WellCare Reports Third Quarter 2011 Results

WellCare Health Plans, Inc. (NYSE: WCG) today reported results for the third quarter ended September 30, 2011. As determined under generally accepted accounting principles (“GAAP”), net income for the third quarter of 2011 was $88.3 million, or $2.03 per diluted share, compared with $42.9 million, or $1.00 per diluted share, for the third quarter of 2010. Adjusted net income for the third quarter of 2011 was $93.2 million, or $2.15 per diluted share, compared with $37.9 million, or $0.89 per diluted share for the third quarter of 2010.

“Our top initiatives continue to deliver strong results in improving health care quality and access, our administrative and medical cost structures, and in delivering prudent, profitable growth,” said Alec Cunningham, WellCare’s chief executive officer. “As a result, we are optimistic about our opportunities for further operating and strategic progress in 2012.”

WellCare’s recent accomplishments are highlighted by the November 1 launch of the Kentucky Medicaid program upon completion of a rapid implementation timeline. The program will focus on improving health care outcomes and care coordination, promoting wellness and healthier lifestyles, and lowering the overall cost of care. Separately, the Company began providing prescription drug benefits under the New York and Ohio Medicaid programs effective October 1. Other recent accomplishments include the accreditations of WellCare’s Georgia and Missouri health plans by the National Committee for Quality Assurance. In addition, during the third quarter the Company completed an upgrade of its core operating system, which will enable further progress in improving service, productivity, and compliance.

Highlights of Operations for the Third Quarter

Adjusted net income for the third quarter of 2011 increased compared with the third quarter of 2010, primarily due to higher premium revenue, offset in part by increased selling, general, and administrative (“SG&A”) expense and increases in the Medicare Advantage and PDP segments’ medical benefits ratios (“MBRs”). In addition, favorable development of prior years’ medical benefits payable contributed to third quarter results.

Membership as of September 30, 2011, increased 10% year-over-year to 2.4 million, compared with 2.2 million members as of September 30, 2010. PDP segment membership increased 211,000 year-over-year, or 28%. Medicare Advantage membership increased year-over-year by 14,000 members, or 12%. Medicaid segment membership decreased by 15,000 year-over-year to 1.3 million members as of September 30, 2011.

Premium revenue for the third quarter of 2011 increased 11% year-over-year to $1.5 billion. The increase mainly was due to growth in PDP segment premium revenue, which increased 33% year-over-year. In addition, third quarter 2011 Medicare Advantage segment revenue increased 14%, and Medicaid segment premium revenue increased 5%, both relative to the third quarter of 2010.

Medical benefits expense for the third quarter of 2011 was $1.2 billion, an increase of 4% from the third quarter of 2010. The MBR was 78.6% in the third quarter of 2011, compared with 83.9% in the third quarter of 2010. The decrease in the Company’s MBR resulted from a decrease in the Medicaid segment MBR, offset in part by increases in the Medicare Advantage and PDP segments’ MBRs. Favorable development of prior years’ medical benefits payable, predominately in the Medicaid segment, contributed to the decreases in the Company and Medicaid segment MBRs.

SG&A expense as determined under GAAP was $178 million in the third quarter of 2011, compared with $143 million for the same period in 2010. Adjusted SG&A was $171 million in the third quarter of 2011, an increase from $150 million in the same period last year. The year-over-year increase in adjusted SG&A expense was driven primarily by the implementation of the Kentucky Medicaid program, the earlier start in 2011 of the Medicare annual election period and the associated marketing costs, as well as membership growth. These increases were offset in part by improvements in operating efficiency. The adjusted administrative expense ratio was 11.2% in the third quarter of 2011, compared with 11.0% in same period in 2010.

Cash Flow and Financial Condition Highlights

Net cash provided by operating activities as determined under GAAP was $319 million in the nine months ended September 30, 2011, compared with net cash used in operating activities of $72 million for the same period of 2010. Net cash provided by operating activities, modified for the timing of receipts from, and payments to, WellCare’s government customers, was $177 million for the first nine months of 2011, compared with the net use of cash of $28 million over the same nine month period in 2010.

