report such information.
Financial data by reportable segment for the three and nine months ended September 30 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MA-PD
|
|
|
PDP
|
|
|
Other
|
|
|
Corporate
|
|
|
Total
|
|
Three months ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,126,924
|
|
|
$
|
201,716
|
|
|
$
|
2,647
|
|
|
$
|
13
|
|
|
$
|
1,331,300
|
|
EBITDA
|
|
|
138,214
|
|
|
|
24,950
|
|
|
|
(3,788
|
)
|
|
|
(11,502
|
)
|
|
|
147,874
|
|
Depreciation and amortization expense
|
|
|
11,926
|
|
|
|
661
|
|
|
|
|
|
|
|
2,664
|
|
|
|
15,251
|
|
|
|
|
|
|
|
Three months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
631,452
|
|
|
$
|
93,452
|
|
|
$
|
306
|
|
|
$
|
12
|
|
|
$
|
725,222
|
|
EBITDA
|
|
|
91,656
|
|
|
|
11,938
|
|
|
|
(63
|
)
|
|
|
(7,796
|
)
|
|
|
95,735
|
|
Depreciation and amortization expense
|
|
|
6,166
|
|
|
|
14
|
|
|
|
|
|
|
|
1,333
|
|
|
|
7,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MA-PD
|
|
|
PDP
|
|
|
Other
|
|
|
Corporate
|
|
|
Total
|
|
Nine months ended September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,380,102
|
|
|
$
|
730,175
|
|
|
$
|
4,221
|
|
|
$
|
42
|
|
|
$
|
4,114,540
|
|
EBITDA
|
|
|
419,377
|
|
|
|
17,937
|
|
|
|
(8,778
|
)
|
|
|
(31,747
|
)
|
|
|
396,789
|
|
Depreciation and amortization expense
|
|
|
37,447
|
|
|
|
2,014
|
|
|
|
|
|
|
|
6,406
|
|
|
|
45,867
|
|
|
|
|
|
|
|
Nine months ended September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,914,754
|
|
|
$
|
338,323
|
|
|
$
|
1,028
|
|
|
$
|
38
|
|
|
$
|
2,254,143
|
|
EBITDA
|
|
|
273,487
|
|
|
|
11,337
|
|
|
|
(72
|
)
|
|
|
(20,294
|
)
|
|
|
264,458
|
|
Depreciation and amortization expense
|
|
|
18,596
|
|
|
|
45
|
|
|
|
|
|
|
|
4,169
|
|
|
|
22,810
|
|
We use segment EBITDA as an analytical indicator for purposes of assessing segment performance, as is
common in the healthcare industry. Segment EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles and segment EBITDA, as presented, may not be comparable to other companies.
A reconciliation of reportable segment EBITDA to net income included in the consolidated statements of income for the three and nine
months ended September 30 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
EBITDA
|
|
$
|
147,874
|
|
|
$
|
95,735
|
|
|
$
|
396,789
|
|
|
$
|
264,458
|
|
Income tax expense
|
|
|
(47,897
|
)
|
|
|
(31,292
|
)
|
|
|
(121,800
|
)
|
|
|
(82,917
|
)
|
Interest expense
|
|
|
(5,735
|
)
|
|
|
(3,150
|
)
|
|
|
(21,989
|
)
|
|
|
(15,375
|
)
|
Depreciation and amortization
|
|
|
(15,251
|
)
|
|
|
(7,513
|
)
|
|
|
(45,867
|
)
|
|
|
(22,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
78,991
|
|
|
$
|
53,780
|
|
|
$
|
207,133
|
|
|
$
|
143,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Liquidity and Capital Resources
We finance our operations primarily through internally generated funds. We generate cash primarily from premium revenue and our primary
uses of cash are payment of medical and SG&A expenses and principal and interest on indebtedness. We anticipate that our current level of cash on hand, internally generated cash flows, and borrowings available under our revolving credit facility
will be sufficient to fund our working capital needs, our debt service, and anticipated capital expenditures over at least the next 12 months.
