Centene Corporation Reports First Quarter 2006 Earnings Results

April 25, 2006 at 6:02 AM EDT

ST. LOUIS--(BUSINESS WIRE)--April 25, 2006--Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended March 31, 2006.

    First Quarter Highlights

    --  Revenues of $455.1 million, a 37% increase.

    --  A 70 basis point increase in sequential quarter health
        benefits ratio (HBR) in the Medicaid and SCHIP category,
        primarily due to pharmacy costs in Indiana.

    --  Earnings from operations of $12.6 million.

    --  Earnings per diluted share of $0.20.

    --  Membership growth of 12.5%.

    --  Operating cash flows of $9.3 million.

    --  Days in claims payable of 43.0.

    --  Closed acquisition of US Script, a pharmacy benefit manager
        based in Fresno, California.

    --  Signed definitive agreement to acquire MediPlan Corporation
        through Ohio subsidiary.

    --  Received preliminary notification of Ohio Medicaid contract
        awards, increasing counties served to 27.

Michael F. Neidorff, Centene's chairman and chief executive officer, said: "The first quarter of 2006 met our expectations, although our results were affected by some market specific factors. In particular, higher pharmacy costs in Indiana, and to a limited degree in Ohio, impacted our overall medical costs, adding 70 basis points to our Medicaid and SCHIP HBR. We have been actively working to address these issues and are confident that the pharmacy costs will normalize in the short-term. Importantly, our purchase of US Script has provided us with an important vehicle to mitigate and positively influence our pharmacy costs. Indiana and Ohio will be transitioned to US Script in May. Wisconsin was converted to the US Script platform in March, and we are already seeing the benefit of this implementation.

"We are pleased with our progress in Kansas and New Jersey, and the new membership opportunities in Ohio and Georgia. We recently received notification from the State of Ohio of our preliminary acceptance to serve Medicaid recipients in the Northwest and East Central regions, our existing service areas. Together with the MediPlan acquisition, we are solidly positioned in the State.

"On February 15, 2006, the Georgia Department of Community Health issued a 60-day delay in implementing its new managed care initiative to June 1, 2006. Nevertheless, our subsidiary Peach State Health Plan is, and will remain, ready to partner with the State's Medicaid and PeachCare for Kids programs. We have successfully completed all readiness reviews and are poised for significant growth in this start-up market.

"We look forward to the Georgia and Ohio implementations, and additional opportunities for growth," concluded Neidorff.

Membership totaled 874,800 at March 31, 2006, a 12.5% increase from 777,300 at March 31, 2005. The following table depicts Medicaid Managed Care membership by state at March 31, 2006 and 2005:

                                            2006           2005
                                        ------------   ------------
Indiana                                     193,000        149,900
Kansas                                      118,200         94,900
Missouri                                     34,500         41,300
New Jersey                                   57,500         52,700
Ohio                                         59,000 (a)     23,900
Texas                                       237,500        243,700
Wisconsin                                   175,100        170,900
                                        ------------   ------------
TOTAL                                       874,800        777,300
                                        ============   ============

(a) Excludes our pending acquisition of MediPlan Corporation

The following table depicts Medicaid Managed Care membership by member category at March 31, 2006 and 2005:

                                            2006           2005
                                        ------------   ------------
Medicaid                                    683,700        588,100
SCHIP                                       175,300        178,500
SSI                                          15,800 (a)     10,700 (b)
                                        ------------   ------------

TOTAL                                       874,800        777,300
                                        ============   ============

(a) 8,600 at-risk; 7,200 ASO
(b) 4,500 at-risk; 6,200 ASO

The following table depicts Specialty Services membership by state at March 31, 2006 and 2005:

                                            2006           2005
                                        ------------   ------------
  Arizona                                    92,300              -
  Kansas                                     39,200         35,400
                                        ------------   ------------

TOTAL                                       131,500         35,400
                                        ============   ============

Note: Includes behavioral health contracts only.
    Statement of Earnings Highlights

    --  For the first quarter of 2006, revenues increased 36.9% to
        $455.1 million from $332.4 million in the first quarter of
        2005. The increase in service revenues for the first quarter
        of 2006 reflects the acquisitions of both AirLogix and US
        Script.

