Centene Corporation Reports 2006 Third Quarter Results

October 24, 2006 at 6:02 AM EDT

ST. LOUIS--(BUSINESS WIRE)--Oct. 24, 2006--Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended September 30, 2006.

    Third Quarter Summary

    --  Revenues of $631.2 million, a 57.6% increase over the 2005
        third quarter.

    --  Loss from operations of $66.6 million, including a non-cash
        impairment charge related to the loss of the Kansas contract
        of $87.1 million pre-tax, or $1.96 per diluted share.

    --  Earnings from operations of $20.5 million, excluding the
        non-cash impairment charge, compared to $15.1 million in the
        2005 third quarter.

    --  Loss per diluted share of $1.65. Earnings per diluted share of
        $0.31, excluding the non-cash impairment charge compared to
        $0.27 in the 2005 third quarter.

    --  Operating cash flows of $110.1 million.

    --  Quarter-end Medicaid Managed Care membership of 1.2 million.

    --  Membership growth of 38.0% over the 2005 third quarter.

    --  Health Benefits Ratio (HBR) for Centene's Medicaid and SCHIP
        populations, which reflects medical costs as a percent of
        premium revenues, of 82.0%.

    --  Medicaid Managed Care G&A expense ratio of 12.1% and Specialty
        Services G&A ratio of 17.0%.

    --  Days in claims payable of 45.3.

    Other Events

    --  Initiated operations in the Southwest region of Georgia,
        ending the quarter with 252,600 members state-wide.

    --  Commenced operations in the seven new counties awarded in the
        East Central market of Ohio.

    --  Started operations in the Corpus Christi market and expanded
        operations in the Austin and Lubbock markets of Texas.

    --  Awarded state-wide Medicaid managed care contract to manage a
        portion of eligible Hoosier Healthwise members through our
        Indiana subsidiary, Managed Health Services (MHS).

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

    --  Commenced Arizona Long-Term Care contract effective October 1,
        2006.

    --  Received preliminary notification of Ohio Medicaid ABD
        contract award in all four regions in which we submitted a
        bid.

Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, commented, "We believe that many of the initiatives that we implemented during the second quarter, including a back-to-basics approach and an evaluation of our medical management practices at a number of levels, have yielded results that indicate that we are back on the right track. We are pleased that our medical claims reserves that were recorded in the 2006 second quarter have developed appropriately and that our third quarter results are in line with our expectations. We continue to evaluate opportunities to implement additional processes and protective measures to help manage our cost trends.

"We are pleased with our membership and revenue growth for the quarter, particularly our strong membership in Georgia, where our subsidiary, Peach State Health Plan, Inc., ended the quarter with 252,600 members, ahead of our expectations. We are now operating in the Atlanta, Central and Southwest regions and we achieved strong membership there despite an overall decline in the total eligible membership in the State. We also experienced growth due to our market expansions in Ohio and Texas.

"On September 1, 2006, we commenced operations in Texas in the Corpus Christi market caring for Medicaid and SCHIP members; we also began serving new Medicaid members in the Lubbock market and SCHIP members in Austin. In addition, our contract to provide managed care services for SSI recipients in the San Antonio and Corpus Christi markets will commence membership operations in January 2007. While we are still seeing higher than average utilization trends in Texas NICU, we expect this cost trend to moderate as the members transition from an unmanaged population into a managed care environment.

"Our Specialty Services segment has experienced year-over-year growth largely due to acquisitions, namely US Script, and to a lesser extent, Cardium and OptiCare. In addition, effective October 1, we began providing services in Yuma/LaPaz and Maricopa counties under our Arizona Long-Term Care contract.

"As we enter the fourth quarter, we look forward to making continued progress in our medical management and to capture future growth opportunities," concluded Neidorff.