The reported changes in cash and cash equivalents for the nine month period ended September 30, 2011, compared to the same period of 2010, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
Net cash provided by operating activities
|
|
$
|
708,506
|
|
|
$
|
155,768
|
|
Net cash used in investing activities
|
|
|
(43,982
|
)
|
|
|
(243,269
|
)
|
Net cash provided by (used in) financing activities
|
|
|
199,316
|
|
|
|
(113,684
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
863,840
|
|
|
$
|
(201,185
|
)
|
|
|
|
|
|
|
|
|
|
Our reported cash flows are significantly influenced by the timing of the Medicare premium payments by
CMS, which is payable to us normally on the first day of each month. This payment is from time to time received in the month prior to the month of medical coverage. When this happens, we record the receipt either in deferred revenue and recognize it
as premium revenue in the month of medical coverage or in funds held for the benefit of members if the payment amount consists of member subsidy amounts. The 2011 October payments (in the amount of $620.2 million) were received in September,
which had the effect of increasing cash flows in that month with a corresponding decrease in October. Adjusting for the effect of the timing of this payment, our operating cash flows (adjusted for premium amounts recorded as deferred revenue) and
financing cash flows (adjusted for member subsidy amounts recorded as funds held for the benefit of members), would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
Net cash provided by operating activities, as reported
|
|
$
|
708,506
|
|
|
$
|
155,768
|
|
Timing effect of CMS payment
|
|
|
(443,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net cash provided by operating activities
|
|
$
|
265,053
|
|
|
$
|
155,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities, as reported
|
|
$
|
199,316
|
|
|
$
|
(113,684
|
)
|
Timing effect of CMS payment
|
|
|
(176,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net cash provided by (used in) financing activities
|
|
$
|
22,546
|
|
|
$
|
(113,684
|
)
|
|
|
|
|
|
|
|
|
|
Our primary sources of liquidity are cash flows provided by our operating activities, proceeds from the
sale or maturities of our investment securities, our revolving credit facility, and available cash on hand, although the Companys access to and use of internally generated cash flows may be limited by regulatory requirements stipulating that
the Companys regulated insurance subsidiaries maintain minimum levels of capital. See Statutory Capital Requirements.
29
Cash Flows from Operating Activities
We generated cash from operating activities (as adjusted) of $265.1 million during the nine months ended September 30, 2011, compared
to generating cash of $155.8 million during the nine months ended September 30, 2010. The favorable variance in cash flow from operations for the 2011 period was primarily the result of increases in net income and non-cash expenses included in
net income, such as depreciation and amortization.
Cash Flows from Investing and Financing Activities
For the nine months ended September 30, 2011, the primary investing activities consisted of expenditures of $148.6 million to
purchase investment securities and restricted investments, the receipt of $131.8 million in proceeds from the sale or maturity of investment securities and restricted investments, and $27.5 million spent on property and equipment additions. The
investing activity in the prior year period consisted primarily of expenditures of $384.3 million to purchase investment securities and restricted investments, the receipt of $150.5 million in proceeds from the sale or maturity of investment
securities and restricted investments, and $9.1 million spent on property and equipment additions.
During the nine months
ended September 30, 2011, cash flows from the Companys financing activities consisted primarily of proceeds of $301.5 million received from the sale of the Companys common stock, the expenditure of $291.4 million for the repayment
of existing long-term debt, $179.0 million of funds received in excess of funds withdrawn from CMS for the benefit of members (which includes the early receipt in September 2011 of $176.8 million discussed above), and $23.3 million in proceeds
received from the exercise of employee stock options. The financing activity in the prior year period consisted primarily of the expenditure of $270.7 million for the repayment of existing long-term debt, the receipt of $200.0 million in proceeds
from the issuance of debt, and $22.3 million of funds withdrawn in excess of funds received from CMS for the benefit of members.
Cash
and Cash Equivalents
At September 30, 2011, the Companys cash and cash equivalents were $1.1 billion,
$248.2 million of which was held in unregulated subsidiaries. Substantially all of the Companys liquidity is in the form of cash and cash equivalents, a portion of which ($807.1 million at September 30, 2011) is held by the Companys
regulated insurance subsidiaries, which amounts are required by law and by our credit agreement to be invested in low-risk, short-term, highly-liquid investments (such as government securities, money market funds, deposit accounts, and overnight
repurchase agreements). As discussed above, cash and cash equivalents at September 30, 2011 includes the early receipt of October payments from CMS of $620.2 million.
The Company invests in securities ($569.7 million at September 30, 2011), primarily corporate, asset-backed and government debt securities, that it generally intends, and has the ability, to hold to
maturity. Because the Company is not relying on these investment securities for near-term liquidity, short term fluctuations in market pricing generally do not affect the Companys ability to meet its liquidity needs. To date, the Company has
not experienced any material issuer defaults on its investment securities.
Statutory Capital Requirements
The Companys regulated insurance subsidiaries are required to maintain satisfactory minimum net worth requirements established by
their respective state departments of insurance. At September 30, 2011, the statutory minimum net worth requirements and actual statutory net worth were as follows (in thousands):
30
|
|
|
|
|
|
|
|
|
Regulated Insurance Subsidiary
|
|
Statutory Net Worth
|
|
|
Minimum
|
|
|
Actual
|
|
Alabama HMO
|
|
$
|
1,112
|
|
|
$
|
59,152
|
|
Bravo Health Insurance (DE)
|
|
|
11,327
|
(1)
|
|
|
70,399
|
|
Bravo Health Mid-Atlantic HMO (MD)
|
|
|
16,754
|
(1)
|
|
|
16,790
|
|
Bravo Health Pennsylvania HMO
|
|
|
51,956
|
(1)
|
|
|
96,837
|
|
Bravo Health Texas HMO
|
|
|
14,985
|
(1)
|
|
|
42,642
|
|
Florida HMO
|
|
|
12,250
|
|
|
|
29,160
|
|
HealthSpring Accident and Health (TX)
|
|
|
68,118
|
(1)
|
|
|
143,086
|
|
Tennessee HMO
|
|
|
17,198
|
|
|
|
113,333
|
|
(1)
|
Minimum statutory net worth calculated at 200% of authorized control level.
