Centene Corporation Reports 2012 Third Quarter Results

ST. LOUIS, Oct. 23, 2012 /PRNewswire/ -- Centene Corporation (NYSE: CNC) today announced its financial results for the quarter ended September 30, 2012. 

During the third quarter of 2012, we recorded net earnings of $0.07 per diluted share reflecting the following:

Earnings excluding Kentucky operations

$

0.78

Third quarter loss from Kentucky operations

(0.31)

Subtotal

0.47

Kentucky premium deficiency reserve

(0.69)

Gains on sales of investments

0.21

State tax benefit

0.08

Net earnings per diluted share

$

0.07

During the third quarter of 2012, we recorded a $63.0 million pre-tax premium deficiency reserve for our Kentucky health plan contract covering the period from October 1, 2012 through July 5, 2013, or $0.69 per diluted share.  We recorded a $17.9 million pre-tax gain on the sale of an investment in a convertible note and $1.5 million in gains on the sale of investments in our Georgia health plan, or $0.21 per diluted share during the third quarter of 2012.  We also recorded a $4.6 million tax benefit, or $0.08 per diluted share, associated with the clarification by a state regarding the items included in the state income tax calculation. 

Third Quarter Highlights

  • Quarter-end at-risk managed care membership of 2,503,000, an increase of 887,300 members, or 55% year over year.
  • Premium and service revenues of $2.2 billion, representing 75% growth year over year.
  • Health Benefits Ratio of 93.3%, compared to 85.0% in 2011.  Excluding our Kentucky operations, the HBR was 88.7% for the third quarter of 2012.
  • General and Administrative expense ratio of 8.2%, compared to 11.3% in 2011.
  • Operating cash flow of $317.2 million for the third quarter of 2012.

Other Events

  • In July 2012, the Company began operating under a new contract with the Washington Health Care Authority to serve Medicaid beneficiaries in the state, initially operating as Coordinated Care. 
  • In July 2012, the Company's subsidiary, Home State Health Plan, began operating under a new contract with the Office of Administration for Missouri to serve Medicaid beneficiaries in the Eastern, Central, and Western Managed Care Regions of the state. 
  • In August 2012, we were notified by the Ohio Department of Job and Family Services that Buckeye Community Health Plan, our Ohio subsidiary, was selected to serve Medicaid members in a dual-eligible demonstration program in three of Ohio's pre-determined seven regions: Northeast (Cleveland), Northwest (Toledo) and West Central (Dayton). This three-year program, which is part of the state of Ohio's Integrated Care Delivery System expansion, will serve those who have both Medicare and Medicaid eligibility. Enrollment is expected to begin in the second half of 2013.
  • In October 2012, we announced that our subsidiary, Kentucky Spirit Health Plan (Kentucky Spirit), notified the Cabinet for Health and Family Services that it is exercising a contractual right that it believes allows Kentucky Spirit to terminate its Medicaid managed care contract with the Commonwealth of Kentucky effective July 5, 2013.  We have also filed a formal dispute with the Cabinet for damages incurred under the contract.  In addition, we have filed a lawsuit in Franklin Circuit Court against the Commonwealth of Kentucky seeking declaratory relief as a result of the Commonwealth's failure to completely and accurately disclose material information.

Michael F. Neidorff, Centene's Chairman and Chief Executive Officer, stated, "The third quarter results demonstrate our commitment to addressing issues identified in the second quarter.  While progress has been made, there is more work to be done to achieve and sustain our targeted margins."

The following table sets forth the Company's membership by state for its managed care organizations:


September 30,


2012


2011

Arizona

23,800



22,800

Florida

209,600



188,600

Georgia

312,400



298,000

Illinois

17,900



13,600

Indiana

205,400



205,300

Kentucky

145,400



Louisiana

167,200



Massachusetts

28,000



34,700

Mississippi

30,600



30,600

Missouri

53,900



Ohio

173,800



162,200

South Carolina

89,400



86,500

Texas

930,700



494,500

Washington

42,000



Wisconsin

72,900



78,900

Total at-risk membership

2,503,000



1,615,700

Non-risk membership



10,600

Total

2,503,000



1,626,300

The following table sets forth our membership by line of business:


September 30,



2012


2011

Medicaid

1,939,400



1,189,900


CHIP & Foster Care

229,600



210,600


ABD & Medicare

289,800



171,700


Hybrid Programs

35,700



38,400


Long-term Care

8,500



5,100


Total at-risk membership

2,503,000



1,615,700


Non-risk membership



10,600


Total

2,503,000



1,626,300


The following table identifies the Company's dual eligible membership by line of business.  The membership tables above include these members.


