Centene Corporation Reports 2007 First Quarter Results

April 24, 2007 at 6:01 AM EDT

ST. LOUIS--(BUSINESS WIRE)--April 24, 2007--Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended March 31, 2007. The revenues, general and administrative expenses and related financial ratios included in this release present premium taxes on a gross basis consistent with our past reporting practice.


------------------------------------------------------------------
                        Q1 2007 Highlights
Total Revenues (in millions)                               $670.8
Medicaid/SCHIP HBR                                           82.3%
Diluted EPS (as reported)                                   $0.85
Diluted EPS excluding FirstGuard activity                   $0.26
------------------------------------------------------------------
    First Quarter Summary

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

    --  Revenues of $670.8 million, a 47.4% increase over the 2006
        first quarter.

    --  Earnings per diluted share of $0.26, excluding FirstGuard
        activity, compared to $0.20 in the 2006 first quarter. Total
        earnings per diluted share of $0.85 include a $0.67 FirstGuard
        tax benefit offset by $0.08 of other FirstGuard activity. The
        2007 first quarter results also include $0.01 of South
        Carolina start-up costs.

    --  Health Benefits Ratio (HBR) for Centene's Medicaid and SCHIP
        populations, which reflects medical costs as a percent of
        premium revenues, of 82.3%.

    --  Medicaid Managed Care G&A expense ratio of 13.0% and Specialty
        Services G&A ratio of 15.8%.

    --  Operating cash flows of $36.0 million.

    --  Days in claims payable of 46.4.

    Other Events

    --  Commenced operations in Texas under a new contract to provide
        managed care for SSI recipients in the San Antonio and Corpus
        Christi markets with 28,700 members at March 31.

    --  Commenced operations in three of the four new regions awarded
        in the Ohio Medicaid ABD contract with 10,700 members at March
        31.

    --  Received notice of contract award of the Texas Comprehensive
        Health Care for Foster Care. Operations are scheduled to
        commence in the fourth quarter of 2007.

    --  Sold the assets of our FirstGuard Missouri health plan,
        effective February 1, 2007.

    --  Issued $175.0 million senior unsecured notes to refinance our
        revolving credit facility balance.

    --  In April 2007, we acquired PhyTrust of South Carolina, a
        physician-driven company that serves over 30,000 members.

Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, stated, "During the first quarter of 2007 we performed within our range of expectations including a predictable level of seasonality. We commenced the Texas STAR Plus roll-out with initial membership ahead of our expectations; in Ohio, the ABD roll-out is on track. We were pleased during the quarter to announce the receipt of the Texas Foster Care contract award to serve approximately 30,000 foster care recipients in the state. We are currently in the process of building the technology infrastructure required to offer this innovative product and look forward to working with the state for a 4th quarter implementation. Although this contract has an initial overall dilutive effect on the current year, the impact on future years will produce a significant return on investment to Centene. We are also optimistic that we will be able to offer this product in other markets.

"Based upon ongoing initiatives to focus on profitability and to enter into disciplined contracts with providers, membership declines in Indiana and Wisconsin were as expected. During the quarter, the termination of certain physician contracts associated with a high-cost hospital system in Wisconsin led to the resulting membership decline and in Indiana, we focused on a smaller group of doctors as part of our state-wide contract award.

"In Georgia, our membership was consistent with our expectations. During the first quarter, the state imposed member recertification requirements commencing on January 1, 2007, which resulted in the loss of our own Peach State members. Regarding claims processing, effective February 28, 2007, we have met the state's requirements, and have substantially reduced claims backlog.

"We've continued to see the benefits of the medical management enhancements we put in place to effectively control costs. It is important to us that we continue to build the business with sustainable processes," concluded Neidorff.