    --  The HBR for Centene's Medicaid and SCHIP populations, which
        reflects medical costs as a percent of premium revenues, was
        82.8% for the first quarter of 2006, compared to 80.6% for the
        same period in 2005. The results for the first quarter of 2006
        reflected: (1) higher utilization trends in certain markets,
        especially in January 2006; (2) an increase in pharmacy
        related costs in Centene's Indiana and Ohio markets; and (3)
        Centene's earlier expansion into new unmanaged markets. The
        HBR for the SSI category was 87.6% for the first quarter of
        2006 compared to 94.6% for the first quarter of 2005 and,
        while approaching Centene's target range, may be volatile
        given the small member base. For the Specialty Services
        segment, the HBR was 84.1% in the first quarter of 2006 versus
        133.5% in the first quarter of 2005. The Specialty Services
        HBR for 2006 included the behavioral health contracts in
        Arizona and Kansas, while the 2005 results included only the
        first three months of the behavioral health contract in
        Kansas.

    --  Medicaid Managed Care general and administrative (G&A)
        expenses as a percent of revenues was 11.9% in the first
        quarter of 2006 compared to 10.8% in the first quarter of
        2005, mainly reflecting Georgia start-up costs and the
        expensing of stock-based compensation as the result of
        Centene's adoption of SFAS No. 123R. In addition, concurrent
        with the closing of the US Script acquisition, the Company
        altered its corporate function allocation methodology to more
        closely align those allocations to the proportion of costs
        required to support each business segment. The effect of this
        change added 0.7% in G&A expenses to the Medicaid Managed Care
        G&A ratio for the first quarter of 2006.

    --  Earnings from operations of $12.6 million in the first quarter
        of 2006 compared to $21.3 million in the first quarter of
        2005, inclusive of Georgia start-up costs.

    --  Net earnings were $8.8 million, or $0.20 per diluted share,
        for the first quarter of 2006, compared to $14.4 million, or
        $0.32 per diluted share, for the first quarter of 2005.

    Balance Sheet and Cash Flow Highlights

At March 31, 2006, the Company held cash and investments of $339.8 million, a portion of which was restricted due to state regulatory requirements. Premium and related receivables increased $22.3 million during the first quarter of 2006, primarily reflecting an increase in capitation receivables and reimbursements due from providers, including amounts due under capitated risk-sharing contracts. The increase also reflected customer receivables due to US Script, which was acquired as of January 1, 2006. Medical claims liabilities totaled $172.8 million at March 31, 2006, representing 43.0 days in claims payable. A reconciliation of the Company's change in days in claims payable from the immediately preceding quarter is highlighted below:

Days in claims payable, December 31, 2005                     45.4
Decrease in claims inventory                                  (1.8)
Conversion of pharmacy benefits to U.S. Script                (0.6)
                                                       ------------
Days in claims payable, March 31, 2006                        43.0
                                                       ============

The Company had cash flows from operating activities of $9.3 million for the quarter ended March 31, 2006.

Outlook

Karey L. Witty, Centene's chief financial officer, commented, "For the second quarter of 2006, we expect revenue in the range of $495 million to $500 million and earnings per diluted share of $0.25 to $0.30. For the full-year 2006, we anticipate revenue in the range of $2.08 billion to $2.16 billion and earnings per diluted share of $1.53 to $1.70. This guidance excludes our recently announced acquisition of MediPlan Corporation, which we expect to close during the second quarter of 2006."

Conference Call

As previously announced, the Company will host a conference call later today, April 25, 2006, at 8:30 AM Eastern Time to review the financial results for the first quarter ended March 31, 2006, and to discuss its business outlook. Michael F. Neidorff and Karey L. Witty will host the conference call. Investors are invited to participate in the conference call by dialing (800) 273-1254 in the United States and Canada, and (706) 679-8592 for international participants, or via a live Internet broadcast at the Company's website, www.centene.com. A replay of the call will be available from April 25, 2006, shortly after completion of the call, until May 9, 2006, at 11:59 PM Eastern Time. Investors may dial (800) 642-1687 in the United States and (706) 645-9291 from abroad and enter access number 7620184.

About Centene Corporation

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

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

                 CENTENE CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED BALANCE SHEETS
                   (In thousands, except share data)

                                               March 31,  December 31,
                                                 2006         2005
                                             ------------ ------------
                                                    (Unaudited)

                   ASSETS

Current assets:
  Cash and cash equivalents                  $   118,512  $ 147,358
  Premium and related receivables, net of
   allowances of $611 and $343, respectively      66,368       44,108
  Short-term investments, at fair value
   (amortized cost $71,400 and $56,863,
   respectively)                                  71,172       56,700
  Other current assets                            24,992       24,439
                                             ------------ ------------
    Total current assets                         281,044      272,605
Long-term investments, at fair value
 (amortized cost $130,189 and $126,039,
 respectively)                                   127,289      123,661
Restricted deposits, at fair value
 (amortized cost $23,081 and $22,821,
 respectively)                                    22,788       22,555
Property, software and equipment, net             82,853       67,199
Goodwill                                         196,986      157,278
Other intangible assets, net                      19,341       17,368
Other assets                                       7,506        7,364
                                             ------------ ------------
    Total assets                             $   737,807  $   668,030
                                             ============ ============