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

                                         2006               2005
                                   ------------------  ---------------
Georgia                                      252,600                -
Indiana                                      198,100          176,300
Kansas                                       112,400          107,600
Missouri                                      32,200           37,300
New Jersey                                    59,100           50,900
Ohio                                          88,300           58,100
Texas                                        259,900          243,600
Wisconsin                                    167,100          173,900
                                   ------------------  ---------------

TOTAL                                      1,169,700          847,700
                                   ==================  ===============

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

                                          2006              2005
                                   ------------------- ---------------
Medicaid                                   922,300         657,500
SCHIP                                      229,400         176,900
SSI                                         18,000 (a)      13,300 (b)
                                   ------------------- ---------------

TOTAL                                    1,169,700         847,700
                                   =================== ===============
    (a) 10,000 at-risk; 8,000 ASO

    (b) 6,800 at-risk; 6,500 ASO

    Statement of Operations

    --  For the 2006 third quarter, revenues increased 57.6% to $631.2
        million from $400.6 million in the 2005 third quarter.

    --  The HBR for Centene's Medicaid and SCHIP populations, which
        reflects medical costs as a percent of premium revenues, was
        82.0% for the three months ending September 30, 2006, a
        decrease of 1.1% over the comparable 2005 period, which
        included $4.5 million for settlement of a lawsuit with Aurora
        Health Care, Inc. (Aurora). This settlement increased the HBR
        by 1.2% for the three months ended September 30, 2005. The
        decrease for the three months ended September 30, 2006 is the
        result of premium rate increases in certain markets, an
        increase in maternal delivery revenue, and the effect of the
        2005 Aurora settlement, offset by an 8.9% increase in average
        in-patient days and higher physician costs. The HBR for the
        three months ended September 30, 2006 did not include any
        overall adverse medical cost development related to prior
        periods.

    --  General and administrative (G&A) expense as a percent of
        revenues for the Medicaid Managed Care segment was 12.1% in
        the third quarter of 2006 compared to 10.6% in the third
        quarter of 2005, primarily due to premium tax or similar
        assessments enacted in certain markets.

    --  Non-cash intangible asset impairment charge of $87.1 million
        (pre-tax), $85.0 million (after-tax), or $1.96 per diluted
        share related to the Kansas Medicaid contract non-renewal
        notification.

    --  Loss from operations of $66.6 million, including a non-cash
        impairment charge related to the loss of the Kansas contract
        of $87.1 million pre-tax, or $1.96 per diluted share.

    --  Earnings from operations of $20.5 million, excluding the
        non-cash impairment charge, compared to $15.1 million in the
        2005 third quarter.

    --  Loss per diluted share of $1.65. Earnings per diluted share of
        $0.31, excluding the non-cash impairment charge compared to
        $0.27 in the 2005 third quarter.

    --  For the nine months ended September 30, 2006, revenues
        increased 46.1% to $1,581.6 million from $1,082.6 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 nine months of 2006 compared to 10.6% in the first nine
        months of 2005. Earnings from operations, excluding the
        non-cash impairment charge, decreased to $39.4 million in the
        first nine months of 2006 from $58.8 million in the first nine
        months of 2005. Net earnings, excluding the non-cash
        impairment charge, were $27.5 million or $0.62 per diluted
        share in the first nine months of 2006.

    Balance Sheet and Cash Flow

At September 30, 2006, the Company had cash and investments of $440.1 million, including $411.1 million held by its regulated entities and $29.0 million held by its unregulated entities. Medical claims liabilities totaled $246.7 million, representing 45.3 days in claims payable.

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, June 30, 2006                            42.6
Increase in claims inventory                                      2.7
Increase for Georgia and Texas claims                             0.3
Conversion of pharmacy benefits to U.S. Script                   (0.3)
                                                                 -----
Days in claims payable, September 30, 2006                       45.3
                                                                 =====

Outlook

The table below depicts the Company's revised guidance for the fourth quarter of 2006 and preliminary guidance for 2007:

                                           Q4              2007
                                    ----------------  ----------------
                                      Low     High      Low     High
Revenue (in millions)               $685.0   $690.0   $2,730   $2,830
Earnings per diluted share           $0.38    $0.43    $1.51    $1.61
----------------------------------------------------------------------

J. Per Brodin, Centene's Chief Financial Officer, stated, "The 2006 fourth quarter and 2007 guidance excludes any potential shut-down costs for our Kansas health plan that would be necessary if our efforts to retain the contract are unsuccessful. The 2007 guidance includes the estimated effect of initiating our Texas Star+ SSI operations effective January 1, 2007 and the Ohio Aged, Blind and Disabled preliminary award which is expected to transition throughout 2007."

