CNC Centene Corp

Centene Corporation (NYSE: CNC) today announced its net earnings from continuing operations for the quarter ended June 30, 2008 were $18.0 million, or $0.41 per diluted share, compared to $10.2 million, or $0.23 per diluted share in the 2007 second quarter. As a reminder, the 2008 first quarter results included the benefit of the July 1 through December 31, 2007 period rate increase for Georgia of approximately $0.28 per diluted share. Unless specifically noted, the discussions below are in the context of continuing operations. Second Quarter Highlights Quarter-end Medicaid Managed Care membership of 1.2 million. Revenues of $860.1 million, or $837.9 million net of premium taxes, an 18.2% increase over the 2007 second quarter. Health Benefits Ratio (HBR), which reflects medical costs as a percent of premium revenues, of 83.3%, compared to 83.6% in the 2007 second quarter. General and administrative (G&A) expense ratio of 13.5%, compared to 14.4% in the 2007 second quarter. Cash flow from operations of $60.0 million. Days in claims payable of 48.5. Other Events Commenced operations under our Texas Foster Care contract, effective April 1, 2008. Repurchased 347,432 shares during the second quarter for approximately $6.4 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. Concluded operations for SSI recipients in the Northwest region of Ohio, effective June 30, 2008. Awarded a contract by the Arizona Health Care Cost Containment System to provide Acute Care services to Medicaid recipients in the Yavapai service area. Membership operations are expected to commence on October 1, 2008. Michael F. Neidorff, Centene�s Chairman and Chief Executive Officer, stated, �We are pleased with the progress our�results show this quarter and�believe they�set a foundation for improvement that we can build on for the rest of 2008 and beyond. Our team remains committed to the goal of margin expansion and we expect to achieve a runrate pretax margin of 4% by the end of 2008 through focused medical management and G&A leverage. While the new growth opportunities available to us�remain robust,�we will employ a disciplined and selective approach to pursuing them,� concluded Neidorff. The following table depicts membership in Centene�s managed care organizations, by state, at June 30, 2008 and 2007: � � 2008 � 2007 Georgia � 278,800 � 281,400 Indiana 161,700 161,700 New Jersey 55,100 59,100 Ohio 137,300 128,200 South Carolina(a) 22,500 31,100 Texas 427,200 333,900 Wisconsin � 124,800 � 136,100 Total � 1,207,400 � 1,131,500 � (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 June 30, 2008 and 2007: � � 2008 2007 Medicaid � 866,700 � 846,900 SCHIP/Foster Care 267,000 216,500 SSI/Medicare � 73,700 � 68,100 Total � 1,207,400 (a) � 1,131,500 (b) � (a) 1,203,900 at-risk; 3,500 ASO (b) 1,097,200 at-risk; 34,300 ASO Statement of Operations For the 2008 second quarter, revenues, net of premium taxes, increased 18.4% to $837.9 million from $707.9 million in the 2007 second quarter. The increase was primarily driven by premium rate increases in Georgia, membership growth in Texas and Ohio, which are the two markets that added SSI products in 2007, as well as growth in Texas from the new Foster Care contract commencing in April 2008. The consolidated HBR, which reflects medical costs as a percent of premium revenues, was 83.3%, a decrease from 83.6% in the 2007 second quarter. The decrease is primarily due to overall increased premium yield and improvement in our Georgia market. Sequentially, our consolidated HBR increased from 83.0% in the 2008 first quarter to 83.3% due to the effect of the Georgia rate increase included in the first quarter, offset by moderating medical cost trends, especially related to SSI members in Ohio. Consolidated G&A expense as a percent of premium and service revenues was 13.5% in the second quarter of 2008, a decrease from 14.4% in the second quarter of 2007. Earnings per diluted share from continuing operations were $0.41, compared to $0.23 in the 2007 second quarter. Balance Sheet and Cash Flow At June 30, 2008, the Company had cash and investments of $709.9 million, including $680.9 million held by its regulated entities and $29.0 million held by its unregulated entities. Medical claims liabilities totaled $363.7 million, representing 48.5 days in claims payable, an increase of 2.3 days from June 30, 2007 and a decrease of 0.8 days from March 31, 2008. Total debt was $222.1 million and debt to capitalization was 32.6%. Year to date cash flow from operations was $86.7 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, March 31, 2008 � � 49.3 Effect of the addition of Foster Care (0.3 ) Change in provider bonus accrual (0.2 ) Claims inventory reduction (0.3 ) Days in claims payable, June 30, 2008 48.5 � � Outlook The table below depicts the Company�s annual guidance for 2008: � � Full Year 2008 Low � High Revenue (in millions)1 $ 3,360 $ 3,410 Earnings per diluted share $ 1.87 $ 1.97 � 1 Revenue net of premium tax � � � � Eric R. Slusser, Centene�s Chief Financial Officer, stated, �We are�increasing our revenue guidance, but maintaining our previous�earnings per share guidance for the year. With the acquisition of Celtic and our new Arizona contract, our revenue expectations have increased for the second half of the year. However, we do not expect either of these to have a material contribution to earnings in 2008. We are optimistic about the second half of the year as we continue to invest in infrastructure and execute on new and existing opportunities. We continue to expect an overall HBR range for the full year of 82.0% to 84.0%.� Conference Call As previously announced, the Company will host a conference call Tuesday, July 22, 2008, at 8:00 A.M. (Eastern Time) to review the financial results for the second quarter ended June 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 August 5, 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 51471537. 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, 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) � � June 30, 2008 � December 31, 2007 ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 357,488 $ 268,584 Premium and related receivables 113,233 90,072 Short-term investments, at fair value (amortized cost $69,205 and $46,392, respectively) 69,524 46,269 Other current assets 38,602 41,414 Total current assets 578,847 446,339 Long-term investments, at fair value (amortized cost $252,441 and $314,681, respectively) 254,578 317,041 Restricted deposits, at fair value (amortized cost $28,023 and $27,056, respectively) 28,283 27,301 Property, software and equipment, net 157,775 138,139 Goodwill 141,009 141,030 Other intangible assets, net 12,177 13,205 Other assets 42,396 36,067 Total assets $ 1,215,065 $ 1,119,122 � LIABILITIES AND STOCKHOLDERS� EQUITY Current liabilities: Medical claims liabilities $ 363,708 $ 335,856 Accounts payable and accrued expenses 148,535 105,096 Unearned revenue 5,266 44,016 Current portion of long-term debt 338 971 Current liabilities of discontinued operations 200 861 Total current liabilities 518,047 486,800 Long-term debt 221,757 206,406 Other liabilities 15,493 10,869 Total liabilities 755,297 704,075 Stockholders� equity: Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding 43,261,883 and 43,667,837 shares, respectively 43 44 Additional paid-in capital 222,438 221,693 Accumulated other comprehensive income: Unrealized gain on investments, net of tax 1,722 1,571 Retained earnings 235,565 191,739 Total stockholders� equity 459,768 415,047 Total liabilities and stockholders� equity $ 1,215,065 $ 1,119,122 CENTENE CORPORATION AND SUBSIDIARIES � CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share data) � � Three Months Ended June 30, � Six Months Ended June 30, 2008 � 2007 2008 � 2007 (Unaudited) (Unaudited) Revenues: Premium $ 819,409 $ 687,842 $ 1,592,887 $ 1,312,668 Premium tax 22,192 19,874 44,823 37,690 Service � 18,466 � 20,015 � 38,996 � 41,607 Total revenues � 860,067 � 727,731 � 1,676,706 � 1,391,965 Expenses: Medical costs 682,589 575,146 1,324,208 1,103,666 Cost of services 14,437 16,670 30,613 32,300 General and administrative expenses 113,199 102,007 212,482 188,474 Premium tax � 22,192 � 19,874 � 44,823 � 37,690 Total operating expenses � 832,417 � 713,697 � 1,612,126 � 1,362,130 Earnings from operations 27,650 14,034 64,580 29,835 Other income (expense): Investment and other income 5,600 6,588 13,369 12,605 Interest expense � (4,065 ) � (4,213 ) � (8,059 ) � (7,345 ) Earnings before income taxes 29,185 16,409 69,890 35,095 Income tax expense � 11,146 � 6,234 � 26,314 � 13,323 Net earnings from continuing operations 18,039 10,175 43,576 21,772 Discontinued operations, net of income tax expense (benefit) of $101, $(5,417), $153 and $(32,197), respectively � 164 � 7,607 � 250 � 34,221 Net earnings $ 18,203 $ 17,782 $ 43,826 $ 55,993 � Net earnings per share: Basic: Continuing operations $ 0.42 $ 0.23 $ 1.00 $ 0.50 Discontinued operations � � � 0.18 � 0.01 � 0.79 Basic earnings per common share $ 0.42 $ 0.41 $ 1.01 $ 1.29 Diluted: Continuing operations $ 0.41 $ 0.23 $ 0.98 $ 0.49 Discontinued operations � � � 0.17 � 0.01 � 0.76 Diluted earnings per common share $ 0.41 $ 0.40 $ 