April 22, 2008 at 06:00 AM EDT
Centene Corporation Reports 2008 First Quarter Earnings

Centene Corporation (NYSE: CNC) today announced its net earnings from continuing operations for the quarter ended March 31, 2008 were $25.5 million, or $0.57 per diluted share, compared to $11.6 million, or $0.26 per diluted share in the 2007 first quarter. The first quarter results include the benefit of the July 1 through December 31, 2007 period rate increase for Georgia, approximately $0.28 per diluted share, which was included in our guidance for the first quarter. Unless specifically noted, the discussions below are in the context of continuing operations.

First Quarter Highlights

  • Quarter-end Medicaid Managed Care membership of 1.2 million.
  • Revenues of $816.6 million, or $794.0 million net of premium taxes, a 22.8% increase over the 2007 first quarter.
  • Health Benefits Ratio (HBR), which reflects medical costs as a percent of premium revenues, of 83.0%, compared to 84.6% in the 2007 first quarter. The first quarter 2008 HBR reflects the benefit of the previously mentioned Georgia rate increase.
  • General and administrative (G&A) expense ratio of 12.5%, compared to 13.4% in the 2007 first quarter.
  • Cash flow from operations of $26.7 million.
  • Days in claims payable of 49.3.

Other Events

  • Announced the acquisition of Celtic Insurance Company, a health insurance carrier focused on the individual health insurance market. Pending regulatory approval, we expect to complete this acquisition in the third quarter of 2008.
  • Commenced operations under our Texas Foster Care contract effective April 1, 2008.
  • Notified the State of Ohio of our intent to withdraw from covering Aged, Blind or Disabled (ABD) members in the Northwest region of Ohio effective July 1.
  • Repurchased 350,332 shares during the first quarter for approximately $7.0 million.

Michael F. Neidorff, Centenes Chairman and Chief Executive Officer, stated, During the first quarter, our HBR was adversely affected by high medical costs in Ohio largely influenced by the ABD population and by a heavy flu season. But aside from these items and an extended rollout of full-risk enrollment in South Carolina, in aggregate our other markets and products performed generally in-line with our expectations.

We are taking actions to improve margins in our Ohio ABD population including exiting the Northwest region as of July 1, 2008, rationalizing our provider networks in the remaining regions, and continuing an ongoing dialogue with the State on rate adequacy and benefit design. We remain committed to serving the needs of our customers in all of our markets, but are also committed to doing so only in markets and with products that produce consistent and adequate returns for our investors, concluded Neidorff.

The following table depicts membership in Centenes managed care organizations, by state, at March 31, 2008 and 2007:

20082007
Georgia 282,700 291,300
Indiana 161,300 176,700
New Jersey 56,500 59,100
Ohio 131,100 118,300
South Carolina 29,300
Texas 369,000 318,500
Wisconsin 126,900 139,400
Total 1,156,800 1,103,300

The following table depicts membership in Centenes managed care organizations, by member category, at March 31, 2008 and 2007:

20082007
Medicaid 862,900 839,600
SCHIP 216,000 211,200
SSI/Medicare 77,900 52,500
Total 1,156,800 (a) 1,103,300 (b)
(a) 1,126,200 at-risk; 30,600 ASO
(b) 1,099,200 at-risk; 4,100 ASO

Statement of Operations

  • For the 2008 first quarter, revenues, net of premium taxes, increased 22.8% to $794.0 million from $646.4 million in the 2007 first quarter. The increase was mainly driven by membership growth in Texas and Ohio, which are the two markets that added SSI products in 2007, as well as the recognition of the Georgia premium rate increase retroactive to July 1, 2007 of $20.8 million.
  • The consolidated HBR, which reflects medical costs as a percent of premium revenues, was 83.0%, a decrease from 84.6% in the 2007 first quarter. The decrease resulted from the recognition of the Georgia premium rate increase, offset by increases from seasonal medical cost trends, in part related to the flu, and continued high medical costs in the Ohio ABD markets.
  • Consolidated G&A expense as a percent of premium and service revenues was 12.5% in the first quarter of 2008, a decrease from 13.4% in the first quarter of 2007.
  • Earnings per diluted share from continuing operations were $0.57, compared to $0.26 in the 2007 first quarter.