September 30,


2012


2011

ABD

76,900


34,000

Long-term Care

7,800


4,700

Medicare

4,000


3,100

Total

88,700


41,800

Statement of Operations: Three Months Ended September 30, 2012

  • For the third quarter of 2012, Premium and Service Revenues increased 75% to $2.2 billion from $1.3 billion in the third quarter of 2011.  The increase was primarily driven by the Texas and Arizona expansions, pharmacy carve-ins in Texas and Ohio, the additions between years of Kentucky, Louisiana, Missouri and Washington contracts and membership growth.  
  • Consolidated HBR of 93.3% for the third quarter of 2012 represents an increase from 85.0% in the comparable period in 2011 and 92.9% from the second quarter of 2012.  The increase compared to last year primarily reflects the recognition of a $63.0 million premium deficiency reserve for our Kentucky contract as well as increased medical costs in Kentucky.  Excluding the Kentucky health plan operations, the third quarter 2012 HBR was 88.7%.
  • Consolidated G&A expense ratio for the third quarter of 2012 was 8.2%, compared to 11.3% in the prior year.  The year over year decrease reflects the leveraging of expenses over higher revenues and a reduction in performance based compensation expense which lowered the ratio by 50 basis points.  
  • Earnings from operations were $(27.6) million in the third quarter 2012 compared to $48.5 million in the third quarter 2011.  Net earnings attributable to Centene Corporation were $3.8 million in the third quarter 2012, compared to  $29.0 million in the third quarter of 2011. 
  • Earnings per diluted share were $0.07 in the third quarter of 2012 compared to $0.55 in the prior year.

Balance Sheet and Cash Flow

At September 30, 2012, the Company had cash, investments and restricted deposits of $1,529.8 million, including $36.0 million held by its unregulated entities.  Medical claims liabilities totaled $919.0 million, representing 42.8 days in claims payable excluding the expense and liability for the Kentucky premium deficiency reserve.  Total debt was $395.3 million which includes $40.0 million drawn on the $350 million revolving credit facility at quarter end.  Debt to capitalization was 25.0% at September 30, 2012, excluding the $76.0 million non-recourse mortgage note.  Cash flow from operations for the three months ended September 30, 2012 was $317.2 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, 2012

41.4



Timing of claim payments

0.9



Impact of new business

0.5



Days in claims payable, September 30, 2012

42.8




Outlook

The table below depicts the Company's annual guidance for 2012.







Low


High 


Premium and Service Revenues (in millions)


$

8,100



$

8,300



Diluted EPS


$

0.56



$

0.66



Consolidated Health Benefits Ratio


90.0

%


91.0

%


General & Administrative expense ratio


8.5

%


8.8

%


Diluted Shares Outstanding (in thousands)


53,600



53,800









The Company's updated guidance reflect business expansion costs of $0.12 to $0.15 per diluted share in the fourth quarter, including business expansion costs for Kansas which is expected to commence in January 2013.

Conference Call

As previously announced, the Company will host a conference call Tuesday, October 23, 2012, at 8:30 A.M. (Eastern Time) to review the financial results for the third quarter ended September 30, 2012, and to discuss its business outlook.  Michael F. Neidorff and William N. Scheffel will host the conference call.  Investors and other interested parties are invited to listen to the conference call by dialing 1-877-270-2148 in the U.S. and Canada; +1-412-902-6510 from abroad; or via a live, audio webcast on the Company's website at www.centene.com, under the Investors section.  A webcast replay will be available for on-demand listening shortly after the completion of the call for the next twelve months or until 11:59 p.m. (Eastern Time) on Tuesday, October 22, 2013, at the aforementioned URL. In addition, a digital audio playback will be available until 9:00 a.m. (Eastern Time) on Tuesday, October 30, 2012, by dialing 1-877-344-7529 in the U.S. and Canada, or +1-412-317-0088 from abroad, and entering access code 10018806.

