Centene Corporation Reports 2006 Third Quarter Results

Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended September 30, 2006.

Third Quarter Summary

Revenues of $631.2 million, a 57.6% increase over the 2005 third quarter.

Loss from operations of $66.6 million, including a non-cash impairment charge related to the loss of the Kansas contract of $87.1 million pre-tax, or $1.96 per diluted share.

Earnings from operations of $20.5 million, excluding the non-cash impairment charge, compared to $15.1 million in the 2005 third quarter.

Loss per diluted share of $1.65. Earnings per diluted share of $0.31, excluding the non-cash impairment charge compared to $0.27 in the 2005 third quarter.

Operating cash flows of $110.1 million.

Quarter-end Medicaid Managed Care membership of 1.2 million.

Membership growth of 38.0% over the 2005 third quarter.

Health Benefits Ratio (HBR) for Centene’s Medicaid and SCHIP populations, which reflects medical costs as a percent of premium revenues, of 82.0%.

Medicaid Managed Care G&A expense ratio of 12.1% and Specialty Services G&A ratio of 17.0%.

Days in claims payable of 45.3.

Other Events

Initiated operations in the Southwest region of Georgia, ending the quarter with 252,600 members state-wide.

Commenced operations in the seven new counties awarded in the East Central market of Ohio.

Started operations in the Corpus Christi market and expanded operations in the Austin and Lubbock markets of Texas.

Awarded state-wide Medicaid managed care contract to manage a portion of eligible Hoosier Healthwise members through our Indiana subsidiary, Managed Health Services (MHS).

Acquired managed vision business of OptiCare Health Systems, Inc. effective July 1.

Commenced Arizona Long-Term Care contract effective October 1, 2006.

Received preliminary notification of Ohio Medicaid ABD contract award in all four regions in which we submitted a bid.

Michael F. Neidorff, Centene’s Chairman and Chief Executive Officer, commented, “We believe that many of the initiatives that we implemented during the second quarter, including a back-to-basics approach and an evaluation of our medical management practices at a number of levels, have yielded results that indicate that we are back on the right track. We are pleased that our medical claims reserves that were recorded in the 2006 second quarter have developed appropriately and that our third quarter results are in line with our expectations. We continue to evaluate opportunities to implement additional processes and protective measures to help manage our cost trends.

“We are pleased with our membership and revenue growth for the quarter, particularly our strong membership in Georgia, where our subsidiary, Peach State Health Plan, Inc., ended the quarter with 252,600 members, ahead of our expectations. We are now operating in the Atlanta, Central and Southwest regions and we achieved strong membership there despite an overall decline in the total eligible membership in the State. We also experienced growth due to our market expansions in Ohio and Texas.

“On September 1, 2006, we commenced operations in Texas in the Corpus Christi market caring for Medicaid and SCHIP members; we also began serving new Medicaid members in the Lubbock market and SCHIP members in Austin. In addition, our contract to provide managed care services for SSI recipients in the San Antonio and Corpus Christi markets will commence membership operations in January 2007. While we are still seeing higher than average utilization trends in Texas NICU, we expect this cost trend to moderate as the members transition from an unmanaged population into a managed care environment.

“Our Specialty Services segment has experienced year-over-year growth largely due to acquisitions, namely US Script, and to a lesser extent, Cardium and OptiCare. In addition, effective October 1, we began providing services in Yuma/LaPaz and Maricopa counties under our Arizona Long-Term Care contract.

“As we enter the fourth quarter, we look forward to making continued progress in our medical management and to capture future growth opportunities,” concluded Neidorff.

The following table depicts membership in Centene’s managed care organizations by state at September 30, 2006 and 2005:

2006 

2005 

Georgia

252,600 

- 

Indiana

198,100 

176,300 

Kansas

112,400 

107,600 

Missouri

32,200 

37,300 

New Jersey

59,100 

50,900 

Ohio

88,300 

58,100 

Texas

259,900 

243,600 

Wisconsin

167,100 

173,900 

 

TOTAL

1,169,700 

847,700 

The following table depicts membership in Centene’s managed care organizations by member category at September 30, 2006 and 2005:

2006 

2005 

Medicaid

922,300 

657,500 

SCHIP

229,400 

176,900 

SSI

18,000 

(a)

13,300 

(b)

 

TOTAL

1,169,700 

 

847,700 

 

(a) 10,000 at-risk; 8,000 ASO

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

Statement of Operations

For the 2006 third quarter, revenues increased 57.6% to $631.2 million from $400.6 million in the 2005 third quarter.