|
Each of these subsidiaries was in compliance with applicable statutory requirements as of September 30, 2011. Notwithstanding the foregoing, the state departments of insurance can require our
regulated insurance subsidiaries to maintain minimum levels of statutory capital in excess of amounts required under the applicable state law if they determine that maintaining additional statutory capital is in the best interest of the
Companys members.
The Companys regulated insurance subsidiaries are restricted from making distributions without
appropriate regulatory notifications and approvals or to the extent such dividends would put them out of compliance with statutory net worth requirements.
Indebtedness
Indebtedness at September 30, 2011 and
December 31, 2010 consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2011
|
|
|
December 31,
2010
|
|
Debt outstanding under credit agreements
|
|
$
|
335,449
|
|
|
$
|
626,875
|
|
Less: current portion of long-term debt
|
|
|
(37,350
|
)
|
|
|
(61,226
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt less current portion
|
|
$
|
298,099
|
|
|
$
|
565,649
|
|
|
|
|
|
|
|
|
|
|
February 2010 Credit Facility
On February 11, 2010, the Company entered into a $350.0 million credit agreement (the Prior Credit Agreement), which, subject to the terms and conditions set forth therein, provided for a
five-year, $175.0 million term loan credit facility and a four-year, $175.0 million revolving credit facility (the Prior Credit Facilities). Proceeds from the Prior Credit Facilities, together with cash on hand, were used to fund the
repayment of $237.0 million in term loans outstanding under the Companys 2007 credit agreement as well as transaction expenses related thereto.
Borrowings under the Prior Credit Agreement accrued interest on the basis of either a base rate or a LIBOR rate plus, in each case, an applicable margin depending on the Companys debt-to-EBITDA
leverage ratio. The Company also paid a commitment fee of 0.375% on the actual daily unused portions of the Prior Credit Facilities.
In connection with entering into the Prior Credit Agreement, the Company wrote-off unamortized deferred financing costs of approximately $5.1 million incurred in connection with the 2007 credit agreement.
The Company also terminated its interest rate swap agreements, which resulted in a payment of approximately $2.0 million to the swap counterparties. Such amounts are classified as interest expense and are reflected in the financial results of the
Company for the quarter ended March 31, 2010.
31
Bravo Health Acquisition Indebtedness
In connection with the acquisition of Bravo Health, the Company and its existing lenders and certain additional lenders amended and
restated the Prior Credit Agreement in the form of the Amended and Restated Credit Agreement (Restated Credit Agreement) on November 30, 2010 to provide for, among other things, the acquisition financing. As amended, the Restated
Credit Agreement provides for the following:
|
|
|
$355.0 million in term loan A indebtedness maturing in February 2015 consisting of:
|
|
|
|
$175.0 million of term loan A indebtedness as Existing Term Loan A ($166.3 million of which was outstanding prior to the Bravo Health
acquisition);
|
|
|
|
$180.0 million of new term loan A indebtedness as New Term Loan A (funded at the closing of the acquisition);
|
|
|
|
$175.0 million revolving credit facility maturing in February 2014 (the Revolving Credit Facility, $100.0 million of which was drawn at the
closing); and
|
|
|
|
$200.0 million of new term loan B indebtedness maturing in November 2016 (New Term Loan B which was funded at the closing).
|
The Revolving Credit Facility, Existing Term Loan A, New Term Loan A, and New Term Loan B are sometimes referred to herein
as the Credit Facilities.
Borrowings under the Restated Credit Agreement accrue interest on the basis of either a
base rate or LIBOR plus, in each case, an applicable margin depending on the Companys total debt to adjusted EBITDA leverage ratio (450 basis points for LIBOR borrowings under New Term Loan B and 375 basis points for LIBOR borrowings under the
other Credit Facilities at September 30, 2011). With respect to New Term Loan B indebtedness, the Restated Credit Agreement includes a minimum LIBOR of 1.5%. The Company also is required to pay a commitment fee of 0.375% per annum, which
may increase to 0.500% per annum if the Companys total debt to adjusted EBITDA leverage ratio is greater than 0.75 to 1.00, on the daily unused portions of the Revolving Credit Facility. The Revolving Credit Facility matures, the
commitments thereunder terminate, and all amounts then outstanding thereunder are payable on February 11, 2014. The Revolving Credit Facility, which is available for working capital and general corporate purposes including capital expenditures
and permitted acquisitions, was undrawn as of September 30, 2011.
