Centene Corporation Reports 2006 Second Quarter Earnings

July 25, 2006 at 6:02 AM EDT

ST. LOUIS, Jul 25, 2006 (BUSINESS WIRE) -- Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended June 30, 2006.

Second Quarter Summary

-- Revenues of $495.3 million, a 41.7% increase over the 2005 second quarter.

-- Earnings from operations of $6.3 million compared to $22.3 million in the 2005 second quarter.

-- Earnings per diluted share of $0.11 (includes $9.7 million of adverse development in the first quarter 2006 medical claims reserves) versus $0.34 in the comparable prior year quarter.

-- Operating cash flows of $5.1 million.

-- Quarter-end Medicaid Managed Care membership of 1.1 million.

-- Medicaid Managed Care G&A expense ratio of 12.3% and Specialty Services G&A ratio of 17.4%.

-- Membership growth of 33.5% over the 2005 second quarter.

-- Days in claims payable of 42.6.

Other Events

-- Commenced operations in Georgia with 216,000 members.

-- Acquired MediPlan Corporation, adding 13,600 Medicaid members in Canton, Ohio.

-- Acquired Cardium Health Services Corporation, a Connecticut-based chronic disease management company.

-- Acquired managed vision business of OptiCare Health Systems, Inc. effective July 1.

-- Awarded two long-term care contracts in Arizona for Maricopa and Yuma/LaPaz counties.

The 2006 second quarter results include approximately $9.7 million of adverse medical cost development in estimated claims liabilities from the 2006 first quarter. The adverse development was largely attributable to: (1) increased medical expense for maternity related cases, including NICU, (2) increased physician costs, (3) increased costs associated with injectibles such as Synagis and Somatropin, and (4) increases in the estimated days for members hospitalized as of March 31, 2006. Approximately $3.7 million of the development occurred in Indiana and $2.2 million occurred in Texas. There has been a slight positive development for 2005 claims. Approximately $7.1 million of the development related to March claims and $2.5 million was for February claims.

In Indiana, there were a number of factors which affected our results. We saw a continuation of increased medical expenses associated with the members added in late 2005, higher percentage of admissions for NICU births and increased Synagis and Somatropin utilization. In addition, our estimated hospital inpatient days increased significantly primarily because of the deteriorating condition of several complex and high-cost cases and missed patient bed-day estimates. Pharmacy costs stabilized in the 2006 second quarter and are expected to decrease in the 2006 third quarter.

In Texas, we are currently experiencing higher costs because of a case mix shift to a higher percentage of members in the pregnant women and newborn categories driving increases in related costs such as NICU, radiology and Synagis, and from members moving out of Primary Care Case Management into a managed care environment. We also had several deteriorating complex and high cost cases.

In Georgia, our subsidiary Peach State Health Plan, Inc., began managing care for 216,000 Medicaid and SCHIP members in the Atlanta and Central regions effective June 1, 2006. The state of Georgia has scheduled membership operations to commence in the Southwest region in September.

During the 2005 fourth quarter, we were awarded contracts in Texas to expand operations to the Corpus Christi market, and operations are scheduled to commence in September 2006. We will also begin serving Medicaid members in Lubbock and a small number of SCHIP members in Austin, effective September 1. In addition, we were recently awarded a contract to provide managed care for SSI recipients in the San Antonio and Corpus Christi markets, for which membership operations are scheduled to start in January 2007.

Our Specialty Services segment has experienced significant year-over-year growth largely due to acquisitions and contract awards. During this past quarter, the Arizona Health Care Cost Containment System awarded our subsidiary, CenCorp Health Solutions, two managed care program contracts to provide Long Term Care services in Maricopa and Yuma/LaPaz counties. Bridgeway Health Solutions, a member of the CenCorp family of specialty companies, will provide those services when the contracts become effective October 2006.

Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, said, "While we are truly disappointed with our second quarter results, we have identified the issues and we are undertaking steps to resolve them in a sustainable manner. We have initiated some very specific corrective actions at the corporate and health plan levels to protect against issues of this magnitude in the future."

