CNC Centene Corp

Centene Corporation (NYSE: CNC) today announced its financial results for the fourth quarter and year ended December 31, 2005. -0- *T ---------------------------------------------------------------------- Fourth Quarter Highlights Full Year Highlights ---------------------------------- ---------------------------------- -- Revenues increased 46.9% to -- Revenues increased 50.4% to $423.2 million $1.5 billion -- Earnings from operations -- Earnings from operations increased 17.0% to $20.4 increased 22.7% to $79.2 million million -- EPS increased 14.8% to $0.31 -- EPS increased 21.6% to $1.24 -- Operating cash flows of $29.1 -- Operating cash flows of $74.0 million million *T Additional Highlights -- Acquired US Script, Inc., a pharmacy benefits manager. -- Membership growth of 12.8% over the fourth quarter of 2004; organic membership growth of 7.8% over the same prior year period. -- Days in claims payable of 45.4. -- Authorized stock repurchase program of up to 4 million shares of Centene's common stock. -- Announced key management appointments to support stated goal of building a multi-line healthcare enterprise. -- Named to The Forbes Platinum 400, a list of America's Best Big Companies. Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, stated, "We are pleased with our 2005 results, given some market specific challenges that we faced during the year. The strength of our information systems, disciplined contracting methodology and growing business diversification give us ongoing visibility and confidence in the stability and predictability of our business model. "During the quarter, growth in our Kansas, Indiana and New Jersey markets was strong. Specifically, Indiana completed the conversion of its remaining counties to mandatory status. We are pleased that, despite intense competition for these recipients, we achieved this significant growth in Indiana while remaining disciplined in contracting and in our approach to gaining membership. The primary challenge in converting recipients into a managed care setting is educating them on how best to access the healthcare system, which takes time and temporarily increases our medical costs. We saw this occur in the Indiana expansion and expect a similar impact as we roll out Georgia later this year. We are well-positioned for growth in Kansas and the State has plans to extend its existing Medicaid contract through the end of 2006. "In Texas, there were a number of factors that affected our membership results during the fourth quarter, including the State's conversion to both a new enrollment broker and a new eligibility system. We achieved increased penetration in our existing service areas, while the overall market contracted. We believe that this market condition could continue to cause enrollment issues similar to those that were experienced in this fourth quarter. However, we still anticipate the service area expansion awards to be effective September 1, 2006. "Regarding Georgia, our newest state, we anticipate that membership operations will commence on April 1; we are fully prepared to meet that schedule, and are working with the State to minimize further delays. "We are pleased with our recent acquisition of US Script, Inc., a pharmacy benefits manager, which adds another important service component to our specialty company business and will help us to contain and manage the most significant cost driver in healthcare-prescription drug costs. "We are looking forward to the opportunities in 2006, and are confident that we are well positioned with strong operating systems, growing depth of management and financial resources to meet them," concluded Neidorff. The following table depicts Medicaid Managed Care membership by state at December 31, 2005 and 2004: -0- *T 2005 2004 -------------- -------------- Indiana 193,300 150,600 Kansas 113,300 94,200 Missouri 36,000 41,200 New Jersey 56,500 52,800 Ohio 58,700 23,800 Texas 242,000 244,300 Wisconsin 172,100 165,800 -------------- -------------- TOTAL 871,900 772,700 ============== ============== 2005 2004 -------------- -------------- Medicaid 681,100 580,200 SCHIP 175,900 182,100 SSI 14,900(a) 10,400(b) -------------- -------------- TOTAL 871,900 772,700 ============== ============== (a) 8,100 at-risk; 6,800 ASO (b) 4,600 at-risk; 5,800 ASO *T The following table depicts Specialty Services membership (1) by state at December 31, 2005 and 2004: -0- *T 2005 2004 -------------- -------------- Arizona 94,700 - Kansas 38,800 - -------------- -------------- TOTAL 133,500 - ============== ============== (1) Includes behavioral health contracts only. *T Statement of Earnings Highlights -- For the fourth quarter of 2005, revenues