Centene Corporation Reports 2008 Second Quarter Earnings

July 22, 2008 at 6:01 AM EDT

ST. LOUIS--(BUSINESS WIRE)--July 22, 2008--Centene Corporation (NYSE: CNC) today announced its net earnings from continuing operations for the quarter ended June 30, 2008 were $18.0 million, or $0.41 per diluted share, compared to $10.2 million, or $0.23 per diluted share in the 2007 second quarter. As a reminder, the 2008 first quarter results included the benefit of the July 1 through December 31, 2007 period rate increase for Georgia of approximately $0.28 per diluted share. Unless specifically noted, the discussions below are in the context of continuing operations.

    Second Quarter Highlights

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

    --  Revenues of $860.1 million, or $837.9 million net of premium
        taxes, an 18.2% increase over the 2007 second quarter.

    --  Health Benefits Ratio (HBR), which reflects medical costs as a
        percent of premium revenues, of 83.3%, compared to 83.6% in
        the 2007 second quarter.

    --  General and administrative (G&A) expense ratio of 13.5%,
        compared to 14.4% in the 2007 second quarter.

    --  Cash flow from operations of $60.0 million.

    --  Days in claims payable of 48.5.

    Other Events

    --  Commenced operations under our Texas Foster Care contract,
        effective April 1, 2008.

    --  Repurchased 347,432 shares during the second quarter for
        approximately $6.4 million.

    --  Completed the previously announced acquisition of Celtic
        Insurance Company, or Celtic, a health insurance carrier
        focused on the individual health insurance market, effective
        July 1, 2008.

    --  Concluded operations for SSI recipients in the Northwest
        region of Ohio, effective June 30, 2008.

    --  Awarded a contract by the Arizona Health Care Cost Containment
        System to provide Acute Care services to Medicaid recipients
        in the Yavapai service area. Membership operations are
        expected to commence on October 1, 2008.

Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, stated, "We are pleased with the progress our results show this quarter and believe they set a foundation for improvement that we can build on for the rest of 2008 and beyond. Our team remains committed to the goal of margin expansion and we expect to achieve a runrate pretax margin of 4% by the end of 2008 through focused medical management and G&A leverage. While the new growth opportunities available to us remain robust, we will employ a disciplined and selective approach to pursuing them," concluded Neidorff.

The following table depicts membership in Centene's managed care organizations, by state, at June 30, 2008 and 2007:


----------------------------------------------------------------------
                                                    2008       2007
                                                 ---------- ----------
 Georgia                                            278,800    281,400
 Indiana                                            161,700    161,700
 New Jersey                                          55,100     59,100
 Ohio                                               137,300    128,200
 South Carolina(a)                                   22,500     31,100
 Texas                                              427,200    333,900
 Wisconsin                                          124,800    136,100
                                                 ---------- ----------
   Total                                          1,207,400  1,131,500
                                                 ========== ==========

(a) Reflects the conversion of South Carolina membership from non-risk
 in 2007 to full risk in 2008.

----------------------------------------------------------------------

The following table depicts membership in Centene's managed care organizations, by member category, at June 30, 2008 and 2007:


----------------------------------------------------------------------
                                               2008         2007
                                            ----------   ----------
 Medicaid                                      866,700      846,900
 SCHIP/Foster Care                             267,000      216,500
 SSI/Medicare                                   73,700       68,100
                                            ----------   ----------
   Total                                     1,207,400(a) 1,131,500(b)
                                            ==========   ==========

(a) 1,203,900 at-risk; 3,500 ASO
(b) 1,097,200 at-risk; 34,300 ASO
----------------------------------------------------------------------
    Statement of Operations

    --  For the 2008 second quarter, revenues, net of premium taxes,
        increased 18.4% to $837.9 million from $707.9 million in the
        2007 second quarter. The increase was primarily driven by
        premium rate increases in Georgia, membership growth in Texas
        and Ohio, which are the two markets that added SSI products in
        2007, as well as growth in Texas from the new Foster Care
        contract commencing in April 2008.

    --  The consolidated HBR, which reflects medical costs as a
        percent of premium revenues, was 83.3%, a decrease from 83.6%
        in the 2007 second quarter. The decrease is primarily due to
        overall increased premium yield and improvement in our Georgia
        market. Sequentially, our consolidated HBR increased from
        83.0% in the 2008 first quarter to 83.3% due to the effect of
        the Georgia rate increase included in the first quarter,
        offset by moderating medical cost trends, especially related
        to SSI members in Ohio.

    --  Consolidated G&A expense as a percent of premium and service
        revenues was 13.5% in the second quarter of 2008, a decrease
        from 14.4% in the second quarter of 2007.

    --  Earnings per diluted share from continuing operations were
        $0.41, compared to $0.23 in the 2007 second quarter.