Under the Restated Credit Agreement, Existing Term
Loan A and New Term Loan A are payable in quarterly principal installments. Prior to June 30, 2013, each quarterly principal installment payable in respect of each of Existing Term Loan A and New Term Loan A will be in an amount equal to 2.5%
of the aggregate initial principal amount of Existing Term Loan A or New Term Loan A, as the case may be, and for principal installments payable on June 30, 2013 and thereafter, that percentage increases to 3.75%. The entire outstanding
principal balance of each of Existing Term Loan A and New Term Loan A is due and payable at maturity on February 11, 2015.
Under the Restated Credit Agreement, New Term Loan B is payable in quarterly principal installments, each in an amount equal to 0.25% of
the aggregate initial principal amount (as adjusted for certain prepayments) of New Term Loan B. The entire outstanding principal balance of New Term Loan B is due and payable on November 30, 2016.
The net proceeds from certain asset sales, casualty and condemnation events, and certain incurrences of indebtedness (subject, in the
cases of asset sales and casualty and condemnation events, to certain reinvestment rights), a portion of the net proceeds from equity issuances and, under certain circumstances, the Companys excess cash flow, are required to be used to make
prepayments in respect of loans outstanding under the Credit Facilities. During March 2011, the Company used $263.4 million of the net proceeds from the underwritten public offering of its common stock for the repayment of indebtedness.
32
In connection with entering into the Prior Credit Agreement, the Company incurred financing
costs of approximately $7.3 million which were recorded in February 2010. In connection with entering into the Restated Credit Agreement, the Company incurred financing costs of approximately $19.5 million, which were paid in November 2010. These
amounts have been accounted for as deferred financing fees and are being amortized over the term of the Restated Credit Agreement using the interest method. During the three months ended March 31, 2011, the Company recorded $1.1 million of
related amortization expense which amortization was accelerated as a result of the $263.4 million repayment of debt discussed above. Such amortization expense is classified as interest expense in the financial results of the Company for the nine
months ended September 30, 2011. The unamortized balance of such costs at September 30, 2011 totaled $18.8 million and is included in other assets on the accompanying consolidated balance sheet.
Off-Balance Sheet Arrangements
At September 30, 2011, we did not have any off-balance sheet arrangement requiring disclosure.
Contractual Obligations
In March 2011, the Company used $263.4
million of the net proceeds from an underwritten public offering of its common stock for the repayment of indebtedness and reduced approximately $43.5 million of future interest related to such debt. Additionally, in July 2011, the Company entered
into a new lease agreement for approximately 75,000 square feet of office space in Nashville, Tennessee. The Company expects the lease to commence in the 2012 second quarter. The Companys prescription drug and market-support operations center
will relocate to this new space. The term of the new lease is ten years with average annual rent of $1.3 million.
Except for
the aforementioned repayment of debt, reduction of future interest related to such debt, and the entering into of a new lease agreement, we did not experience any material changes to contractual obligations outside the ordinary course of business
during the nine months ended September 30, 2011.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires our management to make a number of estimates and assumptions relating to
the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Our estimates are based
on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Changes in estimates are recorded if and when better information becomes available. As future events and their effects cannot be
determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
We believe that the accounting policies discussed below are those that are most important to the presentation of our
financial condition and results of operations and that require our managements most difficult, subjective, and complex judgments. For a more complete discussion of these and other critical accounting policies and estimates of the Company, see
our 2010 Form 10-K.
Medical Expense and Medical Claims Liability
Medical expense is recognized in the period in which services are provided and includes an estimate of the cost of medical expense that
has been incurred but not yet reported, or IBNR. Medical expense includes claim payments, capitation payments, risk sharing payments and pharmacy costs, net of rebates, as well as estimates of future payments of claims incurred, net of
reinsurance. Capitation payments represent monthly contractual fees disbursed to physicians and other providers who are responsible for providing medical care to members. Pharmacy costs represent payments for members prescription drug
benefits, net of rebates from drug manufacturers. Rebates are recognized when earned, according to the contractual arrangements with the respective vendors.
33
Medical claims liability includes medical claims reported to the plans but not yet paid as
well as an actuarially determined estimate of claims that have been incurred but not yet reported.
The IBNR component of
total medical claims liability is based on our historical claims data, current enrollment, health service utilization statistics, and other related information. Estimating IBNR is complex and involves a significant amount of judgment. Accordingly,
it represents our most critical accounting estimate. The development of IBNR includes the use of standard actuarial developmental methodologies, including completion factors and claims trends, which take into account the potential for adverse claims
developments, and considers favorable and unfavorable prior period developments. Actual claims payments will differ, however, from our estimates. A worsening or improvement of our claims trend or changes in completion factors from those that we
assumed in estimating medical claims liabilities at September 30, 2011 would cause these estimates to change in the near term and such a change could be material.
