Centene Corporation Reports 2008 Third Quarter Earnings

October 28, 2008 at 6:01 AM EDT

ST. LOUIS--(BUSINESS WIRE)--Oct. 28, 2008--Centene Corporation (NYSE: CNC) today announced its net earnings from continuing operations for the quarter ended September 30, 2008 were $18.3 million, or $0.41 per diluted share, compared to $16.5 million, or $0.37 per diluted share in the 2007 third quarter. The current quarter results include a loss on investments of $5.2 million pre-tax, or $0.07 per diluted share. Excluding this loss, net earnings were $0.48 per diluted share. Unless specifically noted, the discussions below are in the context of continuing operations and all financial ratios are calculated using revenues excluding premium taxes and investment income.

    Third Quarter Highlights

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

    --  Revenues of $897.1 million, or $873.5 million net of premium
        taxes, an 19.8% increase over the 2007 third quarter.

    --  Health Benefits Ratio (HBR), which reflects medical costs as a
        percent of premium revenues, of 82.4%, compared to 83.4% in
        the 2007 third quarter.

    --  General and administrative (G&A) expense ratio of 14.0%,
        compared to 13.7% in the 2007 third quarter.

    --  Cash flow from operations of $39.8 million.

    --  Days in claims payable of 49.6.

    Other Events

    --  Received notification of a ruling by the Eighth Circuit of The
        United States Court of Appeals upholding the dismissal of a
        Consolidated Class Action Lawsuit.

    --  Stock repurchase program extended through October 31, 2009.
        Repurchased 245,740 shares of our common stock during the
        third quarter for approximately $5 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.

    --  Commenced a new acute care contract in the Yavapai Service
        Area of Arizona, effective October 1, 2008.

    --  Appointed Donald G. Imholz as Senior Vice President and Chief
        Information Officer.

Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, stated, "We are pleased with the continued progress that our results show this quarter. It is gratifying to see the operating traction that our team has gained over the past two quarters and we are working hard to ensure that this positive momentum will be maintained in 2009 and beyond," concluded Neidorff.

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


----------------------------------------------------------------------
                                                    2008       2007
                                                 ---------- ----------
Georgia                                             283,900    286,200
Indiana                                             172,400    156,300
New Jersey                                           54,900     58,300
Ohio                                                132,500    127,500
South Carolina(a)                                    26,600     29,300
Texas                                               436,900    347,000
Wisconsin                                           122,500    132,700
                                                 ---------- ----------
  Total                                           1,229,700  1,137,300
                                                 ========== ==========

(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 September 30, 2008 and 2007:


----------------------------------------------------------------------
                                               2008         2007
                                            ----------    ---------
Medicaid                                       887,700      841,600
SCHIP/Foster Care                              271,700      223,500
SSI/Medicare                                    70,300       72,200
                                             ---------    ---------
  Total                                      1,229,700(a) 1,137,300(b)
                                             =========    =========

(a) 1,226,000 at-risk; 3,700 ASO
(b) 1,104,700 at-risk; 32,600 ASO
----------------------------------------------------------------------

    Statement of Operations

    --  For the 2008 third quarter, revenues, net of premium taxes,
        increased 19.8% to $873.5 million from $729.2 million in the
        2007 third quarter. The increase was primarily driven by
        membership growth, especially related to the new Foster Care
        contract in Texas, premium rate increases and the recent
        acquisition of Celtic which closed on July 1, 2008.

    --  The consolidated HBR, which reflects medical costs as a
        percent of premium revenues, was 82.4%, a decrease from 83.4%
        in the 2007 third quarter. The decrease is primarily due to
        overall increased premium yield, a moderating medical cost
        trend and the acquisition of Celtic. Sequentially, our
        consolidated HBR decreased from 83.3% in the 2008 second
        quarter to 82.4% due to the medical management efforts in
        Ohio, moderating medical cost trends and the affect of the
        acquisition of Celtic, which operates at a lower HBR than our
        existing business.

    --  Consolidated G&A expense as a percent of premium and service
        revenues was 14.0% in the third quarter of 2008, an increase
        from 13.7% in the third quarter of 2007. The increase was due
        to the acquisition of Celtic which operates at a higher G&A
        ratio.

    --  Other income in the third quarter included a loss on
        investments of $5.2 million, or $0.07 per diluted share. As
        previously disclosed in an October 14, 2008, press release and
        8-K filing, the loss was primarily due to investments in the
        Reserve Primary money market fund whose Net Asset Value fell
        below $1.00 per share due to its holdings of securities by
        Lehman Brothers Holdings, Inc. The impairment losses represent
        less than 1% of Centene's investment portfolio as of September
        30, 2008. While the ultimate amount of loss may change, we
        currently expect to recover 95% of our investment in the
        Reserve Primary fund and have more than sufficient liquidity
        to fund our operations in the near term.

