Centene Corporation Reports Twenty-First Consecutive Quarter of Increased Profitability

October 25, 2004 at 4:02 PM EDT

ST. LOUIS--(BUSINESS WIRE)--Oct. 25, 2004--Centene Corporation (NYSE:CNC) today announced its financial results for the quarter ended September 30, 2004.

    Third Quarter Highlights

    --  Revenues of $253.7 million, a 27.7% increase over the third
        quarter of 2003.

    --  Earnings from operations of $16.5 million, a 30.3% increase
        over the third quarter of 2003.

    --  Earnings per diluted share of $0.52.

    --  Organic membership growth of 32.3% over the third quarter of
        2003, including the Texas Exclusive Provider Organization
        (EPO) contract.

    --  Texas EPO start-up costs moved Medicaid Managed Care segment
        G&A expense ratio to 10.5% (GAAP) and 10.0%, exclusive of the
        effect of premium taxes (non-GAAP).

    --  Operating cash flows of $57.5 million for the nine months
        ended September 30, 2004.

    --  Days in claims payable of 57.3 and claims inventory of
        141,200, also driven by the Texas EPO contract.

    --  Signed definitive agreement to purchase FirstGuard, serving
        over 136,000 members and marking Centene's entry into Kansas
        and Missouri, two additional Medicaid-mandated states.

    --  Realigned Specialty Companies into a subsidiary company named
        CenCorp Health Solutions(TM).

    --  Announced plans to establish a claims processing facility in
        Great Falls, Montana to accommodate growth initiatives for
        2005 and beyond.

Michael F. Neidorff, Centene's chairman and chief executive officer, said, "I am pleased to report another strong quarter, marking our 21st quarter of consecutive earnings growth. We remain focused on growing our business methodically and predictably while continuing to work with the states in which we operate to offer better member care while achieving costs savings for the states. We experienced strong growth in Indiana and Texas, while New Jersey and Ohio were relatively flat, as anticipated. We are pleased to have added the 94,500 SCHIP Exclusive Provider Organization members in Texas, effective September 1, 2004, ahead of schedule. In New Jersey, we anticipate marginal growth for the year and are working actively with the State to expand our SSI coverage into additional counties. As we continue to build our physician network and seek to enter new service areas in Ohio, we are confident in the growth opportunities within this State. In Wisconsin, the State has implemented new verification requirements for BadgerCare recipients, resulting in a decline in enrollment from the sequential quarter. In the past, we have experienced similar short-term variances in other markets, namely Indiana and Texas, and will work with the State of Wisconsin to re-qualify recipients. These temporary changes are part of the normal course of doing business and do not affect our prospects for ongoing organic growth of 10-12%.

A significant highlight during the quarter was the announcement of our definitive agreement to purchase FirstGuard, two health plan entities that serve 136,000 members in Kansas and Missouri, marking our entry into two additional Medicaid-mandated states. The organic growth opportunities are significant, given the 1.2 million Medicaid and 120,000 SSI eligibles in both states. We will also be able to leverage our local approach, and the acquisition will be accretive in 2005, consistent with our prior guidance. Subject to regulatory approvals, we expect the transaction to close by the first quarter of 2005.

In addition, our plans to establish a second claims processing center in Great Falls, Montana are underway. When completed, this facility will provide Centene with geographic diversity and redundancy capabilities, while enabling us to methodically plan for our growth initiatives for 2005 and beyond," concluded Neidorff.