As discussed above, actual claim payments will differ from our estimates. The period between incurrence of the expense and payment is, as with most health insurance companies, relatively short, however,
with over 85% of claims typically paid within 60 days of the month in which the claim is incurred. Although there is a risk of material variances in the amounts of estimated and actual claims, the variance is known quickly. Accordingly, we expect
that substantially all of the estimated medical claims payable as of the end of any fiscal period (whether a quarter or year end) will be known and paid during the next fiscal period.
Our policy is to record the best estimate of medical expense IBNR. Using actuarial models, we calculate a minimum amount and maximum
amount of the IBNR component. To most accurately determine the best estimate, our actuaries determine the point estimate within their minimum and maximum range by similar medical expense categories within lines of business. The medical expense
categories we use are in-patient facility, outpatient facility, all professional expense, and pharmacy.
We apply different
estimation methods depending on the month of service for which incurred claims are being estimated. For the more recent months, which account for the majority of the amount of IBNR, we estimate our claims incurred by applying the observed trend
factors to the trailing twelve-month PMPM costs. For prior months, costs have been estimated using completion factors. In order to estimate the PMPMs for the most recent months, we validate our estimates of the most recent months utilization
levels to the utilization levels in older months using actuarial techniques that incorporate a historical analysis of claim payments, including trends in cost of care provided, and timeliness of submission and processing of claims.
The following table illustrates the sensitivity of the completion and claims trend factors and the impact on our operating results caused
by changes in these factors that management believes are reasonably likely based on our historical experience and September 30, 2011 data (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion Factor (a)
|
|
|
Claims Trend Factor (b)
|
|
Increase
(Decrease)
in Factor
|
|
|
Increase
(Decrease)
in Medical
Claims
Liability
|
|
|
Increase
(Decrease)
in Factor
|
|
|
Increase
(Decrease)
in Medical
Claims
Liability
|
|
|
3
|
%
|
|
$
|
(9,630
|
)
|
|
|
(3
|
)%
|
|
$
|
(6,829
|
)
|
|
2
|
|
|
|
(6,495
|
)
|
|
|
(2
|
)
|
|
|
(4,547
|
)
|
|
1
|
|
|
|
(3,286
|
)
|
|
|
(1
|
)
|
|
|
(2,270
|
)
|
|
(1
|
)
|
|
|
3,366
|
|
|
|
1
|
|
|
|
2,264
|
|
(a)
|
Impact due to change in completion factor for the most recent three months. Completion factors indicate how complete claims paid to date are in relation to estimates
for a given reporting period. Accordingly, an increase in completion factor results in a decrease in the remaining estimated liability for medical claims.
|
34
(b)
|
Impact due to change in annualized medical cost trends used to estimate PMPM costs for the most recent three months.
|
Each month, we re-examine the previously established medical claims liability estimates based on actual claim submissions and other
relevant changes in facts and circumstances. As the liability estimates recorded in prior periods become more exact, we increase or decrease the amount of the estimates, and include the changes in medical expenses in the period in which the change
is identified. In every reporting period, our operating results include the effects of more completely developed medical claims liability estimates associated with prior periods.
In establishing medical claims liability, we also consider premium deficiency situations and evaluate the necessity for additional
related liabilities. At September 30, 2011, the Company recorded total premium deficiency liabilities of $3.6 million for two of its smaller health plans, including its start-up Medicaid health plan. We expect these health plans to continue to
require premium deficiency accruals for the near-term. There were no required premium deficiency accruals at December 31, 2010.
Premium Revenue Recognition
We generate revenues primarily from premiums we receive from CMS to provide healthcare benefits to our members. We receive premium payments on a PMPM basis from CMS to provide healthcare benefits to our
Medicare members, which premiums are fixed (subject to retroactive risk adjustment) on an annual basis by contracts with CMS. Although the amount we receive from CMS for each member is fixed, the amount varies among Medicare plans according to,
among other things, plan benefits, demographics, geographic location, age, gender, and the relative risk score of the membership.
We generally receive premiums on a monthly basis in advance of providing services. Premiums collected in advance are deferred and reported as deferred revenue. We recognize premium revenue during the
period in which we are obligated to provide services to our members. Any amounts that have not been received are recorded on the balance sheet as accounts receivable.
Our Medicare premium revenue is subject to periodic adjustment under what is referred to as CMSs risk adjustment payment methodology based on the health risk of our members. Risk adjustment uses
health status indicators to correlate the payments to the health acuity of the member, and consequently establishes incentives for plans to enroll and treat less healthy Medicare beneficiaries. Under the risk adjustment payment methodology,
coordinated care plans must capture, collect, and report diagnosis code information to CMS. After reviewing the respective submissions, CMS establishes the payments to Medicare plans generally at the beginning of the calendar year, and then adjusts
premium levels on two separate occasions on a retroactive basis. The first retroactive risk premium adjustment for a given fiscal year generally occurs during the third quarter of such fiscal year. This initial settlement (the Initial CMS
Settlement) represents the updating of risk scores for the current year based on the prior years dates of service. CMS then issues a final retroactive risk premium adjustment settlement for that fiscal year in the following year (the
Final CMS Settlement). We estimate and record on a monthly basis both the Initial CMS Settlement and the Final CMS Settlement.