increased 46.9% to $423.2 million from $288.1 million in the fourth quarter of 2004. -- For the fourth quarter of 2005, the health benefits ratio (HBR) for Centene's Medicaid and SCHIP populations was 82.1%, within the guided range of 81.5% to 83.5%, which primarily reflected increased costs associated with transitioning Indiana membership from an unmanaged setting into Medicaid managed care. Centene's HBR for the SSI population was 105.4% during the quarter, primarily due to growth in its Wisconsin market. One of the factors which affected the SSI HBR is a sixty-day continuity of care requirement in Wisconsin. The continuity of care requirement limits our ability to implement generic drug substitution or formulary utilization, appropriately manage inpatient utilization and monitor excessive durable medical equipment utilization. As Centene begins to manage these specific cost drivers, it expects the SSI HBR to fall into the target range of 84% to 86%. For the Specialty Services segment, the HBR was 85.0%, reflecting the receipt of an anticipated positive settlement associated with the Kansas behavioral health contract. -- The table below depicts Centene's HBR by member category: -0- *T Three Months Ended December 31, -------------------------------- 2005 2004 -------------- -------------- Medicaid and SCHIP 82.1% 80.2% SSI 105.4 84.7 Specialty Services 85.0 - *T -- Our Medicaid Managed Care general and administrative (G&A) expenses as a percent of revenues was 10.3% in the fourth quarter of 2005 compared to 11.4% in the fourth quarter of 2004. This reduction reflected lower compensation costs related to Centene's year-end performance bonuses, which in part is driven by stock performance. -- Earnings from operations increased 17.0% to $20.4 million in the fourth quarter of 2005 from $17.4 million in the fourth quarter of 2004. -- Net earnings were $13.9 million, or $0.31 per diluted share, for the fourth quarter of 2005 compared to $12.0 million, or $0.27 per diluted share, for the fourth quarter of 2004. -- For the year ended December 31, 2005, revenues increased 50.4% to $1.5 billion from $1.0 billion in 2004. The HBR for the Medicaid and SCHIP populations was 81.7% in 2005 compared to 80.4% in 2004. The increase is comprised of 0.3% of Aurora litigation settlement costs and 0.3% for medical costs experience in the new Indiana service areas. The remaining balance is normal variations. Earnings from operations increased 22.7% to $79.2 million in 2005 from $64.5 million in 2004. Net earnings improved to $55.6 million, or $1.24 per diluted share, in 2005 compared to $44.3 million, or $1.02 per diluted share, in 2004. Balance Sheet Highlights At December 31, 2005, the Company had cash and investments of $350.3 million, of which $322.6 million was held by Centene's regulated entities. Medical claims liabilities totaled $170.5 million, representing 45.4 days in claims payable. A reconciliation of the Company's change in days in claims payable from the immediately preceding quarter is presented below: -0- *T Days in claims payable, September 30, 2005 41.4 Increase in claims inventory 4.3 Payment of quarterly provider settlements (0.3) -------------- Days in claims payable, December 31, 2005 45.4 ============== *T Outlook Karey L. Witty, Centene's Chief Financial Officer, commented, "Our first quarter 2006 revenue guidance is in the range of $444 million to $449 million, and we anticipate net earnings of $0.17 to $0.21 per diluted share. For full year 2006, we anticipate revenue in the range of $2.15 billion to $2.25 billion, and net earnings per diluted share of $1.61 to $1.78." Guidance for 2006 includes the effect of new accounting rules requiring the expensing of stock options. The Financial Accounting Standards Board (FASB) has issued FASB Statement No. 123R, "Share-Based Payment," which covers a range of share-based compensation arrangements, including stock options. Centene began expensing stock options effective January 1, 2006, in accordance with the requirements of FASB Statement No. 123R, the effect of which is expected to reduce diluted earnings per share by approximately $0.04 per share in the first quarter of 2006 and $0.15 per share for the full year. A review of the results for the fourth quarter and additional details on management's outlook for 2006 will take place during the Company's scheduled fourth quarter earnings call. -0- *T 2006 ---------------------------------------------- Q1 Year ---------------------- ---------------------- Low High Low High ---------- ---------- ---------- ---------- Revenue (in millions) $ 444 $ 449 $ 2,150 $ 2,250 Earnings per share $ 0.34 $ 0.35 $ 1.72 $ 1.87 Georgia implementation costs (0.11) (0.09) (a) (a) SFAS No. 123R (0.04) (0.04) (0.15) (0.15) US Script (0.02) (0.01) 0.04 0.06 ---------- ---------- ---------- ---------- Adjusted earnings per share $ 0.17 $ 0.21 $ 1.61 $ 1.78 ========== ========== ========== ========== (a) Georgia effective April 1, 2006 *T Conference Call As previously announced, the Company will host a conference call today, February 7, 2006, at 8:30 a.m. (Eastern Time) to review the financial results for the quarter and year ended December 31, 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 February 21, 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 3978030. 