The following table depicts membership in Centene's managed care organizations by state at March 31, 2007 and 2006:

                                          2007         2006
                                   ------------ ------------
Georgia                                291,300           --
Indiana                                176,700      193,000
New Jersey                              59,100       57,500
Ohio                                   118,300       59,000
Texas                                  318,500      237,500
Wisconsin                              139,400      175,100
                                   ------------ ------------
  Subtotal                           1,103,300      722,100
Kansas and Missouri                         --      152,700
                                   ------------ ------------
  Total                              1,103,300      874,800
                                   ============ ============

The following table depicts membership in Centene's managed care organizations by member category at March 31, 2007 and 2006:

                                                2007          2006
                                           ------------- -------------
Medicaid                                     839,600       574,300
SCHIP                                        211,200       132,000
SSI                                           52,500 (a)    15,800 (b)
                                           ------------- -------------
  Subtotal                                 1,103,300       722,100
Kansas and Missouri Medicaid/SCHIP members        --       152,700
                                           ------------- -------------
  Total                                    1,103,300       874,800
                                           ============= =============
    (a) 48,400 at-risk; 4,100 ASO

    (b) 8,600 at-risk; 7,200 ASO

    Statement of Operations

    --  For the 2007 first quarter, revenues increased 47.4% to $670.8
        million from $455.1 million in the 2006 first quarter.

    --  The HBR for Centene's Medicaid and SCHIP populations, which
        reflects medical costs as a percent of premium revenues, was
        82.3% for the three months ending March 31, 2007, compared to
        82.8% for the same period in 2006. The decrease is primarily
        attributable to the effect of increased premium taxes.
        Sequentially, our Medicaid/SCHIP HBR increased from 82.1% in
        the 2006 fourth quarter to 82.3% because of utilization
        seasonality. The HBR for the three months ended March 31,
        2007, did not include any overall adverse medical cost
        development related to prior periods.

    --  G&A expense as a percent of revenues for the Medicaid Managed
        Care segment was 13.0% in the first quarter of 2007 compared
        to 11.9% in the first quarter of 2006. The increase in the
        Medicaid Managed Care G&A expense ratio for the three months
        ended March 31, 2007, primarily reflects increased premium
        taxes. Premium taxes were $18.2 million in the 2007 first
        quarter and $4.3 million in the 2006 first quarter. This
        increase was offset by the leveraging of our expenses over
        higher revenues especially in our Georgia health plan. The
        first quarter of 2006 included $4.5 million of Georgia
        implementation costs for which there was no associated revenue
        until June 1, 2006. The first quarter of 2007 includes $0.7
        million of South Carolina start-up costs.

    --  Operating earnings were $17.2 million, including a $4.2
        million gain on the sale of FirstGuard Missouri and $2.9
        million of net expense for FirstGuard activity. Excluding the
        gain and other FirstGuard activity, operating earnings were
        $15.8 million compared to $12.6 million in the 2006 first
        quarter.

    --  The first quarter results included a tax benefit from the
        stock of our Kansas health plan, a gain from the sale of our
        Missouri health plan and additional FirstGuard activity. The
        net effect of these FirstGuard activities was $0.59 accretive
        to earnings per diluted share; $0.67 accretion per diluted
        share for the FirstGuard tax benefit, offset by net costs of
        $0.08 per diluted share for other FirstGuard activity.

    --  Earnings per diluted share of $0.85. Earnings per diluted
        share of $0.26 excluding the FirstGuard activity, compared to
        $0.20 in the 2006 first quarter.

    Balance Sheet and Cash Flow

At March 31, 2007, the Company had cash and investments of $562.8 million, including $491.0 million held by its regulated entities and $71.8 million held by its unregulated entities. Medical claims liabilities totaled $276.0 million, representing 46.4 days in claims payable. Total debt was $201.4 million and debt to capitalization was 35.3%.

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, December 31, 2006                        46.4
Increase in claims inventory                                      1.7
Increase for new SSI markets                                      0.2
Georgia and FirstGuard claims                                    (1.9)
                                                               -------
Days in claims payable, March 31, 2007                           46.4
                                                               =======

Outlook

The tables below depict the Company's guidance for the 2007 second quarter and full year.

J. Per Brodin, Centene's Chief Financial Officer, stated, "The 2007 guidance reflects our recently announced award with Texas to provide care under the Comprehensive Health Care for Children in Foster Care and the commencement of operations in South Carolina."