Balance Sheet and Cash Flow

At March 31, 2008, the Company had cash and investments of $676.9 million, including $651.1 million held by its regulated entities and $25.8 million held by its unregulated entities. Medical claims liabilities totaled $347.5 million, representing 49.3 days in claims payable, an increase of 0.2 days from December 31, 2007. Total debt was $216.2 million and debt to capitalization was 32.8%. Cash flow from operations was $26.7 million.

Outlook

The table below depicts the Companys guidance for the 2008 second quarter and full year.

Q2 20082008
LowHighLowHigh
Revenue (in millions)1 $ 822 $ 832 $ 3,300 $ 3,375
Earnings per diluted share $ 0.38 $ 0.42 $ 1.87 $ 1.97

1 Revenue net of premium tax

Eric R. Slusser, Centenes Chief Financial Officer, stated, We are lowering the range of our annual revenue and earnings guidance to reflect a reduction in investment income resulting from actions taken by the Federal Reserve during the first quarter of 2008 as well as the current and expected lower results in the Ohio ABD market. We 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, April 22, 2008, at 8:00 A.M. (Eastern Time) to review the financial results for the first quarter ended March 31, 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 May 6, 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 41656800.

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 Childrens Health Insurance Program (SCHIP), Supplemental Security Income (SSI) and Medicare (Special Needs Plans). 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)

March 31,

2008

December 31,

2007

(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 263,780 $ 268,584
Premium and related receivables 81,468 90,072
Short-term investments, at fair value (amortized cost $60,927 and $46,392, respectively) 60,989 46,269
Other current assets 37,373 41,414
Total current assets 443,610 446,339
Long-term investments, at fair value (amortized cost $319,881 and $314,681, respectively) 324,173 317,041
Restricted deposits, at fair value (amortized cost $27,411 and $27,056, respectively) 27,972 27,301
Property, software and equipment, net 151,265 138,139
Goodwill 141,023 141,030
Other intangible assets, net 12,608 13,205
Other assets 38,624 36,067
Total assets $ 1,139,275 $ 1,119,122
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Medical claims liabilities $ 347,504 $ 335,856
Accounts payable and accrued expenses 115,857 105,096
Unearned revenue 2,231 44,016
Current portion of long-term debt 416 971
Current liabilities of discontinued operations 754 861
Total current liabilities 466,762 486,800
Long-term debt 215,818 206,406
Other liabilities 13,460 10,869
Total liabilities 696,040 704,075
Stockholders equity:
Common stock, $.001 par value; authorized 100,000,000 shares; issued and outstanding 43,424,326 and 43,667,837 shares, respectively 44 44
Additional paid-in capital 222,719 221,693
Accumulated other comprehensive income:
Unrealized gain on investments, net of tax 3,110 1,571
Retained earnings 217,362 191,739
Total stockholders equity 443,235 415,047
Total liabilities and stockholders equity $ 1,139,275 $ 1,119,122

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

Three Months Ended

March 31,

20082007
(Unaudited)
Revenues:
Premium $ 773,478 $ 624,826
Premium tax 22,631 17,816
Service 20,530 21,592
Total revenues 816,639 664,234
Expenses:
Medical costs 641,619 528,520
Cost of services 16,176 15,630
General and administrative expenses 99,283 86,467
Premium tax 22,631 17,816
Total operating expenses 779,709 648,433
Earnings from operations 36,930 15,801
Other income (expense):
Investment and other income 7,769 6,017
Interest expense (3,994 ) (3,132 )
Earnings before income taxes 40,705 18,686
Income tax expense 15,168 7,089
Net earnings from continuing operations 25,537 11,597
Discontinued operations, net of income tax expense (benefit) of $52 and $(26,780) 86 26,614
Net earnings $ 25,623 $ 38,211
Net earnings per share:
Basic:
Continuing operations $ 0.59 $ 0.27
Discontinued operations 0.61
Basic earnings per common share $ 0.59 $ 0.88
Diluted:
Continuing operations $ 0.57 $ 0.26
Discontinued operations 0.59
Diluted earnings per common share $ 0.57 $ 0.85
Weighted average number of shares outstanding:
Basic 43,538,207 43,433,319
Diluted 44,742,893 44,923,340