    --  Earnings per diluted share from continuing operations were
        $0.41, or $0.48 excluding the previously mentioned loss on
        investments, compared to $0.37 in the 2007 third quarter.

    Balance Sheet and Cash Flow

At September 30, 2008, the Company had cash and investments of $754.8 million, including $728.0 million held by its regulated entities and $26.8 million held by its unregulated entities. Medical claims liabilities totaled $379.8 million, representing 49.6 days in claims payable, an increase of 0.5 days from September 30, 2007 and an increase of 1.1 days from June 30, 2008. Total debt was $250.0 million and debt to capitalization was 34.4%. Year to date cash flow from operations was $126.5 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, June 30, 2008                             48.5
Celtic Acquisition                                                 0.8
Other                                                              0.3
                                                                  ----
Days in claims payable, September 30, 2008                        49.6
                                                                  ====

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

Outlook

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

                                                        Full Year 2008
                                                        --------------
                                                          Low    High
                                                        ------- ------
Revenue (in millions)1                                   $3,390 $3,410
Earnings per diluted share                               $ 1.87 $ 1.92

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

Eric R. Slusser, Centene's Chief Financial Officer, stated, "Despite the effects of the $0.07 loss on investments in the third quarter, Centene will not revise the lower end of its previous 2008 earnings per diluted share guidance range. We are tightening the previous range and currently expect 2008 EPS to range from $1.87 to $1.92 and revenue guidance of $3.39 to $3.41 billion, net of premium taxes. We continue to expect the 2008 consolidated HBR to range from 82% to 84%."

Stock Repurchase Authorization

On October 27, 2008, the Company's Board of Directors extended the expiration date of the Company's stock repurchase program to October 31, 2009. The program would have expired October 31, 2008. The program authorizes the repurchase of up to 4,000,000 shares of the Company's common stock from time to time on the open market or through privately negotiated transactions.

Conference Call

As previously announced, the Company will host a conference call Tuesday, October 28, 2008, at 8:30 A.M. (Eastern Time) to review the financial results for the third quarter ended September 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 November 11, 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 63471844.

Non-GAAP Financial Presentation

The Company is providing certain non-GAAP financial measures in this release as the Company believes 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. Specifically, the Company has presented diluted earnings per share for the third quarter of 2008 excluding the effects of a $0.07 loss on investments recorded in the quarter.

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 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 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, individual health insurance, 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.

                 CENTENE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEETS
                  (In thousands, except share data)

                                            September 30, December 31,
                                                2008          2007
                                            ------------- ------------
ASSETS                                              (Unaudited)
Current assets:
     Cash and cash equivalents              $     275,284 $    268,584
     Premium and related receivables              150,351       90,072
     Short-term investments, at fair value
      (amortized cost $160,199 and $46,392,
      respectively)                               160,376       46,269
     Other current assets                          48,109       41,414
                                             ------------  -----------
           Total current assets                   634,120      446,339
Long-term investments, at fair value
 (amortized cost $288,140 and $314,681,
 respectively)                                    288,212      317,041
Restricted deposits, at fair value
 (amortized cost $30,630 and $27,056,
 respectively)                                     30,919       27,301
Property, software and equipment, net of
 accumulated depreciation of $68,834 and
 $54,584, respectively                            170,038      138,139
Goodwill                                          167,008      141,030
Other intangible assets, net                       19,886       13,205
Other assets                                       47,870       36,067
                                             ------------  -----------
           Total assets                     $   1,358,053 $  1,119,122
                                             ============  ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Medical claims liabilities             $     379,845 $    335,856
     Accounts payable and accrued expenses        200,766      105,096
     Unearned revenue                              15,623       44,016
     Current portion of long-term debt                276          971
     Current liabilities of discontinued
      operations                                      255          861
                                             ------------  -----------
           Total current liabilities              596,765      486,800
Long-term debt                                    249,697      206,406
Other liabilities                                  34,017       10,869
                                             ------------  -----------
           Total liabilities                      880,479      704,075
Stockholders' equity:
     Common stock, $.001 par value;
      authorized 100,000,000 shares; issued
      and outstanding 43,159,927 and
      43,667,837 shares, respectively                  43           44
     Additional paid-in capital                   223,369      221,693
     Accumulated other comprehensive
      income:
        Unrealized gain on investments, net
         of tax                                       349        1,571
     Retained earnings                            253,813      191,739
                                             ------------  -----------
           Total stockholders' equity             477,574      415,047
                                             ------------  -----------
           Total liabilities and
            stockholders' equity            $   1,358,053 $  1,119,122
                                             ============  ===========
                 CENTENE CORPORATION AND SUBSIDIARIES

