CNC Centene Corp

Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended June 30, 2007. The revenues, general and administrative expenses and related financial ratios included in this release present premium taxes on a gross basis consistent with our past reporting practice. � Q2 2007 Highlights Total Revenues (in millions) $ 727.7 Medicaid/SCHIP HBR 80.6 % Diluted EPS (as reported) $ 0.40 Diluted EPS excluding FirstGuard activity � $ 0.27 � Second Quarter Summary Quarter-end Medicaid Managed Care membership of 1.1 million Revenues of $727.7 million, a 46.9% increase over the 2006 second quarter. Earnings per diluted share of $0.27, excluding FirstGuard activity, compared to $0.11 in the 2006 second quarter. Health Benefits Ratio (HBR) for Centene�s Medicaid and SCHIP populations, which reflects medical costs as a percent of premium revenues, of 80.6%. Medicaid Managed Care G&A expense ratio of 14.0% and Specialty Services G&A ratio of 15.8%. Operating cash flows of $23.9 million. Days in claims payable of 46.8. Other Events In April 2007, we acquired PhyTrust of South Carolina, a physician-driven company that served over 31,100 members at June 30, 2007. In July 2007, we acquired a minority interest in Access Health Solutions, LLC (Access), the third largest Medicaid managed care entity in Florida. Access currently serves approximately 90,000 members. Michael F. Neidorff, Centene�s Chairman and Chief Executive Officer, stated, �During the second quarter, overall results for revenue, membership growth and earnings were consistent with our expectations, and our Medicaid and SCHIP HBR improved by 170 basis points sequentially. �In Texas, we continue to see growing membership in both SCHIP and SSI, with the Texas STAR Plus overall membership consistent with our expectations. To date, we have 31,400 Star Plus members under management. Recently, the state of Texas indicated its intent to delay the implementation of the Foster Care contract award, which we won in March. We now expect operations to commence in 2008. The state is currently working on its readiness review and we are supporting them in this process. We remain confident that our technology platform will enable us to provide the state more effective tracking of these members and offer a more consistent quality of healthcare for the recipients. �In Georgia, membership was 281,400, within our guided range. While cost and utilization trends in the state are high, we began to see those trends moderate later in the quarter. We expect trends to continue to moderate as our medical management initiatives take hold and have implemented margin protection initiatives effective August 1 with the state. �We will continue to focus our efforts on opportunities to effectively manage our costs as we build the business. There remain numerous avenues to grow on a sustainable basis in Medicaid managed care.� concluded Neidorff. The following table depicts membership in Centene�s managed care organizations by state at June 30, 2007 and 2006: � 2007 2006 Georgia 281,400 216,000 Indiana 161,700 193,000 New Jersey 59,100 59,000 Ohio 128,200 73,100 South Carolina 31,100 � Texas 333,900 235,800 Wisconsin 136,100 174,600 Subtotal 1,131,500 951,500 � Kansas and Missouri � 150,000 Total 1,131,500 1,101,500 The following table depicts membership in Centene�s managed care organizations by member category at June 30, 2007 and 2006: � 2007 2006 Medicaid 846,900 755,400 SCHIP 216,500 179,700 SSI � 68,100 (a) � 16,400 (b) Subtotal 1,131,500 951,500 � Kansas and Missouri Medicaid/SCHIP members � � � 150,000 Total � 1,131,500 � 1,101,500 � (a) 64,000 at-risk; 4,100 ASO (b) 8,900 at-risk; 7,500 ASO � � � � � � � Statement of Operations For the 2007 second quarter, revenues increased 46.9% to $727.7 million from $495.3 million in the 2006 second quarter. The HBR for Centene�s Medicaid and SCHIP populations, which reflects medical costs as a percent of premium revenues, was 80.6%, a decrease of 3.4% over 2006. The HBR for the three months ended June 30, 2006, includes approximately 2.2% ($9.7 million) for adverse medical cost development in estimated medical claims liabilities from the first quarter of 2006. The decrease in the current year is primarily attributable to the adverse development in the prior year and increased premium taxes. Sequentially, our Medicaid and SCHIP HBR decreased from 82.3% in the 2007 first quarter to 80.6% because of decreases in our Indiana, Texas, and Wisconsin markets, primarily related to inpatient and pharmacy cost trends. The 2007 second