    Balance Sheet and Cash Flow

At June 30, 2008, the Company had cash and investments of $709.9 million, including $680.9 million held by its regulated entities and $29.0 million held by its unregulated entities. Medical claims liabilities totaled $363.7 million, representing 48.5 days in claims payable, an increase of 2.3 days from June 30, 2007 and a decrease of 0.8 days from March 31, 2008. Total debt was $222.1 million and debt to capitalization was 32.6%. Year to date cash flow from operations was $86.7 million.

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, 2008                           49.3
Effect of the addition of Foster Care                            (0.3)
Change in provider bonus accrual                                 (0.2)
Claims inventory reduction                                       (0.3)
                                                          ------------
Days in claims payable, June 30, 2008                            48.5
                                                          ============

----------------------------------------------------------------------

Outlook

The table below depicts the Company's annual guidance for 2008:


----------------------------------------------------------------------

                                                  Full Year 2008
                                            --------------------------
                                                 Low          High
                                            ------------- ------------
Revenue (in millions)(1)                           $3,360       $3,410
Earnings per diluted share                          $1.87        $1.97

-----------------------------------------
(1) Revenue net of premium tax
----------------------------------------------------------------------

Eric R. Slusser, Centene's Chief Financial Officer, stated, "We are increasing our revenue guidance, but maintaining our previous earnings per share guidance for the year. With the acquisition of Celtic and our new Arizona contract, our revenue expectations have increased for the second half of the year. However, we do not expect either of these to have a material contribution to earnings in 2008. We are optimistic about the second half of the year as we continue to invest in infrastructure and execute on new and existing opportunities. We continue to expect an overall HBR range for the full year of 82.0% to 84.0%."

Conference Call

As previously announced, the Company will host a conference call Tuesday, July 22, 2008, at 8:00 A.M. (Eastern Time) to review the financial results for the second quarter ended June 30, 2008, and to discuss its business outlook. Michael F. Neidorff and Eric R. Slusser 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 August 5, 2008 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 51471537.

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), Foster Care, Supplemental Security Income (SSI) and Medicare (Special Needs Plans). The Company operates health plans in Arizona, Georgia, Indiana, New Jersey, Ohio, South Carolina, Texas and Wisconsin. In addition, the Company contracts with other healthcare and commercial organizations to provide specialty services including behavioral health, life and health 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.

(Tables Follow)

                 CENTENE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS
                  (In thousands, except share data)

                                             June 30,    December 31,
                                               2008          2007
                                            -----------  -------------
ASSETS                                             (Unaudited)
Current assets:
  Cash and cash equivalents                 $   357,488 $      268,584
  Premium and related receivables               113,233         90,072
  Short-term investments, at fair value
   (amortized cost $69,205 and $46,392,
   respectively)                                 69,524         46,269
  Other current assets                           38,602         41,414
                                             ----------  -------------
       Total current assets                     578,847        446,339
Long-term investments, at fair value
 (amortized cost $252,441 and $314,681,
 respectively)                                  254,578        317,041
Restricted deposits, at fair value
 (amortized cost $28,023 and $27,056,
 respectively)                                   28,283         27,301
Property, software and equipment, net           157,775        138,139
Goodwill                                        141,009        141,030
Other intangible assets, net                     12,177         13,205
Other assets                                     42,396         36,067
                                             ----------  -------------
       Total assets                         $ 1,215,065 $    1,119,122
                                             ==========  =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Medical claims liabilities                $   363,708 $      335,856
  Accounts payable and accrued expenses         148,535        105,096
  Unearned revenue                                5,266         44,016
  Current portion of long-term debt                 338            971
  Current liabilities of discontinued
   operations                                       200            861
                                             ----------  -------------
       Total current liabilities                518,047        486,800
Long-term debt                                  221,757        206,406
Other liabilities                                15,493         10,869
                                             ----------  -------------
       Total liabilities                        755,297        704,075
Stockholders' equity:
  Common stock, $.001 par value; authorized
   100,000,000 shares; issued and
   outstanding 43,261,883 and 43,667,837
   shares, respectively                              43             44
  Additional paid-in capital                    222,438        221,693
  Accumulated other comprehensive income:
    Unrealized gain on investments, net of
     tax                                          1,722          1,571
  Retained earnings                             235,565        191,739
                                             ----------  -------------
       Total stockholders' equity               459,768        415,047
                                             ----------  -------------
       Total liabilities and stockholders'
        equity                              $ 1,215,065 $    1,119,122
                                             ==========  =============
                 CENTENE CORPORATION AND SUBSIDIARIES