Conference Call

As previously announced, the Company will host a conference call Tuesday, October 24, 2006, at 8:30 a.m. (Eastern Time) to review the financial results for the third quarter ended September 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. A replay will be available for on-demand listening shortly after the completion of the call until 11:59 PM Eastern Time on November 7, 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 6573810.

Financial Presentation

The Company is providing certain non-GAAP financial measures in this release as the Company believes that these figures are helpful in allowing individuals to more accurately assess the ongoing nature of the Company's operations and measure the Company's performance more consistently.

The non-GAAP information presented above in the third and fourth bullet under "Third Quarter Summary" and sixth through eighth bullets under "Statement of Earnings" excludes the non-cash intangible asset impairment charge related to the Kansas contract non-renewal notification. This exclusion has been made in the non-GAAP financial measures as management believes that this charge is an unusual event.

The Company uses the presented non-GAAP financial measures internally to focus management on period-to-period changes in the Company's core business. Therefore, the Company believes that this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

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, managed vision, nurse triage, pharmacy benefits management and treatment compliance. Information regarding Centene is available via the Internet at www.centene.com.

The information provided in this press release contains 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.

                            (Tables Follow)
                 CENTENE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS
                  (In thousands, except share data)

                                            September 30, December 31,
                                                2006          2005
                                            ------------- ------------
                                                    (Unaudited)

                  ASSETS
Current assets:
      Cash and cash equivalents                 $200,480     $147,358
      Premium and related receivables, net
       of allowances of $125 and $343,
       respectively                               86,108       44,108
      Short-term investments, at fair value
       (amortized cost $67,679 and $56,863,
       respectively)                              67,392       56,700
      Other current assets                        20,776       24,439
                                            ------------- ------------
            Total current assets                 374,756      272,605
Long-term investments, at fair value
 (amortized cost $148,415 and $126,039,
 respectively)                                   146,666      123,661
Restricted deposits, at fair value
 (amortized cost $25,691 and $22,821,
 respectively)                                    25,565       22,555
Property, software and equipment, net            103,175       67,199
Goodwill                                         136,519      157,278
Other intangible assets, net                      14,949       17,368
Other assets                                      12,211        7,364
                                            ------------- ------------
            Total assets                        $813,841     $668,030
                                            ============= ============

   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
      Medical claims liabilities                $246,669     $170,514
      Accounts payable and accrued expenses       67,957       29,790
      Unearned revenue                            18,597       13,648
      Current portion of long-term debt and
       notes payable                               1,032          699
                                            ------------- ------------
            Total current liabilities            334,255      214,651
Long-term debt                                   168,429       92,448
Other liabilities                                  5,252        8,883
                                            ------------- ------------
            Total liabilities                    507,936      315,982
Stockholders' equity:
      Common stock, $.001 par value;
       authorized 100,000,000 shares;
       issued and outstanding 43,168,505
       and 42,988,230 shares, respectively            44           43
      Additional paid-in capital                 202,760      191,840
      Accumulated other comprehensive
       income:
            Unrealized loss on investments,
             net of tax                           (1,356)      (1,754)
      Retained earnings                          104,457      161,919
                                            ------------- ------------
            Total stockholders' equity           305,905      352,048
                                            ------------- ------------
            Total liabilities and
             stockholders' equity               $813,841     $668,030
                                            ============= ============

See notes to consolidated financial statements.