0.98 $ 1.25 � Weighted average number of shares outstanding: Basic 43,375,944 43,617,360 43,457,076 43,525,848 Diluted 44,275,601 44,815,369 44,516,890 44,871,114 CENTENE CORPORATION AND SUBSIDIARIES � CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) � Six Months Ended June 30, 2008 � 2007 (Unaudited) � Cash flows from operating activities: Net earnings $ 43,826 $ 55,993 Adjustments to reconcile net earnings to net cash provided by operating activities � Depreciation and amortization 16,229 12,991 Stock compensation expense 7,839 7,837 Deferred income taxes 11,879 (327 ) Gain on sale of FirstGuard Missouri � (7,472 ) Changes in assets and liabilities � Premium and related receivables (23,144 ) (21,823 ) Other current assets (4,294 ) (24,583 ) Other assets (1,671 ) (931 ) Medical claims liabilities 27,316 15,035 Unearned revenue (38,753 ) 8,203 Accounts payable and accrued expenses 45,907 11,832 Other operating activities � 1,542 � 3,119 Net cash provided by operating activities � 86,676 � 59,874 Cash flows from investing activities: Purchases of property, software and equipment (34,581 ) (29,352 ) Purchases of investments (172,873 ) (290,962 ) Sales and maturities of investments 210,277 196,407 Proceeds from asset sales � 14,102 Investments in acquisitions and equity method investee, net of cash acquired � (7,818 ) � (5,336 ) Net cash used in investing activities � (4,995 ) � (115,141 ) Cash flows from financing activities: Proceeds from exercise of stock options 3,029 2,651 Proceeds from borrowings 56,005 191,000 Payment of long-term debt (41,287 ) (165,484 ) Excess tax benefits from stock compensation 2,792 797 Common stock repurchases (13,316 ) (3,231 ) Debt issue costs � � � (5,070 ) Net cash provided by financing activities � 7,223 � 20,663 Net increase (decrease) in cash and cash equivalents � 88,904 � (34,604 ) Cash and cash equivalents, beginning of period � 268,584 � 271,047 Cash and cash equivalents, end of period $ 357,488 $ 236,443 � Interest paid $ 7,590 $ 3,738 Income taxes paid $ 15,966 $ 6,049 CENTENE CORPORATION � CONTINUING OPERATIONS SUPPLEMENTAL FINANCIAL DATA � Q2 � Q1 � Q4 � Q3 � Q2 2008 2008 2007 2007 2007 MEMBERSHIP Managed Care: Georgia 278,800 282,700 287,900 286,200 281,400 Indiana 161,700 161,300 154,600 156,300 161,700 New Jersey 55,100 56,500 57,300 58,300 59,100 Ohio 137,300 131,100 128,700 127,500 128,200 South Carolina 22,500 29,300 31,800 29,300 31,100 Texas 427,200 369,000 354,400 347,000 333,900 Wisconsin 124,800 126,900 131,900 132,700 136,100 TOTAL 1,207,400 1,156,800 1,146,600 1,137,300 1,131,500 � Medicaid 866,700 862,900 848,100 841,600 846,900 SCHIP & Foster Care 267,000 216,000 224,400 223,500 216,500 SSI & Medicare 73,700 77,900 74,100 72,200 68,100 TOTAL 1,207,400 1,156,800 1,146,600 1,137,300 1,131,500 � Specialty Services(a): Arizona 99,400 97,900 99,900 99,000 95,200 Kansas 40,000 39,400 39,000 35,600 37,500 TOTAL 139,400 137,300 138,900 134,600 132,700 � (a) Includes behavioral health contracts only. � � REVENUE PER MEMBER(b) $ 214.63 $ 215.35 $ 210.34 $ 201.05 $ 193.09 � CLAIMS(b) Period-end inventory 336,900 393,700 312,700 265,400 281,000 Average inventory 244,800 281,600 288,700 319,900 248,200 Period-end inventory per member 0.28 0.34 0.28 0.24 0.26 � (b) Revenue per member and claims information are presented for the Medicaid Managed Care segment. Q2 � Q1 � Q4 � Q3 � Q2 2008 2008 2007 2007 2007 � DAYS IN CLAIMS PAYABLE(c) 48.5 49.3 49.1 49.1 46.2 � (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 $ 680.9 $ 651.1 $ 626.2 $ 593.6 $ 527.9 Unregulated � 29.0 � � 25.8 � � 33.0 � � 45.9 � � 65.8 � TOTAL $ 709.9 � $ 676.9 � $ 659.2 � $ 639.5 � � $ 593.7 � � DEBT TO CAPITALIZATION(d) 32.6 % 32.8 % 33.3 % 33.1 % 34.0 % � (d) Debt to Capitalization is calculated as follows: total debt divided by (total debt + equity). OPERATING RATIOS: � � Three Months Ended June 30, � Six Months Ended June 30, 2008 � 2007 2008 � 2007 Health Benefits Ratios � � � � Medicaid and SCHIP 81.7 % 83.2 % 80.6 % 83.9 % SSI and Medicare 89.8 90.2 93.7 89.6 Specialty Services 85.8 76.4 85.0 77.9 Total 83.3 83.6 83.1 84.1 � General & Administrative Expense Ratio 13.5 % 14.4 % 13.0 % 13.9 % MEDICAL CLAIMS LIABILITIES (In thousands) Four rolling quarters of the changes in medical claims liabilities are summarized as follows: � Balance, June 30, 2007 $ 292,298 Incurred related to: Current period 2,552,697 Prior period � (7,669 ) Total incurred � 2,545,028 Paid related to: Current period 2,193,031 Prior period � 280,587 Total paid � 2,473,618 Balance, June 30, 2008 $ 363,708 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.