28.10.2008 10:00:00

Centene Corporation Reports 2008 Third Quarter Earnings

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

Third Quarter Highlights

  • Quarter-end Medicaid Managed Care membership of 1.2 million.
  • Revenues of $897.1 million, or $873.5 million net of premium taxes, an 19.8% increase over the 2007 third quarter.
  • Health Benefits Ratio (HBR), which reflects medical costs as a percent of premium revenues, of 82.4%, compared to 83.4% in the 2007 third quarter.
  • General and administrative (G&A) expense ratio of 14.0%, compared to 13.7% in the 2007 third quarter.
  • Cash flow from operations of $39.8 million.
  • Days in claims payable of 49.6.

Other Events

  • Received notification of a ruling by the Eighth Circuit of The United States Court of Appeals upholding the dismissal of a Consolidated Class Action Lawsuit.
  • Stock repurchase program extended through October 31, 2009. Repurchased 245,740 shares of our common stock during the third quarter for approximately $5 million.
  • Completed the previously announced acquisition of Celtic Insurance Company, or Celtic, a health insurance carrier focused on the individual health insurance market, effective July 1, 2008.
  • Commenced a new acute care contract in the Yavapai Service Area of Arizona, effective October 1, 2008.
  • Appointed Donald G. Imholz as Senior Vice President and Chief Information Officer.

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

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

         
  2008   2007
Georgia 283,900 286,200
Indiana 172,400 156,300
New Jersey 54,900 58,300
Ohio 132,500 127,500
South Carolina(a) 26,600 29,300
Texas 436,900 347,000
Wisconsin 122,500 132,700
Total 1,229,700 1,137,300
 
(a) Reflects the conversion of South Carolina membership from non-risk in 2007 to full risk in 2008.
 
 

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

 
  2008   2007
Medicaid   887,700 841,600
SCHIP/Foster Care 271,700 223,500
SSI/Medicare 70,300 72,200

Total

1,229,700 (a) 1,137,300 (b)
 
(a) 1,226,000 at-risk; 3,700 ASO
(b) 1,104,700 at-risk; 32,600 ASO            
 

Statement of Operations

  • For the 2008 third quarter, revenues, net of premium taxes, increased 19.8% to $873.5 million from $729.2 million in the 2007 third quarter. The increase was primarily driven by membership growth, especially related to the new Foster Care contract in Texas, premium rate increases and the recent acquisition of Celtic which closed on July 1, 2008.
  • The consolidated HBR, which reflects medical costs as a percent of premium revenues, was 82.4%, a decrease from 83.4% in the 2007 third quarter. The decrease is primarily due to overall increased premium yield, a moderating medical cost trend and the acquisition of Celtic. Sequentially, our consolidated HBR decreased from 83.3% in the 2008 second quarter to 82.4% due to the medical management efforts in Ohio, moderating medical cost trends and the affect of the acquisition of Celtic, which operates at a lower HBR than our existing business.
  • Consolidated G&A expense as a percent of premium and service revenues was 14.0% in the third quarter of 2008, an increase from 13.7% in the third quarter of 2007. The increase was due to the acquisition of Celtic which operates at a higher G&A ratio.
  • Other income in the third quarter included a loss on investments of $5.2 million, or $0.07 per diluted share. As previously disclosed in an October 14, 2008, press release and 8-K filing, the loss was primarily due to investments in the Reserve Primary money market fund whose Net Asset Value fell below $1.00 per share due to its holdings of securities by Lehman Brothers Holdings, Inc. The impairment losses represent less than 1% of Centene’s investment portfolio as of September 30, 2008. While the ultimate amount of loss may change, we currently expect to recover 95% of our investment in the Reserve Primary fund and have more than sufficient liquidity to fund our operations in the near term.
  • Earnings per diluted share from continuing operations were $0.41, or $0.48 excluding the previously mentioned loss on investments, compared to $0.37 in the 2007 third quarter.

Balance Sheet and Cash Flow

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

A reconciliation of the Company’s change in days in claims payable from the immediately preceding quarter-end is presented below:

 
Days in claims payable, June 30, 2008   48.5
Celtic Acquisition 0.8
Other 0.3
Days in claims payable, September 30, 2008 49.6
 

Outlook

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

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

 

1 Revenue net of premium tax

       
 

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

Stock Repurchase Authorization

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

Conference Call

As previously announced, the Company will host a conference call Tuesday, October 28, 2008, at 8:30 A.M. (Eastern Time) to review the financial results for the third quarter ended September 30, 2008, and to discuss its business outlook. Michael F. Neidorff and Eric R. Slusser will host the conference call. Investors are invited to participate in the conference call by dialing 800-273-1254 in the U.S. and Canada, 706-679-8592 from abroad, or via a live internet broadcast on the Company's website at www.centene.com, under the Investor Relations section. A replay will be available for on-demand listening shortly after the completion of the call until 11:59 P.M. (Eastern Time) on November 11, 2008 at the aforementioned URL, or by dialing 800-642-1687 in the U.S. and Canada, or 706-645-9291 from abroad, and entering access code 63471844.