The following table depicts membership in Centene's managed care organizations by state at September 30, 2004 and 2003:

                                                  2004        2003
                                               ----------  -----------
     Indiana                                     150,000      112,100
     New Jersey                                   53,200       52,700
     Ohio                                         23,500           --
     Texas                                       250,200      152,100
     Wisconsin                                   164,700      150,200
                                               ----------  -----------

     TOTAL                                       641,600      467,100
                                               ==========  ===========

The following table depicts membership in Centene's managed care organizations by member category at September 30, 2004 and 2003:

                                                 2004        2003
                                              ----------  -----------
     Medicaid (excluding SSI)                   479,500     389,200
     SCHIP                                      152,100      68,600
     SSI                                         10,000(a)    9,300(b)
                                              ----------  -----------

     TOTAL                                      641,600      467,100
                                              ==========  ===========

(a) 4,500 at-risk, 5,500 ASO
(b) 4,300 at-risk; 5,000 ASO
    Statement of Earnings Highlights

    --  For the third quarter of 2004, revenues increased 27.7% to
        $253.7 million from $198.8 million in the third quarter of
        2003.

    --  The health benefits ratio (HBR), which reflects medical costs
        as a percent of premium revenues, was 80.7% (GAAP) compared to
        82.0% (GAAP) for the same period in 2003. Excluding premium
        taxes imposed by the State of Texas beginning September 1,
        2003, and the State of New Jersey beginning July 1, 2004, the
        HBR was 81.2% (non-GAAP) for the current quarter.

    --  Consolidated general and administrative (G&A) expenses as a
        percent of revenues increased to 12.7% (GAAP) in 2004 from
        11.4% (GAAP) in the third quarter of 2003. Excluding the
        effect of premium taxes, the expense ratio was 12.2%
        (non-GAAP). The Medicaid Managed Care segment G&A ratio was
        10.0% (non-GAAP) compared to 10.1% (non-GAAP) for the same
        prior year period and included $400,000 of start up costs
        associated with the Texas State Children's Health Insurance
        Program Exclusive Provider Organization contract that was
        effective September 1, 2004. The Specialty Segment G&A ratio
        was 56.0%. The quarter's results included approximately
        $445,000 in due diligence costs for a transaction that we
        decided not to pursue as well as costs associated with the
        closing of our clinic facilities in California and Texas.

    --  Earnings from operations increased 30.3% to $16.5 million from
        $12.6 million in the third quarter of 2003.

    --  Net earnings were $11.4 million, or $0.52 per diluted share,
        compared to $8.7 million, or $0.44 per diluted share, for the
        third quarter of 2003.

    --  For the nine months ended September 30, 2004, revenues
        increased 26.8% to $712.9 million from $562.4 million for the
        same period in the prior year. The health benefits ratio was
        80.9% (GAAP), with the Medicaid component at 80.3%, compared
        to 82.0% for the same period in 2003. General and
        administrative expenses as a percent of revenues for the
        Medicaid segment were 10.4% (GAAP) and 9.9% (non-GAAP) as
        compared to 10.3% (GAAP) in 2003. Earnings from operations
        increased 42.2% to $47.1 million from $33.1 million in 2003.
        Net earnings improved to $32.3 million, or $1.49 per diluted
        share.

    Balance Sheet Highlights

At September 30, 2004, the Company had cash and investments of $323.6 million, a portion of which is restricted due to state regulatory requirements. Medical claims liabilities totaled $126.4 million, representing 57.3 days in claims payable versus 53.5 days from the previous quarter. This increase reflects higher claims inventory levels primarily resulting from transitioning the EPO members to Centene effective September 1, 2004.

Outlook

Karey L. Witty, Centene's chief financial officer, commented, "Our fourth quarter 2004 revenue guidance is in the range of $265 million to $267 million, and we anticipate net earnings of $0.52 to $0.53 per diluted share, based on 22.0 million fully diluted shares outstanding. This anticipates incurring approximately $900,000 in start-up costs during the fourth quarter in preparation for the FirstGuard closing. For 2005, we anticipate revenue in the range of $1.22 billion to $1.24 billion, and net earnings per diluted share of $2.39 to $2.47. Since the FirstGuard transaction is subject to regulatory approvals, our guidance excludes any impact related to the transaction. In addition, this guidance does not include the effects of any pending changes to the accounting treatment for stock options." A review of the results for the third quarter and additional details on management's outlook for the fourth quarter, together with preliminary views on 2005, will take place during the Company's scheduled third quarter earnings call.