CENTENE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Three Months Ended

March 31,

20082007
(Unaudited)
Cash flows from operating activities:
Net earnings $ 25,623 $ 38,211
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation and amortization 7,798 6,274
Stock compensation expense 4,013 3,871
Deferred income taxes 9,472 (1,398 )
Gain on sale of FirstGuard Missouri (4,218 )
Changes in assets and liabilities
Premium and related receivables 8,612 13,588
Other current assets (2,634 ) (26,336 )
Other assets (1,031 ) (636 )
Medical claims liabilities 11,608 (4,340 )
Unearned revenue (41,788 ) 4,796
Accounts payable and accrued expenses 4,489 1,309
Other operating activities 554 4,859
Net cash provided by operating activities 26,716 35,980
Cash flows from investing activities:
Purchases of property, software and equipment (19,879 ) (14,794 )
Purchases of investments (86,025 ) (135,866 )
Sales and maturities of investments 70,888 122,835
Proceeds from asset sales 10,848
Investments in acquisitions and equity method investee, net of cash acquired (2,194 ) (400 )
Net cash used in investing activities (37,210 ) (17,377 )
Cash flows from financing activities:
Proceeds from exercise of stock options 1,148 868
Proceeds from borrowings 26,005 191,000
Payment of long-term debt (17,148 ) (165,248 )
Excess tax benefits from stock compensation 2,638 417
Common stock repurchases (6,953 ) (644 )
Debt issue costs (4,138 )
Net cash provided by financing activities 5,690 22,255
Net (decrease) increase in cash and cash equivalents (4,804 ) 40,858
Cash and cash equivalents, beginning of period 268,584 271,047
Cash and cash equivalents, end of period $ 263,780 $ 311,905
Interest paid $ 463 $ 2,999
Income taxes paid $ 792 $ 5,801

CENTENE CORPORATION

CONTINUING OPERATIONS SUPPLEMENTAL FINANCIAL DATA

Q1Q4Q3Q2
2008200720072007
MEMBERSHIP
Managed Care:
Georgia 282,700 287,900 286,200 281,400
Indiana 161,300 154,600 156,300 161,700
New Jersey 56,500 57,300 58,300 59,100
Ohio 131,100 128,700 127,500 128,200
South Carolina 29,300 31,800 29,300 31,100
Texas 369,000 354,400 347,000 333,900
Wisconsin 126,900 131,900 132,700 136,100
TOTAL1,156,8001,146,6001,137,3001,131,500
Medicaid 862,900 848,100 841,600 846,900
SCHIP 216,000 224,400 223,500 216,500
SSI & Medicare 77,900 74,100 72,200 68,100
TOTAL1,156,8001,146,6001,137,3001,131,500
Specialty Services(a):
Arizona 97,900 99,900 99,000 95,200
Kansas 39,400 39,000 35,600 37,500
TOTAL137,300138,900134,600132,700

(a) Includes behavioral health contracts only.

REVENUE PER MEMBER(b)

$ 215.35 $ 210.34 $ 201.05 $ 193.09

CLAIMS(b)

Period-end inventory

393,700

312,700

265,400

281,000

Average inventory 281,600 288,700 319,900 248,200
Period-end inventory per member 0.34 0.28 0.24 0.26

(b) Revenue per member and claims information are presented for the Medicaid Managed Care segment.

Q1Q4Q3Q2
2008200720072007

DAYS IN CLAIMS PAYABLE(c)

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 $ 651.1 $ 626.2 $ 593.6 $ 527.9
Unregulated 25.8 33.0 45.9 65.8
TOTAL $ 676.9 $ 659.2 $ 639.5 $ 593.7

DEBT TO CAPITALIZATION(d)

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

March 31,

20082007
Health Benefits Ratios
Medicaid and SCHIP 79.5 % 84.5 %
SSI and Medicare 97.5 88.5
Specialty Services 84.1 79.7
Total 83.0 84.6
General & Administrative Expense Ratio 12.5 % 13.4 %

MEDICAL CLAIMS LIABILITIES (In thousands)

Four rolling quarters of the changes in medical claims liabilities are summarized as follows:

Balance, March 31, 2007 $ 267,980
Incurred related to:
Current period 2,449,237
Prior period (11,652 )
Total incurred 2,437,585
Paid related to:
Current period 2,110,081
Prior period 247,980
Total paid 2,358,061
Balance, March 31, 2008 $ 347,504

Centenes claims reserving process utilizes a consistent actuarial methodology to estimate Centenes 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.

Contacts:

Centene Corporation
Edmund E. Kroll, 212-759-0382
Senior Vice President, Finance & Investor Relations
or
Eric R. Slusser, 314-725-4477
Executive Vice President and Chief Financial Officer
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