R
|
Quarterly
Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of
1934
|
¨
|
Transition
Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
Act Of
1934
|
|
|
|
Nevada
|
|
88-0200415
|
(State
or Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
2724
North Tenaya Way, Las Vegas, NV
|
|
89128
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
Large
accelerated filer R
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Part
I.
Financial Information
|
Page
No.
|
1
|
|
2
|
|
3
|
|
4
|
|
5-16
|
|
17-29
|
|
30
|
|
30
|
|
|
|
Part
II. Other Information
|
|
31
|
|
32
|
|
32-33
|
|
33
|
|
33
|
|
33
|
|
33
|
|
34
|
September
30, 2006
|
December
31, 2005
|
||||||
Assets
|
|||||||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$
|
77,925
|
$
|
88,059
|
|||
Investments
|
243,332
|
281,250
|
|||||
Accounts
receivable (less allowance for doubtful accounts: 2006 - $4,920;
2005 -
$5,792)
|
26,445
|
14,501
|
|||||
Current
portion of deferred tax asset
|
26,092
|
23,949
|
|||||
Prepaid
expenses and other current assets
|
81,688
|
30,596
|
|||||
Total
current assets
|
455,482
|
438,355
|
|||||
Property
and equipment, net
|
72,001
|
71,357
|
|||||
Restricted
cash and investments
|
19,311
|
18,252
|
|||||
Goodwill
(less accumulated amortization: 2006 and 2005 - $6,972)
|
14,782
|
14,782
|
|||||
Deferred
tax asset (less current portion)
|
14,354
|
13,266
|
|||||
Note
receivable (less valuation allowance: 2006 and 2005 -
$15,000)
|
47,000
|
47,000
|
|||||
Other
assets
|
95,187
|
65,834
|
|||||
Total
assets
|
$
|
718,117
|
$
|
668,846
|
|||
Liabilities
and stockholders’ equity
|
|||||||
Current
liabilities:
|
|||||||
Accrued
and other current liabilities
|
$
|
73,078
|
$
|
58,238
|
|||
Trade
accounts payable
|
2,165
|
2,347
|
|||||
Accrued
payroll and taxes
|
28,216
|
21,469
|
|||||
Medical
claims payable
|
157,263
|
135,867
|
|||||
Unearned
premium revenue
|
52,566
|
49,067
|
|||||
Current
portion of long-term debt
|
104
|
106
|
|||||
Total
current liabilities
|
313,392
|
267,094
|
|||||
Long-term
debt (less current portion)
|
43,729
|
52,307
|
|||||
Other
liabilities
|
64,057
|
65,193
|
|||||
Total
liabilities
|
421,178
|
384,594
|
|||||
Commitments
and contingencies
|
|||||||
Stockholders’
equity:
|
|||||||
Preferred
stock, $.01 par value, 1,000 shares authorized; none issued or
outstanding
|
¾
|
¾
|
|||||
Common
stock, $.005 par value, 120,000 shares authorized; 2006 - 70,689;
2005 -
69,136 shares issued
|
354
|
346
|
|||||
Treasury
stock: 2006 - 13,579; 2005 - 11,006 common stock shares
|
(485,852
|
)
|
(377,190
|
)
|
|||
Additional
paid-in capital
|
434,543
|
400,287
|
|||||
Accumulated
other comprehensive loss
|
(2,235
|
)
|
(1,750
|
)
|
|||
Retained
earnings
|
350,129
|
262,559
|
|||||
Total
stockholders’ equity
|
296,939
|
284,252
|
|||||
Total
liabilities and stockholders’ equity
|
$
|
718,117
|
$
|
668,846
|
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||
2006
|
2005
|
2006
|
2005
|
|||||||||||||
Operating
revenues:
|
||||||||||||||||
Medical
premiums
|
$
|
405,618
|
$
|
327,084
|
$
|
1,220,726
|
$
|
958,834
|
||||||||
Military
contract revenues
|
¾
|
11
|
¾
|
16,322
|
||||||||||||
Professional
fees
|
13,300
|
11,133
|
39,097
|
31,102
|
||||||||||||
Investment
and other revenues
|
11,079
|
9,215
|
32,860
|
25,071
|
||||||||||||
Total
|
429,997
|
347,443
|
1,292,683
|
1,031,329
|
||||||||||||
Operating
expenses:
|
||||||||||||||||
Medical
expenses
|
323,694
|
259,591
|
981,758
|
755,779
|
||||||||||||
Military
contract expenses
|
¾
|
(108
|
)
|
138
|
2,265
|
|||||||||||
General
and administrative expenses
|
51,291
|
43,451
|
152,914
|
127,082
|
||||||||||||
Total
|
374,985
|
302,934
|
1,134,810
|
885,126
|
||||||||||||
Operating
income
|
55,012
|
44,509
|
157,873
|
146,203
|
||||||||||||
Interest
expense
|
(1,015
|
)
|
(1,991
|
)
|
(2,793
|
)
|
(7,971
|
)
|
||||||||
Other
income (expense), net
|
14
|
427
|
(10
|
)
|
828
|
|||||||||||
Income
before income taxes
|
54,011
|
42,945
|
155,070
|
139,060
|
||||||||||||
Provision
for income taxes
|
(19,082
|
)
|
(14,503
|
)
|
(53,936
|
)
|
(47,377
|
)
|
||||||||
Net
income
|
$
|
34,929
|
$
|
28,442
|
$
|
101,134
|
$
|
91,683
|
||||||||
Net
income per common share
|
$
|
0.62
|
$
|
0.50
|
$
|
1.78
|
$
|
1.67
|
||||||||
Net
income per common share assuming dilution