In September, the Company issued tradable unsecured subordinated notes having an aggregate face value of $112.5 million, with a fixed coupon of 6% and a maturity date of December 31, 2016. These notes were issued in connection with the final resolution of the securities class action settlement. Issuance of the notes had no meaningful impact on operating or financing cash flows in the third quarter.

As of September 30, 2011, unregulated cash and investments were approximately $324 million. Unregulated cash and investments were approximately $188 million as of June 30, 2011, and $201 million as of September 30, 2010. The increase in unregulated cash and investments resulted principally from the net proceeds of the $150 million dollar term loan that the Company borrowed on August 1.

Days in claims payable were 58 days as of September 30, 2011, compared with 56 days as of June 30, 2011, and 56 days as of September 30, 2010.

Financial Outlook

WellCare is updating its financial outlook for the year ended December 31, 2011. The following elements of WellCare’s financial outlook have changed:

  • Adjusted net income per diluted share now is expected to be between approximately $5.55 and $5.65, an increase from the previous guidance for adjusted net income per diluted share of between approximately $4.60 and $4.80. The increase reflects better than anticipated third quarter operating results, the favorable development of prior years’ medical benefits payable recorded in the third quarter, as well as an improved operating outlook for the fourth quarter.
  • Premium revenue is expected to be between approximately $6.0 and $6.05 billion. The previous guidance was for premium revenue to be between $6.0 and $6.1 billion. The change results primarily from the Kentucky Medicaid program launch being delayed to November 1. The launch originally was scheduled for October 1.
  • The adjusted administrative expense ratio is expected to be approximately 11.1%. The previous guidance was for the ratio to be between 10.7% and 10.9%. The change principally is due to the previously described delayed launch of the Kentucky Medicaid program.

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

  • The 2011 Medicaid segment MBR is anticipated to be below the 2010 MBR.
  • The 2011 Medicare Advantage and PDP segments’ MBRs each are anticipated to increase relative to the respective 2010 segment MBRs.

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

Webcast

A discussion of WellCare’s third quarter 2011 results will be webcast live on Wednesday, November 2, 2011, beginning at 8:30 a.m. Eastern Time. A replay will be available beginning approximately one hour following the conclusion of the live broadcast and will be available for 30 days. The webcast is available via the Company’s web site at www.wellcare.com and at www.earnings.com.

About WellCare Health Plans, Inc.

WellCare Health Plans, Inc. provides managed care services targeted to government-sponsored health care programs, focusing on Medicaid and Medicare. Headquartered in Tampa, Florida, WellCare offers a variety of health plans for families, children, and the aged, blind, and disabled, as well as prescription drug plans. The Company served approximately 2.4 million members nationwide as of September 30, 2011. For more information about WellCare, please visit the Company’s website at www.wellcare.com.

Basis of Presentation

In addition to results determined under GAAP, net income and certain other operating results described in this news release are reported after adjustment for certain SG&A and interest expenses related to previously disclosed government investigations and related litigation and associated resolution costs that management believes are not indicative of long-term business operations. Please refer to the schedules in this news release that provide supplemental information reconciling results determined under GAAP to adjusted results.

Cautionary Statement Regarding Forward-Looking Statements

This news release contains “forward-looking” statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions are forward-looking statements. The Company’s financial outlook contains forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause WellCare’s actual future results to differ materially from those projected or contemplated in the forward-looking statements. These risks and uncertainties include, but are not limited to, WellCare’s progress on top priorities such as improving health care quality and access, ensuring a competitive cost position, and delivering prudent, profitable growth.

Additional information concerning these and other important risks and uncertainties can be found under the captions “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and other subsequent filings by WellCare with the U.S. Securities and Exchange Commission, which contain discussions of WellCare’s business and the various factors that may affect it. WellCare undertakes no duty to update these forward-looking statements to reflect any future events, developments, or otherwise.

WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; Dollars in thousands except per share data)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2011201020112010
Revenues:
Premium $ 1,523,057 $ 1,366,924 $ 4,443,848 $ 4,039,191
Medicaid premium taxes 18,869 18,950 55,838 38,078
Total premium 1,541,926 1,385,874 4,499,686 4,077,269
Investment and other income 2,433 2,299 7,050 7,506
Total revenues 1,544,359 1,388,173 4,506,736 4,084,775
Expenses:
Medical benefits 1,197,008 1,147,107 3,626,342 3,435,870
Selling, general and administrative 178,405 142,712 512,415 701,691
Medicaid premium taxes 18,869 18,950 55,838 38,078
Depreciation and amortization 6,453 6,123 19,824 17,770
Interest 3,648 117 3,823 160
Total expenses 1,404,383 1,315,009 4,218,242 4,193,569
Income (loss) before income taxes 139,976 73,164 288,494 (108,794 )
Income tax expense (benefit) 51,721 30,248 109,309 (29,257 )
Net income (loss) $ 88,255 $ 42,916 $ 179,185 $ (79,537 )
Net income (loss) per common share:
Basic $ 2.06 $ 1.01 $ 4.19 $ (1.88 )
Diluted $ 2.03 $ 1.00 $ 4.14 $ (1.88 )
Weighted average common shares outstanding:
Basic 42,887,381 42,411,455 42,757,476 42,313,973
Diluted 43,424,414 42,740,369 43,285,969 42,313,973

WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; Dollars in thousands except per share data)

Sept. 30,
2011

Dec. 31,
2010

ASSETS
Current Assets:
Cash and cash equivalents $ 1,787,733 $ 1,359,548
Investments 217,033 108,788
Premium receivables, net 223,826 127,796
Funds receivable for the benefit of members 33,182
Income taxes receivable 9,973
Prepaid expenses and other current assets, net 139,724 114,492
Deferred income tax asset 41,770 61,392
Total current assets 2,410,086 1,815,171
Property, equipment and capitalized software, net 87,005 76,825
Goodwill 111,131 111,131
Other intangible assets, net 10,279 11,428
Long-term investments 79,850 62,931
Restricted investments 64,772 107,569
Non-current deferred income tax asset 50,931 58,340
Other assets 5,271 3,898
Total Assets $ 2,819,325 $ 2,247,293
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Medical benefits payable $ 757,102 $ 742,990
Unearned premiums 275,757 67,383
Accounts payable 6,839 8,284
Other accrued expenses and liabilities 193,586 199,033
Current portion of amounts accrued related to investigation resolution 43,932 121,406
Current portion of long-term debt 9,375
Other payables to government partners 76,672 46,605
Funds held for the benefit of members 28,222
Income taxes payable 40,875
Total current liabilities 1,432,360 1,185,701
Amounts accrued related to investigation resolution 100,915 216,136
Long-term debt 138,750
Subordinated notes 111,946
Other liabilities 10,597 13,410
Total liabilities 1,794,568 1,415,247
Commitments and contingencies
Stockholders’ Equity:

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

Common stock, $0.01 par value (100,000,000 authorized, 42,793,466 and 42,541,725 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively) 428 425
Paid-in capital 441,860 428,818
Retained earnings 584,296 405,112
Accumulated other comprehensive loss (1,827 ) (2,309 )
Total stockholders’ equity 1,024,757 832,046
Total Liabilities and Stockholders’ Equity $ 2,819,325 $ 2,247,293

WELLCARE HEALTH PLANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in thousands)

