CNC Centene Corp

Centene Corporation (NYSE: CNC) today announced its financial results for the quarter and year ended December 31, 2007. The results exclude the benefit of the July 1 through December 31, 2007 period rate increase for Georgia which was in our previous guidance and will now be recognized in the first quarter of 2008. Our updated guidance disclosed later in this press release reflects this change. As previously announced, premium taxes are now separately disclosed as a component of both revenues and operating expenses on our statement of operations. Related financial ratios included in this release exclude premium taxes. Additionally, we have reclassified and reported our Kansas and Missouri health plans, collectively FirstGuard, as discontinued operations. Unless specifically noted, the discussions below are in the context of continuing operations, and therefore, exclude the FirstGuard operations. � � � � 2007 Highlights � � Q4 � � Full Year Total Revenues (in millions) $ 777.4 $ 2,919.3 Medicaid/SCHIP HBR 84.0 % 83.2 % Diluted EPS (as reported) $ 0.07 $ 0.92 Diluted EPS (excluding restructuring charges) $ 0.20 $ 1.09 � � � � Fourth Quarter Summary 2007 fourth quarter earnings impacted by the inability to recognize the July 1, 2007 Georgia rate increase until the 2008 first quarter. Quarter-end Medicaid Managed Care membership of 1.1 million. Revenues of $777.4 million, a 25.8% increase over the 2006 fourth quarter. Earnings per diluted share of $0.20 (excluding restructuring charges), compared to $0.21 in the 2006 fourth quarter. Health Benefits Ratio (HBR) for Centene�s Medicaid and SCHIP populations, which reflects medical costs as a percent of premium revenues, of 84.0%. Medicaid Managed Care G&A expense ratio of 11.8% and Specialty Services G&A ratio of 15.4%. Total operating cash flows of $37.5 million. Days in claims payable of 49.1. Other Events Recognized previously announced restructuring charge totaling $9.4 million pre-tax. Began participating in the state of South Carolina�s conversion to managed care. Michael F. Neidorff, Centene�s Chairman and Chief Executive Officer, stated, �We concluded the fourth quarter of 2007 with solid revenue, membership and earnings results. Additionally, our cash flows were strong, our Medicaid HBR improved to 84.0%, a decrease of 140 basis points from the 2006 fourth quarter, and our G&A was consistent with our expectations. �In Ohio, our core Medicaid program growth was in line. Medical costs in the ABD population, not unexpectedly, continue to be challenging as we work to manage the integration of these members into our network. Over time, we believe that targeted margins are achievable as we reach critical mass and are able to more effectively manage their care. �In Texas, we experienced growing membership in both SCHIP and the Texas STAR Plus (SSI) program. We are on track for the launch of the state�s Foster Care program on April 1, 2008. �As we commence 2008, we will focus on growing our revenue stream to external third party vendors through our specialty company products and PBM. We are optimistic about the prospects for growth in both new and existing markets in Medicaid managed care and in our specialty businesses,� concluded Neidorff. The following table depicts membership in Centene�s managed care organizations, by state, at December 31, 2007 and 2006: � � � � � � � � � � � � 2007 � � 2006 Georgia 287,900 308,800 Indiana 154,600 183,100 New Jersey 57,300 58,900 Ohio 128,700 109,200 South Carolina 31,800 � Texas 354,400 298,500 Wisconsin 131,900 164,800 Total 1,146,600 1,123,300 � � � � � � � � � � The following table depicts membership in Centene�s managed care organizations, by member category, at December 31, 2007 and 2006: � � � � � � 2007 � � 2006 Medicaid 848,100 887,300 SCHIP 224,400 216,200 SSI 74,100 19,800 Total 1,146,600 (a) 1,123,300 (b) � (a) 1,111,500 at-risk; 35,100 ASO � (b) 1,112,700 at-risk; 10,600 ASO � � Statement of Operations For the 2007 fourth quarter, revenues from continuing operations increased 25.8% to $777.4 million from $617.8 million in the 2006 fourth