On July 30, 2010, Coventry Health Care Inc. (CVH) reported second-quarter income from continuing operations of $149.2 million or $1.01 per share, exceeding the Zacks Consensus Estimate of 57 cents. This also compares favorably with income of $67.7 million or 46 cents in the year-ago quarter. The improved showing was due to a continued emphasis on cost containment throughout the organization.
Coventry's income from continuing operations excludes the 18 cents per share impact of the Medicare Advantage Private Fee-for-Service (MA-PFFS) product and an unfavorable impact of $1.18 per share associated with the class action litigation in Louisiana announced on July 2. The Medicare offering stands discontinued from January 1, 2010.
Including the impact of these items, Coventry reported net income of $1.0 million or 1 cent per share. Net income in the prior-year quarter was $18.4 million or 12 cents per share, which included loss from discontinuing operations of $65.5 million or 44 cents and an income tax benefit of $16.2 million or 10 cents per share.
Behind the Headlines
Total operating revenues in the reported quarter declined 18.0% year over year to $2.87 billion. Managed care premiums decreased 19.7% to $2.57 billion, while revenues from management services increased marginally by 0.4% year over year to $297.6 million. Total membership in the quarter declined 6.3% to 4.89 million.
Coventry witnessed total operating expenses for the reported quarter of $2.86 billion, down 15.7% from the year-ago quarter. Medical costs, the major operating expense component, fell 26.5% to $2.03 billion. Coventry also posted cost of sales of $64.1 million, up 10.5% year over year, while selling, general and administrative expenses (SG&A expenses) declined 15.2% to $454.3 million and depreciation and amortization (D&A) dropped 2.8% to $34.0 million in the reported quarter.
Health Plan Commercial Group Risk: The Health Plan Commercial Risk membership for the reported quarter was 1,522,000, an increase of 45,000 from the prior-year quarter. Health Plan Commercial Risk premium yields in the reported quarter climbed to $313.92 per member per month (PMPM), up 4.7%. The Health Plan Commercial Group Risk MLR in the quarter came in at 78.3% as against 81.7% last year.
Medicare Advantage Coordinated Care Plans (MA-CCP): Coventry reported MA-CCP membership of 192,000, against 182,000 in the year-ago quarter. The Medicare Advantage MLR came in at 81.2%, compared to 90.4% a year ago.
Medicare Part D: Medicare Part D membership stood at 1.63 million at the end of the reported quarter, against 1.56 million in the year-ago quarter. The Medicare Part D MLR in the quarter came in at 90.7%, against 89.9% last year.
Medicaid Risk: The Medicaid membership at the end of the reported quarter stood at 413,000, which reflected an increase of 28,000 members from the year-ago quarter. The Medicaid MLR in the quarter came in at 84.2%, against 90.2% last year.
Evaluation of Balance Sheet and Capital Structure
Coventry ended the quarter with approximately $1.50 billion of cash and cash equivalents. Furthermore, Coventry exited the quarter with $1.6 billion in long-term debt.
As of June 30, 2010, Coventry had total assets of $8.19 billion and shareholders' equity of $3.84 billion.
Comparisons with Competitors
Rival company Unitedhealth Group, Inc. (UNH) reported second-quarter results on July 20, 2010. Income from continuing operations was 99 cents per share, substantially better than the Zacks Consensus Estimate of 75 cents. This also compares favorably with 73 cents in the year-ago period.
Aetna Inc. (AET) reported second-quarter profit from continuing operations of 75 cents per share on July 27, well ahead of the Zacks Consensus Estimate of 73 cents. Aetna reported a profit of 77 cents a year earlier.
WellPoint Inc. (WLP) reported second-quarter results on July 28 with income from continuing operations of $1.67 per share, surpassing the Zacks Consensus Estimate of $1.56 and earnings of $1.50 in the year-ago quarter.
Outlook for 2010
For fiscal 2010, Coventry expects to earn between $2.55 and $2.70 per share (excluding the impact from MA-PFFS in the reported quarter as well as any impact from MA-PFFS for the remainder of 2010). The previous guidance was in the range of $2.47 and $2.62 per share.
Coventry expects GAAP EPS guidance in the range of $1.72-$1.87 per share for fiscal 2010, against the previous guidance of $1.57-$1.72. These results include the unfavorable impact of litigation charge and favorable impact of MA-PFFS.
The company also raised its fiscal 2010 consolidated revenue guidance to a range of $11.25 billion - $11.50 billion. The medical loss ratio is expected between 81.3% and 81.9% in fiscal 2010.
Coventry anticipates cost of sales in the range of $245.0 million-$250.0 million, with SG&A expenses in the range of $1.92 billion-$1.96 billion, along with D&A between $137.0 million and $145.0 million in fiscal 2010.
Our Take
Coventry has a solid fundamental business and continues to grow with all seven core businesses performing at or above internal expectations. Further, we believe that Coventry is also growing on an acquisition front, as it is making continuous efforts to expand its footprint in Missouri and Arkansas.
On June 30, Coventry agreed to acquire Mercy Health Plans ("MHP") and its subsidiaries from Sisters of Mercy Health System for an undisclosed amount. Coventry said the acquisition is expected to be slightly accretive to its 2011 earnings and will serve more than 1.2 million members in its six-state Midwest region upon the completion of the acquisition. Also, in February, Coventry completed the acquisition of Preferred Health Systems Inc. based in Kansas, and the wholly-owned health insurance subsidiary of Via Christi Health System Inc.
We believe that Coventry's acquisitive growth strategy will help it to leverage its regional service centers and improve operating efficiencies, largely through economies of scale.
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