quarter reflects expected claims reserve development and is based on consistent reserving methodology. G&A expense as a percent of revenues for the Medicaid Managed Care segment was 14.0% in the second quarter of 2007 compared to 12.3% in the second quarter of 2006. The increase in the Medicaid Managed Care G&A expense ratio for the three months ended June 30, 2007 primarily reflects increased premium taxes. Premium taxes were $19.9 million in the 2007 second quarter and $6.9 million in the 2006 second quarter. This increase was offset by the leveraging of our expenses over higher revenues, especially in our Georgia health plan. The second quarter of 2006 included two months of Georgia implementation costs for which there was no associated revenue. Operating earnings were $16.9 million, including a $3.3 million gain on the sale of FirstGuard Missouri and $3.4 million of net expense for other FirstGuard activity. Excluding the gain and other FirstGuard activity, operating earnings were $17.0 million compared to $6.3 million in the 2006 second quarter. The second quarter results included a tax benefit from the stock abandonment of our Missouri health plan, a gain from the sale of our Missouri health plan, a contribution to our charitable foundation from the sale proceeds and additional FirstGuard activity. The net effect of these activities was $0.13 accretive to earnings per diluted share. Earnings per diluted share of $0.40. Earnings per diluted share of $0.27, excluding the FirstGuard activity, compared to $0.11 in the 2006 second quarter. For the six months ended June 30, 2007, revenues increased 47.2% to $1.4 billion from $950.4 million for the same period in the prior year. Medicaid Managed Care G&A expenses as a percent of revenues increased to 13.5% in the first six months of 2007 compared to 12.1% in the first six months of 2006. Earnings from operations, excluding the FirstGuard activity, increased to $32.8 million in the first six months of 2007 from $18.9 million in the first six months of 2006. Net earnings, excluding the FirstGuard activity, were $23.6 million or $0.53 per diluted share in the first six months of 2007. Balance Sheet and Cash Flow At June 30, 2007, the Company had cash and investments of $593.7 million, including $527.9 million held by its regulated entities and $65.8 million held by its unregulated entities. Medical claims liabilities totaled $295.3 million, representing 46.8 days in claims payable. Total debt was $201.1 million and debt to capitalization was 34.0%. 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, March 31, 2007 46.4 Remaining FirstGuard reserves 0.4 Days in claims payable, June 30, 2007 46.8 Outlook The table below depicts the Company�s guidance for the 2007 third quarter and full year. Q3 2007 (1) 2007 (1) Low High Low High Revenue (in millions) $ 740 $ 750 $ 2,900 $ 2,940 Earnings per diluted share $ 0.35 $ 0.38 $ 1.36 $ 1.45 (1) Excludes FirstGuard Activity � � � � � � � Eric R. Slusser, Centene�s Chief Financial Officer, stated, �The 2007 third quarter and full year guidance reflects continued in-range HBR performance, reasonable rate increases, continued SSI earnings growth and rigorous G&A focus. The tightened ranges for 2007 revenue and earnings per share reflect the delay of the Texas Foster Care Program from the 2007 fourth quarter to 2008.� Conference Call As previously announced, the Company will host a conference call Tuesday, July 24, 2007, at 8:30 A.M. (Eastern Time) to review the financial results for the second quarter ended June 30, 2007, and to discuss its business outlook. Michael F. Neidorff, Eric R. Slusser 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 P.M. (Eastern Time) on August 7, 2007 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 1100685. Non-GAAP 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 �highlights� table, third bullet under "Second Quarter Summary" and fourth through seventh bullets under "Statement of Operations" excludes the tax benefit related to the stock of our Kansas and Missouri health plans and other activity for the Kansas and Missouri health plans, collectively, FirstGuard Activity. This exclusion has been made in the non-GAAP financial measures as management believes that the tax benefit is an unusual event and the Kansas and Missouri health plans are not indicative of future company operations. 