Nine Months Ended
September 30,

20112010
Cash provided by (used in) operating activities:
Net income (loss) $ 179,185 $ (79,537 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization 19,824 17,770
Equity-based compensation expense 13,160 8,655
Incremental tax benefit from equity-based compensation (2,518 )
Deferred taxes, net 27,032 (67,386 )
Changes in operating accounts:
Premium receivables, net (96,030 ) (24,190 )
Prepaid expenses and other current assets, net (25,232 ) (17,027 )
Medical benefits payable 14,112 (98,851 )
Unearned premiums 208,374 (24,504 )
Accounts payable and other accrued expenses (2,967 ) (43,635 )
Other payables to government partners 30,067 4,300
Amounts accrued related to investigation resolution (80,749 ) 249,915
Income taxes, net 36,995 7,594
Other, net (2,240 ) (5,088 )
Net cash provided by (used in) operating activities 319,013 (71,984 )
Cash provided by (used in) investing activities:
Purchases of investments (332,934 ) (117,903 )
Proceeds from sale and maturities of investments 208,758 114,726
Purchases of restricted investments (26,118 ) (18,386 )
Proceeds from maturities of restricted investments 68,712 24,298
Additions to property, equipment and capitalized software, net (30,773 ) (16,192 )
Net cash used in investing activities (112,355 ) (13,457 )
Cash provided by (used in) financing activities:
Proceeds from debt, net of issuance costs 147,747
Payments on debt (1,875 )
Proceeds from option exercises and other 4,624 1,091
Incremental tax benefit from equity-based compensation 2,518
Purchase of treasury stock (3,538 ) (4,420 )
Payments on capital leases (2,006 ) (935 )
Funds held for the benefit of members 74,057 22,589
Net cash provided by financing activities 221,527 18,325
Cash and cash equivalents:
Increase (decrease) during period 428,185 (67,116 )
Balance at beginning of year 1,359,548 1,158,131
Balance at end of period $ 1,787,733 $ 1,091,015
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for taxes $ 46,109 $ 35,686
Cash paid for interest $ 697 $ 183
Equipment acquired through capital leases $ $ 8,868
Issuance of subordinated notes $ 112,500 $

WELLCARE HEALTH PLANS, INC.
MEMBERSHIP STATISTICS
(Unaudited)

As of September 30,
20112010
Membership by Program
Medicaid Membership
TANF 1,060,000 1,073,000
S-CHIP 161,000 168,000
SSI and ABD 79,000 77,000
FHP 13,000 10,000

Total Medicaid Membership

1,313,000 1,328,000
Medicare Membership
Medicare Advantage 130,000 116,000
Prescription Drug Plan (stand-alone) 967,000 756,000
Total Medicare Membership 1,097,000 872,000
Total Membership 2,410,000 2,200,000
Medicaid Membership by State
Florida 395,000 418,000
Georgia 561,000 548,000
Other states 357,000 362,000
Total Medicaid Membership 1,313,000 1,328,000

WELLCARE HEALTH PLANS, INC.
SEGMENT INFORMATION
(Unaudited; Dollars in thousands)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2011201020112010
Premium revenue:
Medicaid:
Florida $ 224,392 $ 223,409 $ 665,194 $ 669,654
Georgia 386,752 350,689 1,084,566 1,004,507
Other states 269,696 261,845 793,339 752,385
Medicaid premium taxes 18,869 18,950 55,838 38,078
Total Medicaid 899,709 854,893 2,598,937 2,464,624
Medicare:
Medicare Advantage plans 376,597 331,338 1,097,015 1,012,366
Prescription Drug plans 265,620 199,643 803,734 600,279
Total Medicare 642,217 530,981 1,900,749 1,612,645
Total Premium Revenue $ 1,541,926 $ 1,385,874 $ 4,499,686 $ 4,077,269

WELLCARE HEALTH PLANS, INC.
UNAUDITED SUPPLEMENTAL INFORMATION

Reconciliation of GAAP Statements of Operations to Adjusted Statements of Operations
(Dollars in thousands except per share data)

The Company reports adjusted operating results on a non-GAAP basis to exclude certain expenses that management believes are not indicative of longer term business trends and operations. The following are statements of operations and related measures for the third quarter ended September 30, 2011 and 2010, as determined under GAAP, reconciled to the Adjusted Statements of Operations and related measures for each of the same periods.