The following table depicts membership in Centene's managed care organizations by state at June 30, 2006 and 2005:

                                       2006              2005
                                  ---------------   ---------------
  Georgia                                216,000                 -
  Indiana                                193,000           152,800
  Kansas                                 117,100           103,000
  Missouri                                32,900            39,900
  New Jersey                              59,000            52,900
  Ohio                                    73,100            59,600
  Texas                                  235,800           243,800
  Wisconsin                              174,600           173,400
                                  ---------------   ---------------

  TOTAL                                1,101,500           825,400
                                  ===============   ===============

The following table depicts membership in Centene's managed care organizations by member category at June 30, 2006 and 2005:

                                       2006              2005
                                  ---------------   ---------------
  Medicaid                               863,500           637,300
  SCHIP                                  221,600           176,200
  SSI                                     16,400 (a)        11,900 (b)
                                  ---------------   ---------------

  TOTAL                                1,101,500           825,400
                                  ===============   ===============

(a) 8,900 at-risk; 7,500 ASO
(b) 5,500 at-risk; 6,400 ASO

Statement of Earnings

-- For the 2006 second quarter, revenues increased 41.7% to $495.3 million from $349.6 million in the 2005 second quarter.

-- The HBR for Centene's Medicaid and SCHIP populations, which reflects medical costs as a percent of premium revenues, was 84.0% and 83.4% for the three and six month periods ending June 30, 2006, respectively; increases of 3.1% and 2.7% over the comparable 2005 periods. The 2006 second quarter increase was caused primarily by $9.7 million for adverse medical cost development. The increase for the six months ended June 30, 2006 is caused primarily by increased costs associated with the $9.7 million of adverse development, members in the Indiana market and physician and injectibles costs in other markets.

-- General and administrative (G&A) expense as a percent of revenues for the Medicaid Managed Care segment was 12.3% in the second quarter of 2006 compared to 10.5% in the second quarter of 2005. The 2006 second quarter included $4.7 million in costs associated with the start-up of the new health plan in Georgia.

-- Earnings from operations decreased to $6.3 million in the second quarter of 2006 from $22.3 million in the second quarter of 2005.

-- Net earnings were $4.9 million, or $0.11 per diluted share, in the second quarter of 2006 compared to $15.2 million, or $0.34 per diluted share, for the second quarter of 2005.

-- For the six months ended June 30, 2006, revenues increased 39.3% to $950.4 million from $682.0 million for the same period in the prior year. Medicaid Managed Care G&A expenses as a percent of revenues increased to 12.1% in the first half of 2006 compared to 10.6% in the first half of 2005. Earnings from operations decreased to $18.9 million in the first half of 2006 from $43.6 million in the first half of 2005. Net earnings were $13.7 million, or $0.31 per diluted share, in the first half of 2006.

Balance Sheet and Cash Flow

At June 30, 2006, the Company had cash and investments of $349.4 million, including $323.9 million held by its regulated entities and $25.5 million held by its unregulated entities. Medical claims liabilities totaled $187.2 million, representing 42.6 days in claims payable. Consistent with 2005, the state of Wisconsin delayed payment of the June premium of approximately $30 million until July 2006. Similarly, we did not receive Texas' $2.8 million June delivery payment until July 2006.

A reconciliation of the Company's change in days in claims payable from the immediately preceding quarter-end is presented below:

Days in claims payable, March 31, 2006                        43.0
Increase for Georgia claims                                    2.8
Decrease in claims inventory                                  (1.5)
Payment of annual physician performance bonuses               (0.7)
Conversion of pharmacy benefits to U.S. Script                (1.0)
                                                    ---------------
Days in claims payable, June 30, 2006                         42.6
                                                    ===============

Outlook

The table below depicts the Company's revised guidance for the balance of 2006:

                                      Q3                   Q4
                              -------------------  -------------------
                                 Low      High        Low      High

  Revenue (in millions)       $  615.0  $  620.0   $  670.0  $  680.0
  Earnings per diluted share  $   0.29  $   0.32   $   0.35  $   0.41

J. Per Brodin, Centene's Chief Financial Officer, stated, "This guidance includes the effect of all recent acquisitions and contract awards and anticipates that the operations for the Southwest region of Georgia and the Texas expansion will commence on September 1 and the Arizona Long Term Care contract in October. This guidance also reflects management's updated assumptions regarding the Company's health benefits ratio for the remainder of the year."

Conference Call

As previously announced, the Company will host a conference call Tuesday, July 25, 2006, at 8:30 a.m. (Eastern Time) to review the financial results for the second quarter ended June 30, 2006, and to discuss its business outlook. Michael F. Neidorff and J. Per Brodin will host the conference call. Investors are invited to participate in the conference call by dialing 800-273-1254 in the U.S. and Canada, 706-679-8592 from abroad, or via a live Internet broadcast on the Company's website at www.centene.com, under the Investor Relations section. Today's call will also be accompanied by slides which are posted on the Company's website at centene.com. A replay will be available for on demand listening shortly after the completion of the call until 11:59 PM Eastern Time on August 8, 2006 at the aforementioned URL, or by dialing 800-642-1687 in the U.S. and Canada, or 706-645-9291 from abroad, and entering access code 1800936.