                 CENTENE CORPORATION AND SUBSIDIARIES

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

                         Three Months Ended       Nine Months Ended
                            September 30,           September 30,
                       ----------------------- -----------------------
                          2006        2005        2006        2005
                       ----------- ----------- ----------- -----------
                             (Unaudited)             (Unaudited)
Revenues:
  Premium                $610,661    $395,667  $1,522,302  $1,075,027
  Service                  20,588       4,975      59,318       7,619
                       ----------- ----------- ----------- -----------
   Total revenues         631,249     400,642   1,581,620   1,082,646
                       ----------- ----------- ----------- -----------
Expenses:
  Medical costs           501,350     331,050   1,263,251     881,021
  Cost of services         15,373       2,002      45,278       3,573
  General and
   administrative
   expenses                93,991      52,450     233,654     139,274
  Impairment loss          87,091           -      87,091           -
                       ----------- ----------- ----------- -----------
   Total operating
    expenses              697,805     385,502   1,629,274   1,023,868
                       ----------- ----------- ----------- -----------
      Earnings (loss)
       from operations    (66,556)     15,140     (47,654)     58,778
Other income
 (expense):
  Investment and other
   income                   4,625       2,818      12,056       7,461
  Interest expense         (3,082)     (1,190)     (7,536)     (2,386)
                       ----------- ----------- ----------- -----------
      Earnings (loss)
       before income
       taxes              (65,013)     16,768     (43,134)     63,853
Income tax expense          6,180       4,662      14,328      22,087
                       ----------- ----------- ----------- -----------
   Net earnings (loss)   $(71,193)    $12,106    $(57,462)    $41,766
                       =========== =========== =========== ===========

Earnings (loss) per
 share:
  Basic earnings
   (loss) per common
   share                   $(1.65)      $0.28      $(1.33)      $0.99
  Diluted earnings
   (loss) per common
   share                   $(1.65)      $0.27      $(1.33)      $0.93

Weighted average
 number of shares
 outstanding:
  Basic                43,219,053  42,582,129  43,126,062  42,120,149
  Diluted              43,219,053  45,278,328  43,126,062  45,078,852

See notes to consolidated financial statements.

                 CENTENE CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands)

                                                    Nine Months Ended
                                                      September 30,
                                                   -------------------
                                                     2006      2005
                                                   --------- ---------
                                                       (Unaudited)

Cash flows from operating activities:
   Net earnings (loss)                             $(57,462)  $41,766
   Adjustments to reconcile net earnings (loss) to
    net cash provided by operating activities --
         Depreciation and amortization               15,286     9,658
         Excess tax benefits from stock
          compensation                                   --     4,511
         Stock compensation expense                  11,168     3,557
         Impairment loss                             87,091        --
         Loss on sale of investments                     33        58
         Deferred income taxes                       (4,493)   (3,567)
   Changes in assets and liabilities --
         Premium and related receivables            (34,209)   (9,396)
         Other current assets                         2,705    (1,990)
         Other assets                                  (455)   (1,380)
         Medical claims liabilities                  74,367   (17,091)
         Unearned revenue                             4,816     5,892
         Accounts payable and accrued expenses       25,929    11,798
         Other operating activities                    (221)    1,096
                                                   --------- ---------
                  Net cash provided by operating
                   activities                       124,555    44,912
                                                   --------- ---------
Cash flows from investing activities:
   Purchase of property, software and equipment     (39,494)  (16,837)
   Purchase of investments                         (235,501) (108,630)
   Sales and maturities of investments              200,155   129,095
   Acquisitions, net of cash acquired               (66,921)  (55,410)
                                                   --------- ---------
                  Net cash used in investing
                   activities                      (141,761)  (51,782)
                                                   --------- ---------
Cash flows from financing activities:
   Proceeds from exercise of stock options            4,594     3,925
   Proceeds from borrowings                          83,359    45,000
   Payment of long-term debt and notes payable      (12,505)   (4,323)
   Excess tax benefits from stock compensation        2,094        --
   Common stock repurchases                          (7,214)       --
   Other financing activities                            --      (413)
                                                   --------- ---------
                  Net cash provided by financing
                   activities                        70,328    44,189
                                                   --------- ---------
                  Net increase in cash and cash
                   equivalents                       53,122    37,319
                                                   --------- ---------
Cash and cash equivalents, beginning of period      147,358    84,105
                                                   --------- ---------
Cash and cash equivalents, end of period           $200,480  $121,424
                                                   ========= =========


   Interest paid                                     $7,582    $2,184
   Income taxes paid                                 $5,223   $19,658

Supplemental schedule of non-cash financing
 activities:
   Common stock issued for acquisitions                 $--    $8,991

See notes to consolidated financial statements.