                                                         Q2 2007
                                                   -------------------
                                                      Low      High
                                                   --------- ---------
Revenue (in millions)                                  $720      $730
Earnings per diluted share:
  Base earnings                                       $0.31     $0.34
  South Carolina/Texas Foster Care                    (0.06)    (0.06)
                                                   --------- ---------
  Net                                                 $0.25     $0.28
                                                   ========= =========
                                                         2007
                                                 ---------------------
                                                    Low        High
                                                 ---------- ----------
Revenue (in millions)                               $2,920     $3,000
Earnings per diluted share:
  Base earnings                                      $2.10      $2.20
  FirstGuard activity                                (0.59)     (0.59)
  South Carolina/Texas Foster Care                   (0.15)     (0.12)
                                                 ---------- ----------
  Net                                                $1.36      $1.49
                                                 ========== ==========

Conference Call

As previously announced, the Company will host a conference call Tuesday, April 24, 2007, at 8:30 A.M. (Eastern Time) to review the financial results for the first quarter ended March 31, 2007, 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 P.M. (Eastern Time) on May 23, 2007, 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 3639977.

Non-GAAP 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 "highlights" table, third bullet under "First Quarter Summary" and fourth and sixth bullets under "Statement of Operations" excludes the tax benefit related to the stock of our Kansas health plan and other activity for the Kansas and Missouri health plans. This exclusion has been made in the non-GAAP financial measures as management believes that the tax benefit is an unusual event and the Kansas and Missouri health plans are not indicative of future company operations.

The Company uses the presented non-GAAP financial measures internally to focus management on period-to-period changes in the Company's core business operations. 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.

The following table reconciles the Company's Statement of Operations for the first quarter of 2007 on a GAAP basis to a non-GAAP basis. The non-GAAP basis excludes the FirstGuard activity (in thousands, except share data).

                                            Three Months Ended
                                               March 31, 2007
                                      --------------------------------
                                                 FirstGuard
                                         GAAP     Activity   Non-GAAP
                                      ---------- ---------- ----------

Total revenues                         $670,835    $(6,601)  $664,234
Expenses:
  Medical costs                         535,406     (6,886)   528,520
  Cost of services                       15,630         --     15,630
  General and administrative expenses   106,866     (2,583)   104,283
  Gain on sale of FirstGuard Missouri    (4,218)     4,218         --
                                      ---------- ---------- ----------
    Total operating expenses            653,684     (5,251)   648,433
                                      ---------- ---------- ----------
      Earnings from operations           17,151     (1,350)    15,801
  Investment and other income, net        1,369      1,516      2,885
                                      ---------- ---------- ----------
      Earnings before income taxes       18,520        166     18,686
Income tax (benefit) expense            (19,691)    26,780      7,089
                                      ---------- ---------- ----------
    Net earnings                        $38,211   $(26,614)   $11,597
                                      ========== ========== ==========

Diluted earnings per common share         $0.85                 $0.26

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 the State Children's Health Insurance Program (SCHIP) and Supplemental Security Income (SSI). The Company operates health plans in Georgia, Indiana, New Jersey, Ohio, Texas and Wisconsin. In addition, the Company contracts with other healthcare and commercial organizations to provide specialty services including behavioral health, disease management, long-term care, 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.

                 CENTENE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS
                  (In thousands, except share data)


                                             March 31,   December 31,
                                               2007          2006
                                           ------------- -------------
                                                   (Unaudited)
                  ASSETS
Current assets:
  Cash and cash equivalents                    $311,905      $271,047
  Premium and related receivables                78,076        91,664
  Short-term investments, at fair value
   (amortized cost $43,309 and $67,199,
   respectively)                                 43,054        66,921
  Other current assets                           48,499        22,189
                                           ------------- -------------
    Total current assets                        481,534       451,821
Long-term investments, at fair value
 (amortized cost $183,388 and $146,980,
 respectively)                                  182,267       145,417
Restricted deposits, at fair value
 (amortized cost $25,662 and $25,422,
 respectively)                                   25,562        25,265
Property, software and equipment, net           121,403       110,688
Goodwill                                        130,484       135,877
Other intangible assets, net                     16,011        16,202
Other assets                                     14,116         9,710
                                           ------------- -------------
      Total assets                             $971,377      $894,980
                                           ============= =============