Non-GAAP Financial Presentation

The Company is providing certain non-GAAP financial measures in this release as the Company believes these figures are helpful in allowing individuals to more accurately assess the ongoing nature of the Company's operations and measure the Company's performance more consistently. Specifically, the Company has presented diluted earnings per share for the third quarter of 2008 excluding the effects of a $0.07 loss on investments recorded in the quarter.

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

About Centene Corporation

Centene Corporation is a leading multi-line healthcare enterprise that provides programs and related services to individuals receiving benefits under Medicaid, including the State Children’s Health Insurance Program (SCHIP), Foster Care, Supplemental Security Income (SSI) and Medicare (Special Needs Plans). The Company operates health plans in Arizona, Georgia, Indiana, New Jersey, Ohio, South Carolina, Texas and Wisconsin. In addition, the Company contracts with other healthcare and commercial organizations to provide specialty services including behavioral health, individual health insurance, life and health management, long-term care, managed vision, nurse triage, pharmacy benefits management and treatment compliance.

Information regarding Centene is available via the Internet at www.centene.com.

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

CENTENE CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 
  September 30,

2008

 

December 31,

2007

ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 275,284 $ 268,584
Premium and related receivables 150,351 90,072
Short-term investments, at fair value (amortized cost $160,199 and $46,392, respectively) 160,376 46,269
Other current assets 48,109 41,414
Total current assets 634,120 446,339
Long-term investments, at fair value (amortized cost $288,140 and $314,681, respectively) 288,212 317,041
Restricted deposits, at fair value (amortized cost $30,630 and $27,056, respectively) 30,919 27,301
Property, software and equipment, net of accumulated depreciation of $68,834 and $54,584, respectively 170,038 138,139
Goodwill 167,008 141,030
Other intangible assets, net 19,886 13,205
Other assets 47,870 36,067
Total assets $ 1,358,053 $ 1,119,122
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Medical claims liabilities $ 379,845 $ 335,856
Accounts payable and accrued expenses 200,766 105,096
Unearned revenue 15,623 44,016
Current portion of long-term debt 276 971
Current liabilities of discontinued operations 255 861
Total current liabilities 596,765 486,800
Long-term debt 249,697 206,406
Other liabilities 34,017 10,869
Total liabilities 880,479 704,075
Stockholders’ equity:
Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding 43,159,927 and 43,667,837 shares, respectively 43 44
Additional paid-in capital 223,369 221,693
Accumulated other comprehensive income:
Unrealized gain on investments, net of tax 349 1,571
Retained earnings 253,813 191,739
Total stockholders’ equity 477,574 415,047
Total liabilities and stockholders’ equity $ 1,358,053 $ 1,119,122

CENTENE CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

 
  Three Months Ended

September 30,

  Nine Months Ended

September 30,

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

(13

)

  (528 )   237   33,693
Net earnings $ 18,248 $ 15,936 $ 62,074 $ 71,929
 
Net earnings per share:
Basic:
Continuing operations $ 0.42 $ 0.38 $ 1.43 $ 0.88
Discontinued operations   —   (0.01 )   —   0.77
Basic earnings per common share $ 0.42 $ 0.37 $ 1.43 $ 1.65
Diluted:
Continuing operations $ 0.41 $ 0.37 $ 1.39 $ 0.85
Discontinued operations   —   (0.01 )   —   0.75
Diluted earnings per common share $ 0.41 $ 0.36 $ 1.39 $ 1.61
 
Weighted average number of shares outstanding:
Basic 43,232,941 43,532,832 43,381,819 43,528,201
Diluted 44,530,347 44,628,560 44,541,424 44,787,981

CENTENE CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 
  Nine Months Ended September 30,
2008   2007
(Unaudited)
 