quarter. The increase was mainly driven by membership growth in Texas and Ohio, which are the two markets that added SSI products in 2007. The fourth quarter included an approximate $4.2 million reduction of premium revenue and pre-tax earnings due to a prior period true-up with the State of Indiana. The HBR for Centene�s Medicaid and SCHIP populations, which reflects medical costs as a percent of premium revenues, was 84.0%, an increase from 81.3% in the 2007 third quarter. The increase resulted from pharmacy and other general seasonality and the previously mentioned premium true-up in Indiana. G&A expense as a percent of premium and service revenues for the Medicaid Managed Care segment was 11.8% in the fourth quarter of 2007 compared to 10.4% in the fourth quarter of 2006. The increase in the Medicaid Managed Care G&A expense ratio for the three months ended December 31, 2007 primarily reflects our previously announced restructuring charge recorded in the fourth quarter. The pre-tax restructuring charge for asset impairment and severance totaled $9.4 million and increased our G&A ratio by 1.3%. Operating earnings were $0.3 million, including the restructuring charge. Excluding the restructuring charge, operating earnings were $9.7 million compared to $9.8 million in the 2006 fourth quarter. Reported GAAP earnings per diluted share from continuing operations were $0.07, or $0.20 excluding restructuring charges, compared to $0.21 in the 2006 fourth quarter. Net earnings per diluted share (including discontinued operations) were $0.03. For the year ended December 31, 2007, revenues from continuing operations increased 48.8% to $2.9 billion from $2.0 billion for the same period in the prior year. Medicaid Managed Care G&A expenses as a percent of premium and service revenues decreased to 11.1% in the year ended December 31, 2007, compared to 11.4% in the year ended December 31, 2006. Excluding the $12.4 million of restructuring charges, earnings from operations increased to $66.5 million in the year ended December 31, 2007 from $27.8 million in the year ended December 31, 2006. Net earnings from continuing operations, excluding the restructuring charges, were $49.0 million or $1.09 per diluted share in 2007. Balance Sheet and Cash Flow At December 31, 2007, the Company had cash and investments of $659.2 million, including $626.2 million held by its regulated entities and $33.0 million held by its unregulated entities. Medical claims liabilities totaled $335.9 million, representing 49.1 days in claims payable, unchanged from September 30, 2007. Total debt was $207.4 million and debt to capitalization was 33.3%. Outlook The table below depicts the Company�s guidance for the 2008 first quarter and full year. � � � � � � Q1 2008 � � 2008 Low � � High Low � � High Revenue (in millions) (1) $ 785 $ 795 $ 3,370 $ 3,470 Earnings per diluted share $ 0.59 $ 0.64 $ 2.04 $ 2.14 � � (1) Revenue net of premium tax � � Eric R. Slusser, Centene�s Chief Financial Officer, stated, �This guidance reflects normal seasonality, previously mentioned start-up costs in Texas, South Carolina and Florida of approximately $0.09, and the state of Wisconsin�s decision to carve-out pharmacy benefits from our premium, effective February 1, 2008. This guidance also includes premium rate increases of 1.5% in Ohio, effective January 1, 6.3% in Indiana, effective January 1, 3.5% in Wisconsin, effective February 1, and a 3.8% rate increase in Georgia retroactive to July 1, 2007.� Conference Call As previously announced, the Company will host a conference call Friday, February 8, 2008, at 7:30 A.M. (Eastern Time) to review the financial results for the fourth quarter ended December 31, 2007, 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 February 22, 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 34562229. 