|
$
|
0.56
|
$
|
0.43
|
$
|
1.61
|
$
|
1.38
|
Common
Stock
|
In
Treasury
|
Additional
Paid-in
|
Deferred
Compen-
|
Accumulated
Other
Comprehensive
|
Retained
|
Total
Stock-
holders’
|
||||||||||||||||||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
sation
|
Loss
|
Earnings
|
Equity
|
||||||||||||||||||
Balance,
January 1, 2005
|
61,954
|
$
|
310
|
9,192
|
$
|
(237,876
|
)
|
$
|
286,439
|
$
|
(288
|
)
|
$
|
(245
|
)
|
$
|
153,357
|
$
|
201,697
|
|||||||||
Common
stock issued in connection with stock plans
|
1,822
|
9
|
(317
|
)
|
8,731
|
21,875
|
(5,248
|
)
|
¾
|
(5,771
|
)
|
19,596
|
||||||||||||||||
Stock-based
compensation expense
|
¾
|
¾
|
¾
|
¾
|
1,080
|
3,797
|
¾
|
¾
|
4,877
|
|||||||||||||||||||
Common
stock issued in connection with conversion of debentures
|
6,890
|
34
|
¾
|
¾
|
62,966
|
¾
|
¾
|
¾
|
63,000
|
|||||||||||||||||||
Tax
benefits from share-based payment arrangements
|
¾
|
¾
|
¾
|
¾
|
17,470
|
¾
|
¾
|
¾
|
17,470
|
|||||||||||||||||||
Repurchase
of common stock shares
|
¾
|
¾
|
2,186
|
(144,421
|
)
|
¾
|
¾
|
¾
|
¾
|
(144,421
|
)
|
|||||||||||||||||
Treasury
shares not included in stock dividend
|
(1,869
|
)
|
(9
|
)
|
¾
|
¾
|
¾
|
¾
|
¾
|
¾
|
(9
|
)
|
||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||
Net
income
|
¾
|
¾
|
¾
|
¾
|
¾
|
¾
|
¾
|
91,683
|
91,683
|
|||||||||||||||||||
Other
comprehensive income:
|
||||||||||||||||||||||||||||
Net
unrealized holding loss on
available-for-sale
investments ($231 pretax)
|
¾
|
¾
|
¾
|
¾
|
¾
|
¾
|
(1,059
|
)
|
¾
|
(1,059
|
)
|
|||||||||||||||||
Total
comprehensive income
|
¾
|
¾
|
¾
|
¾
|
¾
|
¾
|
(1,059
|
)
|
91,683
|
90,624
|
||||||||||||||||||
Balance,
September 30, 2005
|
68,797
|
$
|
344
|
11,061
|
$
|
(373,566
|
)
|
$ |
389,830
|
$ |
(1,739
|
)
|
$ |
(1,304
|
)
|
$
|
239,269
|
$
|
252,834
|
|||||||||
Balance,
January 1, 2006
|
69,136
|
$
|
346
|
11,006
|
$
|
(377,190
|
)
|
$
|
400,287
|
$
|
¾
|
$
|
(1,750
|
)
|
$
|
262,559
|
$
|
284,252
|
||||||||||
Common
stock issued in connection with stock plans
|
624
|
3
|
(562
|
)
|
19,095
|
8,534
|
¾
|
¾
|
(13,569
|
)
|
14,063
|
|||||||||||||||||
Stock-based
compensation expense
|
¾
|
¾
|
(1
|
)
|
23
|
5,782
|
¾
|
¾
|
5
|
5,810
|
||||||||||||||||||
Common
stock issued in connection with conversion of debentures
|
929
|
5
|
¾
|
¾
|
8,495
|
¾
|
¾
|
¾
|
8,500
|
|||||||||||||||||||
Excess
tax benefits from share-based payment arrangements
|
¾
|
¾
|
¾
|
¾
|
11,445
|
¾
|
¾
|
¾
|
11,445
|
|||||||||||||||||||
Repurchase
of common stock shares
|
¾
|
¾
|
3,136
|
(127,780
|
)
|
¾
|
¾
|
¾
|
¾
|
(127,780
|
)
|
|||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||
Net
income
|
¾
|
¾
|
¾
|
¾
|
¾
|
¾
|
¾
|
101,134
|
101,134
|
|||||||||||||||||||
Other
comprehensive income:
|
||||||||||||||||||||||||||||
Net
unrealized holding loss on available-for-sale investments ($746
pretax)
|
¾
|
¾
|
¾
|
¾
|
¾
|
¾
|
(485
|
)
|
¾
|
(485
|
)
|
|||||||||||||||||
Total
comprehensive income
|
¾
|
¾
|
¾
|
¾
|
¾
|
¾
|
(485
|
)
|
101,134
|
100,649
|
||||||||||||||||||
Balance,
September 30, 2006
|
70,689
|
$
|
354
|
13,579
|
$
|
(485,852
|
)
|
$
|
434,543
|
$
|
¾
|
$
|
(2,235
|
)
|
$
|
350,129
|
$
|
296,939
|
|
Nine
Months Ended September 30,
|
||||||
2006
|
2005
|
||||||
Cash
flows from operating activities:
|
|||||||
Net
income
|
$
|
101,134
|
$
|
91,683
|
|||
Adjustments
to reconcile net income to net cash provided
by operating activities:
|
|||||||
Depreciation
|
12,327
|
11,167
|
|||||
Stock-based
compensation expense
|
5,810
|
4,877
|
|||||
Excess
tax benefits from share-based payment arrangements
|
(11,445
|
)
|
¾
|
||||
Provision
for doubtful accounts
|
1,796
|
1,910
|
|||||
Loss
on property and equipment dispositions
|
213
|
131
|
|||||
Change
in operating assets and liabilities:
|
|||||||
Military
accounts receivable
|
21
|
24,487
|
|||||
Deferred
tax asset
|
8,459
|
13,801
|
|||||
Other
current assets
|
(64,769
|
)
|
2,521
|
||||
Other
assets
|
(4,270
|
)
|
(323
|
)
|
|||
Accrued
payroll and taxes
|
6,747
|
(4,141
|
)
|
||||
Medical
claims payable
|
21,396
|
7,695
|
|||||
Military
health care payable
|
¾
|
(17,061
|
)
|
||||
Other
current liabilities
|
14,121
|
(19,928
|
)
|
||||
Unearned
premium revenue
|
3,499
|
40,511
|
|||||
Other
liabilities
|
(1,136
|
)
|
(4,385
|
)
|
|||
Net
cash provided by operating activities