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, pharmacy benefit management and treatment compliance. Information regarding Centene is available via the Internet at www.centene.com. The information provided in the second, third and fourth paragraphs immediately following the bulleted listings under "Additional Highlights," the second bulleted listing under "Statement of Earnings Highlights," and the paragraphs 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 February 7, 2006. 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. In addition, the actual effect of SFAS 123R on Centene's earnings per share may vary significantly due to changes in its future stock-based compensation strategy, stock price volatility, forfeitures and employee stock option exercise behavior. -0- *T CENTENE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, --------------------- 2005 2004 ---------- ---------- ASSETS Current assets: Cash and cash equivalents $147,358 $84,105 Premium and related receivables, net of allowances of $343 and $462, respectively 44,108 31,475 Short-term investments, at fair value (amortized cost $56,863 and $94,442, respectively) 56,700 94,283 Other current assets 24,439 14,429 --------- --------- Total current assets 272,605 224,292 Long-term investments, at fair value (amortized cost $126,039 and $117,177, respectively) 123,661 116,787 Restricted deposits, at fair value (amortized cost $22,821 and $22,295, respectively) 22,555 22,187 Property, software and equipment, net 67,199 43,248 Goodwill 157,278 101,631 Other intangible assets, net 17,368 14,439 Other assets 7,364 5,350 --------- --------- Total assets $668,030 $527,934 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Medical claims liabilities $170,514 $165,980 Accounts payable and accrued expenses 29,790 31,737 Unearned revenue 13,648 3,956 Current portion of long-term debt and notes payable 699 486 --------- --------- Total current liabilities 214,651 202,159 Long-term debt 92,448 46,973 Other liabilities 8,883 7,490 --------- --------- Total liabilities 315,982 256,622 Stockholders' equity: Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding 42,988,230 and 41,316,122 shares, respectively 43 41 Additional paid-in capital 191,840 165,391 Accumulated other comprehensive income: Unrealized loss on investments, net of tax (1,754 ) (407) Retained earnings 161,919 106,287 --------- --------- Total stockholders' equity 352,048 271,312 --------- --------- Total liabilities and stockholders' equity $668,030 $527,934 ========= ========= CENTENE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except share data) THREE MONTHS ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, --------------------- ---------------------- 2005 2004 2005 2004 --------------------- ---------------------- (Unaudited) Revenues: Premium $416,872 $286,117 $1,491,899 $991,673 Service 6,346 1,947 13,965 9,267 ----------- --------- ----------- ---------- Total revenues 423,218 288,064 1,505,864 1,000,940 ----------- --------- ----------- ---------- Expenses: Medical costs 345,888 229,756 1,226,909 800,476 Cost of services 2,278 1,916 5,851 8,065 General and administrative expenses 54,639 38,948 193,913 127,863 ----------- --------- ----------- ---------- Total operating expenses 402,805 270,620 1,426,673 936,404 ----------- --------- ----------- ---------- Earnings from operations 20,413 17,444 79,191 64,536 Other income (expense): Investment and other income 3,194 1,902 10,655 6,431 Interest expense (1,604) (363) (3,990) (680) ----------- --------- ----------- ---------- Earnings before income taxes 22,003 18,983 85,856 70,287 Income tax expense 8,137 6,973 30,224 25,975 ----------- --------- ----------- ---------- Net earnings $13,866 $12,010 $55,632 $44,312 =========== ========= =========== ========== Earnings per share: Basic earnings per common share $0.32 $0.29 $1.31 $1.09 Diluted earnings per common share $0.31 $0.27 $1.24 $1.02 Weighted average number of shares outstanding: Basic 42,885,900 41,199,463 42,312,522 40,820,909 Diluted 44,812,159 44,309,636 45,027,633 