    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Medical claims liabilities                 $   172,792  $   170,514
  Accounts payable and accrued expenses           47,779       29,790
  Unearned revenue                                12,494       13,648
  Current portion of long-term debt and
   notes payable                                   1,712          699
                                             ------------ ------------
    Total current liabilities                    234,777      214,651
Long-term debt                                   130,940       92,448
Other liabilities                                  7,841        8,883
                                             ------------ ------------
    Total liabilities                            373,558      315,982
Stockholders' equity:
  Common stock, $.001 par value; authorized
   100,000,000 shares; issued and
   outstanding 43,072,053 and 42,988,230
   shares, respectively                               43           43
  Additional paid-in capital                     195,669      191,840
  Accumulated other comprehensive income:
    Unrealized loss on investments, net of
     tax                                          (2,148)      (1,754)
  Retained earnings                              170,685      161,919
                                             ------------ ------------
    Total stockholders' equity                   364,249      352,048
                                             ------------ ------------
    Total liabilities and stockholders'
     equity                                  $   737,807  $   668,030
                                             ============ ============




                 CENTENE CORPORATION AND SUBSIDIARIES

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

                                                Three Months Ended
                                                     March 31,
                                             ------------ ------------
                                                 2006         2005
                                             ------------ ------------
                                                    (Unaudited)
Revenues:
  Premium                                    $   435,562  $   330,944
  Service                                         19,516        1,432
                                             ------------ ------------
    Total revenues                               455,078      332,376
                                             ------------ ------------
Expenses:
  Medical costs                                  361,672      267,756
  Cost of services                                15,588          843
  General and administrative expenses             65,222       42,459
                                             ------------ ------------
    Total operating expenses                     442,482      311,058
                                             ------------ ------------
    Earnings from operations                      12,596       21,318
Other income (expense):
  Investment and other income                      3,540        2,120
  Interest expense                                (1,998)        (562)
                                             ------------ ------------
    Earnings before income taxes                  14,138       22,876
Income Tax Expense                                 5,372        8,465
                                             ------------ ------------
    Net earnings                             $     8,766  $    14,411
                                             ============ ============

Earnings per share:
  Basic earnings per common share            $      0.20  $      0.35
  Diluted earnings per common share          $      0.20  $      0.32

Weighted average number of shares
 outstanding:
  Basic                                       42,987,892   41,560,587
  Diluted                                     44,750,271   44,861,989




                 CENTENE CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands)

                                                Three Months Ended
                                                     March 31,
                                             ------------ ------------
                                                 2006         2005
                                             ------------ ------------
                                                    (Unaudited)

Cash flows from operating activities:
  Net earnings                               $     8,766  $    14,411
  Adjustments to reconcile net earnings to
   net cash provided by operating
   activities --
    Depreciation and amortization                  4,520        2,782
    Excess tax benefits from stock
     compensation                                     --        2,871
    Stock compensation expense                     3,417        1,091
    Loss (gain) on sale of investments                12           10
    Loss on disposal of property and
     equipment                                        30          183
    Deferred income taxes                            232         (983)
  Changes in assets and liabilities --
    Premium and related receivables              (15,812)      (5,512)
    Other current assets                          (2,894)      (4,268)
    Other assets                                    (158)        (491)
    Medical claims liabilities                     2,278       11,602
    Unearned revenue                                (934)         (21)
    Accounts payable and accrued expenses          9,937       (2,446)
    Other operating activities                       (51)         648
                                             ------------ ------------
      Net cash provided by operating
       activities                                  9,343       19,877
                                             ------------ ------------
Cash flows from investing activities:
  Purchase of property, software and
   equipment                                     (14,136)      (3,665)
  Purchase of investments                        (53,194)     (21,767)
  Sales and maturities of investments             33,827       27,542
  Acquisitions, net of cash acquired             (39,912)          --
                                             ------------ ------------
      Net cash (used in) provided by
       investing activities                      (73,415)       2,110
                                             ------------ ------------
Cash flows from financing activities:
  Proceeds from exercise of stock options          2,139        1,390
  Proceeds from borrowings                        37,000           --
  Payment of long-term debt and notes
   payable                                        (2,285)      (4,121)
  Excess tax benefits from stock
   compensation                                    1,454           --
  Common stock repurchases                        (3,082)          --
  Other financing activities                          --          (85)
                                             ------------ ------------
      Net cash provided by (used in)
       financing activities                       35,226       (2,816)
                                             ------------ ------------
      Net (decrease) increase in cash and
       cash equivalents                          (28,846)      19,171
                                             ------------ ------------
Cash and cash equivalents, beginning of
 period                                          147,358       84,105
                                             ------------ ------------
Cash and cash equivalents, end of period     $   118,512  $   103,276
                                             ============ ============