|
93,903
|
152,945
|
|||||
Cash
flows from investing activities:
|
|||||||
Capital
expenditures, net of dispositions
|
(13,183
|
)
|
(8,566
|
)
|
|||
Purchase
of investments, net of proceeds
|
11,500
|
(138,572
|
)
|
||||
Net
cash used for investing activities
|
(1,683
|
)
|
(147,138
|
)
|
|||
Cash
flows from financing activities:
|
|||||||
Payments
on debt and capital leases , net of proceeds
|
(82
|
)
|
(84
|
)
|
|||
Purchase
of treasury stock
|
(127,780
|
)
|
(144,421
|
)
|
|||
Excess
tax benefits from share-based payment arrangements
|
11,445
|
¾
|
|||||
Exercise
of stock in connection with stock plans
|
14,063
|
19,596
|
|||||
Net
cash used for financing activities
|
(102,354
|
)
|
(124,909
|
)
|
|||
Net
decrease in cash and cash equivalents
|
(10,134
|
)
|
(119,102
|
)
|
|||
Cash
and cash equivalents at beginning of period
|
88,059
|
207,619
|
|||||
Cash
and cash equivalents at end of period
|
$
|
77,925
|
$
|
88,517
|
|||
Supplemental
condensed consolidated statement of cash flows
information:
|
|||||||
Cash
paid during the period for interest
|
$
|
(2,672
|
)
|
$
|
(8,533
|
)
|
|
Net
cash paid during the period for income taxes
|
(37,398
|
)
|
(33,410
|
)
|
|||
Non-cash
investing and financing activities:
|
|||||||
Senior
convertible debentures converted into Sierra common stock
|
8,500
|
63,000
|
|||||
Additions
to capital leases
|
¾
|
19
|
Three
Months Ended
|
Nine
Months Ended
|
||||||
September
30, 2006
|
|||||||
(In
thousands)
|
|||||||
Medical
expenses
|
$
|
250
|
$
|
671
|
|||
General
and administrative expenses
|
2,518
|
5,139
|
|||||
Stock-based
compensation expense before income taxes
|
2,768
|
5,810
|
|||||
Income
tax benefit
|
(969
|
)
|
(2,034
|
)
|
|||
Total
stock-based compensation expense after income taxes
|
$
|
1,799
|
$
|
3,776
|
Three
Months Ended September 30, 2006
|
||||||||||
Under
APB
25
|
As
Reported Under
SFAS
123R
|
Difference
|
||||||||
(In
thousands, except per share data)
|
||||||||||
Operating
income
|
$
|
55,999
|
$
|
55,012
|
$
|
(987
|
)
|
|||
Income
before income taxes
|
$
|
54,998
|
$
|
54,011
|
$
|
(987
|
)
|
|||
Net
income
|
$
|
35,571
|
$
|
34,929
|
$
|
(642
|
)
|
|||
Net
income per share
|
$
|
0.63
|
$
|
0.62
|
$
|
(0.01
|
)
|
|||
Net
income per share assuming dilution
|
0.57
|
0.56
|
(0.01
|
)
|
||||||
Cash
flow from operating activities
|
$
|
(45,009
|
)
|
$
|
(46,194
|
)
|
$
|
(1,185
|
)
|
|
Cash
flow from financing activities
|
(16,685
|
)
|
(15,500
|
)
|
1,185
|
Nine
Months Ended September 30, 2006
|
||||||||||
Under
APB
25
|
As
Reported Under
SFAS
123R
|
Difference
|
||||||||
|
(In
thousands, except per share data)
|
|||||||||
Operating
income
|
$
|
161,645
|
$
|
157,873
|
$
|
(3,772
|
)
|
|||
Income
before income taxes
|
$
|
158,842
|
$
|
155,070
|
$
|
(3,772
|
)
|
|||
Net
income
|
$
|
103,586
|
$
|
101,134
|
$
|
(2,452
|
)
|
|||
Net
income per share
|
$
|
1.82
|
$
|
1.78
|
$
|
(0.04
|
)
|
|||
Net
income per share assuming dilution
|
1.64
|
1.61
|
(0.03
|
)
|
||||||
Cash
flow from operating activities
|
$
|
105,348
|
$
|
93,903
|
$
|
(11,445
|
)
|
|||
Cash
flow from financing activities
|
(113,799
|
)
|
(102,354
|
)
|
11,445
|
Three
Months Ended
|
Nine
Months Ended
|
||||||
September
30, 2005
|
|||||||
(In
thousands, except per share data)
|
|||||||
Net
income, as reported
|
$
|
28,442
|
$
|
91,683
|
|||
Less:
total stock-based employee compensation expense determined
under fair value based methods for all awards,
net of tax
|
(1,420
|
)
|
(4,957
|
)
|
|||
Pro
forma net income
|
$
|
27,022
|
$
|
86,726
|
|||
Net
income per share, as reported
|
$
|
0.50
|
$
|
1.67
|
|||
Pro
forma net income, per share
|
0.48
|
1.58
|
|||||
Net
income per share assuming dilution, as reported
|
$
|
0.43
|
$
|
1.38
|
|||
Pro
forma net income, per share
|
0.41
|
1.31
|
Stock
Options
|
|||||||||||||
Three
Months Ended
September 30,
|
Nine
Months Ended September 30,
|
||||||||||||
2006
(1)
|
2005
(1)
|
|
2006
(1)
|
|
2005
|
||||||||
Average
expected term (years)
|
¾
|
¾
|
¾
|
2.16
|
|||||||||
Risk-free
interest rates
|
¾
|
¾
|
¾
|
3.68
|
%
|
||||||||
Expected
volatility
|
¾
|
¾
|
¾
|
50.60
|
%
|
||||||||
Dividend
yield
|
¾
|
¾
|
¾
|
¾
|
|||||||||
Weighted-average
fair value at grant date
|
¾
|
¾
|
¾
|
$
|
15.23
|
(1)
|
No
stock options were granted during the
period.