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 Company uses the presented non-GAAP financial measures internally to allow management to focus 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.

About Centene Corporation

Centene Corporation, a Fortune 500 company, is a leading multi-line healthcare enterprise that provides programs and related services to the rising number of under-insured and uninsured individuals. Many receive benefits provided under Medicaid, including the State Children's Health Insurance Program (CHIP), as well as Aged, Blind or Disabled (ABD), Foster Care and long-term care, in addition to other state-sponsored/hybrid programs, and Medicare (Special Needs Plans). Centene's CeltiCare subsidiary offers states unique, "exchange based" and other cost-effective coverage solutions for low-income populations. The Company operates local health plans and offers a range of health insurance solutions. It also contracts with other healthcare and commercial organizations to provide specialty services including behavioral health, life and health management, managed vision, telehealth services, and pharmacy benefits management.

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 and reserves, competition, membership and revenue projections, timing of regulatory contract approval, changes in healthcare practices, changes in federal or state laws or regulations, changes in expected contract start dates, inflation, provider and state 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, as well as those factors disclosed in the Company's publicly filed documents. The expiration, cancellation or suspension of Centene's Medicaid Managed Care contracts, or the loss of any appeal of or protest to any such expiration, cancellation or suspension, by state governments would also negatively affect Centene.

[Tables Follow]

 

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)


September 30,
2012


December 31,
2011

ASSETS




Current assets:




Cash and cash equivalents

$

796,621



$

573,698


Premium and related receivables

316,123



157,450


Short-term investments

139,920



130,499


Other current assets

123,841



78,363


Total current assets

1,376,505



940,010


Long-term investments

559,714



506,140


Restricted deposits

33,509



26,818


Property, software and equipment, net

381,781



349,622


Goodwill

256,288



281,981


Intangible assets, net

21,375



27,430


Other long-term assets

61,764



58,335


Total assets

$

2,690,936



$

2,190,336


LIABILITIES AND STOCKHOLDERS' EQUITY




Current liabilities:




Medical claims liability

$

919,032



$

607,985


Premium deficiency reserve

63,000




Accounts payable and accrued expenses

162,778



216,504


Unearned revenue

131,967



9,890


Current portion of long-term debt

3,337



3,234


Total current liabilities

1,280,114



837,613


Long-term debt

391,973



348,344


Other long-term liabilities

61,785



67,960


Total liabilities

1,733,872



1,253,917


Commitments and contingencies




Stockholders' equity:




Common stock, $.001 par value; authorized 100,000,000 shares; 54,405,296 issued and 51,632,704 outstanding at September 30, 2012, and 53,586,726 issued and 50,864,618 outstanding at December 31, 2011

54



54


Additional paid-in capital

458,741



421,981


Accumulated other comprehensive income:




Unrealized gain on investments, net of tax

6,702



5,761


Retained earnings

557,759



564,961


Treasury stock, at cost (2,772,592 and 2,722,108 shares, respectively)

(59,277)



(57,123)


Total Centene stockholders' equity

963,979



935,634


Noncontrolling interest

(6,915)



785


Total stockholders' equity

957,064



936,419


Total liabilities and stockholders' equity

$

2,690,936



$

2,190,336


 

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(Unaudited)


Three Months Ended September 30,


Nine Months Ended September 30,


2012


2011


2012


2011

Revenues:








Premium

$

2,184,061



$

1,239,464



$

5,853,469



$

3,640,829


Service

28,403



25,817



84,062



81,629


Premium and service revenues

2,212,464



1,265,281



5,937,531



3,722,458


Premium tax

235,657



36,754



333,484



110,948


Total revenues

2,448,121



1,302,035



6,271,015



3,833,406


Expenses:








Medical costs

2,036,999



1,053,320



5,370,080



3,091,007


Cost of services

21,744



20,229



66,897



60,717


General and administrative expenses

181,073



142,934



512,322



427,067


Premium tax expense

235,946



37,005



333,872



111,668


Impairment loss





28,033




Total operating expenses

2,475,762



1,253,488



6,311,204



3,690,459


Earnings (loss) from operations

(27,641)