The HBR for Centene’s Medicaid and SCHIP populations, which reflects medical costs as a percent of premium revenues, was 82.0% for the three months ending September 30, 2006, a decrease of 1.1% over the comparable 2005 period, which included $4.5 million for settlement of a lawsuit with Aurora Health Care, Inc. (Aurora). This settlement increased the HBR by 1.2% for the three months ended September 30, 2005. The decrease for the three months ended September 30, 2006 is the result of premium rate increases in certain markets, an increase in maternal delivery revenue, and the effect of the 2005 Aurora settlement, offset by an 8.9% increase in average in-patient days and higher physician costs. The HBR for the three months ended September 30, 2006 did not include any overall adverse medical cost development related to prior periods.

General and administrative (G&A) expense as a percent of revenues for the Medicaid Managed Care segment was 12.1% in the third quarter of 2006 compared to 10.6% in the third quarter of 2005, primarily due to premium tax or similar assessments enacted in certain markets.

Non-cash intangible asset impairment charge of $87.1 million (pre-tax), $85.0 million (after-tax), or $1.96 per diluted share related to the Kansas Medicaid contract non-renewal notification.

Loss from operations of $66.6 million, including a non-cash impairment charge related to the loss of the Kansas contract of $87.1 million pre-tax, or $1.96 per diluted share.

Earnings from operations of $20.5 million, excluding the non-cash impairment charge, compared to $15.1 million in the 2005 third quarter.

Loss per diluted share of $1.65. Earnings per diluted share of $0.31, excluding the non-cash impairment charge compared to $0.27 in the 2005 third quarter.

For the nine months ended September 30, 2006, revenues increased 46.1% to $1,581.6 million from $1,082.6 million for the same period in the prior year. Medicaid Managed Care G&A expenses as a percent of revenues increased to 12.1% in the first nine months of 2006 compared to 10.6% in the first nine months of 2005. Earnings from operations, excluding the non-cash impairment charge, decreased to $39.4 million in the first nine months of 2006 from $58.8 million in the first nine months of 2005. Net earnings, excluding the non-cash impairment charge, were $27.5 million or $0.62 per diluted share in the first nine months of 2006.

Balance Sheet and Cash Flow

At September 30, 2006, the Company had cash and investments of $440.1 million, including $411.1 million held by its regulated entities and $29.0 million held by its unregulated entities. Medical claims liabilities totaled $246.7 million, representing 45.3 days in claims payable.

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, 2006

42.6 

Increase in claims inventory

2.7 

Increase for Georgia and Texas claims

0.3 

Conversion of pharmacy benefits to U.S. Script

(0.3)

Days in claims payable, September 30, 2006

45.3 

Outlook

The table below depicts the Company’s revised guidance for the fourth quarter of 2006 and preliminary guidance for 2007:

Q4

2007 

Low

High

Low

High

Revenue (in millions)

$685.0 

$690.0 

$2,730 

$2,830 

Earnings per diluted share

$0.38 

 

$0.43 

 

$1.51 

 

$1.61 

J. Per Brodin, Centene’s Chief Financial Officer, stated, “The 2006 fourth quarter and 2007 guidance excludes any potential shut-down costs for our Kansas health plan that would be necessary if our efforts to retain the contract are unsuccessful. The 2007 guidance includes the estimated effect of initiating our Texas Star+ SSI operations effective January 1, 2007 and the Ohio Aged, Blind and Disabled preliminary award which is expected to transition throughout 2007.”

Conference Call

As previously announced, the Company will host a conference call Tuesday, October 24, 2006, at 8:30 a.m. (Eastern Time) to review the financial results for the third quarter ended September 30, 2006, and to discuss its business outlook. Michael F. Neidorff and J. Per Brodin 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 PM Eastern Time on November 7, 2006 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 6573810.

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 non-GAAP information presented above in the third and fourth bullet under “Third Quarter Summary” and sixth through eighth bullets under “Statement of Earnings” excludes the non-cash intangible asset impairment charge related to the Kansas contract non-renewal notification. This exclusion has been made in the non-GAAP financial measures as management believes that this charge is an unusual event.

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 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 Georgia, 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, managed vision, nurse triage, pharmacy benefits management and treatment compliance. Information regarding Centene is available via the Internet at www.centene.com.