Three Months Ended September 30, 2011Three Months Ended September 30, 2010
GAAPAdjustmentsAdjustedGAAPAdjustmentsAdjusted
Revenues:
Premium $ 1,523,057 $ $ 1,523,057 $ 1,366,924 $ $ 1,366,924
Medicaid premium taxes 18,869 18,869 18,950 18,950
Total premium 1,541,926 1,541,926 1,385,874 1,385,874
Investment and other income 2,433 2,433 2,299 2,299
Total revenues 1,544,359 1,544,359 1,388,173 1,388,173
Expenses:
Medical benefits 1,197,008 1,197,008 1,147,107 1,147,107
Selling, general, and administrative 178,405 (7,814 )

(a)
(b)

170,591 142,712 7,342

(a)
(b)

150,054
Medicaid premium taxes 18,869 18,869 18,950 18,950
Depreciation and amortization 6,453 6,453 6,123 6,123
Interest 3,648 (2,812 )

(c)

836 117 117
Total expenses 1,404,383 (10,626 ) 1,393,757 1,315,009 7,342 1,322,351
Income before income taxes 139,976 10,626 150,602 73,164 (7,342 ) 65,822
Income tax expense 51,721 5,730 57,451 30,248 (2,280 ) 27,968
Net income $ 88,255 $ 4,896 $ 93,151 $ 42,916 $ (5,062 ) $ 37,854
Weighted average shares:
Basic 42,887,381 42,887,381 42,411,455 42,411,455
Diluted 43,424,414 43,424,414 42,740,369 42,740,369
Net income per share:
Basic $ 2.06 $ 0.11 $ 2.17 $ 1.01 $ (0.12 ) $ 0.89
Diluted $ 2.03 $ 0.12 $ 2.15 $ 1.00 $ (0.11 ) $ 0.89
Medical benefits ratio:
Medicaid 79.0 % 79.0 % 88.9 % 88.9 %
Medicare Advantage 80.9 % 80.9 % 78.7 % 78.7 %
Prescription Drug Plans 73.9 % 73.9 % 71.7 % 71.7 %
Aggregate 78.6 % 78.6 % 83.9 % 83.9 %
Administrative expense ratio 11.7 % -0.5 %

(a)
(b)

11.2 % 10.4 % 0.6 %

(a)
(b)

11.0 %
Days in claims payable 58 58 56 56

(a)

Investigation-related legal, accounting, employee retention, and other costs: Administrative expenses associated with the government and Company investigations amounted to $7.3 million and, net of D&O insurance recoveries, a credit of $10.5 million, respectively, in the quarters ended September 30, 2011 and 2010.

(b)

Liability for government investigation resolution and related litigation: Based on the status of these matters, the Company recorded expense of $0.5 million and $3.1 million, respectively, in the quarters ended September 30, 2011 and 2010.

(c)

Investigation-related interest expense: The Company’s tradable unsecured subordinated notes issued in connection with the final resolution of the securities class action settlement incurred $2.8 million in interest expense in the quarter ended September 30, 2011.

WELLCARE HEALTH PLANS, INC.
UNAUDITED SUPPLEMENTAL INFORMATION

Reconciliation of GAAP Statements of Operations to Adjusted Statements of Operations
(Dollars in thousands except per share data)

Nine Months Ended September 30, 2011Nine Months Ended September 30, 2010
GAAPAdjustmentsAdjustedGAAPAdjustmentsAdjusted
Revenues:
Premium $ 4,443,848 $ $ 4,443,848 $ 4,039,191 $ $ 4,039,191
Medicaid premium taxes 55,838 55,838 38,078 38,078
Total premium 4,499,686 4,499,686 4,077,269 4,077,269
Investment and other income 7,050 7,050 7,506 7,506
Total revenues 4,506,736 4,506,736 4,084,775 4,084,775
Expenses:
Medical benefits 3,626,342 3,626,342 3,435,870 3,435,870
Selling, general, and administrative 512,415 (30,670 )

