Centene Corporation Reports Third Quarter Net Earnings of $0.27 Per Share, Net of One-Time Litigation Settlement Charge

October 25, 2005 at 5:31 AM EDT

ST. LOUIS, Oct 25, 2005 (BUSINESS WIRE) -- Centene Corporation (NYSE:CNC) today announced its financial results for the quarter ended September 30, 2005.

Third Quarter Highlights

-- Revenues of $400.6 million, a 57.9% increase over the third quarter of 2004.

-- Arizona behavioral health contract commenced operations effective July 1.

-- Centene's Wisconsin health plan subsidiary entered into a settlement agreement with Aurora Health Care, Inc., resulting in a one-time litigation settlement charge of $4.5 million, and a new long-term provider contract.

-- Health benefits ratio within guided range, exclusive of the one-time charge.

-- Earnings per diluted share of $0.27, net of a one-time litigation settlement charge of $0.06.

-- Membership growth of 32.1% over the third quarter of 2004.

-- Days in claims payable of 41.4, net of claims process improvements and 1.4 days for litigation settlement.

-- Operating cash flows of $51.9 million for the three months ended, an 89.8% increase over the third quarter of 2004.

-- Acquired AirLogix, Inc., an industry leader in respiratory disease management.

-- Awarded Medicaid contracts by the Georgia Department of Community Health to begin serving three regions in 2006.

Michael F. Neidorff, Centene's chairman and chief executive officer, said, "I am pleased to report that overall, it has been a predictable, in-line quarter, and we remain confident about the manner in which Centene conducts its business. Our consistent earnings growth demonstrates the solid visibility we have over the state of the business and the strength of our operating systems. Membership growth was particularly strong in Indiana, as anticipated, and Kansas posted solid gains during the quarter. Our specialty companies have made consistent progress, including our Arizona behavioral health contract, which provides a strong foundation for continued growth in this business segment.

"In keeping with our philosophy of ongoing financial transparency, we hosted for the first time a contracting and claims liability accounting methodology seminar in September. Our goal was to help participants understand the key factors for our ongoing success --claims processing and system reporting, sound contracting, consistent claims liability reserving and provider relationships --all of which enhance the predictability and consistency of our financial results. This disciplined approach, which has been in place for many years, gives consistent control over costs and reduces volatility. It is important that we recognize that the sector and industry are strong and are meeting the needs of recipients and the states in terms of quality, cost-effective care."

There were several nonrecurring events during the quarter that affected our results, including:

----------------------------------------------------------------------
Aurora one-time litigation settlement charge                   $(0.06)
----------------------------------------------------------- ----------
Georgia start-up costs                                          (0.04)
----------------------------------------------------------- ----------
Claims payment process improvements                             (0.02)
----------------------------------------------------------- ----------
Charitable foundation contribution                              (0.01)
----------------------------------------------------------- ----------
Tax benefits                                                     0.03
----------------------------------------------------------------------

The following table depicts membership in Centene's Medicaid Managed Care segment by state at September 30, 2005 and 2004:

2005       2004
                                                 ---------- ----------
Indiana                                            176,300    150,000
Kansas                                             107,600         --
Missouri                                            37,300         --
New Jersey                                          50,900     53,200
Ohio                                                58,100     23,500
Texas                                              243,600    250,200
Wisconsin                                          173,900    164,700
                                                 ---------- ----------
TOTAL                                              847,700    641,600
                                                 ========== ==========

The following table depicts membership in Centene's Medicaid Managed Care segment by member category at September 30, 2005 and 2004:

2005       2004
                                                 ---------- ----------
Medicaid                                           657,500    479,500
SCHIP                                              176,900    152,100
SSI                                               13,300(a)  10,000(b)
                                                 ---------- ----------

TOTAL                                              847,700    641,600
                                                 ========== ==========

(a)  6,800 at-risk, 6,500 ASO
(b)  4,500 at-risk; 5,500 ASO

Statement of Earnings Highlights

-- For the third quarter of 2005, revenues increased 57.9% to $400.6 million from $253.7 million in the third quarter of 2004.

-- The health benefits ratio (HBR), which reflects medical costs as a percent of premium revenues, now includes a larger component of behavioral health claims and was 83.7% compared to 80.7% for the same period in 2004. The effect of the behavioral health business increased the HBR by 0.4%. The current quarter also reflects a $4.5 million litigation settlement increasing the ratio by 1.2%. Additionally, the Company's SSI HBR was 96.2% compared to 92.8% in 2004. While growing, Centene's small SSI member base can experience a volatile HBR. The table below depicts Centene's HBR by member category:

Three Months Ended
                                                     September 30,
                                                 ---------------------
                                                    2005(a)    2004
                                                 ---------- ----------
Medicaid and SCHIP                                    81.7%      80.4%
SSI                                                   96.2       92.8
  Medicaid Managed Care Total                         82.1       80.7
Specialty Services                                    89.7          -
  Total                                               82.5       80.7

(a) Excludes one-time litigation settlement charge.

