Business Context and Reporting Period
Company: Humana Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: Humana is a full-service benefits solutions company offering health and supplemental benefit products to employer groups, government programs, and individuals. As of June 30, 2008, the company served approximately 11.5 million medical members and 6.7 million specialty product members. Operations are divided into two segments: Government (Medicare, Military, Medicaid) and Commercial (Employer groups and individuals).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenues | $7,350,862 | $14,310,566 |
| Net Income | $209,896 | $290,066 |
| Diluted EPS | $1.24 | $1.71 |
| Operating Cash Flow | N/A | $108,462 |
| Cash and Equivalents (Ending) | $1,174,642 | $1,174,642 |
| Long-Term Debt | $1,635,098 | $1,635,098 |
| Benefits Ratio (Total) | 85.0% | 85.8% |
| SG&A Expense Ratio (Total) | 12.6% | 13.2% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 14.2% for the quarter and 13.0% for the six-month period compared to 2007. Premium revenues rose 14.2% ($7.1 billion) for the quarter, driven by growth in both Government and Commercial segments.
- Profitability: Net income for the quarter decreased slightly to $209.9 million from $216.8 million in the prior year quarter. However, net income for the six-month period increased to $290.1 million from $288.1 million.
- Segment Performance:
- Government Segment: Income before taxes declined 13.6% for the quarter and 19.7% for the six-month period. This was primarily due to higher-than-expected pharmacy claim expenses in Medicare stand-alone Prescription Drug Plans (PDPs).
- Commercial Segment: Income before taxes increased 48.8% for the quarter and 39.7% for the six-month period, driven by specialty product growth and acquisitions.
- Cash Flow: Operating cash flow for the six months ended June 30, 2008, was $108.5 million, a significant decrease from $2.05 billion in the prior year period. This variance was largely due to the timing of Medicare premium receipts (July 2007 payments were received in June 2007 due to the weekend).
- Debt Structure: In June 2008, the company issued $750 million in senior notes ($500 million at 7.20% and $250 million at 8.15%) and used the proceeds to repay the outstanding balance under its credit agreement.
Guidance, Outlook, and Risks
- Outlook: Management expects a decrease in consolidated earnings for the full year 2008 compared to 2007 due to lower-than-expected operating results from Medicare stand-alone PDPs. The company believes it has addressed these issues for 2009 through enhanced bid development processes.
- Acquisitions: The company completed acquisitions of OSF Health Plans and SecureHorizons in 2008. It also signed agreements to acquire Cariten Healthcare and Metcare Health Plans, expected to close before year-end 2008.
- Regulatory Risks:
- Medicare Audits: CMS is conducting audits of Medicare Advantage plans regarding risk adjustment data. Material adjustments could adversely affect financial results.
- Legislation: The Medicare Improvements for Patients and Providers Act of 2008 may impact operations starting in 2009 (marketing restrictions) and 2010 (phase-out of indirect medical education costs).
- Legal Proceedings: The company is facing multiple securities class actions and shareholder derivative suits alleging misleading statements regarding Q1 2008 earnings and Medicare Part D costs. Additionally, there are ERISA-related lawsuits and an industry-wide investigation into provider-payment practices.
Investor Verification Checklist
- Medicare PDP Performance: Verify the extent of the variance between actuarial bid assumptions and actual pharmacy claim costs for stand-alone PDPs and the impact on full-year 2008 earnings.
- Legal Exposure: Monitor the status of the securities class actions and derivative suits regarding Q1 2008 earnings guidance and potential financial impact.
- Cash Flow Timing: Confirm the normalization of operating cash flows in subsequent quarters, given the one-time timing benefit in the prior year's Q2.
- Acquisition Integration: Assess the integration progress and financial contribution of recent acquisitions (OSF, SecureHorizons, CompBenefits, KMG) and pending deals (Cariten, Metcare).
- Debt Servicing: Review the impact of the new senior notes issuance on interest expense and the company's leverage ratios.