(a)
(b)

481,745 701,691 (250,381 )

(a)
(b)

451,310
Medicaid premium taxes 55,838 55,838 38,078 38,078
Depreciation and amortization 19,824 19,824 17,770 17,770
Interest 3,823 (2,812 )

(c)

1,011 160 160
Total expenses 4,218,242 (33,482 ) 4,184,760 4,193,569 (250,381 ) 3,943,188

Income (loss) before income taxes

288,494 33,482 321,976 (108,794 ) 250,381 141,587
Income tax expense (benefit) 109,309 14,652 123,961 (29,257 ) 87,038 57,781
Net income (loss) $ 179,185 $ 18,830 $ 198,015 $ (79,537 ) $ 163,343 $ 83,806
Weighted average shares:
Basic 42,757,476 42,757,476 42,313,973 42,313,973
Diluted 43,285,969 43,285,969 42,313,973 424,564 42,738,537
Net income (loss) per share:
Basic $ 4.19 $ 0.44 $ 4.63 $ (1.88 ) $ 3.86 $ 1.98
Diluted $ 4.14 $ 0.44 $ 4.58 $ (1.88 ) $ 3.84 $ 1.96
Medical benefits ratio:
Medicaid 80.5 % 80.5 % 87.9 % 87.9 %
Medicare Advantage 80.2 % 80.2 % 78.6 % 78.6 %
Prescription Drug Plans 87.0 % 87.0 % 84.4 % 84.4 %
Aggregate 81.6 % 81.6 % 85.1 % 85.1 %
Administrative expense ratio 11.5 % -0.7 %

(a)
(b)

10.8 % 17.3 % -6.1 %

(a)
(b)

11.2 %

(a)

Investigation-related legal, accounting, employee retention, and other costs: Administrative expenses associated with the government and Company investigations amounted to $23.9 million and, net of D&O insurance recoveries, a credit of $1.1 million, respectively, in the nine months ended September 30, 2011 and 2010.

(b)

Liability for government investigation resolution and related litigation: Based on the status of these matters, the Company recorded expense of $6.8 million and $251.5 million, respectively, in the nine months ended September 30, 2011 and 2010.

(c)

Investigation-related interest expense: The Company’s tradable unsecured subordinated notes issued in connection with the final resolution of the securities class action settlement incurred $2.8 million in interest expense in the nine months ended September 30, 2011.

WELLCARE HEALTH PLANS, INC.
UNAUDITED SUPPLEMENTAL INFORMATION

Reconciliation of GAAP Net Cash Used in Operating Activities
to Net Cash Provided by (Used in) Operating Activities,
Modified for the Timing of Receipts from, and Payments to, Government Customers
(Dollars in thousands)

The Company reports cash provided by, or used in, operating activities on a non-GAAP basis to exclude the changes in premium receivables, unearned premiums, and other receivables from, and payables to, government customers. The Company believes that operating cash flow excluding these changes is a useful measure for investors, as the excluded changes are a function of the timing of cash receipts from, and payments to, federal and state government agencies at the end of a period.

Nine Months Ended
September 30,

20112010
Net cash provided by (used in) operating activities, as reported under GAAP $ 319,013 $ (71,984 )
Modifications to eliminate changes in:
Premium receivables, net 96,030 24,190
Unearned premiums (208,374 ) 24,504
Other payables to government partners (30,067 ) (4,300 )
Net cash provided by (used in) operating activities, modified for the timing of receipts from, and payments to, government customers $ 176,602 $ (27,590 )

Contacts:

WellCare Health Plans, Inc.
Investor relations:
Gregg Haddad, 813-206-3916
gregg.haddad@wellcare.com
or
Media relations:
Amy Knapp, 813-290-6208
amy.knapp@wellcare.com
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