-- General and administrative (G&A) expenses as a percent of revenues were 13.1% in the third quarter of 2005, compared to 12.7% in the third quarter of 2004. Centene's total G&A ratio increased due to implementation costs related to its new contracts in Georgia, and as discussed later, higher spending on information systems process improvements and increased contributions to its charitable foundation.

-- Earnings from operations decreased 8.1% to $15.1 million from $16.4 million in the third quarter of 2004, reflecting the one-time settlement charge and increased G&A spending.

-- Centene's effective tax rate for the quarter was 27.8% compared to 37.0% in 2004. The decrease was primarily due to a lower state income tax expense resulting from the resolution of state examinations and the recognition of deferred tax benefits related to a change in tax law during the quarter. These tax benefits, totaling $2.4 million gross of federal taxes, were reinvested in the business through the corresponding increase in G&A spending as noted above.

-- Net of the one-time charge of $0.06 and increased G&A spending, net earnings were $12.1 million, or $0.27 per diluted share, which was in-line with previous guidance and compares to $11.3 million, or $0.26 per diluted share, for the third quarter of 2004.

-- For the nine months ended September 30, 2005, revenues increased 51.9% to $1,082.6 million from $712.9 million for the same period in the prior year. The HBR was 82.0%, compared to 80.9% for the same period in 2004. G&A expenses as a percent of revenues were 12.9% as compared to 12.5% in 2004. Earnings from operations increased 24.8% to $58.8 million from $47.1 million in 2004. Net earnings improved to $41.8 million, or $0.93 per diluted share.

Balance Sheet Highlights

At September 30, 2005, the Company had cash and investments of $332.8 million, including $27.7 million held by its unregulated entities and $305.1 million held by its regulated entities. Medical claims liabilities totaled $148.9 million, representing 41.4 days in claims payable versus 49.5 days from the previous quarter. Medical claims liabilities were affected by a reduction in pended claims from 54,000 to 21,000, many of which were large liability claims. Additionally, the average cost per claim held in inventory at September 30 was $144.00 and compares to $204.00 in the immediately preceding quarter.

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, 2005                            49.5
Increased efficiencies in claims processing                      (5.2)
Effect of AZ behavioral health block payment business            (1.5)
Payment of Aurora settlement                                     (1.4)
                                                            ----------
Days in claims payable, September 30, 2005                       41.4
                                                            ==========

As predicted, cash flows provided by operating activities were $51.9 million for the three months ended and $44.9 million for the nine months ended September 30, 2005. Centene received the State of Wisconsin's June capitation payment of $29 million in July.

Outlook

Karey L. Witty, Centene's chief financial officer, stated, "For the fourth quarter of 2005, we expect revenue in the range of $415 million to $420 million and net earnings of $0.30 to $0.32 per diluted share. Additionally, we expect organic membership growth in excess of 10% for 2005. Our preliminary outlook for 2006 includes revenue in the range of $2.03 billion to $2.18 billion and net earnings of $1.72 to $1.87 per diluted share. This guidance excludes the potential impact of any other acquisitions we may undertake during the remainder of 2005 as well as expenses related to stock option grants under SFAS 123R ("Share Based Payment"), which is required to be adopted on January 1, 2006.

Conference Call

As previously announced, the Company will host a conference call this morning, October 25, 2005, at 8:30 a.m. (Eastern Time) to review the financial results for the third quarter ended September 30, 2005, 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 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 8, 2005 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 1255588.

About Centene Corporation

Centene Corporation provides multi-line managed care 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 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 "Third Quarter Highlights," the second bullet under "Statement of Earnings Highlights," and 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)

                                        September 30,     December 31,
                                            2005              2004
                                        ------------      ------------
                                         (Unaudited)
                    ASSETS

Current assets:
  Cash and cash equivalents                $ 121,424         $ 84,105
  Premium and related receivables,
   net of allowances of $156 and $462,
   respectively                               43,235           31,475
  Short-term investments, at fair value
   (amortized cost $58,760 and $94,442,
   respectively)                              58,642           94,283
  Other current assets                        20,500           14,429
                                        -------------     ------------
    Total current assets                     243,801          224,292
Long-term investments, at fair value
 (amortized cost $132,394 and $117,177,
 respectively)                               130,347          116,787
Restricted deposits, at fair value
 (amortized cost $22,614 and $22,295,
 respectively)                                22,344           22,187
Property, software and equipment              55,073           43,248
Goodwill                                     159,579          101,631
Other intangible assets                       21,217           14,439
Other assets                                   7,250            5,350
                                        -------------     ------------
  Total assets                             $ 639,611        $ 527,934
                                        =============     ============