43,616,445 CENTENE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, ---------------------- 2005 2004 ---------- ---------- Cash flows from operating activities: Net earnings $55,632 $44,312 Adjustments to reconcile net earnings to net cash provided by operating activities-- Depreciation and amortization 13,069 10,014 Tax benefits related to stock options 6,469 3,316 Stock compensation expense 4,974 650 Loss (gain) on sale of investments 70 (138) Loss on disposal of property and equipment 454 -- Deferred income taxes 1,786 (1,638) Changes in assets and liabilities-- Premium and related receivables (10,305) (425) Other current assets (6,177) (786) Other assets (525) (728) Medical claims liabilities 4,534 34,501 Unearned revenue 8,182 283 Accounts payable and accrued expenses (4,215) 9,951 Other operating activities 100 93 --------- --------- Net cash provided by operating activities 74,048 99,405 --------- --------- Cash flows from investing activities: Purchase of property, software and equipment (26,909) (25,009) Purchase of investments (150,444) (254,358) Sales and maturities of investments 176,387 243,623 Acquisitions, net of cash acquired (55,485) (86,739) --------- --------- Net cash used in investing activities (56,451) (122,483) --------- --------- Cash flows from financing activities: Proceeds from exercise of stock options 5,621 4,066 Proceeds from borrowings 45,000 45,860 Reduction of long-term debt and notes payable (4,552) (6,596) Other financing activities (413) (493) --------- --------- Net cash provided by financing activities 45,656 42,837 --------- --------- Net increase in cash and cash equivalents 63,253 19,759 --------- --------- Cash and cash equivalents, beginning of period 84,105 64,346 --------- --------- Cash and cash equivalents, end of period $147,358 $84,105 ========= ========= Interest paid $3,291 $494 Income taxes paid $31,287 $20,518 Supplemental schedule of non-cash investing and financing activities: Common stock issued for acquisitions $8,991 $-- Property acquired under capital leases $5,026 $-- CENTENE CORPORATION SUPPLEMENTAL FINANCIAL DATA Q4 Q3 Q2 Q1 2005 2005 2005 2005 --------- --------- --------- --------- MEMBERSHIP Medicaid Managed Care: Indiana 193,300 176,300 152,800 149,900 Kansas 113,300 107,600 103,000 94,900 Missouri 36,000 37,300 39,900 41,300 New Jersey 56,500 50,900 52,900 52,700 Ohio 58,700 58,100 59,600 23,900 Texas 242,000 243,600 243,800 243,700 Wisconsin 172,100 173,900 173,400 170,900 --------- --------- --------- --------- TOTAL 871,900 847,700 825,400 777,300 ========= ========= ========= ========= Medicaid 681,100 657,500 637,300 588,100 SCHIP 175,900 176,900 176,200 178,500 SSI 14,900 13,300 11,900 10,700 --------- --------- --------- --------- TOTAL 871,900 847,700 825,400 777,300 ========= ========= ========= ========= Specialty Services: Arizona 94,700 94,300 - - Kansas 38,800 37,500 37,100 35,400 --------- --------- --------- --------- TOTAL 133,500 131,800 37,100 35,400 ========= ========= ========= ========= REVENUE PER MEMBER(a) $152.48 $147.73 $143.41 $142.15 CLAIMS(a) Period-end inventory 255,000 206,900 195,500 227,700 Average inventory 153,500 148,300 170,300 191,900 Period-end inventory per member 0.29 0.24 0.24 0.29 (a) Revenue per member and claims information are presented for the Medicaid Managed Care segment. DAYS IN CLAIMS PAYABLE(b) 45.4 41.4 49.5 59.7 (b) 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 $322.6 $305.1 $260.5 $295.0 Unregulated 27.7 27.7 27.4 42.1 TOTAL $350.3 $332.8 $287.9 $337.1 ========= ========= ========= ========= ANNUALIZED RETURN ON EQUITY (c) 16.2% 14.9% 20.0% 20.5% (c) 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 Twelve Months Ended Dec. 31, Ended Dec. 31, --------------- ----------------- 2005 2004 2005 2004 --------------- ----------------- Medicaid and SCHIP 82.1% 80.2% 81.7% 80.4% SSI 105.4 84.7 97.5 93.8 Specialty Services 85.0 - 88.1 - GENERAL AND ADMINISTRATIVE EXPENSE RATIO BY BUSINESS SEGMENT: Three Months Twelve Months Ended Dec. 31, Ended Dec. 31, ------------------ --------------- 2005 2004 2005 2004 ------------------ --------------- Medicaid Managed Care 10.3% 11.4% 10.5% 10.7% Specialty Services 30.3 53.7 35.4 52.3 MEDICAL CLAIMS LIABILITIES (In thousands) Changes in medical claims liabilities during 2005 are summarized as follows: Balance, January 1, 2005 $165,980 Acquisitions -- Incurred related to: Current period 1,244,600 Prior period (17,691) ----------- Total incurred 1,226,909 ----------- Paid related to: Current period 1,075,204 Prior period 147,171 ----------- Total paid 1,222,375 ----------- Balance, December 31, 2005 $170,514 =========== 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. *T