|
Purchase
Plan
|
|||||||||||||
Three
Months Ended
September 30,
|
Nine
Months Ended September 30,
|
||||||||||||
|
2006
(1)
|
2005
(1)
|
|
2006
|
2005
|
||||||||
Average
expected term (years)
|
¾
|
¾
|
.50
|
.50
|
|||||||||
Risk-free
interest rates
|
¾
|
¾
|
4.32
|
%
|
2.58
|
%
|
|||||||
Expected
volatility
|
¾
|
¾
|
34.70
|
%
|
27.76
|
%
|
|||||||
Dividend
yield
|
¾
|
¾
|
¾
|
¾
|
|||||||||
Weighted-average
fair value at grant date
|
¾
|
¾
|
$
|
9.95
|
$
|
6.30
|
(1)
|
No
shares were granted under the Purchase Plan during the
period.
|
Weighted
|
|||||||||||||
Number
|
Weighted
|
Average
|
Aggregate
|
||||||||||
Of
|
Average
|
Contractual
Life
|
Intrinsic
|
||||||||||
Shares
|
Exercise
Price
|
Remaining
|
Value
|
||||||||||
(In
thousands)
|
(In
years)
|
|
(In
thousands)
|
|
|||||||||
Outstanding,
January 1, 2006
|
2,844
|
$
|
11.09
|
||||||||||
Granted
|
¾
|
¾
|
|||||||||||
Exercised
|
(966
|
)
|
8.03
|
||||||||||
Canceled
|
(50
|
)
|
9.04
|
||||||||||
Outstanding,
September 30, 2006
|
1,828
|
12.78
|
5.82
|
$
|
45,802
|
||||||||
Exercisable
at September 30, 2006
|
659
|
$
|
12.69
|
5.28
|
$
|
16,573
|
Number
|
Weighted-Average
|
||||||
Of
|
Grant
Date
|
||||||
Shares
|
Fair
Value
|
||||||
|
(In
thousands)
|
||||||
Nonvested
shares, January 1, 2006 (1)
|
1,558
|
$
|
6.44
|
||||
Granted
|
¾
|
¾
|
|||||
Vested
|
(523
|
)
|
5.92
|
||||
Canceled
|
(33
|
)
|
5.72
|
||||
Nonvested
shares, September 30, 2006 (1)
|
1,002
|
$
|
6.74
|
(1)
|
Excludes
172,000 and 167,000 shares at January 1, 2006 and September 30, 2006,
respectively, which vested in 2005, but are not exercisable until
2008.
|
Number
|
Aggregate
|
||||||
Of
|
Intrinsic
|
||||||
Shares
|
Value
|
||||||
|
(In
thousands)
|
|
|||||
Outstanding,
January 1, 2006
|
¾
|
||||||
Granted
|
234
|
||||||
Vested
|
¾
|
||||||
Canceled
|
¾
|
||||||
Outstanding, September
30, 2006(1)(2)
|
234
|
$
|
8,855
|
(1)
|
Exercise
price for all Units is $0.00. (2) Does not include
406,000
shares that have vested but have not
settled.
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||
2006
|
2005
|
2006
|
2005
|
|||||||||
(In
thousands)
|
||||||||||||
Components
of net periodic benefit cost:
|
||||||||||||
Service
cost
|
$
|
126
|
$
|
94
|
$
|
378
|
$
|
283
|
||||
Interest
cost
|
399
|
321
|
1,197
|
962
|
||||||||
Amortization
of prior service credits
|
302
|
303
|
908
|
908
|
||||||||
Recognized
actuarial loss
|
32
|
¾
|
96
|
¾
|
||||||||
Net
periodic benefit cost
|
$
|
859
|
$
|
718
|
$
|
2,579
|
$
|
2,153
|
Three
Months Ended September
30,
|
Nine
Months Ended September 30,
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
(In
thousands, except per share data)
|
|||||||||||||
Basic
income per share:
|
|||||||||||||
Net
income
|
$
|
34,929
|
$
|
28,442
|
$
|
101,134
|
$
|
91,683
|
|||||
Weighted
average common shares outstanding
|
56,332
|
56,770
|
56,706
|
54,818
|
|||||||||
Net
income per common share
|
$
|
0.62
|
$
|
0.50
|
$
|
1.78
|
$
|
1.67
|
|||||
Diluted
income per share:
|
|||||||||||||
Net
income
|
$
|
34,929
|
$
|
28,442
|
$
|
101,134
|
$
|
91,683
|
|||||
Interest
expense on Sierra debentures, net of tax
|
185
|
239
|
562
|
1,066
|
|||||||||
Income
for purposes of computing diluted net income per share
|
$
|
35,114
|
$
|
28,681
|
$
|
101,696
|
$
|
92,749
|
|||||
Weighted
average common shares outstanding
|
56,332
|
56,770
|
56,706
|
54,818
|
|||||||||
Dilutive
options and restricted shares outstanding
|
807
|
1,676
|
943
|
2,020
|
|||||||||
Dilutive
impact of conversion of Sierra debentures
|
5,517
|
7,798
|
5,598
|
10,554
|
|||||||||
Weighted
average common shares outstanding assuming dilution
|
62,656
|
66,244
|
63,247
|
67,392
|
|||||||||
Net
income per common share assuming dilution
|
$
|
0.56
|
$
|
0.43
|
$
|
1.61
|
$
|
1.38
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
(In
thousands)
|
|||||||||||||
Net
income
|
$
|
34,929
|
$
|
28,442
|
$
|
101,134
|
$
|
91,683
|
|||||
Change
in net unrealized holding gain (loss) on available-for-sale
investments
|
1,640
|
(909