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. The 2007 non-GAAP information presented above in the �highlights� table, third bullet under "Fourth Quarter Summary" and fourth, fifth and seventh bullets under "Statement of Operations" excludes the second quarter contribution to our charitable foundation with a portion of the proceeds from the sale of FirstGuard Missouri as well as the fourth quarter charges for fixed asset impairment and severance for an organizational realignment, collectively, restructuring charges. This exclusion has been made in the non-GAAP financial measures as management believes these 2007 restructuring charges 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 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 tables reconcile the Company�s Statement of Operations for the three months and year ended December 31, 2007 on a GAAP basis to a non-GAAP basis. The 2007 non-GAAP basis excludes the restructuring charges mentioned above (in thousands, except share data). � Three Months Ended December 31, 2007 GAAP � Restructuring Charges � Non-GAAP � Total revenues $ 777,439 $ � $ 777,439 Expenses: Medical costs 629,437 � 629,437 Cost of services 15,532 � 15,532 General and administrative expenses 110,978 9,392 101,586 Premium tax expense � 21,145 � � � � � 21,145 � Total operating expenses � 777,092 � � 9,392 � � 767,700 � Earnings (loss) from operations 347 (9,392 ) 9,739 Investment and other income, net � 2,102 � � � � � 2,102 � Earnings (loss) before income taxes 2,449 (9,392 ) 11,841 Income tax expense (benefit) � (584 ) � (3,523 ) � 2,939 � Net earnings from continuing operations 3,033 (5,869 ) 8,902 Discontinued operations, net of income tax � (1,560 ) � � � � (1,560 ) Net earnings (loss) $ 1,473 � $ (5,869 ) $ 7,342 � � Diluted earnings per common share from continuing operations $ 0.07 $ 0.20 � Year Ended December 31, 2007 GAAP � Restructuring Charges (1) � Non-GAAP � Total revenues $ 2,919,292 $ � $ 2,919,292 Expenses: Medical costs 2,324,486 � 2,324,486 Cost of services 61,454 � 61,454 General and administrative expenses 399,687 12,392 387,295 Premium tax expense � 79,572 � � � � 79,572 Total operating expenses � 2,865,199 � 12,392 � � 2,852,807 Earnings (loss) from operations 54,093 (12,392 ) 66,485 Investment and other income, net � 9,543 � � � � 9,543 Earnings (loss) before income taxes 63,636 (12,392 ) 76,028 Income tax expense (benefit) � 22,367 � (4,663 ) � 27,030 Net earnings from continuing operations 41,269 (7,729 ) 48,998 Discontinued operations, net of income tax � 32,133 � � � � 32,133 Net earnings (loss) $ 73,402 $ (7,729 ) $ 81,131 � Diluted earnings per common share from continuing operations $ 0.92 $ 1.09 � (1) For the year ended December 31, 2007, restructuring charges include a $3,000 pre-tax contribution of a portion of the FirstGuard sale proceeds to the Company�s charitable foundation. Premium Tax Presentation The following table shows the Company�s Medicaid/SCHIP HBR and the Medicaid Managed Care G&A ratio on a net basis as reported as well as on a gross basis for analytical purposes. On a net basis, the HBR is calculated as Medical costs divided by Premium revenues and the G&A ratio is recorded as G&A expense divided by the sum of Premium revenue and Service revenue. On a gross basis, the HBR is calculated as Medical costs divided by the sum of Premium revenues and Premium tax and the G&A ratio is recorded as G&A expense plus Premium tax expense, divided by Total revenues. � � � � � � Premium Taxes (in thousands) Medicaid/SCHIP HBR Medicaid Managed Care G&A Ratio Current (Net) � � Gross Current (Net) � � Gross 2007 Q1 $ 17,816 84.5 % 82.0 % 10.2 % 12.7 % Q2 19,874 82.8 80.3 11.4 13.9 Q3 20,737 81.3 78.9 11.0 13.5 Q4 � 21,145 84.0 81.2 11.8 14.3 Total Year $ 79,572 83.2 80.6 11.1 13.6 � 2006 Q1 $ 3,250 81.8 % 80.9 % 12.6 % 13.4 % Q2 5,806 84.8 83.5 12.5 13.8 Q3 12,590 84.4 82.2 11.0 13.2 Q4 � 16,315 85.4 82.9 10.4 12.8 Total Year $ 37,961 84.3 82.5 11.4 13.2 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, 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. (Tables Follow) � CENTENE CORPORATION AND SUBSIDIARIES � CONSOLIDATED BALANCE SHEETS (In thousands, except share data) � December 31, 2007 � 2006 (Unaudited) ASSETS Current assets: Cash and cash equivalents of continuing operations $ 268,584 $ 253,370 Cash and cash equivalents of discontinued operations � � � 17,677 � Total cash and cash equivalents 268,584 271,047 Premium and related receivables 90,072 74,379 Short-term investments, at fair value (amortized cost $46,392 and $57,031, respectively) 46,269 56,790 Other current assets 41,414 17,279 Current assets of discontinued operations, other than cash � � � 32,327 � Total current assets 446,339 451,822 Long-term investments, at fair value (amortized cost $314,681 and $117,620, respectively) 317,041 116,052 Restricted deposits, at fair value (amortized cost $27,056 and $24,512, respectively) 27,301 24,355 Property, software and equipment, net 138,139 110,688 Goodwill 141,030 129,881 Other intangible assets, net 13,205 15,555 Other assets 36,067 9,209 Long-term assets of discontinued operations � � � 37,418 � Total assets $ 1,119,122 $ 894,980 � LIABILITIES AND STOCKHOLDERS� EQUITY Current liabilities: Medical claims liabilities $ 335,856 $ 249,864 Accounts payable and accrued expenses 105,096 63,893 Unearned revenue 44,016 33,816 Current portion of long-term debt and notes payable 971 971 Current liabilities of discontinued operations � 861 � 39,407 � Total current liabilities 486,800 387,951 Long-term debt 206,406 174,646 Other liabilities 10,869 5,853 Long-term liabilities of discontinued operations � � � 107 � Total liabilities 704,075 568,557 Stockholders� equity: Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding 43,667,837 and 43,369,918 shares, respectively 44 44 Additional paid-in capital 221,693 209,340 Accumulated other comprehensive income: Unrealized gain (loss) on investments, net of tax 1,571 (1,251 ) Retained earnings � 191,739 � 118,290 � Total stockholders� equity � 415,047 � 326,423 � Total liabilities and stockholders� equity $ 1,119,122 $ 894,980 � � CENTENE CORPORATION AND SUBSIDIARIES � CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share data) � � Three Months Ended December 31, � Year Ended December 31, 2007 � 2006 2007 � 2006 (Unaudited) (Unaudited) Revenues: Premium $ 736,895 $ 581,217 $ 2,759,018 $ 1,844,452 Premium tax 21,145 16,315 79,572 37,961 Service � 19,399 � � 20,263 � � 80,702 � � 79,581 � Total revenues � 777,439 � � 617,795 � � 2,919,292 � � 1,961,994 � Expenses: Medical costs 629,437 495,712 2,324,486 1,555,658 Cost of services 15,532 15,396 61,454 60,506 General and administrative expenses 110,978 80,527 399,687 280,067 Premium tax expense � 21,145 � � 16,315 � � 79,572 � � 37,961 � Total operating expenses � 777,092 � � 607,950 � � 2,865,199 � � 1,934,192 � Earnings from operations 347 9,845 54,093 27,802 Other income (expense): Investment and other income 6,212 6,251 25,169 16,416 Interest expense � (4,110 ) � (3,100 ) � (15,626 ) � (10,636 ) Earnings before income taxes 2,449 12,996 63,636 33,582 Income tax expense � (584 ) � 3,745 � � 22,367 � � 12,642 � Net earnings from continuing operations 3,033 9,251 41,269 20,940 Discontinued operations, net of income tax (benefit) expense of $1,621, $3,904, $(30,899) and $9,335 respectively � (1,560 ) � 4,582 � � 32,133 � � (64,569 ) Net earnings (loss) $ 1,473 � $ 13,833 � $ 73,402 � $ (43,629 ) � Net earnings (loss) per common share: Basic: Continuing operations $ 0.07 $ 0.21 $ 0.95 $ 0.49 Discontinued operations � (0.04 ) � 0.11 � � 0.74 � � (1.50 ) Basic earnings (loss) per common share $ 0.03 � $ 0.32 � $ 1.69 � $ (1.01 ) Diluted: Continuing operations $ 0.07 $ 0.21 $ 0.92 $ 0.47 Discontinued operations � (0.04 ) � 0.10 � � 0.72 � � (1.45 ) Diluted earnings (loss) per common share $ 0.03 � $ 0.31 � $ 1.64 � $ (0.98 ) � Weighted average number of common shares outstanding: Basic 43,574,811 43,263,237 43,539,950 43,160,860 Diluted 44,951,016 44,631,117 44,823,082 44,613,622 � CENTENE CORPORATION AND SUBSIDIARIES � CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) � Year Ended December 31, 2007 � 2006 (Unaudited) Cash flows from operating activities: Net earnings (loss) $ 73,402 $ (43,629 ) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities� Depreciation and amortization 27,807 20,600 Stock compensation expense 15,781 14,904 Gain on sale of FirstGuard Missouri (7,472 ) � Impairment loss 7,207 