We develop our estimates for risk premium adjustment settlement utilizing historical experience and predictive actuarial models as sufficient member risk score data becomes available over the course of
each CMS plan year. Our actuarial models are populated with available risk score data on our members. Risk premium adjustments are based on member risk score data from the previous year. Risk score data for members who entered our plans during the
current plan year, however, is not available for use in our models; therefore, we make assumptions regarding the risk scores of this subset of our member population.
All such estimated amounts are periodically updated as additional diagnosis code information is reported to CMS and adjusted to actual amounts when the ultimate adjustment settlements are either received
from CMS or the Company receives notification from CMS of such settlement amounts.
As a result of the variability of factors,
including plan risk scores, that determine such estimations, the actual amount of CMSs retroactive risk premium settlement adjustments could be materially more or less than our estimates. Consequently, our estimate of our plans risk
scores for any period and our accrual of settlement
35
premiums related thereto, may result in favorable or unfavorable adjustments to our Medicare premium revenue and, accordingly, our profitability. There can be no assurance that any such
differences will not have a material effect on any future quarterly or annual results of operations.
The following table
illustrates the sensitivity of the Final CMS Settlements and the impact on premium revenue caused by differences between actual and estimated settlement amounts that management believes are reasonably likely, based on our historical experience and
premium revenue for the nine months ending September 30, 2011 (dollars in thousands):
|
|
|
|
|
|
|
Increase
(Decrease)
in Estimate
|
|
|
Increase
(Decrease)
In Settlement
Receivable
|
|
|
1.5
|
%
|
|
$
|
49,172
|
|
|
1.0
|
|
|
|
32,781
|
|
|
0.5
|
|
|
|
16,391
|
|
|
(0.5
|
)
|
|
|
(16,391
|
)
|
Goodwill and Indefinite-Life Intangible Assets
Goodwill represents the excess of cost over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a
purchase business combination and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually. The Company conducts its goodwill impairment testing by first assessing certain qualitative
factors to determine whether events and circumstances lead to the conclusion that it is necessary to perform the two-step goodwill impairment test required under GAAP. The Company calculates the fair value of a reporting unit (commonly referred to
as step one of the goodwill impairment test) only when it concludes that it is more likely than not that the reporting units carrying value is greater than its fair value based on its qualitative assessment of events and
circumstances. The more likely than not threshold is when there is a likelihood of more than 50% that a reporting units carrying value is greater than its fair value.
An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair value. This determination is made
at the reporting unit level and consists of two steps. First, the Company determines the fair value of the reporting unit and compares it to its carrying amount. Second, if the carrying amount of the reporting unit exceeds its fair value, an
impairment loss is recognized for any excess of the carrying amount of the units goodwill over the implied fair value of that goodwill.
In the event a reporting unit has zero or negative carrying amounts the second step of the test is applied to such reporting unit if it is more likely than not that goodwill impairment exists. The implied
fair value of goodwill is determined by allocating the fair value of the reporting units in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting units
goodwill. Goodwill currently exists at six of our reporting units Alabama, Bravo Health Insurance Company, Florida, Tennessee, Pennsylvania, and Texas.
Goodwill valuations have been determined using an income approach based on the present value of future cash flows of each reporting unit. In assessing the recoverability of goodwill, we consider
historical results, current operating trends and results, and we make estimates and assumptions about premiums, medical cost trends, margins and discount rates based on our budgets, business plans, economic projections, anticipated future cash flows
and regulatory data. Each of these factors contains inherent uncertainties and management exercises substantial judgment and discretion in evaluating and applying these factors.
Although we believe we have sufficient current and historical information available to us to test for impairment, it is possible that
actual cash flows could differ from the estimated cash flows used in our impairment tests. We could also be required to evaluate the recoverability of goodwill prior to the annual assessment if we experience various triggering events, including
significant declines in margins or sustained and significant market capitalization declines. These types of events and the resulting analyses could result in goodwill impairment charges in the future.
36
Impairment charges, although non-cash in nature, could adversely affect our financial results in the periods of such charges. In addition, impairment charges may limit our ability to obtain
financing in the future.
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk.
|
As of September 30, 2011 and December 31, 2010, we had the following assets that may be sensitive to changes in interest rates (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
December 31,
|
|
Asset Class
|
|
2011
|
|
|
2010
|
|
Investment securities, available for sale
|
|
$
|
569,736
|
|
|
$
|
551,207
|
|
Restricted investments
|
|
|
28,886
|
|
|
|
29,136
|
|
We have not purchased any of our investments for trading purposes. Investment securities, which consist
primarily of debt securities, have been categorized as either available for sale or held to maturity. Held to maturity securities are those securities that the Company does not intend to sell, nor expect to be required to sell, prior to maturity.