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 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. The following table reconciles the Company�s Statement of Operations for the second quarter of 2007 on a GAAP basis to a non-GAAP basis. The non-GAAP basis excludes the FirstGuard Activity (in thousands, except share data). Three Months Ended June 30, 2007 GAAP FirstGuard Activity Non-GAAP � Total revenues $ 727,738 $ 7 $ 727,731 Expenses: Medical costs 574,862 (284 ) 575,146 Cost of services 16,670 � 16,760 General and administrative expenses 122,596 3,715 118,881 Gain on sale of FirstGuard Missouri � (3,254 ) � (3,254 ) � � Total operating expenses � 710,874 � 177 � 710,697 Earnings (loss) from operations 16,864 (170 ) 17,034 Investment and other income, net � 1,735 � (640 ) � 2,375 Earnings (loss) before income taxes 18,599 (810 ) 19,409 Income tax (benefit) expense � 817 � (6,557 ) � 7,374 Net earnings $ 17,782 $ 5,747 $ 12,035 � Diluted earnings per common share $ 0.40 $ 0.27 Premium Tax Presentation The Company reports premium taxes as a component of revenues and general and administrative expenses (gross basis). The following table shows the Company�s Medicaid/SCHIP HBR and the Medicaid Managed Care G&A ratio on a gross basis as reported as well as on a net basis with premium taxes recorded as a reduction of revenues for analytical purposes. Premium Taxes (in thousands) Medicaid/SCHIP HBR Medicaid Managed Care G&A Ratio Current (Gross) Net Current (Gross) Net 2007 Q1 $ 18,216 82.3 % 84.8 % 13.0 % 10.5 % Q2 � 19,874 80.6 83.1 14.0 11.5 Year to Date $ 38,090 81.5 84.0 13.5 11.0 � 2006 Q1 $ 4,305 82.8 % 83.7 % 11.9 % 11.0 % Q2 6,876 84.0 85.3 12.3 11.0 Q3 13,830 82.0 84.0 13.0 11.0 Q4 � 17,442 82.1 84.4 12.7 10.4 Total Year $ 42,453 82.6 84.3 12.6 10.8 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) and Supplemental Security Income (SSI). The Company operates health plans in 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, 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) � June 30, 2007 December 31, 2006 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 236,443 $ 271,047 Premium and related receivables 113,491 91,664 Short-term investments, at fair value (amortized cost $43,636 and $67,199, respectively) 43,360 66,921 Other current assets � 46,257 � � 22,189 � Total current assets 439,551 451,821 Long-term investments, at fair value (amortized cost $288,993 and $146,980, respectively) 287,719 145,417 Restricted deposits, at fair value (amortized cost $26,328 and $25,422, respectively) 26,220 25,265 Property, software and equipment, net 131,829 110,688 Goodwill 136,316 135,877 Other intangible assets, net 14,472 16,202 Other assets � 13,895 � � 9,710 � Total assets $ 1,050,002 � $ 894,980 � � LIABILITIES AND STOCKHOLDERS� EQUITY Current liabilities: Medical claims liabilities $ 295,340 $ 280,441 Accounts payable and accrued expenses 111,697 72,723 Unearned revenue 42,019 33,816 Current portion of long-term debt � 972 � � 971 � Total current liabilities 450,028 387,951 Long-term debt 200,162 174,646 Other liabilities � 8,779 � � 5,960 � Total liabilities 658,969 568,557 Stockholders� equity: Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding 43,664,105 and 43,369,918 shares, respectively 44 44 Additional paid-in capital 217,705 209,340 Accumulated other comprehensive income: Unrealized loss on investments, net of tax (1,046 ) (1,251 ) Retained earnings � 174,330 � � 118,290 � Total stockholders� equity � 391,033 � � 326,423 � Total liabilities and stockholders� equity $ 1,050,002 � $ 894,980 � � CENTENE CORPORATION AND SUBSIDIARIES � CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share data) � For the Three MonthsEnded June 30, For the Six Months Ended June 30, 2007 2006 2007 2006 (Unaudited) (Unaudited) � Revenues: Premium $ 707,723 $ 476,079 $ 1,356,966 $ 911,641 Service 20,015 19,214 41,607 38,730 Total revenues 727,738 495,293 1,398,573 950,371 Expenses: Medical costs 574,862 400,229 1,110,268 761,901 Cost of services 16,670 14,317 32,300 29,905 General and administrative expenses 122,596 74,441 229,462 139,663 Gain on sale of FirstGuard Missouri (3,254 ) � (7,472 ) � Total operating expenses 710,874 488,987 1,364,558 931,469 Earnings from operations 16,864 6,306 34,015 18,902 Other income (expense): Investment and other income 5,948 3,891 10,449 7,431 Interest expense (4,213 ) (2,456 ) (7,345 ) (4,454 ) Earnings before income taxes 18,599 7,741 37,119 21,879 Income tax (benefit) expense 817 2,776 (18,874 ) 8,148 Net earnings $ 17,782 $ 4,965 $ 55,993 $ 13,731 � Earnings per share: Basic earnings per common share $ 0.41 $ 0.12 $ 1.29 $ 0.32 Diluted earnings per common share $ 0.40 $ 0.11 $ 1.25 $ 0.31 � Weighted average