88,268 Deferred income taxes (10,223 ) (6,692 ) Changes in assets and liabilities� Premium and related receivables 1,663 (39,765 ) Other current assets (6,253 ) 5,352 Other assets (348 ) 91 Medical claims liabilities 56,287 108,003 Unearned revenue 10,085 20,035 Accounts payable and accrued expenses 31,234 28,136 Other operating activities � 3,070 � � (271 ) Net cash provided by operating activities � 202,240 � � 195,032 � Cash flows from investing activities: Purchase of property, software and equipment (53,937 ) (50,318 ) Purchase of investments (606,366 ) (319,322 ) Sales and maturities of investments 456,738 286,155 Proceeds from asset sales 14,102 � Investments in acquisitions and equity method investee, net of cash acquired � (36,001 ) � (66,772 ) Net cash used in investing activities � (225,464 ) � (150,257 ) Cash flows from financing activities: Proceeds from exercise of stock options 5,464 6,953 Proceeds from borrowings 212,000 94,359 Payment of long-term debt and notes payable (181,981 ) (17,355 ) Excess tax benefits from stock compensation � 3,043 Common stock repurchases (9,541 ) (7,833 ) Debt issue costs � (5,181 ) � (253 ) Net cash provided by financing activities � 20,761 � � 78,914 � Net (decrease) increase in cash and cash equivalents � (2,463 ) � 123,689 � Cash and cash equivalents, beginning of period � 271,047 � � 147,358 � Cash and cash equivalents, end of period $ 268,584 � $ 271,047 � � Interest paid $ 11,945 $ 10,680 Income taxes paid $ 7,348 $ 16,418 � Supplemental schedule of non-cash investing and financing activities: Property acquired under capital leases $ 1,736 $ 366 � CENTENE CORPORATION � CONTINUING OPERATIONS SUPPLEMENTAL FINANCIAL DATA � � Q4 � Q3 � Q2 � Q1 2007 2007 2007 2007 MEMBERSHIP Medicaid Managed Care: Georgia 287,900 286,200 281,400 291,300 Indiana 154,600 156,300 161,700 176,700 New Jersey 57,300 58,300 59,100 59,100 Ohio 128,700 127,500 128,200 118,300 South Carolina 31,800 29,300 31,100 � Texas 354,400 347,000 333,900 318,500 Wisconsin 131,900 132,700 136,100 139,400 TOTAL 1,146,600 1,137,300 1,131,500 1,103,300 � Medicaid 848,100 841,600 846,900 839,600 SCHIP 224,400 223,500 216,500 211,200 SSI 74,100 72,200 68,100 52,500 TOTAL 1,146,600 1,137,300 1,131,500 1,103,300 � Specialty Services(a): Arizona 99,900 99,000 95,200 93,600 Kansas 39,000 35,600 37,500 36,600 TOTAL 138,900 134,600 132,700 130,200 � (a) Includes behavioral health contracts only. � REVENUE PER MEMBER(b) $ 210.34 $ 201.05 $ 193.09 $ 178.55 � CLAIMS(b) Period-end inventory 312,700 265,400 281,000 317,600 Average inventory 288,700 319,900 248,200 228,600 Period-end inventory per member 0.28 0.24 0.26 0.29 � (b) Revenue per member and claims information are presented for the Medicaid Managed Care segment. � � Q4 � � Q3 � � Q2 � � Q1 2007 2007 2007 2007 � DAYS IN CLAIMS PAYABLE (c) 49.1 49.1 46.2 45.6 (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 $ 626.2 $ 593.6 $ 527.9 $ 491.0 Unregulated � 33.0 � � 45.9 � � 65.8 � � 71.8 � TOTAL $ 659.2 � $ 639.5 � $ 593.7 � $ 562.8 � � DEBT TO CAPITALIZATION (d) 33.3 % 33.1 % 34.0 % 35.3 % (d) Debt to Capitalization is calculated as follows: total debt divided by (total debt + equity). HEALTH BENEFITS RATIO BY CATEGORY: � � Three Months Ended December 31, � � Year Ended December 31, 2007 � 2006 2007 � 2006 Medicaid and SCHIP 84.0 % 85.4 % 83.2 % 84.3 % SSI 94.5 92.2 92.0 88.0 Specialty Services 74.9 80.5 78.2 82.6 GENERAL AND ADMINISTRATIVE EXPENSE RATIO BY BUSINESS SEGMENT: � � Three Months Ended December 31, � � Year Ended December 31, 2007 � 2006 2007 � 2006 Medicaid Managed Care 11.8 % 10.4 % 11.1 % 11.4 % Specialty Services 15.4 14.5 15.4 17.1 MEDICAL CLAIMS LIABILITIES (In thousands) � Four rolling quarters of the changes in medical claims liabilities are summarized as follows: � Balance, December 31, 2006 $ 249,864 Incurred related to: Current period 2,340,716 Prior period � (16,230 ) Total incurred � 2,324,486 � Paid related to: Current period 2,009,881 Prior period � 228,613 � Total paid � 2,238,494 � Balance, December 31, 2007 $ 335,856 � 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.