      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Medical claims liabilities               $ 148,889        $ 165,980
  Accounts payable and accrued expenses       47,302           31,737
  Unearned revenue                            12,437            3,956
  Current portion of long-term debt and
   notes payable                                 486              486
                                        -------------     ------------
    Total current liabilities                209,114          202,159
Long-term debt                                87,650           46,973
Other liabilities                              9,614            7,490
                                        -------------     ------------
  Total liabilities                          306,378          256,622

Stockholders' equity:
  Common stock, $.001 par value;
   authorized 100,000,000 shares;
   issued and outstanding 42,646,184
   and 41,316,122 shares, respectively            43               41
  Additional paid-in capital                 186,659          165,391
  Accumulated other comprehensive income:
    Unrealized loss on investments,
     net of tax                               (1,522)            (407)
  Retained earnings                          148,053          106,287
                                        -------------     ------------
    Total stockholders' equity               333,233          271,312
                                        -------------     ------------
  Total liabilities and stockholders'
   equity                                  $ 639,611        $ 527,934
                                        =============     ============



                 CENTENE CORPORATION AND SUBSIDIARIES

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

                          Three Months Ended      Nine Months Ended
                             September 30,          September 30,
                       ----------- ----------- ----------- -----------
                           2005       2004        2005        2004
                       ----------- ----------- ----------- -----------
                             (Unaudited)             (Unaudited)
                       ----------- ----------- ----------- -----------
Revenues:
  Premiums             $  395,667  $  251,536  $1,075,027  $  705,556
  Services                  4,975       2,207       7,619       7,320
                       ----------- ----------- ----------- -----------
    Total revenues        400,642     253,743   1,082,646     712,876
                       ----------- ----------- ----------- -----------
Expenses:
  Medical costs           331,050     202,974     881,021     570,720
  Cost of services          2,002       2,111       3,573       6,149
  General and
   administrative
   expenses                52,450      32,187     139,274      88,915
                       ----------- ----------- ----------- -----------
    Total operating
     expenses             385,502     237,272   1,023,868     665,784
                       ----------- ----------- ----------- -----------
      Earnings from
       operations          15,140      16,471      58,778      47,092

Other income
 (expense):
  Investment and other
   income                   2,818       1,683       7,461       4,529
  Interest expense         (1,190)       (126)     (2,386)       (317)
                       ----------- ----------- ----------- -----------
      Earnings before
       income taxes        16,768      18,028      63,853      51,304
Income tax expense          4,662       6,677      22,087      19,002
                       ----------- ----------- ----------- -----------
    Net earnings       $   12,106  $   11,351  $   41,766  $   32,302
                       =========== =========== =========== ===========
Earnings per share:
  Basic earnings per
   common share        $     0.28  $     0.28  $     0.99  $     0.79

  Diluted earnings per
   common share        $     0.27  $     0.26  $     0.93  $     0.74

Weighted average
 number of shares
 outstanding:
  Basic                42,582,129  40,972,858  42,120,149  40,693,804
  Diluted              45,278,328  43,640,180  45,078,852  43,364,120



                 CENTENE CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands)

                                                   Nine Months Ended
                                                     September 30,
                                                 ---------------------
                                                    2005       2004
                                                 ---------- ----------
                                                      (Unaudited)

Cash flows from operating activities:
  Net earnings                                   $  41,766  $  32,302
  Adjustments to reconcile net earnings to net
   cash provided by operating activities --
    Depreciation and amortization                    9,658      7,219
    Deferred income taxes                           (3,567)      (303)
    Tax benefits related to stock options            4,511      1,858
    Stock compensation expense                       3,557         44
    Loss (gain) on sale of investments                  58       (212)
  Changes in assets and liabilities --
    Premium and related receivables                 (9,396)    (2,431)
    Other current assets                            (1,990)    (4,803)
    Other assets                                    (1,380)    (1,773)
    Medical claims liabilities                     (17,091)    19,825
    Unearned revenue                                 5,892         (3)
    Accounts payable and accrued expenses           11,798      5,184
    Other operating activities                       1,096        568
                                                 ---------- ----------
      Net cash provided by operating activities     44,912     57,475
                                                 ---------- ----------
Cash flows from investing activities:
  Purchase of property, software and equipment     (16,837)    (9,487)
  Purchase of investments                         (108,630)  (207,385)
  Sales and maturities of investments              129,095    188,918
  Acquisitions, net of cash acquired               (55,410)    (7,005)
                                                 ---------- ----------
      Net cash used in investing activities        (51,782)   (34,959)
                                                 ---------- ----------
Cash flows from financing activities:
  Reduction of long-term debt and notes payable     (4,323)      (507)
  Proceeds from borrowings                          45,000          -
  Proceeds from stock options and employee stock
   purchase plan                                     3,925      2,332
  Other financing activities                          (413)         -
                                                 ---------- ----------
    Net cash provided by financing activities       44,189      1,825
                                                 ---------- ----------
    Net increase in cash and cash equivalents       37,319     24,341
                                                 ---------- ----------
Cash and cash equivalents, beginning of period      84,105     64,346
                                                 ---------- ----------
Cash and cash equivalents, end of period         $ 121,424  $  88,687
                                                 ========== ==========
  Interest paid                                  $   2,184  $     324
  Income taxes paid                              $  19,658  $  18,844
Supplemental schedule of non-cash investing and
 financing activities:
  Common stock issued for acquisitions           $   8,991  $       -