|
)
|
(485
|
)
|
(1,059
|
)
|
||||||
Comprehensive
income
|
$
|
36,569
|
$
|
27,533
|
$
|
100,649
|
$
|
90,624
|
Managed
Care And Corporate Operations
|
Military
Health Services Operations
|
Total
|
||||||||
(In
thousands)
|
||||||||||
Three
months ended September 30, 2006
|
||||||||||
Medical
premiums
|
$
|
405,618
|
$
|
¾
|
$
|
405,618
|
||||
Professional
fees
|
13,300
|
¾
|
13,300
|
|||||||
Investment
and other revenues
|
11,075
|
4
|
11,079
|
|||||||
Total
revenue
|
$
|
429,993
|
$
|
4
|
$
|
429,997
|
||||
Segment
operating profit
|
$
|
55,008
|
$
|
4
|
$
|
55,012
|
||||
Interest
expense
|
(1,015
|
)
|
¾
|
(1,015
|
)
|
|||||
Other
income (expense), net
|
14
|
¾
|
14
|
|||||||
Income
before income taxes
|
$
|
54,007
|
$
|
4
|
$
|
54,011
|
||||
Three
months ended September 30, 2005
|
||||||||||
Medical
premiums
|
$
|
327,084
|
$
|
¾
|
$
|
327,084
|
||||
Military
contract revenues
|
¾
|
11
|
11
|
|||||||
Professional
fees
|
11,133
|
¾
|
11,133
|
|||||||
Investment
and other revenues
|
9,171
|
44
|
9,215
|
|||||||
Total
revenue
|
$
|
347,388
|
$
|
55
|
$
|
347,443
|
||||
Segment
operating profit
|
$
|
44,346
|
$
|
163
|
$
|
44,509
|
||||
Interest
expense
|
(1,991
|
)
|
¾
|
(1,991
|
)
|
|||||
Other
income (expense), net
|
408
|
19
|
427
|
|||||||
Income
before income taxes
|
$
|
42,763
|
$
|
182
|
$
|
42,945
|
||||
Nine
months ended September 30, 2006
|
||||||||||
Medical
premiums
|
$
|
1,220,726
|
$
|
¾
|
$
|
1,220,726
|
||||
Professional
fees
|
39,097
|
¾
|
39,097
|
|||||||
Investment
and other revenues
|
32,812
|
48
|
32,860
|
|||||||
Total
revenue
|
$
|
1,292,635
|
$
|
48
|
$
|
1,292,683
|
||||
Segment
operating profit (loss)
|
$
|
157,963
|
$
|
(90
|
)
|
$
|
157,873
|
|||
Interest
expense
|
(2,793
|
)
|
¾
|
(2,793
|
)
|
|||||
Other
income (expense), net
|
(10
|
)
|
¾
|
(10
|
)
|
|||||
Income
(loss) before income taxes
|
$
|
155,160
|
$
|
(90
|
)
|
$
|
155,070
|
|||
Nine
months ended September 30, 2005
|
||||||||||
Medical
premiums
|
$
|
958,834
|
$
|
¾
|
$
|
958,834
|
||||
Military
contract revenues
|
¾
|
16,322
|
16,322
|
|||||||
Professional
fees
|
31,102
|
¾
|
31,102
|
|||||||
Investment
and other revenues
|
24,551
|
520
|
25,071
|
|||||||
Total
revenue
|
$
|
1,014,487
|
$
|
16,842
|
$
|
1,031,329
|
||||
Segment
operating profit
|
$
|
131,626
|
$
|
14,577
|
$
|
146,203
|
||||
Interest
expense
|
(7,961
|
)
|
(10
|
)
|
(7,971
|
)
|
||||
Other
income (expense), net
|
1,136
|
(308
|
)
|
828
|
||||||
Income
before income taxes
|
$
|
124,801
|
$
|
14,259
|
$
|
139,060
|
Three
Months Ended
September
30,
|
Percent
Of Revenue
Three
Months Ended
September
30,
|
Increase
(Decrease)
|
|||||||||||||||||
2006
|
2005
|
2006
|
2005
|
2006
vs. 2005
|
|||||||||||||||
(In
thousands, except percentages, per share and
membership)
|
|||||||||||||||||||
Operating
revenues:
|
|||||||||||||||||||
Medical
premiums
|
$
|
405,618
|
$
|
327,084
|
94.3
|
%
|
94.1
|
%
|
$
|
78,534
|
24.0
|
%
|
|||||||
Military
contract revenues
|
¾
|
11
|
¾
|
¾
|
(11
|
)
|
(100.0
|
)
|
|||||||||||
Professional
fees
|
13,300
|
11,133
|
3.1
|
3.2
|
2,167
|
19.5
|
|||||||||||||
Investment
and other revenues
|
11,079
|
9,215
|
2.6
|
2.7
|
1,864
|
20.2
|
|||||||||||||
Total
|
429,997
|
347,443
|
100.0
|
100.0
|
82,554
|
23.8
|
|||||||||||||
Operating
expenses:
|
|||||||||||||||||||
Medical
expenses
|
323,694
|
259,591
|
75.3
|
74.7
|
64,103
|
24.7
|
|||||||||||||
Medical
care ratio
|
77.3
|
%
|
76.8
|
%
|
0.5
|
||||||||||||||
Military
contract expenses
|
¾
|
(108
|
)
|
¾
|
¾
|
108
|
(100.0
|
)
|
|||||||||||
General
and administrative expenses
|
51,291
|
43,451
|
11.9
|
12.5
|
7,840
|
18.0
|
|||||||||||||
Total
|
374,985
|
302,934
|
87.2
|
87.2
|
72,051
|
23.8
|
|||||||||||||
Operating
income
|
55,012
|
44,509
|
12.8
|
12.8
|
10,503
|
23.6
|
|||||||||||||
Interest
expense
|
(1,015
|
)
|
(1,991
|
)
|
(0.2
|
)
|
(0.5
|
)
|
976
|
(49.0
|
)
|
||||||||
Other
income (expense), net
|
14
|
427
|
¾
|
0.1
|
(413
|
)
|
(96.7
|
)
|
|||||||||||
Income
before income taxes
|
54,011
|
42,945