48,547



(40,189)



142,947


Other income (expense):








Investment and other income

23,244



2,697



32,580



9,379


Debt extinguishment costs







(8,488)


Interest expense

(4,855)



(4,572)



(14,393)



(15,523)


Earnings (loss) from operations, before income tax expense

(9,252)



46,672



(22,002)



128,315


Income tax expense (benefit)

(9,547)



18,459



(6,068)



49,216


Net earnings (loss)

295



28,213



(15,934)



79,099


Noncontrolling interest

(3,524)



(774)



(8,732)



(2,007)


Net earnings (loss) attributable to Centene Corporation

$

3,819



$

28,987



$

(7,202)



$

81,106










Net earnings (loss) per common share attributable to Centene Corporation:

Basic earnings (loss) per common share

$

0.07



$

0.58



$

(0.14)



$

1.62


Diluted earnings (loss) per common share

$

0.07



$

0.55



$

(0.14)



$

1.55










Weighted average number of common shares outstanding:








Basic

51,584,860



50,345,512



51,393,345



50,089,845


Diluted

53,806,197



52,620,350



51,393,345



52,320,906


 

CENTENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


Nine Months Ended September 30,


2012


2011

Cash flows from operating activities:




Net earnings (loss)

$

(15,934)



$

79,099


Adjustments to reconcile net earnings (loss) to net cash provided by operating activities




Depreciation and amortization

49,892



43,055


Stock compensation expense

18,417



13,263


Impairment loss

28,033




Gain on sale of investment in convertible note

(17,880)




Gain on sale of investments, net

(1,460)



(213)


Debt extinguishment costs



8,488


Deferred income taxes

(19,318)



(223)


Changes in assets and liabilities




Premium and related receivables

(139,414)



(13,306)


Other current assets

(23,487)



(6,667)


Other assets

1,918



(1,230)


Medical claims liabilities

374,046



40,476)


Unearned revenue

122,077



(65,183)


Accounts payable and accrued expenses

(59,872)



(11,414)


Other operating activities

(9,736)



3,528


Net cash provided by operating activities

307,282



89,673


Cash flows from investing activities:




Capital expenditures

(70,601)



(56,938)


Purchases of investments

(501,958)



(201,145)


Sales and maturities of investments

434,009



180,124


Investments in acquisitions, net of cash acquired



(3,192)


Net cash used in investing activities

(138,550)



(81,151)


Cash flows from financing activities:




Proceeds from exercise of stock options

11,686



13,582


Proceeds from borrowings

215,000



419,183


Payment of long-term debt

(177,422)



(415,475)


Excess tax benefits from stock compensation

6,049



1,632


Common stock repurchases

(2,154)



(1,280)


Contribution from noncontrolling interest

1,032



569


Debt issue costs



(9,242)


Net cash provided by financing activities

54,191



8,969


Net increase in cash and cash equivalents

222,923



17,491


Cash and cash equivalents, beginning of period

573,698



434,166


Cash and cash equivalents, end of period

$

796,621



$

451,657


Supplemental disclosures of cash flow information:




Interest paid

$

12,127



$

16,097


Income taxes paid

$

34,001



$

49,996


 

CENTENE CORPORATION
SUPPLEMENTAL FINANCIAL DATA












Q3


Q2


Q1


Q4


Q3


2012


2012


2012


2011


2011

MEMBERSHIP










Managed Care:










Arizona

23,800



24,000



23,100



23,700



22,800


Florida

209,600



204,100



199,500



198,300



188,600


Georgia

312,400



313,300



306,000



298,200



298,000


Illinois

17,900



17,800



17,400



16,300



13,600


Indiana

205,400



205,000



206,300



206,900



205,300


Kentucky

145,400



143,500



145,700



180,700




Louisiana

167,200



168,700



51,300






Massachusetts

28,000



41,400



36,000



35,700



34,700


Mississippi

30,600



30,100



29,500



31,600



30,600


Missouri

53,900










Ohio

173,800



166,800



161,000



159,900



162,200


South Carolina

89,400



87,800



86,700



82,900



86,500


Texas

930,700



919,200



811,000



503,800



494,500


Washington

42,000










Wisconsin

72,900



75,800



76,000



78,000



78,900


Total at-risk membership

2,503,000



2,397,500



2,149,500



1,816,000



1,615,700


Non-risk membership







4,900



10,600


TOTAL

2,503,000



2,397,500



2,149,500



1,820,900



1,626,300






















Medicaid

1,939,400



1,848,500



1,634,800



1,336,800



1,189,900


CHIP & Foster Care

229,600



222,600



218,800



213,900



210,600


ABD & Medicare

289,800



269,900



247,400



218,000



171,700


Hybrid Programs

35,700



48,100



41,500



40,500



38,400


Long-term Care

8,500



8,400



7,000



6,800



5,100


Total at-risk membership

2,503,000



2,397,500



2,149,500



1,816,000



1,615,700


Non-risk membership







4,900



10,600


TOTAL

2,503,000



2,397,500



2,149,500



1,820,900



1,626,300












Specialty Services(a):










Cenpatico Behavioral Health










Arizona

162,000



159,900



162,100



168,900



175,500


Kansas

48,500



44,300



46,000



46,200



45,600


TOTAL

210,500



204,200



208,100



215,100



221,100












(a) Includes external membership only.


















REVENUE PER MEMBER PER MONTH(b)

$

283



$

279



$

269



$

262



$

245












CLAIMS(b)










Period-end inventory

826,804



1,195,000



735,000



495,500



482,900


Average inventory

547,393



640,600



457,400



367,590



312,400


Period-end inventory per member

0.33



0.50



0.34



0.27



0.30


(b) Revenue per member and claims information are presented for the Managed Care at-risk members.











NUMBER OF EMPLOYEES

6,400



6,200



5,700



5,300



5,000






















 



Q3


Q2


Q1


Q4


Q3


2012


2012


2012


2011


2011











DAYS IN CLAIMS PAYABLE (c)

42.8



41.4



44.7



45.3



43.6


(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, excluding the Kentucky premium deficiency reserve expense and liability.











CASH AND INVESTMENTS (in millions)








Regulated

$

1,493.8



$

1,198.2



$

1,166.9



$

1,198.9



$

1,079.3


Unregulated

$

36.0



$

40.6



$

35.5



$

38.2



$

35.9


TOTAL

$

1,529.8



$

1,238.8



$

1,202.4



$

1,237.1



$

1,115.2












DEBT TO CAPITALIZATION

29.2

%


30.1

%


26.4

%


27.3

%


28.0

%

DEBT TO CAPITALIZATION EXCLUDING NON-RECOURSE DEBT(d)

25.0

%


25.9

%


21.8

%


22.6

%


23.2

%

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

(d) The non-recourse debt represents the Company's mortgage note payable ($76.0 million at September 30, 2012.)

 

Operating Ratios:


Three Months Ended September 30,



Nine Months Ended September 30,



2012


2011


2012


2011

Health Benefits Ratios:








Medicaid and CHIP

91.8

%


81.5

%


90.8

%


82.3

%

ABD and Medicare

97.3



92.0



93.4



90.3


Specialty Services

89.5



87.9



92.5



87.4


Total

93.3



85.0



91.7



84.9










Total General & Administrative Expense Ratio

8.2

%


11.3

%


8.6

%


11.5

%

 

MEDICAL CLAIMS LIABILITY (In thousands)

The changes in medical claims liability are summarized as follows:

Balance, September 30, 2011


$

498,705


Incurred related to:



Current period


6,659,744


Prior period


(55,925)


Total incurred


6,603,819


Paid related to:



Current period


5,684,404


Prior period


436,088


Total paid


6,120,492


Less: Premium Deficiency Reserve


$

63,000


Balance, September 30, 2012


$

919,032


 

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" amount 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.

The amount of the "Incurred related to: Prior period" above represents favorable development and includes the effects of reserving under moderately adverse conditions, new markets where we use a conservative approach in setting reserves during the initial periods of operations, receipts from other third party payors related to coordination of benefits and lower medical utilization and cost trends for dates of service prior to September 30, 2011.

SOURCE Centene Corporation

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