Conference Call

As previously announced, the Company will host a conference call tomorrow, October 26, 2004, at 8:30 a.m. (Eastern Time) to review the financial results for the third quarter ended September 30, 2004, 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 10, 2004 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 1093292.

Financial Presentation

The Company is providing certain non-GAAP financial measures in this release as the Company believes that these figures are helpful in allowing individuals to more accurately assess the ongoing nature of the Company's operations and measure the Company's performance more consistently.

The pro forma (non-GAAP) information presented above in the fifth bullet under "Third Quarter Highlights" and second, third and sixth bullets under "Statement of Earnings Highlights" and presented below in tables excludes the impact of the premium taxes enacted in September 2003 by the State of Texas and in July 2004 by the State of New Jersey. This assumption has been made in the non-GAAP financial measures as management believes that this assumption generally provides a more consistent measure of the Company's performance.

The Company uses the presented non-GAAP financial measures internally to focus management on period-to-period changes in the Company's core business. Therefore, the Company believes that this information is meaningful in addition to the information contained in the GAAP presentation of financial information. The presentation of this additional non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP.

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, New Jersey, Ohio, Texas and Wisconsin. In addition, the Company contracts with other healthcare organizations to provide specialty services including behavioral health, nurse triage and treatment compliance. Information regarding Centene is available via the Internet at www.centene.com.

The information provided in the paragraphs following the bullet listing under "Third Quarter Highlights," and the paragraph under "Outlook" above contain forward-looking statements that relate to future events and future financial performance of Centene. These forward-looking statements represent the Company's estimates as of October 25, 2004. 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)

                                       September 30,      December 31,
                                           2004             2003
                                       -------------- ----------------
                                        (Unaudited)

                ASSETS
Current assets:
  Cash and cash equivalents                  $88,687          $64,346
  Premium and related receivables, net
   of allowances of $470 and $607,
   respectively                               22,739           20,308
  Short-term investments, at fair
   value (amortized cost $43,640 and
   $15,192, respectively)                     43,568           15,160
  Deferred income taxes                        3,143            2,732
  Other current assets                        12,561            7,755
                                       -------------- ----------------
          Total current assets               170,698          110,301
Long-term investments, at fair value
 (amortized cost $170,061 and
 $183,749, respectively)                     170,126          184,811
Restricted deposits, at fair value
 (amortized cost $21,176 and $20,201,
 respectively)                                21,202           20,364
Property, software and equipment              28,831           23,106
Goodwill                                      17,142           13,066
Other intangible assets                        6,808            6,294
Other assets                                   6,346            4,750
                                       -------------- ----------------
          Total assets                      $421,153         $362,692
                                       ============== ================

 LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Medical claims liabilities                $126,394         $106,569
  Accounts payable and accrued
   expenses                                   21,907           17,965
  Unearned revenue                            3,670            3,673
  Current portion of long-term debt
   and notes payable                             288              579
                                       -------------- ----------------
          Total current liabilities          152,259          128,786
Long-term debt                                 7,400            7,616
Other liabilities                              5,571            6,175
                                       -------------- ----------------
          Total liabilities                  165,230          142,577
Stockholders' equity:
  Common stock, $.001 par value;
   authorized 100,000,000 shares;
   issued and outstanding 20,520,026
   and 20,131,924 shares, respectively            21               20
  Additional paid-in capital                 161,613          157,380
  Accumulated other comprehensive income:
      Unrealized gain on investments,
       net of tax                                 12              740
  Retained earnings                           94,277           61,975
                                       -------------- ----------------
          Total stockholders' equity         255,923          220,115
                                       -------------- ----------------
          Total liabilities and
           stockholders' equity             $421,153         $362,692
                                       ============== ================