                         CENTENE CORPORATION

                     SUPPLEMENTAL FINANCIAL DATA

                                   Q3         Q2        Q1       Q4
                                 2006       2006      2006     2005
                               ---------- ---------- -------- --------
MEMBERSHIP
Medicaid Managed Care:
  Georgia                        252,600    216,000        -        -
  Indiana                        198,100    193,000  193,000  193,300
  Kansas                         112,400    117,100  118,200  113,300
  Missouri                        32,200     32,900   34,500   36,000
  New Jersey                      59,100     59,000   57,500   56,500
  Ohio                            88,300     73,100   59,000   58,700
  Texas                          259,900    235,800  237,500  242,000
  Wisconsin                      167,100    174,600  175,100  172,100
                               ---------- ---------- -------- --------
TOTAL                          1,169,700  1,101,500  874,800  871,900
                               ========== ========== ======== ========
  Medicaid                       922,300    863,500  683,700  681,100
  SCHIP                          229,400    221,600  175,300  175,900
  SSI                             18,000     16,400   15,800   14,900
                               ---------- ---------- -------- --------
TOTAL                          1,169,700  1,101,500  874,800  871,900
                               ========== ========== ======== ========

Specialty Services(a):
  Arizona                         94,500     93,600   92,300   94,700
  Kansas                          37,500     39,400   39,200   38,800
                               ---------- ---------- -------- --------
TOTAL                            132,000    133,000  131,500  133,500
                               ========== ========== ======== ========

(a) Includes behavioral health contracts only.
REVENUE PER MEMBER(b)            $169.98    $159.33  $157.17  $152.48

CLAIMS(b)
  Period-end inventory           233,500    186,200  229,800  255,000
  Average inventory              188,600    150,100  175,200  153,500
  Period-end inventory per
   member                           0.20       0.17     0.26     0.29
(b) Revenue per member and claims information are presented for the
 Medicaid Managed Care segment.

DAYS IN CLAIMS PAYABLE (c)          45.3       42.6     43.0     45.4
(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                       $411.1     $323.9   $314.0   $322.6
  Unregulated                       29.0       25.5     25.8     27.7
                               ---------- ---------- -------- --------
TOTAL                             $440.1     $349.4   $339.8   $350.3
                               ========== ========== ======== ========

ANNUALIZED RETURN ON EQUITY (d)   (83.8)%       5.4%     9.8%    16.2%
(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     Nine Months Ended
                              September 30,          September 30,
                          ---------------------- ---------------------
                             2006       2005       2006       2005
                          ----------- ---------- ---------- ----------
Medicaid and SCHIP           82.0%      83.1%      82.8%      81.6%
SSI                          84.1       96.2       86.2       92.6
Specialty Services           82.9       87.2       83.5       88.7
GENERAL AND ADMINISTRATIVE EXPENSE RATIO BY BUSINESS SEGMENT:

                          Three Months Ended      Nine Months Ended
                             September 30,          September 30,
                        ----------------------- ----------------------
                           2006        2005       2006        2005
                        -----------  ---------- ----------  ----------
Medicaid Managed Care      12.1%       10.6%      12.1%       10.6%
Specialty Services         17.0        30.2       18.3        38.9
                      MEDICAL CLAIMS LIABILITIES
                            (In thousands)

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

Balance, September 30, 2005                                  $148,889
Acquisitions                                                    1,788
Incurred related to:
   Current period                                           1,618,282
   Prior period                                                (9,144)
                                                            ----------
      Total incurred                                        1,609,138
                                                            ----------
Paid related to:
   Current period                                           1,374,777
   Prior period                                               138,369
                                                            ----------
      Total paid                                            1,513,146
                                                            ----------
Balance, September 30, 2006                                  $246,669
                                                            ==========

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.

CONTACT: Centene Corporation
Chief Financial Officer:
J. Per Brodin, 314-725-4477
or
Senior Vice President, Investor Relations:
Lisa M. Wilson, 212-759-3929

SOURCE: Centene Corporation