|
12.6
|
12.4
|
11,066
|
25.8
|
|||||||||||||
Provision
for income taxes
|
(19,082
|
)
|
(14,503
|
)
|
(4.5
|
)
|
(4.2
|
)
|
(4,579
|
)
|
31.6
|
||||||||
Tax
rate
|
35.3
|
%
|
33.8
|
%
|
1.5
|
||||||||||||||
Net
income
|
$
|
34,929
|
$
|
28,442
|
8.1
|
%
|
8.2
|
%
|
$
|
6,487
|
22.8
|
%
|
|||||||
Net
income per common share assuming dilution
|
$
|
0.56
|
$
|
0.43
|
$
|
0.13
|
30.2
|
%
|
|||||||||||
Membership
|
|||||||||||||||||||
HMO:
|
|||||||||||||||||||
Commercial
|
273,600
|
251,000
|
22,600
|
9.0
|
%
|
||||||||||||||
Medicare
|
57,000
|
55,200
|
1,800
|
3.3
|
|||||||||||||||
Medicaid
|
57,000
|
53,300
|
3,700
|
6.9
|
|||||||||||||||
Subtotal
HMO
|
387,600
|
359,500
|
28,100
|
7.8
|
|||||||||||||||
PPO:
|
|||||||||||||||||||
Commercial
|
31,300
|
27,000
|
4,300
|
15.9
|
|||||||||||||||
Medicare
|
1,700
|
¾
|
1,700
|
100.0
|
|||||||||||||||
Subtotal
PPO
|
33,000
|
27,000
|
6,000
|
22.2
|
|||||||||||||||
Medicare
Part D
|
183,300
|
¾
|
183,300
|
100.0
|
|||||||||||||||
Medicare
supplement
|
13,700
|
15,900
|
(2,200
|
)
|
(13.8
|
)
|
|||||||||||||
Administrative
services
|
221,100
|
202,000
|
19,100
|
9.5
|
|||||||||||||||
Total
membership
|
838,700
|
604,400
|
234,300
|
38.8
|
%
|
||||||||||||||
Member
months
|
|||||||||||||||||||
HMO:
|
|||||||||||||||||||
Commercial
|
810,900
|
745,700
|
65,200
|
8.7
|
%
|
||||||||||||||
Medicare
|
171,000
|
165,000
|
6,000
|
3.6
|
|||||||||||||||
Medicaid
|
171,600
|
159,000
|
12,600
|
7.9
|
Nine
Months Ended
September
30,
|
Percent
Of Revenue
Nine
Months Ended
September
30,
|
Increase
(Decrease)
|
|||||||||||||||||
2006
|
2005
|
2006
|
2005
|
2006
vs. 2005
|
|||||||||||||||
(In
thousands, except percentages, per share and
membership)
|
|||||||||||||||||||
Operating
revenues:
|
|||||||||||||||||||
Medical
premiums
|
$
|
1,220,726
|
$
|
958,834
|
94.4
|
%
|
93.0
|
%
|
$
|
261,892
|
27.3
|
%
|
|||||||
Military
contract revenues
|
¾
|
16,322
|
¾
|
1.6
|
(16,322
|
)
|
(100.0
|
)
|
|||||||||||
Professional
fees
|
39,097
|
31,102
|
3.0
|
3.0
|
7,995
|
25.7
|
|||||||||||||
Investment
and other revenues
|
32,860
|
25,071
|
2.6
|
2.4
|
7,789
|
31.1
|
|||||||||||||
Total
|
1,292,683
|
1,031,329
|
100.0
|
100.0
|
261,354
|
25.3
|
|||||||||||||
Operating
expenses:
|
|||||||||||||||||||
Medical
expenses
|
981,758
|
755,779
|
76.0
|
73.3
|
225,979
|
29.9
|
|||||||||||||
Medical
care ratio
|
77.9
|
%
|
76.3
|
%
|
1.6
|
||||||||||||||
Military
contract expenses
|
138
|
2,265
|
¾
|
0.2
|
(2,127
|
)
|
(93.9
|
)
|
|||||||||||
General
and administrative expenses
|
152,914
|
127,082
|
11.8
|
12.3
|
25,832
|
20.3
|
|||||||||||||
Total
|
1,134,810
|
885,126
|
87.8
|
85.8
|
249,684
|
28.2
|
|||||||||||||
Operating
income
|
157,873
|
146,203
|
12.2
|
14.2
|
11,670
|
8.0
|
|||||||||||||
Interest
expense
|
(2,793
|
)
|
(7,971
|
)
|
(0.2
|
)
|
(0.8
|
)
|
5,178
|
(65.0
|
)
|
||||||||
Other
income (expense), net
|
(10
|
)
|
828
|
¾
|
0.1
|
(838
|
)
|
(101.2
|
)
|
||||||||||
Income
before income taxes
|
155,070
|
139,060
|
12.0
|
13.5
|
16,010
|
11.5
|
|||||||||||||
Provision
for income taxes
|
(53,936
|
)
|
(47,377
|
)
|
(4.2
|
)
|
(4.6
|
)
|
(6,559
|
)
|
13.8
|
||||||||
Tax
rate
|
34.8
|
%
|
34.1
|
%
|
0.7
|
||||||||||||||
Net
income
|
$
|
101,134
|
$
|
91,683
|
7.8
|
%
|
8.9
|
%
|
$
|
9,451
|
10.3
|
%
|
|||||||
Net
income per common share assuming dilution
|
$
|
1.61
|
$
|
1.38
|
$
|
0.23
|
16.7
|
%
|
|||||||||||
Member
months
|
|||||||||||||||||||
HMO:
|
|||||||||||||||||||
Commercial
|
2,378,200
|
2,192,300
|
185,900
|
8.5
|
%
|
||||||||||||||
Medicare
|
509,700
|
489,600
|
20,100
|
4.1
|
|||||||||||||||
Medicaid
|
507,600
|
465,500
|
42,100
|
9.0
|
·
|
Total
operating revenues improved by 25.3%. This increase was primarily
driven
by a 27.3% increase in medical premiums due to our participation
in the
new Medicare Part D prescription drug program (PDP), an increase
in our
HMO membership and premium rate increases. Also contributing to the
improvement in operating revenues was a 31.1% increase in investment
and