                 CENTENE CORPORATION AND SUBSIDIARIES

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

                         Three Months Ended       Nine Months Ended
                            September 30,           September 30,
                       ----------------------- -----------------------
                          2004        2003        2004        2003
                       ----------- ----------- ----------- -----------
                             (Unaudited)             (Unaudited)
Revenues:
 Premiums                $251,536    $196,173    $705,556    $555,285
 Services                   2,207       2,580       7,320       7,134
                       ----------- ----------- ----------- -----------
    Total revenues        253,743     198,753     712,876     562,419
                       ----------- ----------- ----------- -----------
Expenses:
 Medical costs            202,974     160,812     570,720     460,123
 Cost of services           2,111       2,681       6,149       6,269
 General and
  administrative
  expenses                 32,187      22,620      88,915      62,904
                       ----------- ----------- ----------- -----------
    Total operating
     expenses             237,272     186,113     665,784     529,296
                       ----------- ----------- ----------- -----------
       Earnings from
        operations         16,471      12,640      47,092      33,123
Other income (expense):
 Investment and other
  income                    1,683       1,245       4,529       3,476
 Interest expense            (126)        (71)       (317)       (102)
                       ----------- ----------- ----------- -----------
       Earnings before
        income taxes       18,028      13,814      51,304      36,497
Income tax expense          6,677       5,110      19,002      13,805
Minority interest              --          --          --         881
                       ----------- ----------- ----------- -----------
      Net earnings        $11,351      $8,704     $32,302     $23,573
                       =========== =========== =========== ===========

Earnings per share:
   Basic earnings per
    common share            $0.55       $0.47       $1.59       $1.38
   Diluted earnings
    per common share        $0.52       $0.44       $1.49       $1.28

Weighted average number
 of shares outstanding:
   Basic               20,486,429  18,430,713  20,346,902  17,094,621
   Diluted             21,820,090  19,842,145  21,682,060  18,439,050



                 CENTENE CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (In thousands)

                                                    Nine Months Ended
                                                      September 30,
                                                   -------------------
                                                     2004      2003
                                                   --------- ---------
                                                       (Unaudited)

Cash flows from operating activities:
  Net earnings                                      $32,302   $23,573
  Adjustments to reconcile net earnings to net
   cash provided by operating activities --
      Depreciation and amortization                   7,219     4,299
      Stock compensation expense                         44       232
      Minority interest                                  --      (881)
      Gain on sale of investments                      (212)   (1,188)
  Changes in assets and liabilities --
      Premium and related receivables                (2,431)   (4,132)
      Other current assets                           (4,803)     (849)
      Deferred income taxes                            (303)      452
      Other assets                                   (1,873)      363
      Medical claims liabilities                     19,825       558
      Accounts payable and accrued expenses           5,184      (396)
      Other operating activities                      2,523       293
                                                   --------- ---------
             Net cash provided by operating
              activities                             57,475    22,324
                                                   --------- ---------
Cash flows from investing activities:
  Purchase of property, software and equipment       (9,487)  (16,242)
  Purchase of investments                          (207,385) (291,462)
  Sales and maturities of investments               188,918   202,306
  Acquisitions, net of cash acquired                 (7,005)   (3,218)
                                                   --------- ---------
             Net cash used in investing activities  (34,959) (108,616)
                                                   --------- ---------
Cash flows from financing activities:
  Reduction of long-term debt and notes payable        (507)      (24)
  Extinguishment of acquired liabilities                 --    (1,218)
  Proceeds from stock options and employee stock
   purchase plan                                      2,332       803
  Net proceeds from issuance of common stock             --    81,403
  Proceeds from borrowings                               --     8,581
  Cash paid for fractional share impact of stock
   split                                                 --        (3)
                                                   --------- ---------
             Net cash provided by financing
              activities                              1,825    89,542
                                                   --------- ---------
             Net increase in cash and cash
              equivalents                            24,341     3,250
                                                   --------- ---------
Cash and cash equivalents, beginning of period       64,346    59,656
                                                   --------- ---------
Cash and cash equivalents, end of period            $88,687   $62,906
                                                   ========= =========