   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Medical claims liabilities                   $275,965      $280,441
  Accounts payable and accrued expenses          75,842        72,723
  Unearned revenue                               38,613        33,816
  Current portion of long-term debt                 965           971
                                           ------------- -------------
    Total current liabilities                   391,385       387,951
Long-term debt                                  200,404       174,646
Other liabilities                                10,124         5,960
                                           ------------- -------------
      Total liabilities                         601,913       568,557
Stockholders' equity:
  Common stock, $.001 par value; authorized
   100,000,000 shares; issued and
   outstanding 43,448,324 and 43,369,918
   shares, respectively                              44            44
  Additional paid-in capital                    213,797       209,340
  Accumulated other comprehensive income:
    Unrealized loss on investments, net of
     tax                                           (925)       (1,251)
  Retained earnings                             156,548       118,290
                                           ------------- -------------
      Total stockholders' equity                369,464       326,423
                                           ------------- -------------
      Total liabilities and stockholders'
       equity                                  $971,377      $894,980
                                           ============= =============
                 CENTENE CORPORATION AND SUBSIDIARIES

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


                                                 Three Months Ended
                                                      March 31,
                                               -----------------------
                                                     2007        2006
                                               ----------- -----------
                                                     (Unaudited)
Revenues:
  Premium                                        $649,243    $435,562
  Service                                          21,592      19,516
                                               ----------- -----------
    Total revenues                                670,835     455,078
                                               ----------- -----------
Expenses:
  Medical costs                                   535,406     361,672
  Cost of services                                 15,630      15,588
  General and administrative expenses             106,866      65,222
  Gain on sale of FirstGuard Missouri              (4,218)         --
                                               ----------- -----------
    Total operating expenses                      653,684     442,482
                                               ----------- -----------
      Earnings from operations                     17,151      12,596
                                               ----------- -----------
Other income (expense):
  Investment and other income                       4,501       3,540
  Interest expense                                 (3,132)     (1,998)
                                               ----------- -----------
      Earnings before income taxes                 18,520      14,138
Income tax (benefit) expense                      (19,691)      5,372
                                               ----------- -----------
    Net earnings                                  $38,211      $8,766
                                               =========== ===========

Earnings per share:
  Basic earnings per common share                   $0.88       $0.20
  Diluted earnings per common share                 $0.85       $0.20

Weighted average number of shares outstanding:
  Basic                                        43,433,319  42,987,892
  Diluted                                      44,923,340  44,750,271
                 CENTENE CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands)


                                                   Three Months Ended
                                                        March 31,
                                                   -------------------
                                                       2007      2006
                                                   --------- ---------
                                                       (Unaudited)

Cash flows from operating activities:
  Net earnings                                      $38,211    $8,766
  Adjustments to reconcile net earnings to net cash
   provided by operating activities --
    Depreciation and amortization                     6,274     4,520
    Stock compensation expense                        3,871     3,417
    Deferred income taxes                            (1,398)      232
    Gain on sale of FirstGuard Missouri              (4,218)       --
  Changes in assets and liabilities --
    Premium and related receivables                  13,588   (15,812)
    Other current assets                            (26,336)   (2,894)
    Other assets                                       (636)     (158)
    Medical claims liabilities                       (4,340)    2,278
    Unearned revenue                                  4,796      (934)
    Accounts payable and accrued expenses             1,309     9,937
    Other operating activities                        4,859        (9)
                                                   --------- ---------
      Net cash provided by operating activities      35,980     9,343
                                                   --------- ---------
Cash flows from investing activities:
  Purchase of property, software and equipment      (14,794)  (14,136)
  Purchase of investments                          (135,866)  (53,194)
  Sales and maturities of investments               122,835    33,827
  Proceeds from asset sales                          10,848        --
  Acquisitions, net of cash acquired                   (400)  (39,912)
                                                   --------- ---------
      Net cash used in investing activities         (17,377)  (73,415)
                                                   --------- ---------
Cash flows from financing activities:
  Proceeds from exercise of stock options               868     2,139
  Proceeds from borrowings                          191,000    37,000
  Payment of long-term debt                        (165,248)   (2,285)
  Excess tax benefits from stock compensation           417     1,454
  Common stock repurchases                             (644)   (3,082)
  Debt issue costs                                   (4,138)       --
                                                   --------- ---------
      Net cash provided by financing activities      22,255    35,226
                                                   --------- ---------
      Net increase (decrease) in cash and cash
       equivalents                                   40,858   (28,846)
                                                   --------- ---------
Cash and cash equivalents, beginning of period      271,047   147,358
                                                   --------- ---------
Cash and cash equivalents, end of period           $311,905  $118,512
                                                   ========= =========

  Interest paid                                      $2,999    $2,037
  Income taxes paid                                  $5,801      $911
                         CENTENE CORPORATION