About Centene Corporation

Centene Corporation is a leading multi-line healthcare enterprise that provides programs and related services to individuals receiving benefits under Medicaid, including Supplemental Security Income (SSI) and the State Children's Health Insurance Program (SCHIP). The Company operates health plans in Georgia, Indiana, Kansas, Missouri, New Jersey, Ohio, Texas and Wisconsin. In addition, the Company contracts with other healthcare organizations to provide specialty services including behavioral health, disease management, nurse triage, pharmacy benefit management and treatment compliance. Information regarding Centene is available via the Internet at www.centene.com.

The information provided in the second, fourth, fifth, sixth and seventh paragraphs following the bullet listing under "Other Events," and the table and paragraph under "Outlook" above contain forward-looking statements that relate to future events and future financial performance of Centene. Subsequent events and developments may cause the Company's estimates to change. The Company disclaims any obligation to update this forward-looking financial information in the future. Readers are cautioned that matters subject to forward-looking statements involve known and unknown risks and uncertainties, including economic, regulatory, competitive and other factors that may cause Centene's or its industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Actual results may differ from projections or estimates due to a variety of important factors, including Centene's ability to accurately predict and effectively manage health benefits and other operating expenses, competition, changes in healthcare practices, changes in federal or state laws or regulations, inflation, provider contract changes, new technologies, reduction in provider payments by governmental payors, major epidemics, disasters and numerous other factors affecting the delivery and cost of healthcare. The expiration, cancellation or suspension of Centene's Medicaid managed care contracts by state governments would also negatively affect Centene.

                 CENTENE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED BALANCE SHEETS
                   (In thousands, except share data)

                                                    June 30,  Dec. 31,
                                                      2006      2005
                                                    ------------------
                                                       (Unaudited)

                       ASSETS
Current assets:
      Cash and cash equivalents                     $131,436 $147,358
      Premium and related receivables, net of
       allowances of $175 and $343, respectively      96,852   44,108
      Short-term investments, at fair value
       (amortized cost $77,049 and $56,863,
       respectively)                                  76,700   56,700
      Other current assets                            20,714   24,439
                                                    --------- --------
         Total current assets                        325,702  272,605
Long-term investments, at fair value (amortized
 cost $120,252 and $126,039, respectively)           117,257  123,661
Restricted deposits, at fair value (amortized
 cost $24,283 and $22,821, respectively)              24,008   22,555
Property, software and equipment, net                 90,344   67,199
Goodwill                                             215,376  157,278
Other intangible assets, net                          20,203   17,368
Other assets                                           8,246    7,364
                                                    --------- --------
         Total assets                               $801,136 $668,030
                                                    ========= ========

        LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
      Medical claims liabilities                    $187,204 $170,514
      Accounts payable and accrued expenses           52,540   29,790
      Unearned revenue                                15,413   13,648
      Current portion of long-term debt and
       notes payable                                   1,034      699
                                                    --------- --------
         Total current liabilities                   256,191  214,651
Long-term debt                                       164,462   92,448
Other liabilities                                      6,444    8,883
                                                    --------- --------
         Total liabilities                           427,097  315,982
Stockholders' equity:
      Common stock, $.001 par value; authorized
       100,000,000 shares; issued and
       outstanding 43,200,752 and 42,988,230
       shares, respectively                               43       43
      Additional paid-in capital                     200,622  191,840
      Accumulated other comprehensive income:
          Unrealized loss on investments,
           net of tax                                 (2,276)  (1,754)
      Retained earnings                              175,650  161,919
                                                    --------- --------
         Total stockholders' equity                  374,039  352,048
                                                    --------- --------
         Total liabilities and
          stockholders' equity                      $801,136 $668,030
                                                    ========= ========





                 CENTENE CORPORATION AND SUBSIDIARIES

                  CONSOLIDATED STATEMENTS OF EARNINGS
                   (In thousands, except share data)