Investment securities are classified as non-current assets based on the Companys intention to reinvest such assets upon sale or maturity and to not use such assets in current operations. These investment securities consist of highly liquid
government and corporate debt obligations, the majority of which mature in five years or less. The investments are subject to interest rate risk and will decrease in value if market rates increase. Because of the relatively short-term nature of our
investments and our portfolio mix of variable and fixed rate investments, however, we would not expect the value of these investments to decline significantly as a result of a sudden change in market interest rates. Moreover, because of our
intention not to sell these investments prior to their maturity, we would not expect foreseeable changes in interest rates to materially impair their carrying value. Restricted investments consist of deposits, certificates of deposit, government
securities, and mortgage backed securities, deposited or pledged to state departments of insurance in accordance with state rules and regulations. At September 30, 2011 and December 31, 2010, these restricted assets are recorded at
amortized cost and classified as long-term regardless of the contractual maturity date because of the restrictive nature of the states requirements.
Assuming a hypothetical and immediate 1% increase in market interest rates at September 30, 2011, the fair value of our fixed income investments would decrease by approximately $14.1 million.
Similarly, a 1% decrease in market interest rates at September 30, 2011 would result in an increase of the fair value of our investments of approximately $13.5 million. Unless we determined, however, that the increase in interest rates caused
more than a temporary impairment in our investments, or unless we were compelled by a currently unforeseen reason to sell securities, such a change should not affect our future earnings or cash flows.
We are subject to market risk from exposure to changes in interest rates based on our financing, investing, and cash management
activities. At September 30, 2011, we had $335.4 million of outstanding indebtedness, bearing interest at variable rates at specified margins above either the agent banks alternate base rate or its LIBOR rate, at our election. Holding
other variables constant, including levels of indebtedness, a 0.125% increase in interest rates would have an estimated negative impact on pre-tax earnings and cash flows for the next twelve month period of $251,000. Although changes in the
alternate base rate or the LIBOR rate would affect the costs of funds borrowed in the future, we believe the effect, if any, of reasonably possible near-term changes in interest rates on our consolidated financial position, results of operations or
cash flow would not be material.
Item 4.
|
Controls and Procedures.
|
Our senior management carried out the evaluation required by Rule 13a-15 under the Exchange Act, under the supervision and with the
participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act
(Disclosure Controls). Based on the evaluation, our senior management, including our CEO and CFO, concluded that, as of September 30, 2011, our Disclosure Controls were effective.
37
There has been no change in our internal control over financial reporting identified in
connection with the evaluation that occurred during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Our management, including our CEO and CFO, does not expect that our Disclosure Controls and internal controls will prevent all errors and
all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, with the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
38
PART II OTHER INFORMATION
Item 1.
|
Legal Proceedings.
|
We
are not currently involved in any pending legal proceeding that we believe is material to our financial condition or results of operations. We are, however, involved from time to time in routine legal matters and other claims incidental to our
business, including employment-related claims; claims relating to our health plans contractual relationships with providers, members, and vendors; and claims relating to marketing practices of sales agents and agencies that are employed by, or
independent contractors to, our health plans.
Notwithstanding the foregoing, the Company is aware of four purported class
action lawsuits related to the Proposed Merger that were filed in late October against the Company, its Chairman and Chief Executive Officer, each of its directors, and Cigna. Two of the lawsuits were filed in the Chancery Court for Williamson
County, Tennessee and two were filed in the Delaware Court of Chancery . The complaints are substantially similar and allege, among other things, (i) breach of fiduciary duty, (ii) that the Proposed Merger is the product of a flawed
process, and (iii) that the consideration to be paid to the Companys stockholders in the Proposed Merger is unfair and inadequate. The complaints further allege that Cigna aided and abetted the actions of the Companys officers and
directors in breaching their fiduciary duties to the Companys stockholders. Among other relief, the complaints seek an injunction preventing completion of the Proposed Merger. The Company believes that these lawsuits are without merit and
plans to defend them vigorously. There can be no assurance that additional lawsuits arising out of or relating to the Proposed Merger will not be filed in the future. If additional similar lawsuits are filed or the pleadings referenced above are
amended, the Company does not intend to announce the filing of any similar suits or amendments unless they contain allegations that are substantially distinct from those made in the pending actions.
Reference
is made to the risks and uncertainties previously reported and described under the caption Part I Item 1A. Risk Factors in the 2010 Form 10-K, the occurrence of any of which could materially and adversely affect our business,
prospects, financial condition, and operating results. There have not been any material changes to the risk factors previously reported and described in the 2010 Form 10-K other than as set forth below.