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

                      Three Months Ended        Nine Months Ended
                         September 30,             September 30,
                   ------------------------- -------------------------
                       2008         2007         2008         2007
                   ------------ ------------ ------------ ------------
                          (Unaudited)               (Unaudited)
Revenues:
  Premium          $   855,505  $   709,455  $ 2,448,392  $ 2,022,123
  Premium tax           23,670       20,737       68,493       58,427
  Service               17,962       19,696       56,958       61,303
                   -----------  -----------  -----------  -----------
    Total revenues     897,137      749,888    2,573,843    2,141,853
                   -----------  -----------  -----------  -----------
Operating
 expenses:
  Medical costs        704,731      591,383    2,028,939    1,695,049
  Cost of services      12,854       13,622       43,467       45,922
  General and
   administrative
   expenses            122,627      100,235      335,109      288,709
  Premium tax           24,057       20,737       68,880       58,427
                   -----------  -----------  -----------  -----------
    Total
     operating
     expenses          864,269      725,977    2,476,395    2,088,107
                   -----------  -----------  -----------  -----------
    Earnings from
     operations         32,868       23,911       97,448       53,746
Other income
 (expense):
  Investment and
   other income          2,165        6,352       15,534       18,957
  Interest expense      (4,377)      (4,171)     (12,436)     (11,516)
                   -----------  -----------  -----------  -----------
    Earnings
     before income
     taxes              30,656       26,092      100,546       61,187
Income tax expense      12,395        9,628       38,709       22,951
                   -----------  -----------  -----------  -----------
    Net earnings
     from
     continuing
     operations         18,261       16,464       61,837       38,236
    Discontinued
     operations,
     net of income
     tax (benefit)
     expense of
     $(8), $(323),
     $145 and
     $(32,520),
     respectively          (13)        (528)         237       33,693
                   -----------  -----------  -----------  -----------
    Net earnings   $    18,248  $    15,936  $    62,074  $    71,929
                   ===========  ===========  ===========  ===========

Net earnings per
 share:
  Basic:
    Continuing
     operations    $      0.42  $      0.38  $      1.43  $      0.88
    Discontinued
     operations             --        (0.01)          --         0.77
                   -----------  -----------  -----------  -----------
    Basic earnings
     per common
     share         $      0.42  $      0.37  $      1.43  $      1.65
                   ===========  ===========  ===========  ===========
  Diluted:
    Continuing
     operations    $      0.41  $      0.37  $      1.39  $      0.85
    Discontinued
     operations             --        (0.01)          --         0.75
                   -----------  -----------  -----------  -----------
    Diluted
     earnings per
     common share  $      0.41  $      0.36  $      1.39  $      1.61
                   ===========  ===========  ===========  ===========

Weighted average
 number of shares
 outstanding:
  Basic             43,232,941   43,532,832   43,381,819   43,528,201
  Diluted           44,530,347   44,628,560   44,541,424   44,787,981
                 CENTENE CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands)

                                       Nine Months Ended September 30,
                                       -------------------------------
                                            2008            2007
                                       --------------- ---------------
                                                (Unaudited)

Cash flows from operating activities:
  Net earnings                         $       62,074  $       71,929
  Adjustments to reconcile net
   earnings to net cash provided by
   operating activities
    Depreciation and amortization              26,018          20,381
    Stock compensation expense                 11,576          11,753
    Deferred income taxes                      13,987            (859)
    Loss on sale of investments, net            4,923             161
    Gain on sale of FirstGuard
     Missouri                                      --          (7,472)
  Changes in assets and liabilities --
    Premium and related receivables           (50,797)          6,855
    Other current assets                       (6,422)        (15,540)
    Other assets                                 (713)           (934)
    Medical claims liabilities                 28,109          36,312
    Unearned revenue                          (37,931)         10,680
    Accounts payable and accrued
     expenses                                  74,723          27,981
    Other operating activities                    967           3,505
                                       --------------  --------------
        Net cash provided by operating
         activities                           126,514         164,752
                                       --------------  --------------
Cash flows from investing activities:
  Purchases of property, software and
   equipment                                  (52,588)        (41,774)
  Purchases of investments                   (372,221)       (464,378)
  Sales and maturities of investments         356,367         341,450
  Proceeds from asset sales                        --          14,102
  Investments in acquisitions and
   equity method investee, net of cash
   acquired                                   (83,509)        (26,425)
                                       --------------  --------------
        Net cash used in investing
         activities                          (151,951)       (177,025)
                                       --------------  --------------
Cash flows from financing activities:
  Proceeds from exercise of stock
   options                                      4,770           3,737
  Proceeds from borrowings                    152,005         202,000
  Payments of long-term debt                 (109,410)       (176,729)
  Excess tax benefits from stock
   compensation                                 3,016           1,028
  Common stock repurchases                    (18,244)         (8,581)
  Debt issue costs                                 --          (5,181)
                                       --------------  --------------
        Net cash provided by financing
         activities                            32,137          16,274
                                       --------------  --------------
        Net increase (decrease) in
         cash and cash equivalents              6,700           4,001
                                       --------------  --------------
Cash and cash equivalents, beginning
 of period                                    268,584         271,047
                                       --------------  --------------
Cash and cash equivalents, end of
 period                                $      275,284  $      275,048
                                       ==============  ==============