number of shares outstanding: Basic 43,617,360 43,169,590 43,525,848 43,079,243 Diluted 44,815,369 44,839,149 44,871,114 44,794,558 � CENTENE CORPORATION AND SUBSIDIARIES � CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) � Six Months Ended June 30, 2007 2006 (Unaudited) � Cash flows from operating activities: Net earnings $ 55,993 $ 13,731 Adjustments to reconcile net earnings to net cash provided by operating activities � Depreciation and amortization 12,991 9,541 Stock compensation expense 7,837 7,154 Deferred income taxes (327 ) (287 ) Gain on sale of FirstGuard Missouri (7,472 ) � Changes in assets and liabilities � Premium and related receivables (21,823 ) (45,710 ) Other current assets (24,583 ) 1,859 Other assets (931 ) (1,123 ) Medical claims liabilities 15,035 16,690 Unearned revenue 8,203 1,705 Accounts payable and accrued expenses 11,832 10,658 Other operating activities � 3,119 � 224 Net cash provided by operating activities � 59,874 � 14,442 Cash flows from investing activities: Purchases of property, software and equipment (29,352 ) (23,472 ) Purchases of investments (290,962 ) (113,665 ) Sales and maturities of investments 196,407 97,445 Proceeds from asset sales 14,102 � Acquisitions, net of cash acquired � (5,336 ) � (60,710 ) Net cash used in investing activities � (115,141 ) � (100,402 ) Cash flows from financing activities: Proceeds from exercise of stock options 2,651 3,761 Proceeds from borrowings 191,000 71,967 Payment of long-term debt (165,484 ) (4,487 ) Excess tax benefits from stock compensation 797 1,977 Common stock repurchases (3,231 ) (3,180 ) Debt issue costs � (5,070 ) � � Net cash provided by financing activities � 20,663 � 70,038 Net decrease in cash and cash equivalents � (34,604 ) � (15,922 ) Cash and cash equivalents, beginning of period � 271,047 � 147,358 Cash and cash equivalents, end of period $ 236,443 $ 131,436 � Interest paid $ 3,738 $ 4,598 Income taxes paid $ 6,049 $ 1,645 � CENTENE CORPORATION � SUPPLEMENTAL FINANCIAL DATA � Q2 Q1 Q4 Q3 2007 2007 2006 2006 MEMBERSHIP Medicaid Managed Care: Georgia 281,400 291,300 308,800 252,600 Indiana 161,700 176,700 183,100 198,100 New Jersey 59,100 59,100 58,900 59,100 Ohio 128,200 118,300 109,200 88,300 South Carolina 31,100 � � � Texas 333,900 318,500 298,500 259,900 Wisconsin 136,100 139,400 164,800 167,100 Subtotal 1,131,500 1,103,300 1,123,300 1,025,100 Kansas and Missouri � � 138,900 144,600 TOTAL 1,131,500 1,103,300 1,262,200 1,169,700 � Medicaid 846,900 839,600 887,300 818,000 SCHIP 216,500 211,200 216,200 189,100 SSI 68,100 52,500 19,800 18,000 Subtotal 1,131,500 1,103,300 1,123,300 1,025,100 Kansas and Missouri Medicaid and SCHIP members � � 138,900 144,600 TOTAL 1,131,500 1,103,300 1,262,200 1,169,700 � Specialty Services(a): Arizona 95,200 93,600 94,500 94,500 Kansas 37,500 36,600 36,600 37,500 TOTAL 132,700 130,200 131,100 132,000 � (a) Includes behavioral health contracts only. � REVENUE PER MEMBER(b) $ 198.98 $ 185.90 $ 173.75 $ 169.98 � CLAIMS(b) Period-end inventory 284,800 326,000 296,100 233,500 Average inventory 244,600 239,400 195,700 188,600 Period-end inventory per member 0.26 0.30 0.23 0.20 � (b) Revenue per member and claims information are presented for the Medicaid Managed Care segment. � Q2 Q1 Q4 Q3 2007 2007 2006 2006 DAYS IN CLAIMS PAYABLE (c) 46.8 46.4 46.4 45.3 (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 $ 527.9 $ 491.0 $ 479.8 $ 411.1 Unregulated � 65.8 � 71.8 � 28.9 � 29.0 TOTAL $ 593.7 $ 562.8 $ 508.7 $ 440.1 � DEBT TO CAPITALIZATION (d) 34.0% 35.3% 35.0% 35.6% (d)Debt to Capitalization is calculated as follows: total debt divided by (total debt + equity). � HEALTH BENEFITS RATIO BY CATEGORY: � � Three Months Ended June 30, Six Months Ended June 30, 2007 2006 2007 2006 Medicaid and SCHIP 80.6 % 84.0 % 81.5 % 83.4 % SSI 87.5 87.6 87.2 87.6 Specialty Services 75.9 83.7 77.5 83.9 GENERAL AND ADMINISTRATIVE EXPENSE RATIO BY BUSINESS SEGMENT: � � Three Months Ended June 30, Six Months Ended June 30, 2007 2006 2007 2006 Medicaid Managed Care 14.0 % 12.3 % 13.5 % 12.1 % Specialty Services 15.8 17.4 15.8 19.3 MEDICAL CLAIMS LIABILITIES (In thousands) Four rolling quarters of the changes in medical claims liabilities are summarized as follows: � Balance, June 30, 2006 $ 187,204 Acquisitions 1,788 Incurred related to: Current period 2,180,604 Prior period � (12,426 ) Total incurred � 2,168,178 Paid related to: Current period 1,889,731 Prior period � 172,099 Total paid � 2,061,830 Balance, June 30, 2007 $ 295,340 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.