                 CENTENE CORPORATION AND SUBSIDIARIES

                      SUPPLEMENTAL FINANCIAL DATA

                               Q3         Q2         Q1         Q4
                              2005       2005       2005       2004
                           ---------- ---------- ---------- ----------
MEMBERSHIP
  Indiana                    176,300    152,800    149,900    150,600
  Kansas                     107,600    103,000     94,900     94,200
  Missouri                    37,300     39,900     41,300     41,200
  New Jersey                  50,900     52,900     52,700     52,800
  Ohio                        58,100     59,600     23,900     23,800
  Texas                      243,600    243,800    243,700    244,300
  Wisconsin                  173,900    173,400    170,900    165,800
                           ---------- ---------- ---------- ----------
TOTAL                        847,700    825,400    777,300    772,700
                           ========== ========== ========== ==========

  Medicaid                   657,500    637,300    588,100    580,200
  SCHIP                      176,900    176,200    178,500    182,100
  SSI                         13,300     11,900     10,700     10,400
                           ---------- ---------- ---------- ----------
TOTAL                        847,700    825,400    777,300    772,700
                           ========== ========== ========== ==========

REVENUE PER MEMBER         $  147.73  $  143.41  $  142.15  $  139.38

CLAIMS
  Period-end inventory       206,900    195,500    227,700    150,300
  Average inventory          148,300    170,300    191,900    128,300
  Period-end inventory per
   member                       0.24       0.24       0.29       0.19

DAYS IN CLAIMS PAYABLE (a)      41.4       49.5       59.7       66.5

(a) 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                $   305.1  $   260.5  $   295.0  $   271.4
  Unregulated                   27.7       27.4       42.1       46.0
                           ---------- ---------- ---------- ----------
TOTAL                      $   332.8  $   287.9  $   337.1  $   317.4
                           ========== ========== ========== ==========

ANNUALIZED RETURN ON
 EQUITY (b)                     14.9%      20.0%      20.5%      18.2%

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



HEALTH BENEFITS RATIO BY CATEGORY:

                            Three Months Ended     Nine Months Ended
                               September 30,         September 30,
                           ---------- ---------- ---------- ----------
                              2005       2004       2005       2004
                           ---------- ---------- ---------- ----------
Medicaid and SCHIP              83.0%      80.4%      81.5%      80.5%
SSI                             96.2       92.8       92.6       96.6
  Medicaid Managed Care
   Total                        83.3       80.7       81.7       80.9
Specialty Services              89.7          -       91.0          -
  Total                         83.7       80.7       82.0       80.9



GENERAL AND ADMINISTRATIVE EXPENSE RATIO BY BUSINESS SEGMENT:

                            Three Months Ended     Nine Months Ended
                               September 30,         September 30,
                           ---------- ---------- ---------- ----------
                              2005       2004       2005       2004
                           ---------- ---------- ---------- ----------
Medicaid Managed Care           10.6%      10.5%      10.6%      10.4%
Specialty Services              30.2       56.0       38.9       51.8
  Total                         13.1       12.7       12.9       12.5



                      MEDICAL CLAIMS LIABILITIES
                            (In thousands)

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

Balance, September 30, 2004                                 $ 126,394
  Acquisitions                                                 24,909
  Incurred related to:
    Current period                                          1,123,677
    Prior period                                              (12,900)
                                                            ----------
      Total incurred                                        1,110,777
                                                            ----------
  Paid related to:
    Current period                                          1,000,533
    Prior period                                              112,658
                                                            ----------
      Total paid                                            1,113,191
                                                            ----------
Balance, September 30, 2005                                 $ 148,889
                                                            ==========

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.

SOURCE: Centene Corporation

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