Cash flows from operating activities:
Net earnings $ 62,074 $ 71,929
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization 26,018 20,381
Stock compensation expense 11,576 11,753
Deferred income taxes 13,987 (859 )
Loss on sale of investments, net 4,923 161
Gain on sale of FirstGuard Missouri — (7,472 )
Changes in assets and liabilities —
Premium and related receivables (50,797 ) 6,855
Other current assets (6,422 ) (15,540 )
Other assets (713 ) (934 )
Medical claims liabilities 28,109 36,312
Unearned revenue (37,931 ) 10,680
Accounts payable and accrued expenses 74,723 27,981
Other operating activities   967   3,505
Net cash provided by operating activities   126,514   164,752
Cash flows from investing activities:
Purchases of property, software and equipment (52,588 ) (41,774 )
Purchases of investments (372,221 ) (464,378 )
Sales and maturities of investments 356,367 341,450
Proceeds from asset sales — 14,102
Investments in acquisitions and equity method investee, net of cash acquired   (83,509 )   (26,425 )
Net cash used in investing activities   (151,951 )   (177,025 )
Cash flows from financing activities:
Proceeds from exercise of stock options 4,770 3,737
Proceeds from borrowings 152,005 202,000
Payments of long-term debt (109,410 ) (176,729 )
Excess tax benefits from stock compensation 3,016 1,028
Common stock repurchases (18,244 ) (8,581 )
Debt issue costs   —   (5,181 )
Net cash provided by financing activities   32,137   16,274
Net increase (decrease) in cash and cash equivalents   6,700   4,001
Cash and cash equivalents, beginning of period   268,584   271,047
Cash and cash equivalents, end of period $ 275,284 $ 275,048
 
Supplemental cash flow information:
Interest paid $ 8,467 $ 4,480
Income taxes paid $ 28,370 $ 6,965

CENTENE CORPORATION

 

CONTINUING OPERATIONS SUPPLEMENTAL FINANCIAL DATA

 
  Q3   Q2   Q1   Q4   Q3
2008 2008 2008 2007 2007
MEMBERSHIP
Managed Care:
Georgia 283,900 278,800 282,700 287,900 286,200
Indiana 172,400 161,700 161,300 154,600 156,300
New Jersey 54,900 55,100 56,500 57,300 58,300
Ohio 132,500 137,300 131,100 128,700 127,500
South Carolina 26,600 22,500 29,300 31,800 29,300
Texas 436,900 427,200 369,000 354,400 347,000
Wisconsin 122,500 124,800 126,900 131,900 132,700
TOTAL 1,229,700 1,207,400 1,156,800 1,146,600 1,137,300
 
Medicaid 887,700 866,700 862,900 848,100 841,600
SCHIP & Foster Care 271,700 267,000 216,000 224,400 223,500
SSI & Medicare 70,300 73,700 77,900 74,100 72,200
TOTAL 1,229,700 1,207,400 1,156,800 1,146,600 1,137,300
 

Specialty Services(a):

Arizona 102,400 99,400 97,900 99,900 99,000
Kansas 40,100 40,000 39,400 39,000 35,600
TOTAL 142,500 139,400 137,300 138,900 134,600
 

(a) Includes behavioral health contracts only.

 

REVENUE PER MEMBER(b)

$ 213.95

$

214.63 $ 215.35 $ 210.34 $ 201.05
 

CLAIMS(b)

Period-end inventory

321,200

336,900

393,700

312,700

265,400

Average inventory 317,100 244,800 281,600 288,700 319,900
Period-end inventory per member 0.26 0.28 0.34 0.28 0.24
 

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

  Q3   Q2   Q1   Q4   Q3
2008 2008 2008 2007 2007
 

DAYS IN CLAIMS PAYABLE(c)

49.6 48.5 49.3 49.1 49.1

(c) Days in Claims Payable is a calculation of Medical Claims Liabilities at the end of the period divided by average claims expense per calendar day for such period.

 
CASH AND INVESTMENTS (in millions)
Regulated $ 728.0 $ 680.9 $ 651.1 $ 626.2 $ 593.6
Unregulated   26.8     29.0     25.8     33.0     45.9  
TOTAL $ 754.8   $ 709.9   $ 676.9   $ 659.2   $ 639.5  
 

DEBT TO CAPITALIZATION(d)

34.4 % 32.6 % 32.8 % 33.3 % 33.1 %

(d) Debt to Capitalization is calculated as follows: total debt divided by (total debt + equity).

OPERATING RATIOS:

 
  Three Months Ended

September 30,

  Nine Months Ended

September 30,

2008   2007 2008   2007
Health Benefits Ratios        
Medicaid and SCHIP 81.3 % 81.3 % 80.9 % 82.9 %
SSI and Medicare 89.7 92.4 92.3 90.8
Specialty Services 79.5 82.2 82.7 79.4
Total 82.4 83.4 82.9 83.8
 
General & Administrative Expense Ratio 14.0 % 13.7 % 13.4 % 13.9 %

MEDICAL CLAIMS LIABILITIES (In thousands)

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

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

Centene’s claims reserving process utilizes a consistent actuarial methodology to estimate Centene’s ultimate liability. Any reduction in the "Incurred related to: Prior period” claims may be offset as Centene actuarially determines "Incurred related to: Current period.” As such, only in the absence of a consistent reserving methodology would favorable development of prior period claims liability estimates reduce medical costs. Centene believes it has consistently applied its claims reserving methodology in each of the periods presented.

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