                             Three Months Ended     Six Months Ended
                                  June 30,              June 30,
                          ---------------------- ---------------------
                               2006       2005       2006       2005
                          ----------- ---------- ---------- ----------
                               (Unaudited)           (Unaudited)
Revenues:
   Premiums                 $476,079   $348,416   $911,641   $679,360
   Services                   19,214      1,212     38,730      2,644
                          ----------- ---------- ---------- ----------
      Total revenues         495,293    349,628    950,371    682,004
                          ----------- ---------- ---------- ----------
Expenses:
   Medical costs             400,229    282,215    761,901    549,971
   Cost of services           14,317        728     29,905      1,571
   General and
    administrative
    expenses                  74,441     44,365    139,663     86,824
                          ----------- ---------- ---------- ----------
      Total operating
       expenses              488,987    327,308    931,469    638,366
                          ----------- ---------- ---------- ----------
         Earnings from
          operations           6,306     22,320     18,902     43,638
Other income (expense):
   Investment and other
    income                     3,891      2,523      7,431      4,643
   Interest expense           (2,456)      (634)    (4,454)    (1,196)
                          ----------- ---------- ---------- ----------
         Earnings before
          income taxes         7,741     24,209     21,879     47,085
Income tax expense             2,776      8,960      8,148     17,425
                          ----------- ---------- ---------- ----------
      Net earnings            $4,965    $15,249    $13,731    $29,660
                          =========== ========== ========== ==========

Earnings per share:
   Basic earnings per
    common share               $0.12      $0.36      $0.32      $0.71
   Diluted earnings per
    common share               $0.11      $0.34      $0.31      $0.66

Weighted average number of
 shares outstanding:
   Basic                  43,169,590 42,203,946  43,079,243 41,884,044
   Diluted                44,839,149 45,087,772  44,794,558 44,984,818






                 CENTENE CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                   (In thousands, except share data)


                                               Six Months Ended
                                                   June 30,
                                       ------------------------------
                                            2006              2005
                                       --------------   -------------
                                                  (Unaudited)

Cash flows from operating activities:
   Net earnings                           $13,731           $29,660
   Adjustments to reconcile net
    earnings to net cash provided
    by operating activities --
       Depreciation and amortization        9,541             5,901
       Excess tax benefits from stock
         compensation                          --             3,782
       Stock compensation expense           7,154             2,304
       Loss on sale of investments             33                39
       Deferred income taxes                 (287)            1,191
   Changes in assets
    and liabilities --
         Premium and related receivables  (45,710)          (38,364)
         Other current assets               1,859            (2,224)
         Other assets                      (1,123)             (946)
         Medical claims liabilities        16,690           (12,387)
         Unearned revenue                   1,705             5,701
         Accounts payable and accrued
           expenses                        10,658            (2,716)
         Other operating activities           191             1,034
                                       --------------   -------------
           Net cash provided by
            (used in) operating
            activities                     14,442            (7,025)
                                       --------------   -------------
Cash flows from investing activities:
   Purchase of property,
    software and equipment                (23,472)           (8,768)
   Purchase of investments               (113,665)          (74,928)
   Sales and maturities of investments     97,445            84,984
   Acquisitions, net of cash acquired     (60,710)          (21,342)
                                       --------------   -------------
           Net cash used in investing
            activities                   (100,402)          (20,054)
                                       --------------   -------------
Cash flows from financing activities:
   Proceeds from exercise of stock
    options                                 3,761             2,864
   Proceeds from borrowings                71,967            10,000
   Payment of long-term debt and
    notes payable                          (4,487)           (4,242)
   Excess tax benefits from
    stock compensation                      1,977                --
   Common stock repurchases                (3,180)               --
   Other financing activities                  --               (50)
                                       --------------   -------------
           Net cash provided by
            financing activities           70,038             8,572
                                       --------------   -------------
           Net decrease in cash
            and cash equivalents          (15,922)          (18,507)
                                       --------------   -------------
Cash and cash equivalents,
 beginning of period                      147,358            84,105
                                       --------------   -------------
Cash and cash equivalents, end
 of period                               $131,436           $65,598
                                       ==============   =============


   Interest paid                           $4,598            $1,209
   Income taxes paid                       $1,645           $12,904

Supplemental schedule of non-cash
 financing activities:
   Common stock issued for acquisitions       $--            $8,995