other revenues, which increased due to an increase in yield during
2006
and higher average invested
balances.
|
·
|
HMO
membership increased 7.8% as a result of new accounts and in-case
growth.
|
·
|
Medical
expenses, as a percentage of medical premiums and professional fees,
or
medical care ratio, increased by 160 basis points as a result of
the much
higher medical care ratio related to the
PDP.
|
·
|
General
and administrative (G&A) expenses as a percentage of medical premiums
decreased to 12.5% in 2006 from 13.3% in 2005. G&A expenses increased
20.3% primarily due to PDP related expenses, higher employee compensation
related expenses, premium taxes, and brokers’ fees.
|
·
|
Operating
income from our managed care and corporate operations improved 20.0%
primarily driven by medical premium revenue growth from new members
and
premium rate increases. Our operating margin from our managed care
and
corporate operations, which is operating income divided by total
revenues,
decreased 80 basis points as a result of the lower operating margin
for
the PDP.
|
·
|
We
repurchased 3.1 million shares of our common stock during 2006. Our
weighted average common shares outstanding assuming dilution has
decreased
from 67.4 million in 2005 to 63.2 million in 2006.
|
·
|
Our
net income per common share assuming dilution increased
16.7%.
|
·
|
It
currently appears unlikely that we will extend our contract with
our
current primary southern Nevada contracted hospital group, HCA Inc.
(HCA).
Our current contract is scheduled to expire on December 31, 2006.
While we
are now engaged in an effort to move our HCA hospital days to other
contracted hospitals, there will be emergency situations that will
require
us to use one or more HCA hospitals in 2007. See Medical Expenses
below
for more details.
|
·
|
Cash
flows from operating activities decreased to $93.9 million from $152.9
during 2005. This decrease is mostly due to additional payments from
CMS
received in 2005 and not in 2006, see Medical Premiums below for
more
details, and negative cash flow of $39.1 million related to the PDP.
The
negative cash flow is primarily due to CMS reconciliation issues
and
insufficient funding from CMS for our reimbursable low-income subsidy
costs. These costs will be fully reimbursed after CMS performs their
year-end reconciliation. These decreases were partially offset by
an
increase in medical claims payable during 2006 compared to
2005.
|
CMS selected us to participate in the new voluntary PDP for our Medicare Advantage plans as well as a stand-alone program for 2006. We were also selected to participate in a local and regional Medicare Advantage PPO plans. Sierra Health and Life Insurance Company, Inc. (SHL) offers the stand-alone PDP, marketed under the brand name SierraRx, in eight regions covering Arizona, California, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and Washington. SHL has also been selected as a PDP sponsor in the same states for auto-enrolled Medicare and Medicaid beneficiaries. SierraRx covers a wide variety of preferred generic and brand name prescription drugs that are distributed through most major retail pharmacy chains and a large number of independent pharmacies. At September 30, 2006, we had 183,300 beneficiaries enrolled in the PDP, the | |
majority of which were auto-enrolled beneficiaries. |
Nine
Months Ended September 30,
|
|||||||
2006
|
2005
|
||||||
(In
thousands)
|
|||||||
Sources
of cash:
|
|||||||
Cash
provided by operating activities
|
$
|
93,903
|
$
|
152,945
|
|||
Exercise
of stock in connection with stock plans
|
14,063
|
19,596
|
|||||
Other
|
22,945
|
¾
|
|||||
Total
cash sources
|
130,911
|
172,541
|
|||||
Uses
of cash:
|
|||||||
Purchase
of investments, net of proceeds (1)
|
¾
|
(138,572
|
)
|
||||
Purchase
of treasury stock
|
(127,780
|
)
|
(144,421
|
)
|
|||
Other
|
(13,265
|
)
|
(8,650
|
)
|
|||
Total
cash uses
|
(141,045
|
)
|
(291,643
|
)
|
|||
Net
decrease in cash
|
$
|
(10,134
|
)
|
$
|
(119,102
|
)
|
A.M.