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

[Tables Follow]

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

September 30,

2006

December 31,

2005

(Unaudited)

 

ASSETS

Current assets:

Cash and cash equivalents

$ 200,480 

$ 147,358 

Premium and related receivables, net of allowances of $125 and $343, respectively

86,108 

44,108 

Short-term investments, at fair value (amortized cost $67,679 and $56,863, respectively)

67,392 

56,700 

Other current assets

20,776 

24,439 

Total current assets

374,756 

272,605 

Long-term investments, at fair value (amortized cost $148,415 and $126,039, respectively)

146,666 

123,661 

Restricted deposits, at fair value (amortized cost $25,691 and $22,821, respectively)

25,565 

22,555 

Property, software and equipment, net

103,175 

67,199 

Goodwill

136,519 

157,278 

Other intangible assets, net

14,949 

17,368 

Other assets

12,211 

7,364 

Total assets

$ 813,841 

$ 668,030 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

Medical claims liabilities

$ 246,669 

$ 170,514 

Accounts payable and accrued expenses

67,957 

29,790 

Unearned revenue

18,597 

13,648 

Current portion of long-term debt and notes payable

1,032 

699 

Total current liabilities

334,255 

214,651 

Long-term debt

168,429 

92,448 

Other liabilities

5,252 

8,883 

Total liabilities

507,936 

315,982 

Stockholders’ equity:

Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding 43,168,505 and 42,988,230 shares, respectively

44 

43 

Additional paid-in capital

202,760 

191,840 

Accumulated other comprehensive income:

Unrealized loss on investments, net of tax

(1,356)

(1,754)

Retained earnings

104,457 

161,919 

Total stockholders’ equity

305,905 

352,048 

Total liabilities and stockholders’ equity

$ 813,841 

$ 668,030 

See notes to consolidated financial statements.

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

 

Three Months Ended

September 30,

Nine Months Ended

September 30,

2006 

2005 

2006 

2005 

(Unaudited)

(Unaudited)

Revenues:

Premium

$ 610,661 

$ 395,667 

$ 1,522,302 

$ 1,075,027 

Service

20,588 

4,975 

59,318 

7,619 

Total revenues

631,249 

400,642 

1,581,620 

1,082,646 

Expenses:

Medical costs

501,350 

331,050 

1,263,251 

881,021 

Cost of services

15,373 

2,002 

45,278 

3,573 

General and administrative expenses

93,991 

52,450 

233,654 

139,274 

Impairment loss

87,091 

- 

87,091 

- 

Total operating expenses

697,805 

385,502 

1,629,274 

1,023,868 

Earnings (loss) from operations

(66,556)

15,140 

(47,654)

58,778 

Other income (expense):

Investment and other income

4,625 

2,818 

12,056 

7,461 

Interest expense

(3,082)

(1,190)

(7,536)

(2,386)

Earnings (loss) before income taxes

(65,013)

16,768 

(43,134)

63,853 

Income tax expense

6,180 

4,662 

14,328 

22,087 

Net earnings (loss)

$ (71,193)

$ 12,106 

$ (57,462)

$ 41,766 

 

Earnings (loss) per share:

Basic earnings (loss) per common share

$ (1.65)

$ 0.28 

$ (1.33)

$ 0.99 

Diluted earnings (loss) per common share

$ (1.65)

$ 0.27 

$ (1.33)

$ 0.93 

 

Weighted average number of shares outstanding:

Basic

43,219,053 

42,582,129 

43,126,062 

42,120,149 

Diluted

43,219,053 

45,278,328 

43,126,062 

45,078,852 

See notes to consolidated financial statements.

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

Nine Months Ended

September 30,

2006 

2005 

(Unaudited)

 

Cash flows from operating activities:

Net earnings (loss)

$ (57,462)

$ 41,766 

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities —

Depreciation and amortization

15,286 

9,658 

Excess tax benefits from stock compensation

– 

4,511 

Stock compensation expense

11,168 

3,557 

Impairment loss

87,091 

– 

Loss on sale of investments

33 

58 

Deferred income taxes

(4,493)

(3,567)

Changes in assets and liabilities —

Premium and related receivables

(34,209)

(9,396)

Other current assets

2,705 

(1,990)

Other assets

(455)

(1,380)

Medical claims liabilities

74,367 

(17,091)

Unearned revenue

4,816 

5,892 

Accounts payable and accrued expenses

25,929 

11,798 

Other operating activities

(221)

1,096 

Net cash provided by operating activities

124,555 

44,912 

Cash flows from investing activities:

Purchase of property, software and equipment

(39,494)

(16,837)

Purchase of investments

(235,501)

(108,630)

Sales and maturities of investments

200,155 

129,095 

Acquisitions, net of cash acquired

(66,921)

(55,410)

Net cash used in investing activities

(141,761)

(51,782)

Cash flows from financing activities:

Proceeds from exercise of stock options

4,594 

3,925 

Proceeds from borrowings

83,359 

45,000 

Payment of long-term debt and notes payable

(12,505)

(4,323)

Excess tax benefits from stock compensation

2,094 

– 

Common stock repurchases

(7,214)

– 

Other financing activities

– 

(413)

Net cash provided by financing activities

70,328 

44,189 

Net increase in cash and cash equivalents

53,122 

37,319 

Cash and cash equivalents, beginning of period

147,358 

84,105 

Cash and cash equivalents, end of period

$ 200,480 

$ 121,424 

 

 

Interest paid

$ 7,582 

$ 2,184 

Income taxes paid

$ 5,223 

$ 19,658 

 

Supplemental schedule of non-cash financing activities:

Common stock issued for acquisitions

$ – 

$ 8,991 

See notes to consolidated financial statements.

CENTENE CORPORATION

SUPPLEMENTAL FINANCIAL DATA

 

Q3

Q2

Q1

Q4

2006 

2006 

2006 

2005 

MEMBERSHIP

Medicaid Managed Care:

Georgia

252,600 

216,000 

− 

− 

Indiana

198,100 

193,000 

193,000 

193,300 

Kansas

112,400 

117,100 

118,200 

113,300 

Missouri

32,200 

32,900 

34,500 

36,000 

New Jersey

59,100 

59,000 

57,500 

56,500 

Ohio

88,300 

73,100 

59,000 

58,700 

Texas

259,900 

235,800 

237,500 

242,000 

Wisconsin

167,100 

174,600 

175,100 

172,100 

TOTAL

1,169,700 

1,101,500 

874,800 

871,900 

Medicaid

922,300 

863,500 

683,700 

681,100 

SCHIP

229,400 

221,600 

175,300 

175,900 

SSI

18,000 

16,400 

15,800 

14,900 

TOTAL

1,169,700 

1,101,500 

874,800 

871,900 

 

Specialty Services(a):

Arizona

94,500 

93,600 

92,300 

94,700 

Kansas

37,500 

39,400 

39,200 

38,800 

TOTAL

132,000 

133,000 

131,500 

133,500 

 

(a) Includes behavioral health contracts only.

REVENUE PER MEMBER(b)

$169.98 

$159.33 

$157.17 

$152.48 

 

CLAIMS(b)

Period-end inventory

233,500 

186,200 

229,800 

255,000 

Average inventory

188,600 

150,100 

175,200 

153,500 

Period-end inventory per member

0.20 

0.17 

0.26 

0.29 

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

 

DAYS IN CLAIMS PAYABLE (c)

45.3 

42.6 

43.0 

45.4 

(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

$411.1 

$323.9 

$314.0 

$322.6 

Unregulated

29.0 

25.5 

25.8 

27.7 

TOTAL

$440.1 

$349.4 

$339.8 

$350.3 

 

ANNUALIZED RETURN ON EQUITY (d)

(83.8)%

5.4%

9.8%

16.2%

(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

Nine Months Ended

September 30,

September 30,

2006 

2005 

2006 

2005 

Medicaid and SCHIP

82.0%

83.1%

82.8%

81.6%

SSI

84.1 

96.2 

86.2 

92.6 

Specialty Services

82.9 

87.2 

83.5 

88.7 

GENERAL AND ADMINISTRATIVE EXPENSE RATIO BY BUSINESS SEGMENT:

 

Three Months Ended

Nine Months Ended

September 30,

September 30,

2006 

2005 

2006 

2005 

Medicaid Managed Care

12.1%

10.6%

12.1%

10.6%

Specialty Services

17.0 

30.2 

18.3 

38.9 

MEDICAL CLAIMS LIABILITIES

(In thousands)

 

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

 

Balance, September 30, 2005

$148,889 

Acquisitions

1,788 

Incurred related to:

Current period

1,618,282 

Prior period

(9,144)

Total incurred

1,609,138 

Paid related to:

Current period

1,374,777 

Prior period

138,369 

Total paid

1,513,146 

Balance, September 30, 2006

$ 246,669 

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.