                          CENTENE CORPORATION

                      SUPPLEMENTAL FINANCIAL DATA


                                      Q2       Q1       Q4       Q3
                                     2006     2006     2005     2005
                                 ---------- -------- -------- --------
MEMBERSHIP
Medicaid Managed Care:
   Georgia                         216,000        -        -        -
   Indiana                         193,000  193,000  193,300  176,300
   Kansas                          117,100  118,200  113,300  107,600
   Missouri                         32,900   34,500   36,000   37,300
   New Jersey                       59,000   57,500   56,500   50,900
   Ohio                             73,100   59,000   58,700   58,100
   Texas                           235,800  237,500  242,000  243,600
   Wisconsin                       174,600  175,100  172,100  173,900
                                 ---------- -------- -------- --------
   TOTAL                         1,101,500  874,800  871,900  847,700
                                 ========== ======== ======== ========
   Medicaid                        863,500  683,700  681,100  657,500
   SCHIP                           221,600  175,300  175,900  176,900
   SSI                              16,400   15,800   14,900   13,300
                                 ---------- -------- -------- --------
TOTAL                            1,101,500  874,800  871,900  847,700
                                 ========== ======== ======== ========

Specialty Services(a):
   Arizona                          93,600   92,300   94,700   94,300
   Kansas                           39,400   39,200   38,800   37,500
                                 ---------- -------- -------- --------
TOTAL                              133,000  131,500  133,500  131,800
                                 ========== ======== ======== ========

(a) Includes behavioral health contracts only.


REVENUE PER MEMBER(b)              $159.33  $157.17  $152.48  $147.73

CLAIMS(b)
   Period-end inventory            186,200  229,800  255,000  206,900
   Average inventory               150,100  175,200  153,500  148,300
   Period-end inventory per
    member                            0.17     0.26     0.29     0.24

(b) Revenue per member and claims information are presented for the
    Medicaid Managed Care segment.


DAYS IN CLAIMS PAYABLE(c)             42.6     43.0     45.4     41.4

(c) Days in Claims Payable is a calculation of Medical Claims
    Liabilities at the end of the period divided by average claims
    expense per calendar day for such period.


CASH AND INVESTMENTS (in millions)
  Regulated                         $323.9   $314.0   $322.6   $305.1
  Unregulated                         25.5     25.8     27.7     27.7
                                 ---------- -------- -------- --------
TOTAL                               $349.4   $339.8   $350.3   $332.8
                                 ========== ======== ======== ========

ANNUALIZED RETURN ON EQUITY(d)         5.4%     9.8%    16.2%    14.9%

(d) Annualized Return on Equity is calculated as follows: (net income
    for quarter x 4) divided by ((beginning of period equity + end of
    period equity) divided by 2).





HEALTH BENEFITS RATIO BY CATEGORY:


                            Three Months Ended      Six Months Ended
                                June 30,               June 30,
                        ----------------------------------------------
                              2006        2005      2006         2005
                        ----------------------------------------------
Medicaid and SCHIP            84.0%       80.9%     83.4%        80.7%
SSI                           87.6        85.2      87.6         89.3
Specialty Services            83.7        86.3      83.9        109.3



GENERAL AND ADMINISTRATIVE EXPENSE RATIO BY BUSINESS SEGMENT:


                            Three Months Ended      Six Months Ended
                                June 30,               June 30,
                        ----------------------------------------------
                              2006        2005      2006         2005
                        ----------------------------------------------
Medicaid Managed Care         12.3%       10.5%     12.1%        10.6%
Specialty Services            17.4        58.8      19.3         54.6




                      MEDICAL CLAIMS LIABILITIES
                            (In thousands)

Four rolling quarters of the changes in medical claims liabilities
are summarized as follows:


Balance, June 30, 2005           $153,593
Acquisitions                            -
Incurred related to:
   Current period               1,443,263
   Prior period                    (4,424)
                               -----------
      Total incurred            1,438,839
                               -----------
Paid related to:
   Current period               1,256,398
   Prior period                   148,830
                               -----------
      Total paid                1,405,228
                               -----------
Balance, June 30, 2006           $187,204
                               ===========


Centene's claims reserving process utilizes a consistent actuarial
methodology to estimate Centene's ultimate liability. Any reduction in
the "Incurred related to: Prior period" claims may be offset as
Centene actuarially determines "Incurred related to: Current period."
As such, only in the absence of a consistent reserving methodology
would favorable development of prior period claims liability estimates
reduce medical costs. Centene believes it has consistently applied its
claims reserving methodology in each of the periods presented.

SOURCE: Centene Corporation

Centene Corporation
J. Per Brodin, 314-725-4477
or
Lisa M. Wilson, 212-759-3929
www.centene.com