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

                     Three Months Ended         Six Months Ended
                           June 30,                  June 30,
                   ------------------------  ------------------------
                      2008         2007         2008         2007
                   -----------  -----------  -----------  -----------
                         (Unaudited)               (Unaudited)
Revenues:
 Premium           $   819,409  $   687,842  $ 1,592,887  $ 1,312,668
 Premium tax            22,192       19,874       44,823       37,690
 Service                18,466       20,015       38,996       41,607
                   -----------  -----------  -----------  -----------
    Total revenues     860,067      727,731    1,676,706    1,391,965
                   -----------  -----------  -----------  -----------
Expenses:
 Medical costs         682,589      575,146    1,324,208    1,103,666
 Cost of services       14,437       16,670       30,613       32,300
 General and
  administrative
  expenses             113,199      102,007      212,482      188,474
 Premium tax            22,192       19,874       44,823       37,690
                   -----------  -----------  -----------  -----------
    Total
     operating
     expenses          832,417      713,697    1,612,126    1,362,130
                   -----------  -----------  -----------  -----------
    Earnings from
     operations         27,650       14,034       64,580       29,835
Other income
 (expense):
 Investment and
  other income           5,600        6,588       13,369       12,605
 Interest expense       (4,065)      (4,213)      (8,059)      (7,345)
                   -----------  -----------  -----------  -----------
    Earnings
     before income
     taxes              29,185       16,409       69,890       35,095
Income tax expense      11,146        6,234       26,314       13,323
                   -----------  -----------  -----------  -----------
    Net earnings
     from
     continuing
     operations         18,039       10,175       43,576       21,772
    Discontinued
     operations,
     net of income
     tax expense
     (benefit) of
     $101,
     $(5,417),
     $153 and
     $(32,197),
     respectively          164        7,607          250       34,221
                   -----------  -----------  -----------  -----------
    Net earnings   $    18,203  $    17,782  $    43,826  $    55,993
                   ===========  ===========  ===========  ===========

Net earnings per
 share:
 Basic:
    Continuing
     operations    $      0.42  $      0.23  $      1.00  $      0.50
    Discontinued
     operations             --         0.18         0.01         0.79
                   -----------  -----------  -----------  -----------
    Basic earnings
     per common
     share         $      0.42  $      0.41  $      1.01  $      1.29
                   ===========  ===========  ===========  ===========
 Diluted:
    Continuing
     operations    $      0.41  $      0.23  $      0.98  $      0.49
    Discontinued
     operations             --         0.17         0.01         0.76
                   -----------  -----------  -----------  -----------
    Diluted
     earnings per
     common share  $      0.41  $      0.40  $      0.98  $      1.25
                   ===========  ===========  ===========  ===========

Weighted average
 number of shares
 outstanding:
  Basic             43,375,944   43,617,360   43,457,076   43,525,848
  Diluted           44,275,601   44,815,369   44,516,890   44,871,114
                 CENTENE CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands)

                                            Six Months Ended June 30,
                                            -------------------------
                                               2008          2007
                                            -----------  ------------
                                                   (Unaudited)

Cash flows from operating activities:
 Net earnings                               $    43,826  $     55,993
 Adjustments to reconcile net earnings to
  net cash provided by operating activities
  --
   Depreciation and amortization                 16,229        12,991
   Stock compensation expense                     7,839         7,837
   Deferred income taxes                         11,879          (327)
   Gain on sale of FirstGuard Missouri               --        (7,472)
 Changes in assets and liabilities --
   Premium and related receivables              (23,144)      (21,823)
   Other current assets                          (4,294)      (24,583)
   Other assets                                  (1,671)         (931)
   Medical claims liabilities                    27,316        15,035
   Unearned revenue                             (38,753)        8,203
   Accounts payable and accrued expenses         45,907        11,832
   Other operating activities                     1,542         3,119
                                            -----------  ------------
       Net cash provided by operating
        activities                               86,676        59,874
                                            -----------  ------------
Cash flows from investing activities:
 Purchases of property, software and
  equipment                                     (34,581)      (29,352)
 Purchases of investments                      (172,873)     (290,962)
 Sales and maturities of investments            210,277       196,407
 Proceeds from asset sales                           --        14,102
 Investments in acquisitions and equity
  method investee, net of cash acquired          (7,818)       (5,336)
                                            -----------  ------------
       Net cash used in investing activities     (4,995)     (115,141)
                                            -----------  ------------
Cash flows from financing activities:
 Proceeds from exercise of stock options          3,029         2,651
 Proceeds from borrowings                        56,005       191,000
 Payment of long-term debt                      (41,287)     (165,484)
 Excess tax benefits from stock compensation      2,792           797
 Common stock repurchases                       (13,316)       (3,231)
 Debt issue costs                                    --        (5,070)
                                            -----------  ------------
       Net cash provided by financing
        activities                                7,223        20,663
                                            -----------  ------------
       Net increase (decrease) in cash and
        cash equivalents                         88,904       (34,604)
                                            -----------  ------------
Cash and cash equivalents, beginning of
 period                                         268,584       271,047
                                            -----------  ------------
Cash and cash equivalents, end of period    $   357,488  $    236,443
                                            ===========  ============