                     SUPPLEMENTAL FINANCIAL DATA


                               Q1         Q4         Q3         Q2
                             2007       2006       2006       2006
                           ---------- ---------- ---------- ----------
MEMBERSHIP
Medicaid Managed Care:
  Georgia                    291,300    308,800    252,600    216,000
  Indiana                    176,700    183,100    198,100    193,000
  New Jersey                  59,100     58,900     59,100     59,000
  Ohio                       118,300    109,200     88,300     73,100
  Texas                      318,500    298,500    259,900    235,800
  Wisconsin                  139,400    164,800    167,100    174,600
                           ---------- ---------- ---------- ----------
    Subtotal               1,103,300  1,123,300  1,025,100    951,500
  Kansas and Missouri             --    138,900    144,600    150,000
                           ---------- ---------- ---------- ----------
      TOTAL                1,103,300  1,262,200  1,169,700  1,101,500
                           ========== ========== ========== ==========

  Medicaid                   839,600    887,300    818,000    755,400
  SCHIP                      211,200    216,200    189,100    179,700
  SSI                         52,500     19,800     18,000     16,400
                           ---------- ---------- ---------- ----------
    Subtotal               1,103,300  1,123,300  1,025,100    951,500
  Kansas and Missouri
   Medicaid and SCHIP
   members                        --    138,900    144,600    150,000
                           ---------- ---------- ---------- ----------
      TOTAL                1,103,300  1,262,200  1,169,700  1,101,500
                           ========== ========== ========== ==========

Specialty Services(a):
  Arizona                     93,600     94,500     94,500     93,600
  Kansas                      36,600     36,600     37,500     39,400
                           ---------- ---------- ---------- ----------
      TOTAL                  130,200    131,100    132,000    133,000
                           ========== ========== ========== ==========

(a) Includes behavioral health contracts only.

REVENUE PER MEMBER(b)        $185.90    $173.75    $169.98    $159.33

CLAIMS(b)
  Period-end inventory       326,000    296,100    233,500    186,200
  Average inventory          239,400    195,700    188,600    150,100
  Period-end inventory per
   member                       0.30       0.23       0.20       0.17

(b) Revenue per member and claims information are presented for the
 Medicaid Managed Care segment.
                                      Q1       Q4       Q3       Q2
                                    2007     2006     2006     2006
                                   -------- -------- -------- --------

DAYS IN CLAIMS PAYABLE (c)            46.4     46.4     45.3     42.6

(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                        $491.0   $479.8   $411.1   $323.9
   Unregulated                        71.8     28.9     29.0     25.5
                                   -------- -------- -------- --------
          TOTAL                     $562.8   $508.7   $440.1   $349.4
                                   ======== ======== ======== ========

ANNUALIZED RETURN ON EQUITY (d)       43.9%    17.5%  (83.8)%     5.4%

(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).

DEBT TO CAPITALIZATION (e)            35.3%    35.0%    35.6%    30.7%

(e) Debt to Capitalization is calculated as follows: total debt
 divided by (total debt + equity).

HEALTH BENEFITS RATIO BY CATEGORY:

                                                   Three Months Ended
                                                        March 31,
                                                   -------------------
                                                       2007      2006
                                                   --------- ---------
Medicaid and SCHIP                                     82.3%     82.8%
SSI                                                    86.3      87.6
Specialty Services                                     79.3      84.1
    GENERAL AND ADMINISTRATIVE EXPENSE RATIO BY BUSINESS SEGMENT:
                                                   Three Months Ended
                                                        March 31,
                                                   -------------------
                                                       2007      2006
                                                   --------- ---------
Medicaid Managed Care                                  13.0%     11.9%
Specialty Services                                     15.8      22.3

MEDICAL CLAIMS LIABILITIES (In thousands)

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

Balance, March 31, 2006                   $172,792
Acquisitions                                 1,788
Incurred related to:
  Current period                         1,993,912
  Prior period                                (367)
                                  -----------------
    Total incurred                       1,993,545
                                  =================
Paid related to:
  Current period                         1,721,354
  Prior period                             170,806
                                  -----------------
    Total paid                           1,892,160
                                  -----------------
Balance, March 31, 2007                   $275,965
                                  =================

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

SOURCE: Centene Corporation