Best Company, Inc. (2)
|
Fitch
Ratings (1)
|
Standard
& Poor's Corp. (2)
|
|||||||||||||||||
Rating
|
Ranking
|
Rating
|
Ranking
|
Rating
|
Ranking
|
||||||||||||||
Financial
strength rating:
|
|||||||||||||||||||
HMO
and health and life insurance subsidiaries
|
B++
Very Good
|
5th
of 16
|
A-
Strong
|
7th
of 23
|
n/a
|
n/a
|
|||||||||||||
Issuer
credit ratings:
|
|||||||||||||||||||
HMO
and health and life insurance subsidiaries
|
bbb+
Very Good
|
8th
of 22
|
n/a
|
n/a
|
n/a
|
n/a
|
|||||||||||||
Parent
company
|
bb+
Speculative
|
11th
of 22
|
BBB
Good
|
9th
of 23
|
n/a
|
n/a
|
|||||||||||||
Counterparty
credit rating
|
n/a
|
n/a
|
n/a
|
n/a
|
BB+
Speculative
|
11th
of 22
|
|||||||||||||
Senior
convertible debentures
|
bb+
Speculative
|
11th
of 22
|
BBB-
Investment Grade
|
10th
of 23
|
BB+
Speculative
|
11th
of 22
|
(c)
|
Below,
is a summary of stock repurchases for the nine months ended September
30,
2006. See Note 5, Share Repurchases, of our Notes to Condensed
Consolidated Financial Statements for information regarding our stock
repurchase plan.
|
Period
|
Total
Number
Of
Shares
Repurchased
(1)
|
Average
Price
Paid
Per
Share
|
Total
Number
Of
Shares Purchased
As
Part Of Publicly
Announced
Plan
Or
Program
|
Approximate
Dollar
Value
Of Shares
That
May Yet Be
Purchased
Under
The
Plan (2)
|
||||
(In
thousands, except per share data)
|
||||||||
Beginning
approximate dollar value of shares that may yet be
purchased
|
$42,125
|
|||||||
January
1, 2006 - January 31, 2006
|
70
|
$39.30
|
70
|
39,392
|
||||
February
1, 2006 - February 28, 2006
|
1,010
|
40.35
|
1,010
|
73,675
|
||||
March
1, 2006 - March 31, 2006
|
1,121
|
42.49
|
1,121
|
26,056
|
||||
April
1, 2006 - April 30, 2006
|
633
|
39.97
|
633
|
75,764
|
||||
May
1, 2006 - May 31, 2006
|
290
|
39.15
|
290
|
64,427
|
||||
June
1, 2006 - June 30, 2006
|
¾
|
¾
|
¾
|
64,427
|
||||
July
1, 2006 - July 31, 2006
|
¾
|
¾
|
¾
|
64,427
|
||||
August
1, 2006 - August 31, 2006
|
¾
|
¾
|
¾
|
64,427
|
||||
September
1, 2006 - September 30, 2006
|
¾
|
¾
|
¾
|
64,427
|
(1)
|
Certain
repurchases were made pursuant to a 10b5-1
plan.
|
(2)
|
At
January 1, 2006, $42.1 million remained available for purchase under
previously approved plans. On February 16, 2006, April 20, 2006 and
October 19, 2006 our Board of Directors authorized $75.0 million
in
additional share repurchases for a total of $225.0 million. At
October 25, 2006, $139.4 million was available under the Board of
Directors’ authorized plan. The repurchase program has no stated
expiration date.
|
(d)
|
Below,
is a summary of 2¼% senior convertible debenture conversions for the nine
months ended September 30, 2006. See Note 4, Long-Term Debt, of our
Notes
to Condensed Consolidated Financial Statements for information regarding
our senior convertible debentures.
|
Period
|
Total
Dollar Value of Debentures Converted
|
Average
Price
Paid
Per
Debenture
|
Total
Dollar Value
Of
Debentures
Purchased
As
Part Of Publicly
Announced
Plan
Or
Program
|
Approximate
Dollar
Value
Of Debentures
That
May Yet Be
Purchased
Under
The
Plan
|
January
1, 2006 - January 31, 2006
|
$500,000
|
109.35
shares of common stock for each $1,000 principal amount of
debentures
|
none
|
none
|
February
1, 2006 - February 28, 2006
|
¾
|
¾
|
¾
|
¾
|
March
1, 2006 - March 31, 2006
|
¾
|
¾
|
¾
|
¾
|
April
1, 2006 - April 30, 2006
|
¾
|
¾
|
¾
|
¾
|
May
1, 2006 - May 31, 2006
|
¾
|
¾
|
¾
|
¾
|
June
1, 2006 - June 30, 2006
|
¾
|
¾
|
¾
|
¾
|
July
1, 2006 - July 31, 2006
|
¾
|
¾
|
¾
|
¾
|
August
1, 2006 - August 31, 2006
|
¾
|
¾
|
¾
|
¾
|
September
1, 2006 - September 30, 2006
|
8,000,000
|
109.35
shares of common stock for each $1,000 principal amount of
debentures
|
none
|
none
|
(10.1)
|
Sierra
Health Services, Inc. Supplemental Executive Retirement Plan III
effective
January 1, 2005.
|
(31.1)
|
Rule
13a - 14(a) or 15d - 14(a) Certification of Chief Executive Officer.
|
(31.2)
|
Rule
13a - 14(a) or 15d - 14(a) Certification of Chief Financial Officer.
|
(32.1)
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 of Principal Executive Officer.
|
(32.2)
|
Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 of Principal Financial Officer.
|
|
SIERRA
HEALTH SERVICES, INC.
Registrant
By:/s/
MARC R. BRIGGS
Marc
R. Briggs
Vice
President of Finance,
Chief
Accounting Officer
|