   Interest paid                                       $324       $85
   Income taxes paid                                $18,844   $13,479



                          CENTENE CORPORATION

                      SUPPLEMENTAL FINANCIAL DATA

                                      Q3       Q2       Q1       Q4
                                     2004     2004     2004     2003
                                   -------- -------- -------- --------
MEMBERSHIP
   Indiana                         150,000  132,900  125,400  119,400
   New Jersey                       53,200   54,000   54,000   54,000
   Ohio                             23,500   23,800   23,800       --
   Texas                           250,200  155,300  154,000  158,400
   Wisconsin                       164,700  167,300  165,200  157,800
                                   -------- -------- -------- --------
TOTAL                              641,600  533,300  522,400  489,600
                                   ======== ======== ======== ========

   Medicaid                        479,500  460,300  446,900  411,800
   SCHIP                           152,100   63,200   65,900   68,400
   SSI                              10,000    9,800    9,600    9,400
                                   -------- -------- -------- --------
TOTAL                              641,600  533,300  522,400  489,600
                                   ======== ======== ======== ========

REVENUE PER MEMBER                 $144.70  $145.31  $145.19  $142.38

CLAIMS
   Period-end inventory            141,200   89,700  102,300  131,000
   Average inventory                96,800   98,800  107,400  102,500
   Period-end inventory per member    0.22     0.17     0.20     0.27

DAYS IN CLAIMS PAYABLE (a)            57.3     53.5     55.4     59.0

(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.

ANNUALIZED RETURN ON EQUITY (b)       18.2%    18.2%    17.9%    18.1%

(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      Nine Months
                                        Ended             Ended
                                     September 30,     September 30,
                                   ----------------- -----------------
                                     2004     2003     2004     2003
                                   -------- -------- -------- --------
Medicaid and SCHIP                    80.1%    81.3%    80.3%    82.0%
SSI                                   92.8    102.9     96.6    103.5
  Total (GAAP)                        80.7     82.0     80.9     82.9
  Total (non-GAAP)                    81.2     82.1     81.3     82.9



GENERAL AND ADMINISTRATIVE EXPENSE RATIO BY BUSINESS SEGMENT:

                   Three Months Ended          Nine Months Ended
                      September 30,              September 30,
               --------------------------- ---------------------------
                   2004          2003          2004          2003
               ------------- ------------- ------------- -------------
                      Non-          Non-          Non-          Non-
               GAAP  GAAP(c) GAAP  GAAP(c) GAAP  GAAP(c) GAAP  GAAP(c)
               ------------- ------------- ------------- -------------
Medicaid
 Managed Care  10.5%   10.0% 10.2%   10.1% 10.4%    9.9%  10.3%  10.3%
Specialty
 Services      56.0    56.0  32.0    32.0  51.8    51.8   31.0   31.0
   Total       12.7    12.2  11.4    11.2  12.5    12.0   11.2   11.1

(c) Excluding effect of premium taxes.



                       MEDICAL CLAIMS LIABILITES
                            (In thousands)

Four rolling quarters of the changes in medical claims liabilities are
summarized as follows:
                                                      ----------------
                                                           2004
                                                      ----------------
       Balance, September 30, 2003                            $91,739
       Incurred related to:
         Current period                                       750,116
         Prior period                                         (13,330)
                                                      ----------------
           Total incurred                                     736,786
                                                      ----------------
       Paid related to:
         Current period                                       630,164
         Prior period                                          71,967
                                                      ----------------
           Total paid                                         702,131
                                                      ----------------
       Balance, September 30, 2004                           $126,394
                                                      ================

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
             Investor Relations:
             Lisa M. Wilson, 212-759-3929

    SOURCE: Centene Corporation