Supplemental cash flow information:
  Interest paid                        $        8,467  $        4,480
  Income taxes paid                    $       28,370  $        6,965
                         CENTENE CORPORATION

          CONTINUING OPERATIONS SUPPLEMENTAL FINANCIAL DATA

                        Q3        Q2        Q1        Q4        Q3
                       2008      2008      2008      2007      2007
                     --------- --------- --------- --------- ---------
MEMBERSHIP
Managed Care:
   Georgia             283,900   278,800   282,700   287,900   286,200
   Indiana             172,400   161,700   161,300   154,600   156,300
   New Jersey           54,900    55,100    56,500    57,300    58,300
   Ohio                132,500   137,300   131,100   128,700   127,500
   South Carolina       26,600    22,500    29,300    31,800    29,300
   Texas               436,900   427,200   369,000   354,400   347,000
   Wisconsin           122,500   124,800   126,900   131,900   132,700
                     --------- --------- --------- --------- ---------
          TOTAL      1,229,700 1,207,400 1,156,800 1,146,600 1,137,300
                     ========= ========= ========= ========= =========

   Medicaid            887,700   866,700   862,900   848,100   841,600
   SCHIP & Foster
    Care               271,700   267,000   216,000   224,400   223,500
   SSI & Medicare       70,300    73,700    77,900    74,100    72,200
                     --------- --------- --------- --------- ---------
          TOTAL      1,229,700 1,207,400 1,156,800 1,146,600 1,137,300
                     ========= ========= ========= ========= =========

Specialty
 Services(a):
   Arizona             102,400    99,400    97,900    99,900    99,000
   Kansas               40,100    40,000    39,400    39,000    35,600
                     --------- --------- --------- --------- ---------
          TOTAL        142,500   139,400   137,300   138,900   134,600
                     ========= ========= ========= ========= =========

(a) Includes behavioral health contracts only.

REVENUE PER
 MEMBER(b)           $  213.95 $  214.63 $  215.35 $  210.34 $  201.05

CLAIMS(b)
   Period-end
    inventory          321,200   336,900   393,700   312,700   265,400
   Average inventory   317,100   244,800   281,600   288,700   319,900
   Period-end
    inventory per
    member                0.26      0.28      0.34      0.28      0.24

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

DAYS IN CLAIMS PAYABLE(c)        49.6    48.5    49.3    49.1    49.1
(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                   $728.0  $680.9  $651.1  $626.2  $593.6
   Unregulated                   26.8    29.0    25.8    33.0    45.9
                               ------- ------- ------- ------- -------
          TOTAL                $754.8  $709.9  $676.9  $659.2  $639.5
                               ======= ======= ======= ======= =======

DEBT TO CAPITALIZATION(d)        34.4%   32.6%   32.8%   33.3%   33.1%
(d) Debt to Capitalization is calculated as follows: total debt
 divided by (total debt + equity).
OPERATING RATIOS:

                                  Three Months Ended Nine Months Ended
                                    September 30,      September 30,
                                  ------------------ -----------------
                                    2008      2007     2008     2007
                                  --------- -------- -------- --------
Health Benefits Ratios
  Medicaid and SCHIP                  81.3%    81.3%    80.9%    82.9%
  SSI and Medicare                    89.7     92.4     92.3     90.8
  Specialty Services                  79.5     82.2     82.7     79.4
  Total                               82.4     83.4     82.9     83.8

General & Administrative Expense
 Ratio                                14.0%    13.7%    13.4%    13.9%
MEDICAL CLAIMS LIABILITIES (In thousands)
Four rolling quarters of the changes in medical claims liabilities are
 summarized as follows:

Balance, September 30, 2007                                $  315,311
Acquisitions                                                   15,398
Incurred related to:
   Current period                                           2,665,373
   Prior period                                                (6,997)
                                                           ----------
      Total incurred                                        2,658,376
                                                           ==========
Paid related to:
   Current period                                           2,304,281
   Prior period                                               304,959
                                                           ----------
      Total paid                                            2,609,240
                                                           ----------
Balance, September 30, 2008                                $  379,845
                                                           ==========

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

SOURCE: Centene Corporation