  Interest paid                              $     2,037  $       692
  Income taxes paid                          $       911  $     1,133

Supplemental schedule of non-cash financing
 activities:
  Property acquired under capital leases     $        26  $        --




                          CENTENE CORPORATION

                      SUPPLEMENTAL FINANCIAL DATA

                               Q1         Q4         Q3         Q2
                              2006       2005       2005       2005
                           ---------- ---------- ---------- ----------
MEMBERSHIP
Medicaid Managed Care:
  Indiana                    193,000    193,300    176,300    152,800
  Kansas                     118,200    113,300    107,600    103,000
  Missouri                    34,500     36,000     37,300     39,900
  New Jersey                  57,500     56,500     50,900     52,900
  Ohio                        59,000     58,700     58,100     59,600
  Texas                      237,500    242,000    243,600    243,800
  Wisconsin                  175,100    172,100    173,900    173,400
                           ---------- ---------- ---------- ----------
TOTAL                        874,800    871,900    847,700    825,400
                           ========== ========== ========== ==========

  Medicaid                   683,700    681,100    657,500    637,300
  SCHIP                      175,300    175,900    176,900    176,200
  SSI                         15,800     14,900     13,300     11,900
                           ---------- ---------- ---------- ----------
TOTAL                        874,800    871,900    847,700    825,400
                           ========== ========== ========== ==========

Specialty Services (a):
  Arizona                     92,300     94,700     94,300          -
  Kansas                      39,200     38,800     37,500     37,100
                           ---------- ---------- ---------- ----------
TOTAL                        131,500    133,500    131,800     37,100
                           ========== ========== ========== ==========

(a) Includes behavioral health contracts only.


REVENUE PER MEMBER (b)     $  157.17  $  152.48  $  147.73  $  143.41

CLAIMS (b)
  Period-end inventory       229,800    255,000    206,900    195,500
  Average inventory          175,200    153,500    148,300    170,300
  Period-end inventory per
   member                       0.26       0.29       0.24       0.24

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


DAYS IN CLAIMS PAYABLE (c)      43.0       45.4       41.4       49.5

(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                $   314.0  $   322.6  $   305.1  $   260.5
  Unregulated                   25.8       27.7       27.7       27.4
                           ---------- ---------- ---------- ----------
TOTAL                      $   339.8  $   350.3  $   332.8  $   287.9
                           ========== ========== ========== ==========


ANNUALIZED RETURN ON
 EQUITY (d)                      9.8%      16.2%      14.9%      20.0%

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




HEALTH BENEFITS RATIO BY CATEGORY:

                                            Three Months Ended
                                                 March 31,
                                        ------------   ------------
                                            2006           2005
                                        ------------   ------------
Medicaid and SCHIP                             82.8%          80.6%
SSI                                            87.6           94.6
Specialty Services                             84.1          133.5




GENERAL AND ADMINISTRATIVE EXPENSE RATIO BY BUSINESS SEGMENT:

                                            Three Months Ended
                                                 March 31,
                                        ------------   ------------
                                            2006           2005
                                        ------------   ------------
Medicaid Managed Care                          11.9%          10.8%
Specialty Services                             22.3           50.2




                      MEDICAL CLAIMS LIABILITIES
                            (In thousands)

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

Balance, March 31, 2005                 $   177,582
Acquisitions                                      -
Incurred related to:
  Current period                          1,332,120
  Prior period                              (11,295)
                                        ------------
    Total incurred                        1,320,825
                                        ------------
Paid related to:
  Current period                          1,160,178
  Prior period                              165,437
                                        ------------
    Total paid                            1,325,615
                                        ------------
Balance, March 31, 2006                 $   172,792
                                        ============

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
             Karey L. Witty, 314-725-4477
             or
             Lisa M. Wilson, 212-759-3929
             www.centene.com

    SOURCE: Centene Corporation