 Interest paid                              $     7,590  $      3,738
 Income taxes paid                          $    15,966  $      6,049
                         CENTENE CORPORATION

          CONTINUING OPERATIONS SUPPLEMENTAL FINANCIAL DATA

                        Q2        Q1        Q4        Q3        Q2
                       2008      2008      2007      2007      2007
                     --------- --------- --------- --------- ---------
MEMBERSHIP
Managed Care:
  Georgia              278,800   282,700   287,900   286,200   281,400
  Indiana              161,700   161,300   154,600   156,300   161,700
  New Jersey            55,100    56,500    57,300    58,300    59,100
  Ohio                 137,300   131,100   128,700   127,500   128,200
  South Carolina        22,500    29,300    31,800    29,300    31,100
  Texas                427,200   369,000   354,400   347,000   333,900
  Wisconsin            124,800   126,900   131,900   132,700   136,100
                     --------- --------- --------- --------- ---------
       TOTAL         1,207,400 1,156,800 1,146,600 1,137,300 1,131,500
                     ========= ========= ========= ========= =========

  Medicaid             866,700   862,900   848,100   841,600   846,900
  SCHIP & Foster Care  267,000   216,000   224,400   223,500   216,500
  SSI & Medicare        73,700    77,900    74,100    72,200    68,100
                     --------- --------- --------- --------- ---------
       TOTAL         1,207,400 1,156,800 1,146,600 1,137,300 1,131,500
                     ========= ========= ========= ========= =========

Specialty
 Services(a):
  Arizona               99,400    97,900    99,900    99,000    95,200
  Kansas                40,000    39,400    39,000    35,600    37,500
                     --------- --------- --------- --------- ---------
       TOTAL           139,400   137,300   138,900   134,600   132,700
                     ========= ========= ========= ========= =========

(a) Includes behavioral health contracts only.


REVENUE PER MEMBER(b)  $214.63   $215.35   $210.34   $201.05   $193.09

CLAIMS(b)
  Period-end
   inventory           336,900   393,700   312,700   265,400   281,000
  Average inventory    244,800   281,600   288,700   319,900   248,200
  Period-end
   inventory per
   member                 0.28      0.34      0.28      0.24      0.26

(b) Revenue per member and claims information are presented for the
 Medicaid Managed Care segment.
                             Q2       Q1       Q4       Q3       Q2
                            2008     2008     2007     2007     2007
                          -------- -------- -------- -------- --------

DAYS IN CLAIMS PAYABLE(c)    48.5     49.3     49.1     49.1     46.2

(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              $ 680.9  $ 651.1  $ 626.2  $ 593.6  $ 527.9
   Unregulated               29.0     25.8     33.0     45.9     65.8
                          -------- -------- -------- -------- --------
        TOTAL             $ 709.9  $ 676.9  $ 659.2  $ 639.5  $ 593.7
                          ======== ======== ======== ========-========

DEBT TO CAPITALIZATION(d)    32.6%    32.8%    33.3%    33.1%    34.0%

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

                               Three Months Ended   Six Months Ended
                                    June 30,            June 30,
                               -------------------  -----------------
                                 2008       2007      2008     2007
                               ---------  --------  --------  -------
Health Benefits Ratios
  Medicaid and SCHIP                81.7%     83.2%     80.6%    83.9%
  SSI and Medicare                  89.8      90.2      93.7     89.6
  Specialty Services                85.8      76.4      85.0     77.9
  Total                             83.3      83.6      83.1     84.1

General & Administrative
 Expense Ratio                      13.5%     14.4%     13.0%    13.9%
MEDICAL CLAIMS LIABILITIES (In thousands)
Four rolling quarters of the changes in medical claims liabilities are
 summarized as follows:

Balance, June 30, 2007                              $        292,298
Incurred related to:
  Current period                                           2,552,697
  Prior period                                                (7,669)
                                                    ----------------
     Total incurred                                        2,545,028
                                                    ================
Paid related to:
  Current period                                           2,193,031
  Prior period                                               280,587
                                                    ----------------
     Total paid                                            2,473,618
                                                    ----------------
Balance, June 30, 2008                              $        363,708
                                                    ================

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
Edmund E. Kroll
Senior Vice President, Finance & Investor Relations
212-759-0382
or
Eric R. Slusser
Executive Vice President and Chief Financial Officer
314-725-4477

SOURCE: Centene Corporation