Failure To Complete the Proposed Merger Could Negatively Affect Us.
On October 24, 2011, we entered into the Merger Agreement with Cigna and its indirect wholly-owned subsidiary, pursuant to which
Merger Sub will be merged with and into the Company, with the Company surviving the merger as an indirect wholly-owned subsidiary of Cigna. There is no assurance that our stockholders will approve the adoption of the Merger Agreement, and there is
no assurance that the other conditions to the completion of the Proposed Merger will be satisfied. In connection with the Proposed Merger, we and our stockholders will be subject to several risks, including the following:
|
|
|
the current market price of our common stock reflects a market assumption that the Proposed Merger will occur, and a failure to complete the Proposed
Merger could result in a decline in the market price of our common stock;
|
|
|
|
certain costs relating to the Proposed Merger, such as legal and accounting fees, are payable by us whether or not the Proposed Merger is completed,
and we could incur unexpected additional costs in connection with the Proposed Merger;
|
|
|
|
upon termination of the Merger Agreement under certain circumstances, the Company would be required to pay Cigna a termination fee of $115 million,
which could adversely affect our financial results;
|
|
|
|
the Company may be unable to obtain the approvals required to complete the Proposed Merger;
|
39
|
|
|
there may be substantial disruption to our business and a distraction of our management and employees from day-to-day operations because matters
related to the Proposed Merger may require substantial commitments of their time and resources, which could adversely affect our operations and financial results;
|
|
|
|
pending the closing of the Proposed Merger, the Merger Agreement restricts the Company from engaging in certain actions without Cignas consent,
which could prevent us from pursuing business opportunities that may arise prior to the closing of the Proposed Merger, and the Company will be subject to business uncertainties that could adversely affect our operations and financial results;
|
|
|
|
if the Merger Agreement is not adopted by our stockholders, or if the Proposed Merger is not consummated for any other reason, there can be no
assurance that any other transaction acceptable to us will be offered or that our business, prospects or results of operations will not be adversely affected;
|
|
|
|
the length of time necessary to consummate the Proposed Merger may be longer than anticipated;
|
|
|
|
uncertainty about the effect of the Proposed Merger may adversely affect our relationships with our employees, physicians, providers, suppliers, and
other persons with whom we have business relationships; and
|
|
|
|
we are aware of a number of lawsuits that have been filed against us as a result of the announcement of the Proposed Merger and there may be additional
lawsuits filed against us relating to the Proposed Merger, and an adverse judgment in such lawsuits may increase the costs relating to the Proposed Merger or prevent the Proposed Merger from becoming effective or from becoming effective within the
expected timeframe.
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds.
|
Issuer Purchases of Equity Securities
During the quarter ended
September 30, 2011, the Company repurchased the following shares of its common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number of
Shares Purchased
|
|
|
Average Price Paid
per Share ($)
|
|
|
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or
Programs
|
|
|
Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under
the Plans
or
Programs ($)
|
|
07/01/11 07/31/11
|
|
|
166
|
|
|
|
45.27
|
|
|
|
|
|
|
|
|
|
08/01/11 08/31/11
|
|
|
642
|
|
|
|
36.31
|
|
|
|
|
|
|
|
|
|
09/01/11 09/30/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
808
|
|
|
|
38.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares reflected as purchased in the table above are shares withheld by the Company to satisfy the
payment of tax obligations related to the vesting of shares of restricted stock.
Our ability to purchase common stock and to
pay cash dividends is limited by our credit agreement. As a holding company, our ability to repurchase common stock and to pay cash dividends is also dependent on the availability of cash dividends from our regulated insurance subsidiaries, which
are restricted by the laws of the states in which we operate, as well as limitations under our credit agreement. In addition, under the Merger Agreement, the Company is prohibited from repurchasing common stock generally and from paying dividends.
Item 3.
|
Defaults Upon Senior Securities.
|
Inapplicable.
40
Item 5.
|
Other Information.
|
Inapplicable.
See Exhibit
Index following signature page.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
HEALTHSPRING, INC.
|
|
|
|
|
Date: November 2, 2011
|
|
|
|
By:
|
|
/s/ K
AREY
L.
W
ITTY
|
|
|
|
|
|
|
Karey L. Witty
|
|
|
|
|
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
|
41
EXHIBIT INDEX
|
|
|
|
|
10.1
|
|
Form of Amended and Restated Executive Severance and Noncompetition Agreement
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31.1
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Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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32.2
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Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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101
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The following materials from HealthSpring, Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting
Language); (i) Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Condensed Consolidated Balance Sheets (Parenthetical) at September 30, 2011 and December 31,2010, (iii) Condensed Consolidated Statements of
Income for the three and nine months ended September 30, 2011 and 2010, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, and (v) Notes to Condensed Consolidated Financial
statements*.
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*
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Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for
purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.
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